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Defined Benefit Pension Plan Distribution Decisions by Public Sector Employees

  • Robert L. Clark
  • Melinda S. Morrill
  • David Vanderweide
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    Studies examining pension distribution choices have found that the tendency of private-sector workers is to select lump sum distributions instead of life annuities. In the public sector, defined benefit pensions usually offer lump sum distributions equal to employee contributions, not the present value of the annuity. Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation. Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing important benefits due to lack of knowledge, understanding, or accessibility of benefits. In contrast to prior research in the private sector, we find no evidence of a bias toward cash distributions for public employees in North Carolina.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18488.

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    Date of creation: Oct 2012
    Date of revision:
    Publication status: published as Defined Benefit Pension Plan Distribution Decisions by Public Sector Employees , Robert L. Clark, Melinda Sandler Morrill, David Vanderweide. in Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century , Clark, Rauh, and Duggan. 2014
    Handle: RePEc:nbr:nberwo:18488
    Note: AG LS PE
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    1. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: the Roles of Planning, Financial Literacy, and Housing Wealth," NBER Working Papers 12585, National Bureau of Economic Research, Inc.
    2. Butler, Monika & Teppa, Federica, 2007. "The choice between an annuity and a lump sum: Results from Swiss pension funds," Journal of Public Economics, Elsevier, vol. 91(10), pages 1944-1966, November.
    3. Robert L. Clark & Melinda Sandler Morrill, 2010. "Retiree Health Plans in the Public Sector," Books, Edward Elgar, number 13688, April.
    4. Brown, Jeffrey R., 2001. "Private pensions, mortality risk, and the decision to annuitize," Journal of Public Economics, Elsevier, vol. 82(1), pages 29-62, October.
    5. Sabelhaus, John & Weiner, David, 1999. "Disposition of Lump-Sum Pension Distributions: Evidence from Tax Returns," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 593-614, September.
    6. Papke, Leslie E., 2004. "Pension Plan Choice in the Public Sector: The Case of Michigan State Employees," National Tax Journal, National Tax Association, vol. 57(2), pages 329-39, June.
    7. John Chalmers & Jonathan Reuter, 2012. "How Do Retirees Value Life Annuities? Evidence from Public Employees," Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2601-2634.
    8. Hurd, Michael & Panis, Constantijn, 2006. "The choice to cash out pension rights at job change or retirement," Journal of Public Economics, Elsevier, vol. 90(12), pages 2213-2227, December.
    9. Chang, Angela E., 1996. "Tax Policy, Lump-Sum Pension Distributions, and Household Saving," National Tax Journal, National Tax Association, vol. 49(2), pages 235-49, June.
    10. Robert L. Clark & Lee A. Craig & John Sabelhaus, 2011. "State and Local Retirement Plans in the United States," Books, Edward Elgar, number 13685, April.
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