Higher Salaries or Higher Pensions? Inferring Preferences from Teachers’ Retirement Behavior

This paper tests whether defined-benefits (DB) pensions are as effective as salaries in retaining employees by estimating and comparing workers’ extensive-margin labor supply responses to these two forms of compensations. To distinguish between these responses, I study the retire- ment behavior of teachers in Wisconsin around the passage of Act 10, a budget-saving reform that cut salaries and DB pensions with staggered timing across teachers and school districts. I use a life-cycle model of consumption and retirement to estimate responses to changes in these forms of compensation and find that teachers respond four times less to changes in pensions than to changes in salaries of the same size along the substitution margin. Back-of-the-envelope calculations suggest that 800 additional teachers (11% of all retirement-eligible teachers) would have been retained in Wisconsin had the state opted for cutting pensions rather than salaries.