A new NBER working paperexamines whether early retirement incentives work more effectivelythan eligibility milestones at getting employees to retire. (Photo:Shutterstock)

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A new working paper from the National Bureau of EconomicResearch finds that public sector employees offered early retirement eligibility or earlyretirement buyouts are more likely to retire, without incurring anydeficits in retirement wealth levels.

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The paper “Retirement Choices by State and Local Public SectorEmployees: The Role of Eligibility and Financial Incentives” lookedat the probability of retirement as a function of pension wealth atearly and normal retirement eligibility and Social Security coverage in the public sectorjob.

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Defined benefit plans are expensive to close, even if a state ormunicipality wants to close its plan and switch over to definedcontribution plans.

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As a result, the study says, recent legislative actions focus onchanges that affect new hires instead of existing employees,creating “defined benefit hybrids or combinations with definedcontribution plans for new hires that may reduce plan generositybut still maintain the pattern of defined benefit financialinfluences on retirement,”

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There's not a lot of research on the question of whetheroffering incentives to retire early actually affects retirementbehavior, the study says.

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But considering how underfunded many public pension plans are,it adds, “understanding the influences of plan generosity andeligibility requirements is critical for assessing plan solvencyand evaluating the impact of these recent legislative changes.”

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Older workers are eligible at different ages for taking pensionincome, getting certain health insurance, and obtaining SocialSecurity benefits. The study looked at whether reaching the stageof becoming eligible for one of the three affected retirementdecisions as much as early retirement incentives.

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It found that while public employee retirement is responsive toprogram eligibility focal points, such as becoming eligible for theplan's early retirement benefit through age and years of service,there's no evidence that pension wealth or future pensionincentives influence retirement separately.

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The report adds that although the effects of such personalcircumstances as poor health “have larger economic effects,”retirement can be encouraged by state and local governments, orschool districts, by offering retiree health insurance and offeringan early out package—or, conversely, encourage employee retentionby eliminating retiree health insurance or by changing theage/service combination required.

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It concludes in part that rather than rely on “plan generosity,”to influence employee retirement decisions and keep future pensioncosts in check, state governments might be better off tweaking planeligibility rules and work on making the choice of early retirementan attractive one.

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READ MORE:

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Anticipated retirement age has changed by 6years since 1991

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Explaining early retirement package optionsto employees

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Simple quiz can predict earlyretirement

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Marlene Satter

Marlene Y. Satter has worked in and written about the financial industry for decades.