Teacher Pension Incentives and the Timing of Retirement

Abstract

The rising costs and large unfunded liabilities of defined benefit (DB) teacher retirement systems raise questions about their efficacy and viability. Reform of teacher pension plans depends critically on reliable predictions of behavioral responses to alternative pension rules. We estimate an option-value model of individual teacher retirement using administrative data for Missouri teachers. The model fits the observed aggregate retirement behavior very well. We use the estimated structural parameters to simulate retirement behavior under alternative pension rules. Our simulations show that on net the enhancements of Missouri teacher pension benefits in the 1990's lowered the average retirement age for teachers. Conversion from the current DB plan to a defined contribution (DC) plan would have the opposite effect, and would dampen "spikes" in teacher retirement timing. The 1990's enhancements raised welfare for all teachers, however, the DC plan that we simulate has a mixed welfare impact, raising welfare for teachers near retirement but reducing it for teachers with less experience.teacher pensions, school staffing, school finance