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Lessons for public pensions from Utah's move to pension choice*

Published online by Cambridge University Press:  10 June 2016

ROBERT L. CLARK ,
EMMA HANSON  and
OLIVIA S. MITCHELL
ROBERT L. CLARK
Affiliation:
Poole College of Management, North Carolina State University, Box 7229, Raleigh, NC 27696, USA (e-mail [email protected])
EMMA HANSON
Affiliation:
Department of Economics, North Carolina State University, Box 8110, Raleigh, NC 27696, USA
OLIVIA S. MITCHELL
Affiliation:
The Wharton School, University of Pennsylvania and NBER, 3620 Locust Walk, 3000 SH-DH, Philadelphia, PA 19104, USA
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Abstract

We explore what happened when the state of Utah moved away from its traditional defined benefit pension. In its place, it offered new hires a choice between a conventional defined contribution plan and a hybrid plan option, where the latter has both a guaranteed benefit component and a defined contribution plan where employees bear investment risk. We show that around 60% of new hires failed to make any active choice and, as a result, were automatically defaulted into the hybrid plan. Slightly more than half of those who made an active choice elected the hybrid plan. Post-reform, employees who failed to actively elect a primary retirement plan were also far less likely to enroll in a supplemental retirement account, compared with new hires who actively selected a plan. We also find that employees hired following the reform were more likely to leave public employment, resulting in higher separation rates. This could reflect a reduction in the desirability of public employment under the new pension design and an improving economic climate in the state. Our results imply that public pension reformers must consider employee responses in addition to potential cost savings, when developing and enacting major pension plan changes.

Keywords

J26J32J33Employee choice of pension planpensions and job separationgenerosity of pension and retirement saving
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 15 , Special Issue 3: The Impact of Reforms of State Retirement Plans , July 2016 , pp. 285 - 310
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

*

The research described in this paper began with a conversation with Richard Ellis, State Treasurer of Utah, who provided introductions to the leaders of the Utah Retirement System (URS) and supported our examination of the impact of pension reform in Utah. The authors acknowledge the assistance of Daniel Anderson, Executive Director; Jeff Allen, Chief Information Officer; John Brinkerhoff, Chief Privacy Officer and Information Security Officer; Joe Kanis, Retirement Applications Manager; and others at URS. This work was presented at ‘Retirement and Health Benefit in the Public Sector’, an NBER conference, and useful comments were provided by David Laibson. Research support was provided by the Pension Research Council/Boettner Center at The Wharton School of the University of Pennsylvania. The research is part of the NBER programs on Aging, Public Economics, and Labor Studies. Opinions and errors are solely those of the authors and not of the institutions with whom the authors are affiliated. © 2015 Clark, Hanson, and Mitchell.

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