Do Deferred Benefit Cuts for Current Employees Increase Separation?

Abstract

This study examines whether deferred benefit cuts affecting current public employees encourage mid-career teachers and civil servants to separate from their employers. The analysis takes advantage of a 2005 reform to the Employees’ Retirement System of Rhode Island (ERSRI) that dramatically reduced the generosity of benefits for current workers. Importantly, the cuts applied only to ERSRI members who had not vested by June 30, 2005. High-tenure ERSRI members and municipal government employees in Rhode Island were unaffected. This sharp difference in benefit levels permits a triple-differences research design in which low-tenure ERSRI members are compared, before and after the reform, to high-tenure members, and to lowand high-tenure members of the Municipal Employees’ Retirement System of Rhode Island. The results show that the benefit cut caused a 2.4-percentage-point increase in the rate of separation, implying an elasticity of employer-specific labor supply with respect to deferred benefits of 0.28. Although state employees were more sensitive to benefit cuts than teachers, the low elasticities for both groups suggest that the labor market for public employees may not be highly competitive.