Academic journal article Economic Inquiry

Evaluating Pension Portability Reforms: The Tax Reform Act of 1986 as a Natural Experiment Abstract

Academic journal article Economic Inquiry

Evaluating Pension Portability Reforms: The Tax Reform Act of 1986 as a Natural Experiment Abstract

Article excerpt

This article exploits a change in the vesting rules for employer-sponsored pension plans introduced by the Tax Reform Act of 1986 to identify the causal effect of pension portability legislation on workers' voluntary mobility decisions. We pool data from different years of the Survey of Income and Program Participation to estimate the impact of this reform using difference-in-differences methods. Our results suggest that the reform had a positive and significant impact on voluntary job mobility of the treatment group. (JEL J24, J44, J62, J63, J68)

I. INTRODUCTION

With increasing mobility of the labor force, (1) portability of pension rights is an important policy issue for those countries where employer-sponsored pension plans play a major role in the provision of retirement income. In most of these countries the nature of employer-sponsored pension plans has gradually shifted, in the last two decades, from traditional defined benefit (DB) to more portable defined contribution (DC) types. While the shift has been particularly significant in the United States, DB plans remain dominant in countries such as Canada, Germany, Ireland, and the United Kingdom, where they still account for up to two-thirds of workers' participation in employer-sponsored pension plans. (2) Moreover, countries such as Canada, Germany, Ireland, and the United Kingdom have recently passed reforms aimed at improving pension portability through shorter vesting periods and/or indexation of DB plans' vested pension rights (Andrietti 2002). In the United States, the Tax Reform Act of 1986 (TRA '86), a bill not explicitly focused on pension reforms, brought about a sharp cut in the maximum length of the vesting period required for full accrual of pension rights. (3)

While a large number of studies have focused on the impact of employer-sponsored pension plans and the incentives they create for job mobility choices, (4) very little is known about the role of pension portability features per se in job mobility decisions. In particular, to the best of our knowledge, no study has explicitly examined the extent to which vesting rules affect labor mobility. This article fills this gap by exploiting the sharp change in vesting rules introduced by TRA '86. This change in legislation offers a transparent source of plausibly exogenous variation that allows us to identify a group of employees who are vested under the new rules but would not have been vested otherwise and to use them as the treatment group.

Our results suggest that the change in vesting rules had a positive and significant impact on the voluntary job mobility of the treatment group. Moreover, an empirical assessment of robustness to potential measurement/classification errors suggests that the treatment effect estimated by pairing our preferred treatment/control groups may represent a lower estimation bound. Finally, the robustness of our findings to a number of falsification tests lends further support to a causal interpretation of our results.

The link between employer pension coverage and labor mobility is complex. Employer-sponsored pensions are often thought to be a significant impediment to worker mobility. This belief originated in early U.S. studies, which consistently reveal a significant negative association between employer pension coverage and job mobility (see, among others, Bartel and Borjas 1977; Mitchell 1982, 1983).

The "new pension economics" literature hypothesizes three possible causal pathways to explain this empirical finding. The conventional view, framed in implicit contract theory, relates this negative association to tenure-related quit costs imposed on workers who leave a DB plan before retirement due to long vesting periods and backloaded benefit accruals (Ippolito 1985).

The empirical support for this view (Ippolito 1987; Clark and McDermed 1988; Allen, Clark, and McDermed 1988, 1993), which contributed to its popularity among policy makers and academics alike, has been challenged by a number of studies that found little or no role of portability losses in explaining quit decisions. …

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