Teacher Pension Choice: Surveying the Landscape in Washington State

In this descriptive paper we detail the structure of two Washington State teacher retirement plans: a traditional defined benefit plan and a hybrid defined benefit-defined contribution plan. We provide preliminary evidence on how retirement plan structures may relate to the choices that teachers make. Our analysis of the financial incentives offered to Washington State teachers under the two different plans reveals several patterns that may influence teacher behavior. Teachers experience large gains in their pension wealth by crossing key age and experience thresholds. The relative magnitude of expected pension wealth differs sharply between the plans depending on when a teacher anticipates exiting the position, and the magnitude of anticipated returns to investment. We observe teacher choices between the traditional defined benefit plan and the hybrid plan during two time periods: 1996-1997 and 2008-2010. In 1996-1997 teachers were offered a financial inducement to switch into the newly created hybrid plan and defaulted into staying in the traditional plan if no action was taken. Teachers hired during 2008-2010 defaulted into the hybrid plan if no action was taken. Most of the teachers who were given a choice opted for the hybrid plan. This preference for the hybrid plan is more pronounced among the 1996-1997 cohort, who received a financial incentive in the form of a transfer payment for switching. The notable exception is among teachers who were over 55, and or teachers with relatively high experience levels, who were more likely to choose the traditional defined benefit plan.