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The market sensitivity of retirement and defined contribution pensions: Evidence from the public sector

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  • Gustafson, Matthew T.

Abstract

I provide evidence that defined contribution (DC) pensions make retirement more positively correlated with stock market returns as compared to defined benefits (DB) pensions. To identify the effect, I exploit the U.S. federal government's switch in 1984 from a DB pension system (CSRS) to a hybrid-DC pension system (FERS). I estimate that FERS exposes approximately 24% more pension wealth to the financial markets. Compared to untreated employees, employees treated with the hybrid-DC pension respond to a one standard deviation shock to quarterly market returns by adjusting their retirement date by approximately one month, approximately offsetting changes in DC pension wealth with labor income.

Suggested Citation

  • Gustafson, Matthew T., 2017. "The market sensitivity of retirement and defined contribution pensions: Evidence from the public sector," Journal of Public Economics, Elsevier, vol. 145(C), pages 1-13.
  • Handle: RePEc:eee:pubeco:v:145:y:2017:i:c:p:1-13
    DOI: 10.1016/j.jpubeco.2016.11.008
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    Keywords

    Defined contribution pensions; Retirement; Stock market returns; Federal employees;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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