Ann A. McDermed

Pensions, Bonding, and Lifetime Jobs

A well-known, if underappreciated, finding in the mobility literature is that turnover is much lower in jobs covered by pensions than in other jobs. This could result from capital losses for job changes created by most benefit formulas, the tendency of turnover-prone individuals to avoid jobs covered by pensions, or higher overall compensation levels in such jobs. A switching bivariate probit model of pension coverage and turnover is developed to estimate the effect of each of these factors. The results show that capital losses are the main factor responsible for lower turnover in jobs covered by pensions, but self-selection and compensation levels also play an important role. This is the first direct evidence that bonding is important for understanding long-term employment relationships.

The choice of pension plans in a changing regulatory environment

The private pension system in the United States has changed dramatically since the mid-1970s. Under the influence of new tax policies and changing federal regulations, more employers and workers are favoring defined contribution plans.

Retirement plans and saving decisions: the role of information and education

Increasingly, individuals are being required to take more responsibility for their own retirement saving. Lifecycle theories of resource allocation provide a framework to examine work, retirement, consumption, and saving decisions. However, optimal decision making requires adequate knowledge of financial mathematics, risk and return properties of investments, and expectations concerning wage growth and tax policy. This paper explores the response of individuals to financial education seminars. Using data from three surveys of participants in seminars offered by TIAA-CREF, we estimate changes in retirement goals and saving behavior after the respondents have attended a seminar which discusses keep components of saving for retirement. The results indicate that financial education can produce significant changes in how individuals think and plan for retirement. Throughout the analysis, women were found to be more responsive to the seminar and were more likely to raise their desired retirement age, increase their target income replacement goal, and alter their savings behavior.

Financial education and retirement savings

We acknowledge the cooperation of numerous consultants in TIAA-CREF Consulting Services who administered the surveys in conjunction with seminars around the country. We would like to thank Pirie McIndoe, Al Gonzalez, and Brian Usischon, TIAA-CREF Raleigh-Durham Office, for their assistance in pretesting the survey and Robert Romano, TIAA-CREF Sales Support, for his efforts in coordinating the integration of the surveys with the financial education seminars. Paul Mulvey played a major role in the design of the survey, and Kshama Sawant provided important data analysis assistance for the project. Juanita Kreps contributed to the development of the overall project. Professor Clarks research on this project is supported by a grant from the TIAA-CREF Institute.

Pension Plan Choice among University Faculty

A pension plan is an important component of lifetime earnings, and thus the decision between a defined benefit pension and a defined contribution pension is an important one. This study uses data from annual faculty censuses of the University of North Carolina system, where new hires are given a choice between a state defined benefit pension and a defined contribution plan. Newly hired faculty members who are older, female, and nonwhite are found to be more likely to choose the defined benefit plan. Some differences across university Carnegie classification are also seen. In addition, a declining trend in defined benefit participation is shown.

Earnings and Pension Compensation: The Effect of Eligibility

Pension compensation is shown to rise with age and tenure until the worker becomes eligible to receive benefits. At this point, pension compensation drops sharply. If workers are paid their marginal product in each period, earnings grow at a lower rate prior to eligibility but must increase when the worker reaches the age of eligibility. This hypothesis is tested using data from the Retirement History Study, and earnings are found to rise significantly after eligibility. This finding supports the concept of spot market compensation and is in direct conflict with the predictions of Lazear-type lifetime contracts.

The Pension Cost of Changing Jobs

Workers covered by defined benefit pension plans receive lower benefits at retirement if they leave their current jobs before reaching retirement age. This study estimates the magnitude of this pension loss for workers in the May 1983 supplement of the Current Population Survey, using pension formula estimates from the 1983 Employee Benefit Survey. The pension loss is generally greatest between the ages of 35 and 54 and represents roughly half of a years earnings for that age group. The loss tends to be quite high in the declining mining and manufacturing sectors. This probably resulted in lower voluntary attrition at a time of massive layoffs and plant closings.

Inflation, Pension Benefits, and Retirement

Participation in an employer pension plan will influence the retirement decision of older workers. This paper derives the change in the expected present value of the lifetime flow of wages and pension benefits from an additional year of work under a defined benefit pension plan using an earnings formula. Pension and personal characteristics are explicitly modeled and their effect on the accumulation of pension benefits as a worker approaches retirement is examined. Increases in inflation are shown to reduce the value of this pension compensation and also to lower the present value of lifetime benefits. Thus the relatively high rates of inflation that have prevailed in the United States throughout the 1970s have altered the real pension wealth and annual total compensation of older workers through pension effects.

Postretirement Increases in Pensions in the 1980s Did Plan Finances Matter

Many firms give postretirement increases in pension benefits to retirees even though the formal pension contract does not require them. A leading explanation for the existence of postretirement increases is that they are part of an implicit employment contract that requires the firm to award postretirement increases when the financial performance of the pension fund is better than expected. Data from the 1986 Employee Benefit Survey is combined with financial information from the Form 5500 tax reporting forms for 1985 to estimate the determinants of postretirement increases in pension benefits between 1980 and 1985. The results indicate that financial factors are not closely related to the incidence of postretirement benefit increases but are important determinants of the magnitude of benefit increases. Other results reveal that proxies for the presence of an implicit contract are positively associated with the probability that a firm will award a postretirement benefit increase.Many firms give post-retirement increases in pension benefits to retirees even though the pension contract does not require such increases. A leading explanation of this behavior is that benefit increases are part of an implicit contract where retirees accept lower initial benefits in return for the option of receiving a share of the plans financial returns above the risk-free rate. The paper reports mixed evidence on the linkage between the financial performance of pension plans and post-retirement increases. Between 1980 and 1985, benefit increases were larger in plans with high funding ratios and lofty rates of return. However, the practice of giving post-retirement increases became much less widespread in the 1980s, despite dramatically improved financial performances across all pension plans.