The effect of 31^st year pension enhancement on mid- and late-career retirement decisions

ABSTRACT

A majority of career teachers in Missouri defined benefit pension plan reach their pension wealth peak before their 31^st year of service. The 2002 pension enhancement in Missouri generates a local gain in pension wealth that is lower than the peak and also creates an eligibility milestone at the 31^st service year. To test whether the 31^st year enhancement affects retirement timing decisions for mid- to late-career teachers, I use administrative data of Missouri teachers and employ difference-in-differences models. I find that the 31^st year enhancement reduces the likelihood of retirement at early and full retirement eligibilities, and helps retain experienced teachers.

KEYWORDS:

• Behavioural finance
• pension
• retirement decision
• retirement policy

JEL CLASSIFICATION:

• J26
• H79

Acknowledgments

The views expressed here are those of the author and should not be attributed to his institution or data provider. Any and all errors are attributable to the author.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Pension wealth in this paper is calculated as the present value of pension benefits following Koedel and Xiang (2017).

² FAS is calculated using the three highest consecutive years of salary in Missouri PSRS.

³ All teachers who are eligible for the 31^st year enhancement had at least one opportunity to retire with unreduced benefits under full retirement. In PSRS, teachers are full retirement eligible when they have 30 or more years of service, or their sum of age and service years are 80 or more (i.e., rule-of-80).

⁴ The pension wealth gain of $5,000 for treatment teachers is compared to comparison teachers as highlighted by the solid vertical line in Figure 2.

⁵ As it is documented that early-career teachers’ labour supply decisions are less likely to be affected by pension incentives (French and Jones 2012; Koedel and Xiang 2017), I start the analysis from the 20^th service year.

⁶ Average retirement rate for teachers in this sample age group is 28%.

⁷ The negative effect on retirement likelihood is also identified at the 22^nd service year with a higher p-value.

⁸ Note that monthly pension benefit levels continuously increase when a teacher continues to work (due to higher years of service) with a jump in benefit levels at the 31^st year (due to an increase in formula factor to 2.55 from 2.5).

⁹ Average retirement rate for teachers in this sample age group is 33%.

¹⁰ Average retirement rate for teachers in this sample age group is 6.1%.