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Teacher Pension Incentives and the Timing of Retirement

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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.

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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 1111.

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Length: 34 pgs.
Date of creation: 14 Sep 2011
Date of revision:
Handle: RePEc:umc:wpaper:1111

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Keywords: teacher pensions; school staffing; school finance;

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  1. Stern, Steven, 1997. "Approximate Solutions to Stochastic Dynamic Programs," Econometric Theory, Cambridge University Press, vol. 13(03), pages 392-405, June.
  2. Asch, Beth & Haider, Steven J. & Zissimopoulos, Julie, 2005. "Financial incentives and retirement: evidence from federal civil service workers," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 427-440, February.
  3. Leora Friedberg & Anthony Webb, 2005. "Retirement and the Evolution of Pension Structure," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
  4. Joshua Furgeson & Robert P. Strauss & William B. Vogt, 2006. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions," Education Finance and Policy, MIT Press, vol. 1(3), pages 316-348, June.
  5. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  6. Robin L. Lumsdaine & James H. Stock & David A. Wise, 1992. "Pension Plan Provisions and Retirement: Men & Women, Medicare, and Models," NBER Working Papers 4201, National Bureau of Economic Research, Inc.
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