The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions

Abstract

The retirement behavior of Pennsylvania public school teachers in 1997–98 and 1998–99, a period when state early retirement incentives were temporarily increased, is modeled using a choice framework that emphasizes both pecuniary and nonpecuniary factors of the retirement decision under a defined benefit retirement plan. We find each to have large and statistically significant effects on the decision to retire.The present value of inflation-adjusted pension benefits of a public defined benefit plan is found to be an important and sizable determinant of retirement. A $1,000 (or .4 percent) increase in the real present value of pension benefits is estimated to increase the probability of retirement for female teachers by .02 to .08 percentage points; this implies an elasticity of retirement for female teachers with respect to the present value of real pensions of between 2.0 to 3.5. These estimated defined benefit pension elasticities for female teachers are higher than for male teachers, whose comparable retirement elasticity was 1.9 to 2.5.A $1,000 increase in current salary is found to reduce themean probability of retirement by .1 percentage points, implying an elasticity of −1.4. Thus, substantial salary increases systematically reduce the probability of older teachers retiring.