Changes in Labor Force Participation of Older Americans and their Pension Structures: A Policy Perspective

by Frank Heiland, Baruch College, City University of New York and Zhe Li, Framingham State University

We propose to investigate how the shift in the private pension coverage from defined benefit (DB) to defined contribution (DC) plans in the past two decades contributed to the dramatic rise in labor force participation of older Americans. Compared with DB pensions, DC plans have two features that can encourage labor force participation by older workers. First, DC pension wealth accruals are not tied to the timing of retirement as in DB pensions. Consequently, work by individuals with DC pensions after reaching standard retirement ages does not result in a decline in retirement wealth levels. Second, the employer contribution in DC pensions increases the returns to labor supply, fostering increased labor force participation. We propose to develop and estimate a life-cycle model of labor supply, retirement, and savings behavior using data from the Health and Retirement Study (1992-2008). We will implement the key features of a private pension system, comprised of both DB and DC plans, in a life-cycle model of retirement with public pension (Social Security). This novel policy-oriented framework will allow for an unprecedentedly detailed analysis of the impact of the availability of DC plans on the labor supply and retirement decisions. We will use the estimated model to predict labor force participation and retirement trends under counterfactual pension policy scenarios.

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