Incentives and Limitations of Employment Policies on Retirement Transitions

An NBER conference on Incentives and Limitations of Employment Policies on Retirement Transitions took place on August 10-11 in Wyoming. Research Associates Robert L. Clark of North Carolina State University and Joseph P. Newhouse of Harvard University organized the meeting. These researchers' papers were presented and discussed:

Maria D. Fitzpatrick, Cornell University and NBER

Pension Reform and Return to Work Policies

For many people, working after beginning retirement benefit collection is a way to enhance financial security by increasing income. Existing research has shown that retirees are sensitive to the Social Security earnings test, which restricts the amount of earnings some beneficiaries can receive (e.g., Friedberg 1998, Friedberg 2000, Gelber et al. 2013, Gelber et al. 2017). However, little is known about the effects of other types of policies on post-retirement employment. Instead of restricting earnings, many public pension plans restrict the number of hours beneficiaries can work. Fitzpatrick uses return-to-work rules limiting the number of hours of employment in a state's public pension plan and administrative data on employment and retirement to determine the rules' effects on retirement decisions and post-retirement labor supply. They find that the increases in the maximum number of hours of post-retirement employment lead to increases in retirement benefit collection and increases in part-time work among retirees. As such, these policies appear to be binding on the labor supply decisions of some employees. Policymakers should take this into account when designing policies aimed at extending work-lives or improving the health of pension systems.

Leslie E. Papke, Michigan State University

Retirement Options and Outcomes for Public Employees

Papke analyzes the effects of state public pension parameters on the retirement of public employees. Using a panel data set of public sector workers from 12 waves of the Health and Retirement Study, she models the probability of retirement as a function of pension wealth at early and normal retirement eligibility and Social Security coverage in the public sector job. The researcher finds that becoming eligible for early or normal retirement, or receiving an early-out offer, significantly increases the probability of retiring. Papke also finds evidence that participants are less likely to retire the larger their future pension accrual. She do not find any effect of retirement wealth levels.

John Hsu, Partners Healthcare; Joseph P. Newhouse; and Lindsay Overhage, Harvard University

Impact of Fiscal Shocks on Retiree Health Plans and Effect on Work and Retirement Decisions

Hsu, Newhouse, and Overhage investigate possible labor force and health effects from cities in fiscal difficulty, using bond downgrades as a measure of difficulty. They match 23 cities with downgrades and 31 cities that maintained stable ratings to sampling units in the Medical Expenditure Panel Survey. Using a standard difference-indifference analysis, the researchers found that in the year of the downgrade and for the three subsequent years, the rate of separation from public employment in the cities with downgrades fell. The researchers found suggestive evidence of an adverse effect on health, but did not find effects on health care use and spending, very likely from a lack of power.

Norma Coe, University of Pennsylvania and NBER

Impact of Health Plan Reforms in Washington on Retirement Decision

The State of Washington, as part of a State Innovation Model (SIM) grant, is changing the payment model within state employee health insurance plans. The system is moving to value-based purchasing. New plans were rolled out January 2016 (enrollment occurred in late 2015). This move towards value-based purchasing is large-scale, with the stated goal of getting 80% of state employees covered by plans that contain value-based purchasing within the next five years. The goal of payment reform is to improve member experience, member health, and cut costs. However, changing health insurance during employment can directly and indirectly change retirement timing, through changing the relative costs of insurance and through improving health. This paper examines who switches to valuebased insurance, where the design explicitly decreases premiums without changing other out-of-pocket risks. Coe finds that older state employees are less likely to switch insurance plans, even after controlling for the network of doctors an individual typically sees. Second, she looks at the labor market activity - both leaving the state-employee sector and retiring from state-employment - and find that those with valuebased insurance plans are less likely to leave state employment, but more likely to retire. However, the effect sizes are rather small.

Vanya Horneff and Raimond Maurer, Goethe University Frankfurt, and Olivia S. Mitchell, University of Pennsylvania and NBER

How Will Persistent Low Expected Returns Shape Household Behavior?

Many economists posit that global capital markets will pay much lower expected returns on investments in the future compared to the past. Horneff, Maurer, and Mitchell examine how lower real returns will influence work, retirement, saving, and investment behavior of older Americans. Using a calibrated realistic dynamic life cycle model that builds on the researchers' past work, they show that, in a low expected return regime, workers build up less wealth in their tax-qualified 401(k) accounts compared to the past. Moreover, men and women optimally claim social security benefits later and work more, when expected real returns are low. Naturally, there is heterogeneity in responses due to the tax and transfer system, which causes the better-educated to be relatively more sensitive to real interest rate changes. By contrast, the least-educated alter their behavior less. Interestingly, this result implies that wealth inequality is lower in periods of persistent low expected returns.

Joseph F. Quinn and Kevin Cahill, Boston College, and Michael Giandrea, Bureau of Labor Statistics

Transitions From Career Employment Among Public- and Private-Sector Workers

Do the retirement patterns of public-sector workers differ from those in the private sector? Most private-sector workers today face a do-it-yourself retirement income landscape characterized by an exposure to market forces through defined-contribution pension plans and private saving, and the risk of financial insecurity later in life. Public-sector workers, in contrast, are typically covered by defined-benefit pension plans that both encourage retirement at relatively young ages and offer financial security at older ages. As a result, the consequences of private- and public-sector workers' retirement decisions could differ in important ways. For workers generally, and for private-sector workers in particular, a focus among researchers and policymakers has been the importance of continued work later in life for improving financial security at older ages. Such concerns might be of less consequence for public-sector workers due to the prevalence of defined-benefit pensions. Public-sector workers' departures from the labor force might also differ from those in the private sector, all else equal, because of the age-specific incentives within their defined-benefit plans. Despite these important differences, the privatepublic distinction has received relatively little attention in the retirement literature. Quinn, Cahill, and Giandrea examine how private- and public-sector workers transition from career employment to complete labor force withdrawal, with a focus on the role of bridge employment, phased retirement, and re-entry. The researchers identify the prevalence and determinants of each pathway to retirement using longitudinal data on four cohorts of private- and public-sector career older workers from the Health and Retirement Study (HRS). The findings suggest that the prevalence of work after leaving career employment among public-sector workers resembles that of private-sector workers, although with a higher prevalence of part-time bridge employment, a result that has important implications for public policy as the pace of societal aging accelerates.

Melinda S. Morrill, North Carolina State University and NBER, and John Westall, North Carolina State University

The Role of Social Security in Retirement Timing: Evidence from a National Sample of Teachers

How important is Social Security income in workers' retirement timing? About 40 percent of public school teachers are not covered by Social Security. This provides an opportunity to analyze the causal impact of Social Security on retirement timing by comparing covered and non-covered teachers. Using individual-level data from the American Community Survey, Morrill and Westall find strong evidence of higher rates of retirement among covered teachers at key Social Security eligibility ages. This pattern is most pronounced at the early Social Security eligibility age for single female teachers and just after the full eligibility age for married teachers. This illustrates the importance of Social Security in retirement timing. In addition, these estimates suggest that, should the federal government mandate full inclusion in Social Security for all public sector workers, newly covered teachers and other public sector workers would retire at younger ages putting further strain on public pension plan finances.

Robert L. Clark, North Carolina State University and NBER; Robert G. Hammond, North Carolina State University; and David Vanderweide, North Carolina General Assembly

Navigating Complex Financial Decisions at Retirement: Evidence from Annuity Choices in Public Sector Pensions

Choices regarding the disposition of wealth at retirement can have substantial implications for retirement income security. Clark, Hammond, and Vanderweide analyze the factors determining annuity payout option choices within the context of a public sector defined pension plan with no default annuity option. Using combined administrative records and survey data, they explore the role of individual and household characteristics as well as risk preferences, time preferences, and financial literacy. The researchers also document retiree well-being and satisfaction with retirement decision making. The evidence is consistent with predictions over which households might benefit most from each annuity option. Comparing retirees who chose different types of annuities, we find that these groups of retirees report very different levels of well-being in retirement. All retirees report lower levels of retirement income security over time, with strong differences among those who chose different types of annuities.

Gila Bronshtein, Stanford University; Jason Scott, Financial Engines; John B. Shoven, Stanford University and NBER; and Sita Slavov, George Mason University and NBER

The Power of Working Longer (NBER Working Paper No. 24226)

Bronshtein, Scott, Shoven, and Slavov compare the relative strengths of working longer vs. saving more in terms of increasing a household's affordable, sustainable standard of living in retirement. Both stylized households and actual households from the Health and Retirement Study are examined. They assume that workers commence Social Security benefits when they retire. The basic result is that delaying retirement by 3-6 months has the same impact on the retirement standard of living as saving an additional one-percentage point of labor earnings for 30 years. The relative power of saving more is even lower if the decision to increase saving is made later in the work life. For instance, increasing retirement saving by one percentage point ten years before retirement has the same impact on the sustainable retirement standard of living as working a single month longer. The calculations of the relative power of working longer and saving more are done for a wide range of realized rates of returns on saving, for households with different income levels, and for singles as well as married couples. The results are quite invariant to these circumstances.

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