Goldhaber & Grout: Pension Choices and the Savings Patterns of Public School Teachers

From the Introduction:

Few states have incorporated DC features into teacher pension systems and we know very little about how providing teachers with greater control over deferred compensation might affect their savings behavior. In this paper we report on the retirement savings behavior of Washington State teachers enrolled in the state’s hybrid pension plan, which includes a DC component funded by employee contributions. Our research, which is the first quantitative analysis of teachers’ choices of defined contribution rates, speaks to the debate around the structuring of teacher pension systems. Specifically, we address the following questions: 1) How are discretionary retirement savings rates influenced by individual characteristics and the ability to adjust contribution rates?; 2) What can we infer about teacher preferences for current compensation versus the present value of investment in retirement compensation?; and 3) How does the level of retirement savings compare under traditional defined benefit and hybrid pension systems? To answer these questions we use longitudinal pension plan data from Washington State, where public school teachers who enroll in the state’s hybrid pension plan can choose from a menu of contribution rates.

We find that teachers’ initial contribution rate choices appear to be age dependent, and are affected by their beliefs about the ability to adjust contribution rates after the initial rate selection. The preferences of teachers revealed through their choice of contribution rate plans indicates that they value the opportunity to invest in retirement compensation far more than prior evidence has suggested. And, consequently, the total amount per teacher contributed to retirement savings is estimated to be higher under Washington’s hybrid DB-DC pension system than it would be under the more traditional DB-only system.

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