Paper Looks at Public-Sector Retirement Choices.

Position:News & Numbers

Becoming eligible for early retirement, or receiving an early-out offer, significantly increases the probability of retiring among state and local government employees, regardless of individual pension wealth, according to a working paper from the National Bureau of Economic Research. Many public pension plans face underfunding, so it's important to understand the influences of plan generosity and eligibility requirements when assessing plan solvency and evaluating the impact of legislative changes. As a public policy matter, it's also useful to understand the relative value participants place on aspects of their retirement plans.

"Public employee retirement is responsive to program eligibility focal points--in particular becoming eligible for the plan's early retirement benefit through one's age and years of service," the study found. Pension wealth and future pension incentives' influence didn't seem to affect retirement separately, however. The author speculates that "if becoming eligible for early retirement is perceived as reference point, deviations from that point may be psychologically uncomfortable."

Most full-time state and local public employees participate in a defined benefit plan that offers normal retirement benefits at relatively early ages, and these plans vary widely across state and job descriptions. Plans also differ in eligibility thresholds (the age and service combination that determine early or normal retirement). Social Security coverage is another important factor when analyzing pension coverage; the extent to which public employees are covered varies...

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