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How Teachers Respond to Pension System Incentives: New Estimates and Policy Applications

The costs of state and local pension plans have been a source of fiscal stress in many states and communities. This has led legislatures to consider major changes in these plans. In order to assess the fiscal and staffing consequences of plan changes it is important to develop reliable statistical models of employee retirement behavior. Structural models are valuable in this regard since the proposed reforms often involve fundamental changes in plan design such as a transition from a defined benefit (DB) to a defined contribution (DC) or hybrid plan. In this paper the authors estimate a structural model of teacher retirement behavior using administrative panel data. They show that the Stock-Wise (1990) option value model provides a good fit to the data and predicts well out-of-sample when used to forecast the effect of pension enhancements during the 1990's. The structural model is used to simulate the effect of several DC alternatives to the current DB plan.

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

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Length: 40 pgs.
Date of creation: 14 Sep 2011
Date of revision: 20 Jan 2015
Handle: RePEc:umc:wpaper:1111
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  1. Alan L. Gustman & Thomas L. Steinmeier, 1983. "A Structural Retirement Model," NBER Working Papers 1237, National Bureau of Economic Research, Inc.
  2. Courtney Coile & Jonathan Gruber, 2007. "Future Social Security Entitlements and the Retirement Decision," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 234-246, May.
  3. Robert M. Costrell & Josh B. McGee, 2010. "Teacher Pension Incentives, Retirement Behavior, and Potential for Reform in Arkansas," Education Finance and Policy, MIT Press, vol. 5(4), pages 492-518, October.
  4. Stinebrickner, Todd R, 2001. "A Dynamic Model of Teacher Labor Supply," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 196-230, January.
  5. Stern, Steven, 1997. "Approximate Solutions to Stochastic Dynamic Programs," Econometric Theory, Cambridge University Press, vol. 13(03), pages 392-405, June.
  6. Borsch-Supan, Axel & Hajivassiliou, Vassilis A., 1993. "Smooth unbiased multivariate probability simulators for maximum likelihood estimation of limited dependent variable models," Journal of Econometrics, Elsevier, vol. 58(3), pages 347-368, August.
  7. 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.
  8. repec:spr:pharme:v:22:y:2004:i:4:p:225-244 is not listed on IDEAS
  9. Leora Friedberg & Anthony Webb, 2005. "Retirement and the Evolution of Pension Structure," Journal of Human Resources, University of Wisconsin Press, vol. 40(2).
  10. Richard J. Murnane & Randall J. Olsen, 1990. "The Effects of Salaries and Opportunity Costs on Length of Stay in Teaching: Evidence from North Carolina," Journal of Human Resources, University of Wisconsin Press, vol. 25(1), pages 106-124.
  11. Robert Novy‐Marx & Joshua Rauh, 2011. "Public Pension Promises: How Big Are They and What Are They Worth?," Journal of Finance, American Finance Association, vol. 66(4), pages 1211-1249, 08.
  12. Cory Koedel & Shawn Ni & Michael Podgursky, 2012. "Who Benefits from Pension Enhancements?," Working Papers 1207, Department of Economics, University of Missouri, revised 08 Jun 2012.
  13. 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.
  14. 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.
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