In Search of the perfect DROP: Balancing competing interests to achieve optimal design

Abstract

The deferred retirement option plan (DROP) has been the source of much interest and controversy in the US governmental arena over the last twenty years. Uniquely suited for the public sector,1 the DROP allows an employee to ‘retire’ from the pension system, continue to work and collect what would otherwise be his pension in a separate accumulation account. Thus, a DROP arrangement forms a unique ‘hybrid’ between the traditional defined benefit (DB) pension annuity and the defined contribution (DC) retirement account. This paper explains the basic operation of the DROP, examines the public policy considerations surrounding it, and suggests an optimal design which best suits both the government employee and the taxpaying public.