Academic journal article Monthly Labor Review

Pension Plans as a Spur to Labor Force Withdrawal

Academic journal article Monthly Labor Review

Pension Plans as a Spur to Labor Force Withdrawal

Article excerpt

To what extent may pension plans decrease labor force participation among older workers? In a study undertaken for the National Bureau of Economic Research, economists at several universities probe the possible effect of defined-benefit pension plans on labor force behavior. Their objective, according to David A. Wise, author of the study, is "to demonstrate the order of magnitude of the potential incentive effective of these plans without attempting to present empirical estimates of the impacts, but suggesting the response of workers to pension plan characteristics could be substantial."

The economists consider the case of a 30-year-old worker in a "typical plan." the plan calculates normal retirement benefits as 1 percent of average earnings over the last 5 years of service multiplied by years of service. Benefits are reduced by 3 percent for each year that early retirement at age 55 precedes normal retirement at age 65. "Cliff vesting" occurs after 10 years, meaning the employee accrues no credits until meeting the service requirement. "The annual increment to pension wealth" is calculated as a percentage of the wage rate. "Underlying the calculations is a representative lifetime age-earnings profile that assumes substantial growth in real wage rates between agess 30 and 50 and very little growth from 50 to 65. …

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