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.