Koedel & Xiang: Pension Enhancements and the Retention of Public Employees

ABSTRACT:

We use data on workers in the largest public-sector occupation in the United States – teaching – to examine the effect of pension enhancements on employee retention. Specifically, we study a 1999 enhancement to the pension formula for public school teachers in St. Louis that discretely and dramatically increased their incentives to remain in covered employment. The St. Louis enhancement is substantively similar to enhancements that occurred in other state and municipal pension plans across the United States in the late 1990s and early 2000s. To identify the effect of the enhancement on teacher retention, we leverage the fact that the strength of the incentive increase varied across the workforce depending on how far teachers were from retirement eligibility when it was enacted. The retention incentives for late-career teachers were increased the most by the enhancement but their behavioral response was modest. A cost-benefit analysis indicates that the pension enhancement was not a cost-effective way to improve employee retention.

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