Do Pension Cuts for Current Employees Increase Separation?

WP#2019-3

Abstract

This study examines whether pension cuts affecting current public employees encourage mid-career teachers and civil servants to separate from their employers. The analysis takes advantage of a 2005 reform to the Employees’ Retirement System of Rhode Island (ERSRI) that dramatically reduced the generosity of benefits for current workers. Importantly, the cuts applied only to ERSRI members who had not vested by June 30, 2005. Vested ERSRI members and municipal government employees in Rhode Island were unaffected. This sharp difference in benefit levels permits a triple-differences research design in which non-vested ERSRI members are compared, before and after the reform, to vested members and to all members of the Municipal Employees’ Retirement System of Rhode Island. The results show that the pension cut caused a 2.4-percentage-point increase in the rate of separation, implying an elasticity of labor supply with respect to pension benefits of around 0.25. Rhode Island teachers were significantly less responsive to the benefit cut than other occupations, in line with an existing literature on teacher labor supply, suggesting that the results from that literature may not generalize to the broader workforce.