TY - JOUR AU - Chalmers, John AU - Johnson, Woodrow T AU - Reuter, Jonathan TI - The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon JF - National Bureau of Economic Research Working Paper Series VL - No. 18517 PY - 2012 Y2 - November 2012 DO - 10.3386/w18517 UR - http://www.nber.org/papers/w18517 L1 - http://www.nber.org/papers/w18517.pdf N1 - Author contact info: John Chalmers Charles H. Lundquist College of Business University of Oregon Eugene, OR 97403 E-Mail: jchalmer@uoregon.edu Woodrow T. Johnson Division of Risk, Strategy, and Financial Innovation U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549 Tel: 202-551-6611 Fax: 202-772-9290 E-Mail: JohnsonW@sec.gov Jonathan Reuter Carroll School of Management Boston College 224B Fulton Hall 140 Commonwealth Avenue Chestnut Hill, MA 02467 Tel: 617/552-2863 Fax: 617/552-0431 E-Mail: reuterj@bc.edu M1 - published as John Chalmers, Woodrow T. Johnson, Jonathan Reuter. "The Effect of Pension Design on Employer Costs and Employee Retirement Choices: Evidence from Oregon," in Robert Clark, Joshua Rauh, and Mark Duggan, editors, "Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century" Elsevier, Journal of Public Economics, vol. 116 (2014) M3 - presented at "State and Local Pensions Conference", August 17-18, 2012 AB - Oregon's Public Employees Retirement System (PERS) is a rich setting in which to study the effect of pension design on employer costs and employee retirement-timing decisions. PERS pays retirees the maximum benefit calculated using three formulas that can be characterized as defined benefit (DB), defined contribution (DC), and a combination of DB and DC. From the employer's perspective, we show that this "maximum benefit" calculation is costly. Average ex post retirement benefits are 54% higher than they if had been calculated using only the DB formula. Monte Carlo simulations verify that the higher cost could have been predicted at the start of our sample period. From the employee's perspective, we show that plan design distorts the retirement-timing decision: employees receiving DC benefits are significantly more likely to retire before the normal retirement age than employees receiving DB benefits. Exploiting two sources of exogenous variation in the level of the DC benefit, we show that employees respond to within-year variation in their retirement incentives and, consistent with peer effects, that they respond more strongly to these incentives when more of their coworkers face similar incentives. Finally, consistent with the emerging literature on financial mistakes by households, we show that a small but significant fraction of retirees would benefit from shifting their retirements by as little as one month. ER -