The impact of a DROP program on the age of retirement and employer pension costs

Abstract

This paper investigates the impact of a Deferred Retirement Option Plan (DROP) on the age of retirement of employees covered by defined benefit pension plans provided by the City of Philadelphia. We show that the program results in significant and substantial increases in the age of retirement: 1.25 years on average for municipal employees. Employees make use of the program in ways that maximize the expected present value of their pension benefits, with municipal employees entering the program an average 2.1 years before the age at which they would otherwise have retired. Consequently, the program results in a substantial increase in pension cost. We estimate that the program has cost the city around $258 million over the period to 31 December 2009. We construct an indicator of employee quality and find that some classes of high-quality employees are disproportionately likely to delay retirement as a result of the program.