As more baby boomers reach their 60s and late 50s, many state and local governments risk a mass exodus of retirees, making it more difficult to provide public services. The nation’s workforce will continue to age as life expectancy rises and the size of the younger labor pool stagnates; employers striving to meet their staffing needs will need to retain these older workers. Yet the traditional pension plans that cover most state and local government employees generally encourage early retirement. Well-designed public pension reforms could eliminate these work disincentives.

This brief describes how final average salary defined benefit pensions discourage work at older ages and reports the age at which employees maximize expected lifetime benefits from these traditional plans. Employees face an effective pay cut if they remain on the payroll past that age. […]

Many plans discourage work by retirement-eligible employees, who forfeit a month’s worth of benefits for every month they remain on the job beyond the retirement age. Lifetime benefits often fall when older workers remain on the job past this point, because benefits lost while working exceed the benefits gained from an additional service month. Compounding these losses, some plans cap retirement benefits, so some long-tenured employees can’t boost even their monthly benefits by working longer. And most plans require employee contributions, so those who work longer must contribute more.

When Do Lifetime Benefits Begin Falling?

In 63 percent of traditional state and local pension plans, employees hired at age 25 maximize their lifetime benefits, net of their own contributions, by age 57. Net lifetime benefits fall when employees in these plans work longer, effectively cutting their annual compensation. Traditional plans covering police officers and firefighters generally begin penalizing work at even younger ages: 72 percent of age-25 hires max out by age 55. By contrast, only 16 percent of plans covering teachers reach their maximum by age 55. Nonetheless, teachers can boost their benefits by working past age 61 in only 25 percent of plans and by working past 64 in only 14 percent of plans. Employees who keep working after they have maximized their pension benefits often suffer steep loses. On average, age-25 hires lose 48 percent of their maximum net lifetime benefits by working until age 67, Social Security’s full retirement age for those born after 1959.

See here to read the full policy brief and its associated tables.

This article republishes selections from “When Do State and Local Pension Plans Encourage Workers to Retire?” by Richard W. Johnson, Barbara Butrica, Owen Haaga, and Benjamin G. Southgate,” policy brief published by Urban Institute in April 2014.