Evaluating the Wage-Pension Trade-Off

Nadezhda S. Karamcheva, Boston College

This project develops and estimates a model for the labor market whose purpose is to provide a framework for better understanding what value workers place on the wages and pensions in their compensation packages.  Recognizing that pensions are an indispensable part of compensation and understanding how individuals value pensions relative to wages will provide valuable insight into how individuals save for retirement and how policy reform can affect their savings behavior.

Treating pensions as exogenous, previous studies have often overlooked the fact that workers’ job search behavior determines simultaneously their wage and benefits. In this study I am proposing a new approach to addressing this issue. I adopt a dynamic search framework that will make it possible to track how individuals choose jobs over their lifecycle.  When choosing between compensation in the form of wages versus pension contributions, the workers are essentially making a trade-off between current and future consumption.  They will choose jobs with employers who offer a mix between current wages and pensions that come closer to the workers’ own preferences for savings.  The model will be estimated using standard maximum likelihood estimation techniques, using data primarily from the Panel Study of Income Dynamics (PSID). My analysis will answer questions such as what will be effect on the distribution of retirement wealth, following a future decrease in the generosity of Social Security benefits, change in the tax treatment of pensions, or an increase in normal retirement age.

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