Incentivizing Retirement: An Analysis of Cash Retirement Incentives for Chicago Teachers

Abstract

Retirement incentives are frequently used by school districts facing financial difficulties. They provide a means of either decreasing staff size or replacing retiring senior teachers with less expensive junior teachers. We analyze a one-time retirement incentive in a large school district paid to teachers willing to retire at the end of the 2016–2017 school year that required 1,500 teachers to accept the offer for it to be paid. The analysis uses an estimated structural model of teacher retention—enabling predictions through simulation of what teacher behavior would be in lieu of the incentive. As predicted by the model, too few teachers accepted the incentive and it was not paid. Simulations enable the decomposition of the would-be retirement incentive takers into those that retired because of the retirement incentive (i.e., marginal teachers) and those who would have retired without the incentive. We find that (1) most teachers who receive the retirement incentive would have retired regardless leading to substantial payments to teachers whose decisions are unchanged, (2) marginal teachers are likely to have retired within a couple years without the incentive limiting the period in which a salary gap can recoup the incentive’s costs, and (3) sharp increases in salary over the first years of teaching narrow the salary gap from which potential savings might derive. These mechanisms are common to most school districts so it is unlikely districts using retirement incentives will realize any cost savings if they replace retiring teachers with junior teachers.