Labor Market Effects of Pensions and Implications for Teachers

Abstract

While the retirement security landscape has changed drastically for most workers over the last twenty years, traditional defined benefit (DB) pension plans remain the overwhelming norm for K–12 teachers. Because DB plans pay off fully with a fixed income after retirement only if a teacher stays in the profession for decades and yield little or nothing if a teacher leaves early, DB plans induce a strong, nonlinear relationship between years of tenure and benefit accrual. One implication is that as many current teachers approach eligibility for full pensions, there are strong incentives for retirement and associated consequences in the teacher labor market. In this article, we assess the key features of DB plans, discuss the general incentive effects, and consider the application to the particular case of teachers. This work highlights the importance of assessing the characteristics of teachers who respond most to the retirement timing incentives.