Household Borrowing and Shocks to Retirement Benefits
What happens when workers suffer a decrease in total wealth due to changes in their retirement plan’s benefit levels?
Individuals participating in the workforce face a complex trade-off between either consuming more now and working longer until retirement, or saving more now and being able to retire earlier. This trade-off is exacerbated when workers suffer an unanticipated reduction in their future retirement benefits. This paper examines how people who experienced such a reduction responded along two dimensions—how long they kept working until retiring and how much consumer credit they used.
The author exploits a provision in a 2005 Texas pension reform act that “grandfathered” some workers into the former retirement benefit program, while reducing the benefits of other workers. To gauge the effects of a shock to retirement benefits, he compared public school employees who narrowly missed qualifying for the grandfather provision to those who barely qualified for the exemption.