Association for Public Policy Analysis & Management

Many US workers receive a large portion of their lifetime compensation in the form of retirement pensions. Would they be better off with higher salaries and lower pensions? This paper studies this question by examining the retirement responses to a reform that changed both workers’ salaries and pensions. In 2011, Wisconsin’s Act 10 ended collective bargaining (CB) over teachers’ pay schedules, triggering a decline in gross salaries and in defined-benefits (DB) pensions for some older teachers. The Act also increased teachers’ contributions to the pension fund, lowering net salaries for all teachers. I use the staggered timing of implementation of the two provisions and the subsequent variation in net salaries and pensions across teachers and districts over time to characterize how workers trade off higher salaries against higher pensions and to learn about their preferences. Retirement rates more than doubled after 2011, and more than half of this increase was due to a decline in pensions. I estimate a retirement semi-elasticity of -0.59 to net salaries and to 0.12 to pensions, which suggest that teachers are more responsive to changes in present rather than in deferred compensation. I then use a life-cycle model to estimate teachers’ preferences, allowing for uncertainty over future pay. The model can be used to evaluate the effects of alternative policies which reduce teachers’ pensions while leaving net pay unchanged.