Breaking the Implicit Contract: Using Pension Freezes to Study Lifetime Labor Supply
When the baby boom generation members who are still working reach retirement age and leave the labor force, economic growth could slow, the number of Social Security and Medicare benefit claims will rise, and fewer workers will pay into these programs. Eliminating the Social Security component of the payroll tax for workers over the age of 60 has been proposed as a way to incentivize older workers to delay retirement and thus mitigate these adverse effects. To better understand how retirement behavior might respond to such an unexpected policy-induced change in compensation structure, this paper examines the elimination of traditional pensions and subsequent adoption of 401(k) plans by U.S. employers. More specifically, it studies how workers aged 50 to 70 have responded to these so-called pension freezes. The author uses a novel data set that combines detailed administrative information on pension plan characteristics with matched employer-employee data to estimate a model that highlights the importance of forward-looking behavior in determining retirement decisions. This model is suited to evaluating the potential effect of a policy that would incentivize delayed retirement through a permanent shift in future compensation trajectories.