The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon

John Chalmers, Woodrow T. Johnson, Jonathan Reuter

NBER Working Paper No. 18517
Issued in November 2012, Revised in March 2013
NBER Program(s):Aging, Public Economics

Oregon's Public Employees Retirement System (PERS) is a rich setting in which to study the effect of pension design on employer costs and employee retirement-timing decisions. PERS pays retirees the maximum benefit calculated using three formulas that can be characterized as defined benefit (DB), defined contribution (DC), and a combination of DB and DC. From the employer's perspective, we show that this "maximum benefit" calculation is costly. Average ex post retirement benefits are 54% higher than they if had been calculated using only the DB formula. Monte Carlo simulations verify that the higher cost could have been predicted at the start of our sample period. From the employee's perspective, we show that plan design distorts the retirement-timing decision: employees receiving DC benefits are significantly more likely to retire before the normal retirement age than employees receiving DB benefits. Exploiting two sources of exogenous variation in the level of the DC benefit, we show that employees respond to within-year variation in their retirement incentives and, consistent with peer effects, that they respond more strongly to these incentives when more of their coworkers face similar incentives. Finally, consistent with the emerging literature on financial mistakes by households, we show that a small but significant fraction of retirees would benefit from shifting their retirements by as little as one month.

download in pdf format
   (434 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18517


Users who downloaded this paper also downloaded* these:
Chalmers and Reuter w18158 Is Conflicted Investment Advice Better than No Advice?
Clark, Morrill, and Vanderweide w18488 Defined Benefit Pension Plan Distribution Decisions by Public Sector Employees
Friedberg and Owyang w10714 Explaining the Evolution of Pension Structure and Job Tenure
Lusardi, Mitchell, and Curto w17863 Financial Sophistication in the Older Population
Smith and West w18502 Retirement Pay and Officer Retention
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us