Journal of Pension Economics and Finance

Articles

Behavioral economics perspectives on public sector pension plans

JOHN BESHEARSa1, JAMES J. CHOIa2, DAVID LAIBSONa3 and BRIGITTE C. MADRIANa4

a1 Stanford University, Graduate School of Business, 518 Memorial Way, Stanford, CA 94305-5015, USA and NBER (e-mail: beshears@stanford.edu)

a2 Yale School of Management, 135 Prospect Street, P.O. Box 208200, New Haven, CT 06520-8200, USA and NBER (e-mail: james.choi@yale.edu)

a3 Department of Economics, Harvard University, Littauer Center, Cambridge, MA 02138, USA and NBER (e-mail: dlaibson@harvard.edu)

a4 Harvard Kennedy School, Harvard University, 79 JFK Street, Cambridge, MA 02138, USA and NBER (e-mail: Brigitte_Madrian@harvard.edu)

Abstract

We describe the pension plan features of the states and the largest cities and counties in the U.S. Unlike in the private sector, defined benefit (DB) pensions are still the norm in the public sector. However, a few jurisdictions have shifted toward defined contribution (DC) plans as their primary savings plan, and fiscal pressures are likely to generate more movement in this direction. Holding fixed a public employee's work and salary history, we show that DB retirement income replacement ratios vary greatly across jurisdictions. This creates large variation in workers’ need to save for retirement in other accounts. There is also substantial heterogeneity across jurisdictions in the savings generated in primary DC plans because of differences in the level of mandatory employer and employee contributions. One notable difference between public and private sector DC plans is that public sector primary DC plans are characterized by required employee or employer contributions (or both), whereas private sector plans largely feature voluntary employee contributions that are supplemented by an employer match. We conclude by applying lessons from savings behavior in private sector savings plans to the design of public sector plans.

Footnotes

We thank Gwen Reynolds, Janelle Schlossberger, Jessica Zeng, Arash Alidoust, and John Klopfer for their help in going through state, county, and city pension documents, calling many public pension offices, and compiling and analyzing the resulting data. Karl Scholz and the other participants in the NBER State and Local Pensions Conference provided many helpful comments. Financial support from the National Institute on Aging (grant nos. R01-AG021650 and P01-AG005842) is gratefully acknowledged. The opinions and conclusions expressed are solely those of the authors.