Pension Enhancements and the Retention of Public Employees: Evidence from Teaching

We use data from workers in the largest public-sector occupation in the United States – teaching – to examine the effect of pension enhancements on employee retention. Specifically, we study a 1999 enhancement to the benefit formula for public school teachers in St. Louis that resulted in an immediate and dramatic increase in their incentives to remain in covered employment. To identify the effect of the enhancement on teacher retention, we leverage the fact that the strength of the incentive increase varied across the workforce depending on how far teachers were from retirement eligibility when it was enacted. Our results indicate that the St. Louis enhancement – which was structurally similar to enhancements that were enacted in other public pension plans across the United States in the late 1990s and early 2000s – was not a cost-effective way to increase employee retention.