The Incentive Effects of Private Pension Plans

The proportion of workers covered by pensions has increased very substantially over the past two or three decades, and in particular the number of older workers with pensions continues to increase. During the same period,and especially in the past decade, the labor force participation of older workers has declined dramatically. These two trends may well be related. This paper examines the incentive effects of private pensions. We find that the provisions of pension plans provide very substantial incentives to terminate work at the current job after the age of early retirement and even greater incentives to leave after the age of normal retirement. It is not unusual for the reduction in pension 'benefit accrual after these retirement ages to equal the equivalent of a 30 percent reduction in wage earnings. In addition to a potentially large impact on labor force participation of older workers, pension plan provisions are likely to have important effects on labor mobility of younger workers.