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Breaking the Implicit Contract: Using Pension Freezes to Study Lifetime Labor Supply
Dhiren Patki, Federal Reserve Bank of Boston

In this paper, studies the recent and widespread elimination of traditional pensions and subsequent adoption of 401(k) plans by U.S. employers. Using thousands of firm-level natural experiments, it shows that unexpected losses in future compensation engendered by pension plan transitions induce a 1 percentage point increase in retirement on impact. Affected workers who do not retire immediately choose to lengthen their careers and exhibit a 2 percentage point reduction in retirement 10 years after the pension plan transition. Observed heterogeneity in retirement behavior is indicative of differences in wealth and in preferences for leisure. Using these credibly identified treatment effects as estimation targets, it fits a structural model of retirement and saving and uses the model to evaluate the effect of a counterfactual reform that eliminates Social Security payroll taxes for workers over age 60. Simulations from the estimated model show that the reform increases the average retirement age by one year and provides substantial welfare gains to older workers.

Public Pensions and State Government Borrowing Costs
Chuck Boyer, University of Chicago

Boyer explores what U.S. state government bond prices imply about the relative recovery rates of pensioners and debtholders in a state default. He provides evidence of a statistically significant and economically meaningful relationship between unfunded public pension liabilities and state government bond spreads. This relationship is stronger in states where pensioners are likely to have higher bargaining power or legal protection in a default. Estimates from a model for municipal debt imply that public pensions are not wholly senior to bonded debt in every state and cross-sectional variation in market perceptions of seniority is related to political and legal factors.

The Prevalence of COLA Adjustments in Public Sector Retirement Plans
Maria D. Fitzpatrick, Cornell University and NBER
Gopi Shah Goda, Stanford University

State and local employees comprise a significant proportion of the workforce and are largely covered by defined benefit pensions. Many of these retirement plans have been facing funding gaps, but legal restrictions often prevent them from reducing benefits for current employees. However, retirement plans can reduce liabilities by changing cost-of-living-adjustments, or COLAs, which are commonly applied to benefits each year to allow retirees to maintain purchasing power in retirement. In this study, Fitzpatrick and Goda examine the prevalence of COLA adjustments in public sector retirement plans through original data collection for 49 plans in 30 states, which cover approximately 52 percent of public sector workers overall. Among this sample, on average 45 percent of workers each year experienced some change in COLAs between 2005 and 2018, with more than half of these workers experiencing negative changes. The researchers consider stylized examples of public sector workers subject to reductions in COLAs to understand how COLA adjustments may affect workers' retirement decisions. Their analysis suggests that eliminating a 3 percent COLA could delay retirement of affected workers by approximately 4.5 months.

Do Deferred Benefit Cuts for Current Employees Increase Separation?
Laura Quinby, Boston College
Gal Wettstein, Boston College

In this study, Quinby and Wettstein examine whether deferred benefit cuts affecting current public employees encourage mid-career teachers and civil servants to separate from their employers. The analysis takes advantage of a 2005 reform to the Employees' Retirement System of Rhode Island (ERSRI) that dramatically reduced the generosity of benefits for current workers. Importantly, the cuts applied only to ERSRI members who had not vested by June 30, 2005. High-tenure ERSRI members and municipal government employees in Rhode Island were unaffected. This sharp difference in benefit levels permits a triple-differences research design in which low-tenure ERSRI members are compared, before and after the reform, to high-tenure members, and to lowand high-tenure members of the Municipal Employees' Retirement System of Rhode Island. The results show that the benefit cut caused a 2.4-percentage-point increase in the rate of separation, implying an elasticity of employer-specific labor supply with respect to deferred benefits of 0.28. Although state employees were more sensitive to benefit cuts than teachers, the low elasticities for both groups suggest that the labor market for public employees may not be highly competitive.

Public Employee Pensions and Municipal Insolvency
Sean Myers, The Wharton School, University of Pennsylvania

This paper studies how municipal governments jointly manage spending, credit market borrowing, and a public employee pension system. Myers models governments as levered investors who must meet non-defaultable pension obligations and may value government spending more than citizens. He quantifies the model using data on California cities, including a new record of fiscal emergencies, tax increases required to maintain essential city services. After the financial crisis depleted pension funds, cities engaged in excessive risk-taking: the fiscal emergency option encouraged gambling for resurrection that kept cities vulnerable to shocks well into the recovery. To correct this problem, a spending cap works better than a restriction on risk-taking.

How Much Can Collective Defined Contribution Plans Improve Risk-Sharing?
Deborah J. Lucas, Massachusetts Institute of Technology and NBER
Daniel Smith, Massachusetts Institute of Technology

Collective Defined Contribution (CDC) plans have been suggested as an attractive and sustainable alternative to public sector DB plans. A CDC plan is a hybrid structure, designed to provide more predictable retirement benefits than a traditional DC plan while operating at the lower cost of a DB plan. It does this by sharing investment risk across worker cohorts and centralizing asset management. Lucas and Smith develop a model of an unsubsidized CDC plan, and use it to characterize the risk-sharing rules and investment policies that maximize a "scheduled benefit" for retirees that is almost always achieved or exceeded. The researchers compare the outcomes under the CDC system with those from an otherwise similar options-augmented DC model, where participants have access to self-financing strategies that involve trading in one-year put and call options. The ability to effectively trade long-dated options in the CDC framework delivers a somewhat higher scheduled benefit than can be achieved by self-insuring in an options augmented DC plan. However under current contribution policies, the scheduled benefit in the CDC plan falls short of what most would consider an adequate retirement income.



Paulina S. Diaz Aguirre, Arnold Ventures
Iwan Barankay, University of Pennsylvania
Anahid Bauer, University of Illinois at Urbana Champaign
Vicki Bogan, Cornell University
Ron Borzekowski, Amazon
Chuck Boyer, University of Chicago
Rodrigo Guerrero Castaneda, Yale University
Cheryl Damberg, Rand Corporation
Paul Davies, Congressional Research Service
Edoardo Di Porto, University of Naples Federico II
Jane Dokko, Federal Reserve Bank of Chicago
Gary Englehardt, Syracuse University
Theodore F. Figinski, U.S. Department of the Treasury
Lucas Finamor, Yale University
Lynn Fisher, Social Security Administration
Teresa Ghilarducci, New School for Social Research
Anastasia Girshina, Stockholm School of Economics
Karen Glenn, Social Security Administration
Maya Haran Rosen, Hebrew University of Jerusalem
Melody Harvey, IRP
Jamie Hentall-MacCuish, University College London
Howell Jackson, Harvard University
Martha Jaimes, The New School
Sreeraahul Kancherla, University of California at Berkeley
Jeanna H. Kenney, University of Pennsylvania
Margaret Lay, Mount Holyoke College
Jonathan M. Leganza, Clemson University
Helge Liebert, Harvard Medical School
Maarten Lindeboom, Vrije Universiteit Amsterdam
Alexander Michaelides, Imperial College London
Paul Mohnen, University of Michigan
Terry Moon, University of British Columbia
Patrick Murphy, Arnold Ventures
Anne Nolan, Economic and Social Research Institute
Dhiren Patki, Federal Reserve Bank of Boston
Francisco Perez Arce, University of Southern California
David Rajnes, Social Security Administration
Prerna Rakheja, Johns Hopkins University
Claudia Robles Garcia, Stanford University
Arthur Seibold, University of Mannheim
Robert Siliciano, Boston College
Sven Sinclair, Social Security Administration
Daniel Smith, Massachusetts Institute of Technology
John Topoleski, Congressional Research Service
Nathanaël Vellekoop, University of Toronto
Hilary Waldron, Department of the Treasury
Adelina Yanyue Wang, NBER
Yanwen Wang, University of British Columbia
Gal Wettstein, Boston College

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