Panel Paper: Pension Generosity in Oregon and Its Impact on Mid-Career Teacher Attrition and Older Teachers' Retirement Decisions

Saturday, November 5, 2016 : 3:50 PM
Jay (Washington Hilton)

*Names in bold indicate Presenter

Kevin E. Cahill1, Michael Giandrea2, Andrew Dyke1 and John Tapogna1, (1)ECONorthwest, (2)U.S. Bureau of Labor Statistics


Oregon’s Tier One Public Employees Retirement System (PERS), which covered members prior to January 1, 1996, was one of the most generous pension plans ever devised. Oregon’s pension generosity was the result of a provision called “money match,” in which individuals received a guaranteed minimum annual rate of return of eight percent, in addition to “excess crediting” when the market rate of return exceeded this amount. The Tier One money match system generated replacement rates that averaged 100 percent of earnings in the year 2000 among teachers with 30 years or more of tenure, far exceeding the 50-percent target among Oregon’s PERS Board. This paper describes the evolution of Oregon’s Public Employees Retirement System (PERS) and how Oregon’s Tier One plan came to be. We document the generosity of the money match provision under Oregon’s Tier One plan and show that, among a comparison group of plans, the present discounted value of benefits under the next-most-generous plan for a teacher retiring in 2014 at age 62 with 30 years of service was approximately one half as large as those under Oregon’s Tier One money match provision.

We then examine the extent to which Oregon’s pension system impacted its K12 workforce, as greater pension generosity could incentivize longer tenures. In the case of Oregon’s money match provision, however, the true magnitude of its generosity was largely unknown to teachers until just prior to retirement. As such, any economic incentives to promote longer tenure among mid-career teachers were muted, while the plan’s generosity, once revealed just prior to retirement, created strong wealth effects that could enable earlier K12 exits. We find that between 2000 and 2010, average tenure among teachers in Oregon was, for the most part, below that of teachers in nearby Washington and the U.S. generally. A further analysis of attrition based on more than 57,000 Oregon teachers active from 2000 to 2013 revealed that quit rates among those covered under Tier One did not differ systematically from those covered under Oregon’s more recent pension plan provisions. Quit rates among Oregon’s Tier One teachers were even somewhat higher than those among teachers in Washington who were covered by plans that were substantially less generous than Oregon’s Tier One plan. These findings suggest that the generosity of Oregon’s Tier One plan did not induce mid-career teachers to remain in Oregon’s K12 workforce longer. Finally, using work histories on 8,621 teachers in Oregon who were aged 50 and older in 2000 we find that the generosity of Oregon’s Tier One money match provision encouraged earlier departures from the K12 workforce, with teachers leaving, on average, one year earlier than what would have been expected under Oregon’s full formula, defined-benefit plan.

These findings suggest that pension generosity alone does not incentivize longer tenure—even in the extreme case of Oregon—as the true generosity of a plan must be known to employees in advance. Oregon’s Tier One pension was not only costly but the plan appears to have negatively impacted Oregon’s K12 workforce.

Full Paper: