Working Paper

Breaking the Implicit Contract: Using Pension Freezes to Study Lifetime Labor Supply

Abstract: This paper studies the elimination of traditional pensions and subsequent adoption of 401(k) plans by U.S. employers. Using thousands of firm-level natural experiments, it shows that unexpected losses in future compensation engendered by pension plan transitions induce premature retirement for some workers and delayed retirement for others. Observed heterogeneity in retirement behavior is indicative of differences in wealth and in preferences for leisure. Using credibly identified treatment effects as estimation targets, it fits a structural model of retirement and uses the model to evaluate the effect of a counterfactual reform that eliminates Social Security payroll taxes for older workers.

Keywords: labor supply; pensions; retirement savings; Social Security payroll tax;

JEL Classification: J26; J32; J41; M52; D15; H24;

https://doi.org/10.29412/res.wp.2021.07

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 2021-06-01

Number: 21-7