SixtyFour Brown Laschever

When They're Sixty-Four: Peer Effects and the Timing of Retirement
Kristine M. Brown and Ron A. Laschever

Article Citation
Brown, Kristine M., and Ron A. Laschever. 2012. "When They're Sixty-Four:
Peer Effects and the Timing of Retirement." American Economic Journal:
Applied Economics, 4(3): 90115.

DOI:10.1257/app.4.3.90

Abstract
This paper examines the effect of peers on an individual's likelihood of
retirement using an administrative dataset of all retirement-eligible Los
Angeles teachers for the years 1998-2001. We use two large unexpected
pension reforms that differentially impacted financial incentives within and
across schools to construct an instrument for others' retirement decisions.
Controlling for individual and school characteristics, we find that the
retirement of an additional teacher in the previous year at the same school
increases a teacher's own likelihood of retirement by 1.5-2 percentage
points. We then explore some possible mechanisms through which this effect
operates. (JEL H75, I21, J14, J26, J45)

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90
American Economic Journal: Applied Economics 2012, 4(3): 90115
http://dx.doi.org/10.1257/app.4.3.90
When Theyre Sixty-Four:
Peer Effects and the Timing of Retirement
By Kristine M. Brown and Ron A. Laschever*

This paper examines the effect of peers on an individuals likelihood
of retirement using an administrative dataset of all retirement-eligi-
ble Los Angeles teachers for the years 19982001. We use two large
unexpected pension reforms that differentially impacted fnancial
incentives within and across schools to construct an instrument for
others retirement decisions. Controlling for individual and school
characteristics, we fnd that the retirement of an additional teacher
in the previous year at the same school increases a teachers own
likelihood of retirement by 1.52 percentage points. We then explore
some possible mechanisms through which this effect operates. (JEL
H75, I21, J14, J26, J45)
M
any countries and US states are reforming insolvent public pension programs
by raising retirement ages and cutting benefts.
1
The extent to which indi-
vidual retirement decisions respond to these reforms will determine their effects on
pension viability, labor force composition, and elderly well-being. Cross-country
comparisons show that the labor force participation of older workers is strongly
aligned with social security rules, and calibrations of macroeconomic models
imply large intertemporal labor supply elasticities.
2
However, the results of several
1
In 1983, the United States raised the Social Security normal retirement age from age 65 to 67 for those born
after 1959. Recently, many European countries have reformed their social security programs: Germany raised the
retirement age from 65 to 67 (Wilson 2010); France from 60 to 62; Spain from 65 to 67 (Minder 2011).
2
Gruber and Wise (2004) include several examples of the distinct retirement patterns found across countries.
Mastrobuoni (2009) shows (incomplete) shifting toward new normal retirement ages in the US. See Chetty et al.
(forthcoming) for an overview of the labor supply elasticity estimates from the macroeconomic literature.
* Brown: Department of Economics and School of Labor and Employment Relations, University of Illinois
at Urbana-Champaign, 504 E. Armory Ave., Champaign, IL 61820 (e-mail: kmb@illinois.edu); Laschever:
Department of Economics and School of Labor and Employment Relations, University of Illinois at Urbana-
Champaign, 504 E. Armory Ave., Champaign, IL 61820 (e-mail: ronL@illinois.edu). We thank Rich Akresh,
Isabelle Bajeux-Besnainou, Jane Leber Herr, Salar Jahedi, Tobias Klein, Darren Lubotsky, Elizabeth Powers,
Deborah Rupp, two anonymous referees, and seminar participants at the 2008 SEA Meetings, 2010 ASSA
Meetings, 2010 SOLE Meetings, 2011 Netspar Workshop, Hebrew University, Tel-Aviv University, University of
Arkansas, University of Illinois at Chicago, and the University of Illinois at Urbana-Champaign for discussions
and comments. Joon Yeol Lew provided excellent research assistance. This research was supported by the US
Social Security Administration through grant #10-M-98363-1-01 to the National Bureau of Economic Research
as part of the SSA Retirement Research Consortium. The fndings and conclusions expressed are solely those
of the authors and do not represent the views of SSA, any agency of the federal government, or the NBER. All
errors are our own.

To comment on this article in the online discussion forum, or to view additional materials, visit the article page
at http://dx.doi.org/10.1257/app.4.3.90.
Contents
When Theyre Sixty-Four: Peer Effects and the Timing of Retirement 90
I. Pension Plan Details and Data 94
II. Empirical Framework 98
III. Results 103
A. Instrumental Variable Estimates of the Effect of Peers on Retirement 105
B. Reduced-Form Results 108
IV. Alternative Group Specifcations and Robustness Checks 110
V. Discussion and Conclusion 113
REFERENCES 114
VOL. 4 NO. 3 91 BROWN AND LASCHEVER: PEER EFFECTS AND THE TIMING OF RETIREMENT
microeconomic studies imply a small labor supply elasticity with respect to pension
program fnancial incentives.
3
The goal of this paper is to examine the role of peer effects in reconciling some
of these seemingly contradictory fndings. In the presence of peer effects, an indi-
viduals change in retirement behavior in response to a pension reform will spill-
over and affect the retirement decisions of others, even those that were not directly
affected by the reform. The change in individual retirement incentives is then ampli-
fed and the resulting social multiplier in retirement may cause the aggregate impact
of pension reforms to be larger than would be implied by individual responses to
changes in pension fnancial features.
There are several reasons why peer effects may play a role in the retirement con-
text. First, retirement is a complicated fnancial decision and individuals may rely
on others as a source of information or even simply mimic the behavior of oth-
ers. Second, individuals may also enjoy retirement more (or enjoy their time at
work less) if their long-time colleagues are retired. Further, the growing evidence
that peers affect workplace productivity, and other labor market and economic out-
comes, suggests that peers may be important in the retirement decision.
4, 5
In this paper, we examine the direct effect of peers on the retirement decisions
of Los Angeles public school teachers and estimate the causal effect of the number
of colleagues retirements in the previous year on a teachers own likelihood of
retirement. Using an exogenous reform of the teachers pension plan, coupled with
a rich administrative panel dataset of all retirement-eligible Los Angeles school dis-
trict teachers in the years 19982001, we employ an instrumental variable strategy
to address the main challenges to peer effects estimation. We fnd that all else equal,
an additional peer retirement in the previous year has a positive and statistically
signifcant effect on ones own likelihood of retirement.
While there is some evidence that peers are important for retirement-related deci-
sions, there is little work examining the effect of peer behavior on retirement timing.
Dufo and Saez (2002, 2003) fnd that enrollment in retirement plans is affected by
the choices of colleagues and Hastings and Tejeda-Ashton (2008) fnd that peers
and family members play a role in providing information for the choice of pension
plans in Mexico. These studies do not address the decision of when to retire, but
lend support to the importance of coworkers and friends in retirement planning.
Our fndings, on the other hand, provide some of the frst evidence that peers may
not only affect retirement decisions indirectly by infuencing retirement savings,
but also that they have a direct impact on whether or not an individual retires in
a given year. Chalmers, Johnson, and Reuter (2008), concurrent with our work,
3
For example, Burtless (1986) and Krueger and Pischke (1992) fnd that Social Security can explain only a
small part of the labor force participation trends of older individuals. Coile and Gruber (2007) fnd that fnancial
incentives cannot fully explain the high incidence of retirement at ages 62 and 65. Manoli and Weber (2011) provide
quasi-experimental evidence of a relatively small response to pension parameters.
4
Peers at the workplace have been shown to have an effect on productivity (e.g., Bandiera, Barankay, and Rasul
2009; Mas and Moretti 2009), and some of the underlying social mechanisms in production may extend to the
retirement decision.
5
Researchers have examined peer effects in such settings as welfare take-up (Bertrand, Luttmer, and
Mullainathan 2000), drug use among college students (Duncan et al. 2005), social norms and unemployment dura-
tion (Stutzer and Lalive 2004), recidivism (Bayer, Hjalmarsson, and Pozen 2009), etc.
92 AMERICAN ECONOMIC JOURNAL: APPLIED ECONOMICS JULY 2012
also examine the effect of coworkers retirement behavior on individual retirement
decisions and fnd that peers play an important role. Whereas they focus on groups
at the organization level, with our data we are able to identify all colleagues that
work together in the same physical location. Also, the pension reform we examine
created multidimensional variation in the incentive to retire across teachers, which
is required for our identifcation strategy.
Incorporating peer effects into any economic decision, including the retirement
decision, introduces several challenges to identifcation and estimation. However,
the Los Angeles public school setting and our administrative data offer several
advantages for identifying and estimating the causal effect of peer retirements on
individual retirement decisions. There are potentially many factors, unrelated to
peer effects per se, that could be mistakenly attributed to peer effects. For exam-
ple, one might observe a correlation in the retirement outcomes of those who work
together because of correlated tastes for leisure among colleagues or as a response
to a demanding supervisor.
We show, by extending the Partial Population Intervention approach (Mofftt
2001), that a policy reform that exogenously and differentially impacts the fnan-
cial incentives for retirement across the teaching population can be used to address
these challenges and identify the causal effect of others retirement behavior on
own likelihood of retirement. The source of our instrumental variable strategy is
two pension reforms that created an exogenous, unexpected, and permanent shock
to the pension fnancial incentives for retirement of Los Angeles teachers. The
reforms affected individuals differently depending on their age and years of ser-
vice at the time of the reform, creating necessary across-school and within-school
variation while allowing us to control for the direct effect of the reform on ones
own retirement plan. The exogenous and unexpected shock to the pension fnan-
cial incentives of others is used as an instrument for the number of colleagues that
retired in the previous year.
The differential impact of the reform is essential for identifcation for two rea-
sons. First, by affecting individuals differently, it creates variation in the effect of the
reform on each peer group due to differences in the composition of teacher charac-
teristics. Second, if all teachers in the same school are affected in the same manner,
even if the shock is completely exogenous, one cannot identify the effect of peers
separately from the direct effect of the shock on an individual.
This differential reform underlies our identifcation strategy but several features
of our data are also benefcial for estimating peer effects. The data include all teach-
ers in Los Angeles and their school assignments, so we are able to fully determine
and observe each teachers peer group, which we defne as retirement-eligible col-
leagues working in the same physical location. This is a particularly natural and
relevant reference group as workplace colleagues might be a source of information
about a work-related pension plan. Because California teachers are not covered by
Social Security, their employer-sponsored pension and reforms of this pension are
likely to be especially important considerations for retirement planning. We are also
able to match teachers to school characteristics that may be correlated with the work
environment, such as student test scores. The data allow us to accurately identify
the fnancial incentives that may infuence individual retirement decisions, as the
administrative data include salary and other variables that are suffcient to calculate
retirement benefts.
Applying our differential instrumental variable strategy and controlling for a
host of school characteristics and other teachers characteristics, we fnd that an
additional peer retirement in the previous year increases own likelihood of retire-
ment by 1.52.0 percentage points in our preferred specifcations. These results are
also robust to the inclusion of a school-level fxed effect and an individual-level
fxed effect. Several robustness checks indicate that teachers responses to col-
leagues retirements in the previous year are not driven by coordinated retirements
of spouses, a subsequent increase in workload or a distaste for working with less
experienced teachers. We also perform two types of falsifcation tests, which pro-
vide further evidence that our fndings are not an artifact of spurious correlations.
Using an additional data source, we examine whether the social effect is stronger
across sub-networks as defned by race, gender, and subject taught. While there are
differences in retirement rates across these characteristics, we fnd no evidence of
a differential response to peers across these characteristics or evidence that peers
respond more strongly to those similar to them.
Finally, we further investigate two types of mechanisms through which the
social effect may operate. We fnd little support for the hypothesis that school-
specifc retirement-age norms play an important role. Because individuals may
be affected not only by those who retire, but also by the information provided by
those who decide to stay, we examine how teachers are infuenced by the change
in the fnancial situation of all of their peers. We fnd evidence that teachers are not
only infuenced by others change in fnancial incentives, but that their response
to their own fnancial incentives is infuenced by the change experienced by oth-
ers. We also fnd that the extent to which others maximize their pension benefts
affects the degree to which an individual fully maximizes the fnancial benefts of
his or her own pension plan.
Our fndings suggest that peers play an important role in infuencing the retire-
ment decision and are consistent with a social multiplier in retirement. One policy
implication is that raising the Social Security normal retirement age for younger
cohorts could cause those that are not directly affected by the reform to also delay
retirement, while the effect on the target group is mitigated. Our results not only
document and estimate the existence of peer effects, but also provide a direct dollar
amount estimate of the spillover effect that providing one person with a fnancial
incentive would have on his or her peers. For example, we fnd that holding all other
teachers pension wealth constant, providing an additional unexpected $80,000 of
pension wealth to one colleague (the average amount of additional pension wealth
gained in the frst reform) is equivalent to unexpectedly increasing ones own pen-
sion wealth by approximately $6,400.
The next section introduces the retirement plan of Los Angeles teachers as well
as the unanticipated pension reforms and describes the data. Section II models the
retirement decision and discusses the use of the reform to identify the peer effect.
Section III describes the results. We consider alternative specifcations and robust-
ness checks in Section IV. Section V concludes. Additional details and specifcations
can be found in the online Appendix.
I. Pension Plan Details and Data
We examine the effect of peer retirement decisions on individual retirement
decisions in the Los Angeles Unifed School District (LAUSD). This setting
is advantageous for several reasons. Small peer groups that are relevant for an
individuals retirement decision can be naturally defned as the retirement-eligible
teachers working in the same school building. Further, we observe many peer
groups because LAUSD, the second largest school district in the country, has over
500 schools. Employment conditions across groups are also more homogenous
than they would be across other workplaces. By virtue of working in the same
school district, teachers at all schools in our sample share the same salary sched-
ule, benefts, and curriculum requirements.
All the teachers in our sample are covered by a statewide defned beneft retire-
ment plan administered through the California State Teachers Retirement System
(CalSTRS). The characteristics of the California teachers program closely resem-
ble those of most employer-sponsored defned-beneft pensions and those of Social
Security. Each full-time teacher is required to contribute to the program while work-
ing and, upon retirement, receives a lifetime annuity that is determined by his or her
salary, retirement age, and years of service.
While many factors will enter an individual teachers retirement decision, includ-
ing health, family considerations, and working conditions, the CalSTRS pension
is likely to be an important factor for Los Angeles teachers for two reasons. First,
CalSTRS members are not simultaneously covered by Social Security, making this
pension the only source of employment-based retirement income for career teach-
ers. Second, CalSTRS is relatively generous; the average replacement rate for
retired teachers is 59 percent of fnal average salary, compared to a replacement rate
of 41 percent for the average Social Security annuitant.
6
We exploit two pension reforms to examine how changes to pension fnancial
incentives directly affect individual retirement decisions and also how they indi-
rectly affect behavior through the retirement decisions of colleagues. The reforms
to the teachers pension are at the heart of our instrumental variable strategy as
detailed in Section II. We summarize the effect of the reforms on individual pen-
sion fnancial measures below. The pension plan and reform are further detailed in
online Appendix II.
In August 1998 and August 2000, the California State Legislature passed close-of-
session bills that substantially increased the generosity of the teachers pension for
retirements occurring on or after January 1, 1999 and January 1, 2001, respectively,
without any provision to fund the beneft increases.
7
The reforms were unexpected
and the details were worked out just prior to passage, however, the changes were
clearly communicated to all active teachers through the CalSTRS fall newsletters.
The frst reform increased pension wealth, the present value of the stream of
retirement income, by 1020 percent for those age 60 or older and by 10 percent for
younger teachers with at least 30 years of service. The interaction of age and service
6
California State Teachers Retirement System (2006) and Social Security Administration (2006).
7
The 1998 legislative bills were AB 1102 and AB 1150 and the 2000 bill was AB 1933.
is important for determining the impact of the reform at the individual level and this
interaction created signifcant variation in the effect of the reform across individuals
with similar ages and years of experience. A stylized example of this interaction is
illustrated in Figure 1. Panels A and B show pension wealth pre- and post-reform
as a function of age, holding service constant at 29 and 30 years, respectively.
Panel A shows that the current pension wealth of a 60 year old with 29 years of
service is unaffected by the reform, but the unexpected change in pension wealth for
an otherwise identical 63 year old colleague is $150,000. Comparing across panels,
it is clear that the unexpected change in pension wealth for 60 year olds with just a
one year difference in service is also large. The second CalSTRS reform provided
a lump sum longevity bonus to teachers at three target service levels. The bonus
awarded an additional $2,400 of annual retirement income to teachers with 30 years
of service, $3,600 to those with 31 years of service, and $4,800 to those with 32 or
more years of service. This reform also affected individuals differently, but only
along the service dimension. For the average teacher that was eligible for the bonus
at the time of reform, his or her pension wealth increased unexpectedly by 613 per-
cent. Such an unexpected increase in pension wealth provides affected individuals
with an additional incentive to retire in the current period.
We focus on the impact of the reforms on pension wealth in this section because
it is the basis of our IV estimation strategy, however, this was not the only effect
of the reform on pension fnancial incentives. The reform also provided some
individuals with an additional incentive to delay retirement. For example, both
reforms introduced a discontinuous increase in benefts at 30 years of service,
Figure 1. The Effect of the First Reform on the Pension-Wealth-Age Profile
Note: Salary is fxed at $55,000/year, the individual is assumed to live until age 85, and future income is not
discounted.
5
6
7
8
9
10
P
e
n
s
i
o
n

w
e
a
l
t
h

(
$
1
0
0
k
)
Age
5
6
7
8
9
10
55 56 57 58 59 60 61 62 63 64 65
P
e
n
s
i
o
n

w
e
a
l
t
h

(
$
1
0
0
k
)
Age
Pre-reform pension wealth
Post-reform pension wealth
Panel A. Holding service fixed at 29 years Panel B. Holding service fixed at 30 years
55 56 57 58 59 60 61 62 63 64 65
providing individuals with 29 years of service at the time of the reforms with a
clear incentive to delay retirement for a year. We do not detail this aspect of the
reforms here (see online Appendix II for further technical details), but we intro-
duce a variable in Section II that captures the fnancial option value of delaying
retirement and include it in our analysis.
Data.In this study we use individual-level administrative data for the com-
plete population of teachers age 45+ that were employed by the LAUSD.
8
The
data include an annual census of active teachers for each of the academic years
19972003 and all retirement episodes during this time period. We focus on retire-
ment-eligible teachers, those age 55 or older in academic years 19982001. Each
person-year observation (N = 24, 444) includes age, years of service, salary, gen-
der, retirement date (if applicable) and school assignment. School assignment is
the key variable with which we are able to identify each teachers colleagues and
a teacher-specifc identifer allows us to follow teachers over time. Two measures
of the pension fnancial incentives, pension wealth and peak value, are calculated
for each teacher in each academic year using the salary, service, and age informa-
tion available from the administrative data. These measures are described in Section
II and further calculation details can be found in Appendix II. The administrative
teacher-level data has also been matched to school-level characteristics.
9
These
school characteristics include the average age, service, and education of all teach-
ers (regardless of age) in the school, as well as student characteristics, such as test
scores and grade level of the school.
We use an academic year as the time unit of analysis. The academic year is
defned as starting in September and ending the following August (e.g., academic
year 1998 covers the period September 1, 1998August 31, 1999). Although we
know the exact date of all retirement occurrences and could look at retirement
decisions in fner units of time, such as months or even days, an annual measure
is more natural for the LAUSD context. Retirements are not spread evenly across
the year as over 80 percent of retirements occur during the summer months with
over 70 percent occurring in June alone.
10
Teachers are also required to formally
announce their retirements at least 30 days in advance (and they may be encour-
aged to do so even earlier by administrators for staff planning purposes). These
two facts make the window in which teachers are able to respond to observed
retirements of other teachers at their school by immediately retiring in the same
academic year very small, though it does not rule out peer consultation that results
in simultaneous retirements. In Section IV, we show that our results are robust to
looking at shorter and longer peer retirement windows, as well as at contempora-
neous peer retirements.
8
These data were compiled with the assistance of the Offce of Personnel Research and Assessment in LAUSD.
9
We use the publicly available CBEDS data from the California Department of Education (http://www.cde.
ca.gov/ds/).
10
This is not surprising as teachers may be reluctant to leave their classes mid-year. Finishing out the contract
year is also important for maximizing retirement service credits.
Summary statistics for LAUSD teachers are shown in panel A of Table 1. Each
year 9.4 percent of teachers age 55 and over retire. The retirement-eligible LAUSD
teachers are, on average, just short of 60 years old and have 21 years of service
within LAUSD, and over 70 percent are women. As a group they have an average
pension wealth of $518,000. The peak value measure, fully described in the next
section, suggests that these teachers could increase their pension wealth by up to 20
percent, on average, with continued work. For those individuals that had an unex-
pected gain in pension wealth due to the reforms in academic years 1998 and 2000,
the average gain in pension wealth was $81,200.
If coworkers are affecting individual retirement decisions, then it is not only own
characteristics that matter, but the characteristics of ones group. For each teacher,
Table 1Summary Statistics for Academic Years 19982001
Panel A. Teacher-level
(Teacher Year); N = 24,444
Panel B. School-level
(School Year); N = 2,270
Statistics of the school-mean
Variable Mean SD Median Mean SD Median
Retired during this academic year 0.094 0.292 0.093 0.117 0.063
Pension wealth ($100k) 5.180 3.238 4.626 5.217 1.508 5.171
Peak value ($10k) 10.106 8.596 10.135 10.393 3.721 10.241
Unexpected change in pension wealth ($100k)
a
0.812 0.342 0.844 0.828 0.201 0.839
Unexpected change in peak value ($10k)
b
3.230 3.849 3.103 2.474 2.768 2.805
Salary ($10k) 5.837 0.738 6.062 5.822 0.367 5.842
Age 59.920 3.912 59.030 59.859 1.675 59.788
Service 21.240 11.048 20.960 21.216 5.060 21.473
Female 0.725 0.446 0.805 0.206 0.857
Average peers pension wealth ($100k) 5.023 1.287 4.994 5.055 1.496 5.010
Average peers peak value ($10k) 10.098 2.923 9.879 10.285 3.380 10.169
Total of peers unexpected change in
pension wealth ($100k)
c
5.841 4.860 4.384 3.520 3.501 2.558
Average of peers unexpected change
in pension wealth ($100k)
c
0.343 0.188 0.318 0.356 0.217 0.334
Total of peers unexpected change in
peak value ($10k)
c
36.434 52.883 13.357 22.590 35.464 8.090
Average of peers unexpected change in
peak value($10k)
c
2.167 2.390 0.927 2.277 2.488 1.489
Number of peers age 55+ at school 18.176 13.181 14.000 10.660 9.378 8.000
Number of full-time equivalent teachers
at school
80.736 44.759 72.580 56.746 35.129 48.000
Average age of all teachers at school 43.946 3.267 44.100 43.071 3.681 42.918
Average teaching experience of all teachers
at school
12.917 2.697 12.800 12.396 3.067 12.140
Pupil to teacher ratio 21.698 3.273 21.000 20.290 3.340 19.608
Math test ranking at school level 5.567 2.608 5.500 5.506 2.659 5.367
Fraction of all teachers with at least an
MA at school
0.286 0.089 0.286 0.266 0.098 0.257
Elementary school 0.513 0.500 0.722 0.448
Middle school 0.187 0.390 0.125 0.330
High school 0.250 0.433 0.086 0.281
Note: The sample includes, for each academic year 19982001, all teachers age 5575 in the given year.
a
Observations are included conditional on having a nonzero value of the unexpected change in pension wealth
at the individual level (5,144 individual-year observations).
b
Observations are included conditional on having a nonzero value of the unexpected change in peak value at the
individual level (8,126 individual-year observations).
c
These include only observations in the years 1998 and 2000 (11,846 individual-year observations).
we defne the relevant peer group for retirement to be all teachers age 55 or older that
are working in the same school.
11
There are 585 unique schools observed in LAUSD
over this time period, and the average number of teachers age 55 or greater working
in each school is 10.77. However, there is substantial variation across schools.
Panel B of Table 1 provides summary statistics for the schools. The table treats
each school-by-year average as an observation, and reports the mean, median, and
standard deviation of the average-within-school teacher characteristics. The standard
deviation illustrates the amount of variation in peer characteristics across schools.
The variables central to our estimation are the school-level retirement rate and the
unexpected change in pension wealth that is used as the instrument for school-
level retirements. The average retirement rate across school-by-year observations
is 9.3 percent but the standard deviation is 11.7 percent. The mean total unantici-
pated change in peers pension wealth (our primary instrument) in the reform years
is $352,000. There is also signifcant variation in this variable across schools. As
indicated in Table 1, the standard deviation in the average total unexpected change
in pension wealth across schools is $350,100. We discuss this measure, used as an
instrument, in further detail in the next section.
II. Empirical Framework
The focus of this paper is the identifcation and estimation of the effect of peers
on ones own likelihood of retirement. We highlight this in our model by expand-
ing on the core feature of all retirement decision models, utility maximization over
lifetime consumption and leisure (years in retirement), to explicitly incorporate both
the effects of the school environment and the characteristics and behavior of ones
peers. Given that our focus is not the estimation of the price and income elasticities
of labor supply for comparison with the existing retirement literature, a reduced-
form approach is more suitable for our purposes.
12
The econometric specifcation we use is derived from a utility-based choice
framework (McFadden 1974). Let U
i, s, t

*
be the latent utility that individual i, in
school s gets from retirement in year t. We specify the latent utility as an addi-
tively separable function of work-related fnancial incentives, other individual
characteristics, and school characteristics. Allowing for an individual fxed effect

i
, the econometric framework of the retirement decision y = 1, can be written as
Pr( y
i, s, t
= 1 | i, s, t) = Pr( U
i, s, t

*
> 0 | i, s, t). To keep our discussion and illustration
of the identifcation strategy tractable we focus, as the bulk of the literature has, on
the linear-in-means specifcation:
13
(1) y
i, s, t
= X
i, s, t
+ m(
_

y
i, s
) + Z
s, t
+
s
+
t
+
i
+
i, s, t
,
11
We chose 55 since, in almost all cases, that is the earliest retirement-eligible age. However, our results are
robust to defning the group as those 45 and older.
12
See Lumsdaine and Mitchell (1999) for a survey of the structural retirement literature.
13
However, the reduced-form specifcations were also estimated using the logit functional form and the results
are qualitatively and quantitatively similar. See online Appendix Table A8.
where
_

y
i, s
, Z
s, t
, and
s
are school-level measures that may affect retirement. The
individuals observable fnancial incentives, such as salary, and the pension variables
pension wealth (P W
i, s, t
) and peak value (P K
i, s, t
), are included in X
i, s, t
. Observable
personal characteristics that may affect the disutility of working, such as age and
years of service, are also included in the vector X
i, s, t
, while unobservable character-
istics are captured by an individual-level fxed effect
i
and individual shock
i, s, t
.
For the purpose of calculating the pension variables, retirement and pension claim-
ing are treated as coincident, and we assume it is an absorbing state.
14
We describe
the pension variables briefy below as they are important for capturing individual
fnancial incentives and are central to our identifcation strategy.
Pension wealth, P W
i, s, t
, is the present discounted value of the stream of pen-
sion income for the individual if he or she retires in year t and it can be written as

a=t

T

a | t

(
1

_

1 + r

)

at
B(t), where B(t) is annual pension income;
a | t
is the prob-
ability of living to year a, given having lived to year t; and r is the real interest rate.
The peak value measure, introduced by Coile and Gruber (2001), succinctly
captures the fnancial return to work or the price of retirement in terms of pen-
sion wealth when pension wealth accrual is nonlinear.
15
This measure of the fnan-
cial option value of delaying retirement is the difference between pension wealth
associated with retirement in the current year and the expected pension wealth
for retirement at the future age that maximizes pension wealth. It can be written
P K
i, s, t
= P W
i, s, R
max

P W
i, s, t
, where P W
i, s, t
is pension wealth in year t, and R
max
is
the retirement year in [t + 1, T ] in which pension wealth is maximized.
16
The effects of the school environment as well as the characteristics of ones peers
are summarized in equation (1) by: m(
_

y
i, s
) + Z
s, t
+
s
. We consider three
possible types of group-level effects. The frst type of measure is the retirement
behavior or outcomes of all others,
_

y
i, s
, where the notation i denotes that own
behavior is excluded. The second type of measure is the observable school charac-
teristics summarized by the vector Z
s, t
, such as the student body or the age compo-
sition of other teachers in the school. The third type of measure is the unobserved
school-level effect, such as a friendly and supportive school principal, which is
denoted by
s
.
We are frst and foremost concerned with correctly identifying the effect of others
behavior from alternative explanations, such as workplace environment, however,
there are many mechanisms through which the peer effect could operate. One rea-
son individuals may be affected by others retirement is that they derive utility from
14
Teachers that have started receiving CalSTRS pension payments are eligible to work again only in California
school districts that face a shortage of qualifed teachers, but they will not accrue wealth under CalSTRS and they
face an earnings limit.
15
Peak value does not capture the structure of these benefts precisely, but this would only be crucial if one
were trying to estimate structural parameters, such as retirement elasticity. For example, Blomquist and Newey
(2002) develop a nonparametric estimate in the presence of nonlinear budget constraints. We adapted this method
and found that the peak value approach captured the essential features of the pension program well enough given
the focus of our paper.
16
Coile and Grubers (2001) peak value is similar to the Stock and Wise (1990) utility option value. Peak value
has been used extensively in other work including a volume of international retirement studies edited by Gruber
and Wise (2004) and Asch, Haider, and Zissimopoulos (2005). Similarly, Samwick (1998) calculated the individual
option value and used this variable directly in a regression.
acting in accordance with others (social norms). Alternatively, increased retirement
behavior among others may increase own likelihood of retirement for other reasons.
Deciding when to retire is complex so individuals may mimic the behavior of others
in order to reduce the computational burden of the decision. Brock and Durlauf
(2001) discuss utility-based models in which own behavior depends on the utility
and behavior of others, and distinguish between own utility increasing in group-
level outcomes, and own utility depending on the distance from the group-level
outcome. In online Appendix III, we explore two possible types of mechanisms:
conforming to retirement-age norms, and the effect of others response to fnancial
incentives on own response to fnancial incentives.
Identifcation Strategy.The growing body of literature on identifcation and
estimation of peer effects has recognized several threats to validity and problems
associated with the family of specifcations that includes equation (1).
17
First,
because assignment to schools (or groups) is not random, a concern is that teachers
with an unobservable taste for work might select their working environment based
on the characteristics (observable or unobservable) of other teachers. Second, like
in the nonpeer case, an omitted variable problem may exista common unobserv-
able-to-the-econometrician factor in a school, such as the school principal, may be
affecting all teachers retirement decisions.
Additionally, two types of refection problems (Manski 1993) could exist in
our setting, and would cause us to mistakenly attribute the observed social effect
to others retirement behavior. First, peer unobservables may be correlated with
the observables of those peers resulting in one type of refection problem. Second,
because we are using the linear-in-means specifcation, even if assignment were
random, and there were no school-unobservable components, a refection problem
would still exist, namely the inability to separately identify and . In our context,
for example, we would want to distinguish and identify whether peer retirements
were directly affecting own retirement, or whether teachers were affected by the
years of service of their colleagues. Teachers may prefer to work with (and thus be
less likely to retire when surrounded by) more experienced colleagues, but at the
same time, the average years of service among colleagues is positively correlated
with colleagues retirements.
Our identifcation strategy makes use of three features of our setting and avail-
able data to address these potential sources of bias. We use the exogenous changes
induced by the pension reform to derive instrumental variables to address any bias
for group-level retirement outcomes as well as own pension fnancial incentives. We
also exploit the panel data nature of our sample to difference out any individual or
school-level, fxed-over-time unobservable component. Finally, the richness of the
individual- and school-level data allows us to distinguish among various school-
level effects on teacher retirement, such as student test scores or an increase in work-
load due to colleagues retirements.
17
The interested reader is referred to Brock and Durlauf (2001) and Mofftt (2001) for a more thorough discus-
sion of some of these issues.
In the case of peer effects, a valid instrument, i.e., one that is correlated with the
endogenous group outcomes and uncorrelated with own unobservables, is not suf-
fcient, as noted for instance, by Brock and Durlauf (2001) and Krauth (2006). An
additional requirement of the instrument is that it has a differential effect across and
within schools. The intuition behind this requirement is straightforward. Consider a
case in which a reform exposes all group members to the same exogenous incentive
to retire. This new incentive will enter each individuals retirement decision and so
should be included directly in the regression. Therefore, it can not also be used as an
instrument for the groups retirement behavior, as it would be identical to the own-
incentive measure. In this case, it will not be possible to distinguish an individuals
response to his or her own change in incentives from his response to the groups
reform-induced change in behavior, even though the instrument was not correlated
with individual unobservables.
Mofftt (2001) discusses a Partial Population Intervention strategy that can be
used when some individuals in each group are assigned a treatment (e.g., in Miguel
and Kremer (2004) only some children in every class receive a deworming treat-
ment; in Cipollone and Rosolia (2007) the treatment only directly affected boys
in each class). In online Appendix I, we extend this approach to allow for different
treatments to individuals within a group, which we denote as a differential popula-
tion intervention (DPI). For example, the reform caused an unanticipated change in
pension wealth, and did so differently for each teacher, according to their age and
years of service. In turn, this generates suffcient variation across and within groups.
This allows us to instrument both own and others measures simultaneously (e.g.,
Acemoglu and Angrist (2000) instrument own schooling and state-level schooling
using different instruments).
The differential IV addresses concerns regarding the endogeneity of the group
retirement measure as well as own fnancial measures. However, a common concern
in the retirement literature is that in addition to the pension variables, other variables
of interest may be correlated with individual-level unobservables that also affect
the retirement decision. This would lead to biased estimates even if peer effects
played no role. The fact that all California teachers are covered by the same pension
alleviates a usual concern that individuals may select into retirement programs with
features that match their tastes for work, however, it is still possible that teachers
with relatively poor health or greater demands outside of work may be less attached
to the labor force and have systematically lower pension wealth.
In addition to using the pension-reform-derived instrumental variables to
address the endogeneity of own pension plan fnancial variables, our panel data
allow us to use fxed effects to address other systematic unobservable character-
istics, such as health or marital status. Note that the case of an individual-level
unobservable fxed component encompasses the less general case of an unob-
served school-level fxed component when teachers do not change schools.
18
We
extend our DPI approach to the case where there is an unobservable individual-
level and school-level fxed effect, and show that identifcation is possible even
18
As discussed in Section III, our results are robust to the inclusion of teachers who moved across schools, as
they represent a very small portion of the sample.
if there is a differential reform in only some of the periods. As discussed in the
empirical specifcations, the inclusion of an individual fxed effect allows us to
address unobserved health, marital status, and external wealth resources. Further,
in Section V, we provide evidence that our peer effect estimates are not driven by
the joint retirement decisions of couples working at the same school.
It is useful to think about the role of fxed effects when combined with instrumen-
tal variables. First, the inclusion of fxed effects would address any concern about
a fxed group-level unobservable effect. However, it would not suffce in the case
where unobservable characteristics are (systematically) changing over time. This
is especially a concern when studying retirement that explicitly alters group mem-
bership, since group characteristics are based on the composition of its members.
Similarly, even a constant setting may lead to group responses to shocks that would
not be captured by the fxed effect. For example, even if the principal did not change
during a reform year, she might infuence teachers to respond to and think of the
reform in a certain way. For these reasons, fxed effects would not eliminate the need
for instrumenting the group effects, and we employ both strategies simultaneously.
In regard to own characteristics, we view the use of individual fxed effects as
addressing many of the potential biases due to unobservables such as wealth and
health. Controlling for an individual fxed effect, the pension reform is not likely
to be correlated with any yearly shocks to health or nonpension wealth. Unlike
the case of group-level measures, when controlling for the fxed effects changes to
own fnancial measures are not likely to be correlated with the taste for retirement.
Therefore, once fxed effects are included, instrumenting own characteristics is not
likely to be needed. For completeness, we present our fxed effects results with and
without instrumenting own characteristics.
The derivation of the DPI identifcation with fxed effects in online Appendix I
follows the setup of many papers in the literature on peer effects by examining
the effect of others contemporaneous outcomes. One disadvantage of contempo-
raneous timing is the need to assume the existence of a social equilibrium (e.g.,
Manski 1993) or that individuals have the correct expectations about group behav-
ior.
19
The detailed panel data at our disposal allows us to also examine how lagged
(and therefore observable to teachers) retirements of others affect individuals. Our
preferred specifcation for equation (1) is to use the lagged, and therefore actual,
realization of the group outcome: m(
_

y
i, s
) =
_

y
i, s, t1
(others retirement in the
previous period, self excluded), instead of m(
_

y
i, s
) = E[ y
j, t
| j S ]. The results
we present in Section IIIA focus on lag-outcomes specifcations as they are more
consistent with the institutional detail discussed in Section I. However, our deriva-
tions in online Appendix I emphasize that the source of the identifcation is not the
use of lagged outcomes. Note that using lagged outcomes does not eliminate the
simultaneity problem of the group decision and requires us to use the identifca-
tion strategy discussed in this section.
20
We fnd similar results in Section IV when
19
See Angrist and Pischke (2008, 19498) for a concise treatment of the drawbacks to using same-period
outcomes of others.
20
For example, if there is an important observable or unobservable group-level variable ( Z
s
or
s
) that deter-
mines retirement, it is likely to affect previous year retirements of others just as strongly as it affects (planned)
current-year retirements of others.
we examine alternative group-effect-timings that consider the contemporaneous
retirement of others.
The above discussion assumed that all peers have an equal weight on ones own
outcomes. We relax this assumption in Section IV by considering various group
partitions, such as gender, race, and teaching subject.
III. Results
In Section II, we examined the advantages of a differential instrumental variable
(IV) strategy. The IV for colleague retirements is constructed from measures of
the reform-induced change in pension fnancial incentives faced by each individual.
For both the frst and second reforms, individual i s unanticipated change in pen-
sion wealth (and similarly for peak value) is the pension wealth for individual i at
time t calculated under the post-reform beneft formula minus the pension wealth
for individual i at time t calculated under the pre-reform beneft formula: PW_I V
i, t

= P W
i, t

post
P W
i, t

pre
. The unexpected changes in pension wealth are completely driven
by differences in the pre-reform and post-reform calculation of pension benefts.
The individual characteristics that enter the pension formulaage, years of service,
and salaryare held constant at their values in year t. We use this individual-level
shock as an instrument for own pension fnancial incentives.
The main IV for colleague retirements in year t at school s is calculated as the
sum of colleagues unanticipated change in pension wealth, self excluded:
Peer_PW_I V
i, s, t
=
js, ji
P W_I V
j, t
.
Similarly, in some specifcations we also make use of the unexpected change in peak
value, the shock to the option value of delaying retirement, which is calculated in
the same way. The measures of the unanticipated change in fnancial incentives will
be zero in nonreform years.
There are several conditions that must hold for this IV to be valid for estimat-
ing peer effects in retirement. As motivated in Section II, crucial for identifcation,
the reforms must have a differential effect on teachers within and across schools.
There is large variation in PW_I V
i, t
both within and across schools (see Table 1)
that allows us to identify and estimate the peer effect. This allows us to use both
own shock and shock to others in the same specifcation. In addition to having a
differential effect, our instrument should be correlated with the variable of inter-
est. Since each individual is affected by the unanticipated change in their fnancial
incentives, it is likely their outcomes as a group would be affected by a change in
the groups incentives. We show empirical support for this below. Finally, the most
crucial question in any IV setting is whether the instrument is uncorrelated with the
unobservable component. We argue that, in this case, two features make this more
likely to hold. First, the pension reform was unanticipated. Second, we are able to
observe all the factors that affect our IV. In particular, the IV is solely a function of
the age, service, and salary composition of teachers in a given school, all of which
are measures we fully observe and can control for in the analysis.
In Table 2, we show estimates of equation (1), excluding peer retirements to frst
provide empirical support for our instrument at the individual level. Columns 13
show that individual fnancial incentives are strongly correlated with the retire-
ment decision after controlling for age, years of teaching experience, salary, and
additional individual and school characteristics. The coeffcients of both pension
wealth and peak value are of the expected sign and statistically signifcant at the
1 percent level. The estimates are also in line with estimates from other studies
that use this model of retirement (e.g., Gruber and Wise 2004). The integer age
dummies (not reported in the table) also have the expected sign. The coeffcient
on salary is positive in most specifcations, but is only statistically different from
zero in the 19982001 sample. The expected sign of the salary coeffcient in this
setting is ambiguous because the salaries of LAUSD teachers are a strict function
of service (which we also control for directly) and education, and are negotiated at
the district level. In addition, several omitted variables, including nonpension wealth
and taste for work, may be correlated with salary. Our results both for own pension
measures and the peer effects discussed in the next section are robust to controlling
for every possible location on the salary schedule rather than salary directly (see
online Appendix Table A8).
Table 2Determinants of Retirement Excluding Peers Retirement Behavior
All LAUSD teachers, ages 5575; Linear probability model; Dependent variableRetirement
(1) (2) (3) (4) (5) (6) (7) (8)
Specifcation OLS OLS OLS 2SLS OLS 2SLS OLS 2SLS
Pension wealth ($100k) 0.013*** 0.013*** 0.013*** 0.022** 0.014*** 0.022* 0.038*** 0.036***
(0.004) (0.005) (0.005) (0.011) (0.005) (0.011) (0.008) (0.014)
Peak value ($10k) 0.006*** 0.005*** 0.005*** 0.001 0.005*** 0.001
(0.001) (0.000) (0.000) (0.001) (0.001) (0.001)
Peak value is positive 0.088*** 0.682
(0.020) (0.596)
Salary ($10k) 0.009** 0.005 0.006 0.006 0.004 0.007 0.023 0.029
(0.004) (0.004) (0.004) (0.008) (0.004) (0.008) (0.016) (0.021)
Years of service in LAUSD 0.003*** 0.003*** 0.002*** 0.005*** 0.003*** 0.005***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Years of service (squared) 0.000*** 0.000*** 0.000*** 0.000** 0.000*** 0.000** 0.001*** 0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.001)
Fixed-effects level School School Teacher Teacher
Academic years 19982001 19992001 19992001 19992001 19992001 19992001 19992001 19992001

R
2
0.10 0.11 0.11 0.11 0.12 0.12 0.19 0.06
Sample size 24,444 21,296 21,296 21,296 21,296 21,296 21,296 21,296
Notes: Standard errors, in parentheses, are clustered at the school level, allowing any correlation across individuals and years within
school. All specifcations control for gender, and include age dummies and year fxed effects. Peer group measures (self-excluded)
include number of retirement-eligible (age 55+) teachers and the average age and service of those 55+. School-level measures
include pupil-to-teacher ratio, fraction of teachers with a masters degree or higher, fraction of teachers that are female, and aver-
age rank on students standardized math test scores. Specifcations without teacher or school fxed effects also include the number
of full-time-equivalent teachers and school grade-range (elementary, high school, etc.). The specifcations in columns 1 and 2 do
not include peer group or school-level measures. In column 1, the sample includes, for each academic year 19982001, all teach-
ers age 5575 in the given year. In the remaining columns, the sample includes all teachers that are age 5575 during at least one
of the academic years 19992001 and that do not change schools. Given the sample, teacher fxed effects also capture school fxed
effects. There are 585 unique schools. The p-values of the F-test for the excluded instruments in columns 4, 6 and 8 (with F-statistics
adjusted for multiple endogenous variables using Angrist and Pischke 2008) are 0.001 or less in all cases. See online Appendix
Table A2 for frst stage summary.
*** Signifcant at the 1 percent level.
** Signifcant at the 5 percent level.
* Signifcant at the 10 percent level.
In column 4, we instrument own pension wealth and peak value with individual-
level reform-induced shocks, PW_I V
i, t
and PK_I V
i, t
. The standard errors increase,
but the coeffcient on pension wealth is still of the expected sign, somewhat larger
in magnitude and statistically signifcant at the 5 percent level. This lends support
for the use of the shock in pension wealth at the group level to instrument for retire-
ments of the group. The peak value, however, is no longer statistically signifcant.
This result is also consistent with our fnding below that the unexpected change in
peers pension wealth is better suited than the unexpected change in peers peak
value as an instrument for peer retirements. In columns 5 and 6, we include school
fxed effects. The F-test of the joint signifcance of the school-level fxed effects
rejects the null at the 1 percent level, suggesting that the existence of school-level
peer effects is plausible. In column 6, we also instrument own pension fnancial
incentives and the results are similar to column 4. In columns 7 and 8, an individual
fxed effect is included and the effect of pension wealth on retirement, even after
instrumenting, remains statistically signifcant at the 1 percent level.
A. Instrumental Variable Estimates of the Effect of Peers on Retirement
We estimate the effect of others retirement behavior on ones own retirement
using the unanticipated change in fnancial incentives of own and others as IVs. The
specifcation we estimate is
(2) y
i, s, t
= X
i, s, t
+ Z
s, t
+ Y
i, t1, s
+
t
+
s
+
i
+
i, s, t
.
The variable of interest is Y
i, t1, s
, the lagged retirement of others. In Table 3, we
use the number of retirements in the previous year. We obtain similar results when
we examine the lagged average retirement rate of others in the same school, self
excluded (see Section IV).
The peer effect results are presented in Table 3. The frst column of Table 3 includes
the nave OLS estimate. The number of retirements of others is found to have a posi-
tive and statistically signifcant effect on the likelihood of own retirement. Using the
point estimate of column 1, one additional retirement of a colleague would increase
ones own likelihood of retirement by 0.6 percentage points. Since peer retirement
measures are lagged one year and include a host of individual, year, and school level
controls, we view these results as instructive. However, to address any lingering
concern regarding these group measures, we turn to the IV estimates in columns
28. The performance of the group-level instrument is detailed in panel B of Table
3. The individual-level IVs are detailed in online Appendix Table A2. Column 2 is
the same as 1, but now the peer-retirement measure is instrumented by the unantici-
pated change in pension wealth of others. The results for the peer measure are sta-
tistically signifcant at the 1 percent level. As might be expected, the standard errors
are larger. Using the point estimate of column 2, one colleague retirement increases
the individuals likelihood of retirement by an additional 1.5 percentage points. The
second-stage goodness of ft and the F-statistic for the excluded instrument (28.59)
illustrate the strength of our instrument.
The group-IV is solely a function of the age, service, and salary composition of
teachers in a given school, all of which are measures we fully observe. In all specif-
cations, we control for the average age, size, and years of service of those eligible to
retire (age 55 or older). The results are robust to instead using the lagged values of
Table 3Two-Stage-Least-Squares Estimates of Peer Effects
All LAUSD teachers ages 5575; 2SLS (columns 28); Dependent variableRetirement
(1) (2) (3) (4) (5) (6) (7) (8)
Specifcation OLS
IV peer
retirement
IV peer
retirement
IV peer
retirement
IV peer
retirement
IV peer
retirement
IV peer
retirement
and own
fnancials
IV peer
retirement
and own
fnancials
Panel A
Number of retirees among 0.006*** 0.015*** 0.015** 0.026** 0.015* 0.020** 0.021** 0.017**
peers 55+ in previous
year
(0.002) (0.006) (0.007) (0.010) (0.008) (0.010) (0.010) (0.008)
Pension wealth ($100k) 0.011** 0.011** 0.011** 0.012** 0.021* 0.013*** 0.021* 0.035***
(0.006) (0.006) (0.006) (0.006) (0.012) (0.005) (0.011) (0.014)
Peak value ($10k) 0.006*** 0.006*** 0.006*** 0.006*** 0.005*** 0.001
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Own peak value is positive 0.124*** 0.575
(0.024) (0.606)
Number of peers age 55+ 0.000 0.000 0.000 0.003* 0.000 0.000 0.000 0.000
(0.000) (0.000) (0.000) (0.002) (0.001) (0.000) (0.000) (0.001)
Average age of peers 55+ 0.003* 0.003* 0.003* 0.013*** 0.004 0.002 0.002 0.004
(0.002) (0.002) (0.002) (0.004) (0.004) (0.001) (0.001) (0.004)
Average service of peers 0.000 0.000 0.001 0.002 0.000 0.000 0.000 0.000
55+ (0.001) (0.001) (0.001) (0.001) (0.001) (0.000) (0.000) (0.002)
Additional peer service
categories
Yes
Fixed-effects level School Teacher Teacher
Academic years 1999,2001 1999,2001 1999,2001 1999,2001 1999,2001 19992001 19992001 19992001
R
2
of second stage 0.11 0.11 0.11 0.11 0.21 0.11 0.11 0.10
Sample size 14,150 14,150 14,150 14,150 14,150 21,296 21,296 21,296
Panel B. First stage for number of retirees among those 55+ in previous year (see notes for additional coeffcients)
Lag total unanticipated 0.185*** 0.170*** 0.158*** 0.153*** 0.087*** 0.087*** 0.151***
change in pension wealth
of peers ($100k)
(0.034) (0.039) (0.055) (0.061) (0.026) (0.026) (0.049)
F-statistic for excluded IV
a
28.59 19.48 8.19 6.18 11.43 11.40 4.80
p-value for the above test 0.0000 0.0000 0.0044 0.0132 0.0008 0.0008 0.0085
R
2
of frst stage 0.45 0.46 0.12 0.11 0.40 0.40 0.13
Notes: Standard errors, in parentheses, are clustered at the school level. All specifcations control for own pension wealth, peak
value, salary, years of service, service squared, gender, and include age dummies and year fxed effects. Peer group measures (self-
excluded) include number of retirement-eligible (age 55+) teachers and the average age and service of those 55+. School-level
measures include pupil-to-teacher ratio, fraction of teachers with a masters degree or higher, fraction of teachers that are female,
and average rank on students standardized math test scores. Specifcations without teacher or school fxed effects also include the
number of full-time-equivalent teachers and school grade-range (elementary, high-school, etc.). The sample includes all teachers
that are age 5575 during at least one of the academic years 19992001 and that do not change schools. Given the sample, teacher
fxed effects also capture school fxed effects.
a
The F-statistic in case of multiple endogenous variables (columns 7 and 8) was adjusted using Angrist and Pischke (2008).
In column 8, the frst-stage coeffcient of the 2-year lag unexpected change in others pension wealth on peer retirements is
0.137*** (0.048). The frst-stage coeffcient of the effect of unexpected change in pension wealth on own pension wealth
is 1.126*** (0.023) in column 7 and 0.889*** (0.007) in column 8. The frst-stage coeffcient of the effect of unexpected
change in peak value on peak value is 1.789*** (0.027) in column 7, and the frst-stage effect of unexpected change in peak
value on peak value is positive is 0.003*** (0.001) in column 8.
these variables or defning the peer group as those 45 and older (see online Appendix
Table A8). Column 3 includes additional measures of the school-level service com-
position (fraction of other teachers with 1519, 2024, 2529, and 30 or more years
of service) as well as average salary of others. The coeffcient of the group measure
remains statistically signifcant at the 5 percent level and is of the same magnitude.
Column 4 illustrates the results are robust to the inclusion of a school fxed effect.
In column 6, we expand the sample to include academic year 2000 (between the
two years used in columns 15). The additional year allows us to instrument own
pension fnancial measures (columns 78). The peer effect is still of similar magni-
tude but now has a larger standard error (signifcant at the 5 percent level), and the
instrument is weaker. This is likely due to the fact that for the added year, the peer
group IV takes the value of zero as there was no reform during that year.
The IV estimates in columns 26 address potential concerns regarding the peer-
retirement measure, but the results may still be biased if the individual unobserv-
able component is important in determining retirement and is correlated with own
pension measures. In column 7, we use the shock to own fnancial incentives to
instrument own pension wealth and own peak value. Similar to the results in Table
2, own pension wealth is still statistically different from zero at the 10 percent level,
though own peak value is no longer statistically signifcant. This is likely due to two
reasons. First, given the timing of the reforms, the IV measures have a value of zero
in two of the three years in the sample.
21
Second, the IV for peak value is likely
to be quite weak as the peak value measure is a function of pension wealth, and
therefore highly correlated with it. The effect of others retirement behavior remains
unchanged in magnitude and statistically signifcant at the 5 percent level.
22
Though the individual-level IVs allow us to address potential bias in own pen-
sion fnancials, this would not address any concerns about biased estimates of other
measures, such as education and the associated salary, that could result from unob-
servables, such as baseline health condition or marital status. The rich dataset at our
disposal allows us to link teachers over time, and thus purge any individual fxed
effect. We implement the strategy discussed in Section II. Columns 5 and 8 of Table
3 include an individual-level fxed effect, corresponding to
i
in equation (2). The
samples in Table 3 condition on those who have not changed schools, so the indi-
vidual fxed effect also controls for any fxed school unobservable.
23
The individual-
level fxed-effect specifcation only includes those variables that change over time
(both for self and at the school level). In addition, the pension wealth and peak value
measures are colinear in this case. We therefore include only pension wealth as our
21
When we adjust the standard errors for the fact that IVs are nonbinding in some years the statistical signif-
cance remains the same.
22
The results in columns 27 of Table 3 include a single IV for peer retirements. We obtained almost identi-
cal results both for the point estimates and the signifcance levels when we used two group-level instruments: the
unanticipated change in pension wealth (as before), as well as the unanticipated change in peak value. Appendix
Table A3 contains the full set of those results and the results of the overidentifcation teststhe null is never rejected
at the 10 percent level. Becasue the peak value group-IV is weaker in each of the specifcations our preferred speci-
fcations use only the group-level pension wealth IV.
23
The results in the previous sections and for this specifcation are the same whether or not we exclude teachers
who moved between schools, as only a small proportion of teachers move between schools this late in their career.
For example, see columns 7 and 8 in online Appendix Table A8. In our sample, on average, less than 160 teachers
over the age of 55 move between schools every year.
measure. As an alternative measure of peak value, we include an indicator for those
who have not yet reached their maximum pension wealth.
With the individual fxed effect, the effect of others previous year retirements
remains positive and statistically signifcant at the 10 percent level or better. In col-
umn 5, where we do not instrument own fnancial measures, own pension wealth has
a positive coeffcient, and the coeffcient for the peak value measure is negative, as
expected. Both are statistically signifcant at conventional levels. In column 8, pen-
sion wealth and the peak value measure are instrumented with the pension wealth
and peak value shocks. The result for the peer effect remains very similar. The stan-
dard error for own peak value is now very large, likely due to the relative weakness
of the additional IV. The coeffcient on pension wealth remains positive and statisti-
cally signifcant at the 10 percent level. We view the fxed effect approach in this
setting as addressing most if not all of the concerns that instrumenting own pension
measures would address, but column 8 of Table 3 illustrates that our peer effects
fnding is very similar when these strategies are combined.
Taken together, our fndings of peer effects remain after using three strategies at
the same time. We control for any individual-level fxed effect, we examine the lag
rather than the contemporaneous peer retirement measure, and we instrument that lag
measure using the unanticipated change in fnancial incentives experienced by others.
B. Reduced-Form Results
In this section, we use the unanticipated change in fnancial incentives both for
self and peers as predictors of change in retirement behavior. In addition to being
a direct test of the IV (e.g., Chernozhukov and Hansen 2008), in this particular
setting the direct estimates have a meaningful and straightforward economic inter-
pretation. An unanticipated shock to fnancial incentives is likely to be a central
feature of most pension reforms and the shock we study is denominated in dol-
lars. For the different specifcations we use, we control for an individuals own
pension wealth and peak value to include the reform-induced shocks to their own
fnancial measures. Hence, we focus on the unanticipated shocks for all others,
self excluded.
The results of the reduced-form specifcation, examining the shocks directly,
are presented in Table 4. For example, columns 13 of Table 4 correspond to the
IV estimate in columns 35 in Table 3 that were discussed above. The full set of
reduced-form results corresponding to Table 3 can be found in online Appendix
Table A3. In all cases, the lagged total unanticipated change in pension wealth of
all other teachers age 55 or older in ones school, self excluded, has a positive and
statistically signifcant effect on own likelihood of retirement. The point estimates
suggest that an additional $100,000 of pension wealth to all others (in total, not
each) increases ones own likelihood of retirement by 0.2 to 0.4 percentage points.
In columns 48, we replace own pension wealth and peak value with the unex-
pected change in each, and column 5 also includes the unanticipated change in the
peak value of others. The coeffcient on others pension wealth does not change
and remains statistically signifcant at the 10 percent level. The unexpected change
in own pension wealth is statistically signifcant at the 10 percent level and of the
same magnitude as the coeffcient on pension wealth when it was instrumented
in Table 3. However, neither own nor others unexpected change in peak value is
signifcantly different from zero in many of the specifcations. Columns 3, 7, and
8 all include individual (and school) fxed effects. The coeffcient on others unex-
pected change in pension wealth remains the same and is statistically signifcant
at the 10 percent level or lower.
Column 8 in Table 4 is the reduced form corresponding to column 8 in Table 3.
The additional sample year (2000) allows us to include an additional group-level IV,
the 2-year lag unexpected shock to the pension wealth of others.
24
The measure is
statistically signifcant at the 10 percent level (compared to the 1 year lag which is
statistically signifcant at the 1 percent level). For comparison, column 7 of Table 4
24
Additional specifcations incorporating this IV can be found in online Appendix Table A4.
Table 4The Effect of Peers Unanticipated Change in Financial Incentives on Own Retirement
(reduced form)
All LAUSD teachers ages 5575; Linear probability model; Dependent variableRetirement
(1) (2) (3) (4) (5) (6) (7) (8)
Lag total unanticipated 0.003** 0.004*** 0.002* 0.002*** 0.002*** 0.001* 0.001** 0.003**
change in pension wealth
of peers, self excluded
($100k)
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Unexpected change in own 0.024* 0.025* 0.024* 0.033*** 0.033***
pension wealth ($100k) (0.013) (0.013) (0.013) (0.011) (0.011)
Lag total unanticipated 0.000
change in peak value of
peers, self excluded
($10k)
(0.000)
Unexpected change in own 0.003* 0.003* 0.002 0.002 0.002
peak value ($10k) (0.002) (0.002) (0.002) (0.002) (0.002)
2-year lag total 0.002*
unanticipated change in
pension wealth of peers,
self excluded ($100k)
(0.001)
Pension wealth ($100k) 0.011** 0.013** 0.019
(0.006) (0.006) (0.012)
Peak value ($10k) 0.006*** 0.006***
(0.001) (0.001)
Own peak value is positive 0.121***
(0.024)
Fixed-effects level School Teacher School Teacher Teacher
Academic years 1999,2001 1999,2001 1999,2001 19992001 19992001 19992001 19992001 19992001
R
2
0.11 0.12 0.22 0.11 0.11 0.11 0.19 0.19
Sample size 14,150 14,150 14,150 21,296 21,296 21,296 21,296 21,296
Notes: Standard errors, in parentheses, are clustered at the school level. All specifcations control for own salary, years of service,
service squared, gender, and include age dummies and year fxed effects. Peer group measures (self-excluded) include number
of retirement-eligible (age 55+) teachers and the average age and service of those 55+. School-level measures include pupil-to-
teacher ratio, fraction of teachers with a masters degree or higher, fraction of teachers that are female, and average rank on students
standardized math test scores. Specifcations without teacher or school fxed effects also include the number of full-time-equivalent
teachers and school grade-range (elementary, high school, etc.). Column 1 includes additional peer service categories. The sample
includes all teachers that are age 5575 during at least one of the academic years 19992001 and that do not change schools. Given
the sample, teacher fxed effects also capture school fxed effects.
includes only one group-level IV, as well as the two IVs that capture the shock to
ones own fnancial measures.
The point estimates in Table 4 suggest that the effect of an unanticipated change
to own pension wealth is roughly 13 times larger than the effect of others receiving
an unanticipated shock of the same amount (in total, not each). The point estimate
suggests that other colleagues receiving an extra $100,000 in pension wealth (in
total, not each) has the same effect on ones own retirement as receiving an addi-
tional $8,300 to ones own pension wealth.
IV. Alternative Group Specifcations and Robustness Checks
We examine alternative group specifcations, including contemporaneous timing,
as well as summarize the results of two falsifcation tests. These results are reported
in Table 5. In column 1, we examine the average retirement rate of others (lagged,
Table 5Alternative Group Specifications and Falsification Tests
All LAUSD teachers ages 5575; Dependent variableRetirement (columns 17), Salary (column 8)
(1) (2) (3) (4) (5) (6) (7) (8)
Specifcation 2SLS 2SLS 2SLS 2SLS 2SLS OLS OLS OLS
Panel A
Rate of retirement in 0.182**
previous year (0.091)
Period during which group Previous Previous Current & Current
retirements are measured
(25)
summer spring &
summer
previous
year
year
Number of retirees during 0.019*** 0.015*** 0.010*** 0.027***
period listed above (25) (0.007) (0.006) (0.003) (0.006)
Lead unanticipated change 0.002 0.003
in pension wealth of
peers ($100k)
(0.002) (0.002)
Lag unanticipated change 0.004*** 0.000
in pension wealth of
peers ($100k)
(0.001) (0.002)
Academic years 1999,2001 1999,2001 1999,2001 1999,2001 1999,2001 1999 1999 1999,2001
R
2
of second stage 0.11 0.11 0.11 0.11 0.10 0.10 0.10 0.50
Sample size 14,145 14,145 14,145 14,145 14,145 7,653 7,653 14,145
Panel B. First stage of the above specifcations (frst stage reported for variable listed above)
Unanticipated change in
pension wealth of peers
($100k)
0.198***
(0.021)
0.158***
(0.032)
0.186***
(0.033)
0.290***
(0.049)
0.104***
(0.039)
F-statistic for excluded IV 81.85 24.23 31.31 34.19 7.20
R
2
of frst stage 0.12 0.40 0.43 0.63 0.53
Notes: Standard errors, in parentheses, are clustered at the school level. All specifcations control for own pension wealth, peak
value, salary, years of service, service squared, gender, and include age dummies and year fxed effects. Peer group measures (self-
excluded) include number of retirement-eligible (age 55+) teachers and the average age and service of those 55+. School-level
measures include pupil-to-teacher ratio, fraction of teachers with a masters degree or higher, fraction of teachers that are female,
average rank on students standardized math test scores, number of full-time-equivalent teachers and school grade-range (elemen-
tary, high school, etc.). The sample includes all teachers that are age 5575 during at least one of the academic years 19992001 and
that do not change schools. In columns 25, all other own and group-level measures are computed for the academic year.
self excluded) rather than the number of other retirees. As an instrument (frst stage
results reported in panel B), we use the average unanticipated change in pension
wealth of others. The result for the average-measure is statistically signifcant at the
5 percent level and is quantitatively the same as the result for number of retirements.
We demonstrate in columns 25 that our fndings are robust to using alterna-
tive windows of time to defne the peer group. Though our preferred specifcation
focuses on the effect of others retirements in the previous academic year, one might
be concerned that this defnition is too exclusive, omitting the effect of contempo-
raneous peer decisions, or too inclusive. Each column examines a different set of
peers, while holding the effect of own characteristics and other school-level mea-
sures the same as in the previous specifcations. In columns 24, we examine the
effect of others retirements in the previous summer, previous spring and summer,
and current and previous year. In all cases, the peer effect remains statistically sig-
nifcant at the 1 percent level and the magnitudes of the effect are similar to the one-
year case. In column 5, we examine the effect of only current-period retirements
and fnd a statistically signifcant effect at the 1 percent level. To make the results
comparable, column 5 examines the same years as column 1 in Table 3. The IV for
current number of retirees is therefore the unanticipated shock to pension wealth
among all others in the previous period.
In columns 6 and 7 of Table 5, we present the results of a reduced-form fal-
sifcation test in which the lead (future) shock to the pension wealth of others is
considered. By exploiting the specifc timing of the two reforms, we are able to
include both the lag and future unexpected shocks to others fnancial measures.
25

We fnd that the lag-retirement of others remains statistically signifcant, whereas
the future-retirement of others has a smaller point estimate, and is not statistically
signifcant. When we include only the lead measure (column 6), we fnd an even
smaller and statistically insignifcant effect. These fndings are consistent with the
retirements of others having an actual causal effect on individual retirements, rather
than merely being a proxy for the work-conditions in a given school. Last, in column
8, we examine an identical specifcation to the ones in the previous section, but as a
falsifcation test, the dependent variable is salary rather than retirement. While own
characteristics, such as years of service and age, are found to affect ones own salary,
the shock to others pension wealth (self excluded) no longer has a statistically sig-
nifcant effect (and the point estimate is 0.00007). Since teachers have very little
control over their own salary (beyond years of service or education), this fnding is
consistent with our group instrument having a true effect on own retirement, rather
than picking up a spurious correlation in the attributes of teachers in schools. The
results of additional robustness checks, described below, can be found in more detail
in online Appendix Section III.
As an additional robustness check, we address the concern that while the retire-
ment of others directly affects individuals retirement decisions, the peer effect we
estimate may be driven by the coordinated retirements of married couples working
in the same school. Note that due to the lag structure of our main specifcation,
25
The reforms were two years apart, and so we examine the retirement behavior of those in the year after the
frst reform and before the second reform.
the peer effect would pick up couples that retire in consecutive years rather than
together. We test whether individuals are less sensitive to the retirements of same-
sex colleagues. To do this we include the total number of same-sex retirees in
ones school in the previous year in our main specifcation. This variable is instru-
mented with the lag total unanticipated change in pension wealth of same-sex
peers. While the coeffcient on the retirements of same-sex colleagues is negative,
it is half the magnitude of the coeffcient on all retirements and is not statisti-
cally different from zero (e.g., column 8 in online Appendix Table A5). Further, in
online Appendix IV1, we show that there is little change in the peer effect when
we estimate our specifcations excluding randomly assigned coworker couples.
This result is robust to 1,000 iterations of random couple assignment where the
number of excluded couples is derived from the US Census 2000 teacher-married-
to-teacher marriage rates.
We explore the potential heterogeneity in the retirement peer effect across teach-
ers with different observable characteristics. First, we consider that the peer effect
may not be homogenous across teachers by sex, race/ethnicity, and teaching assign-
ment. For example, we may expect individuals that can more easily calculate their
pension benefts (e.g., science or math teachers) to be less infuenced by their peers.
We fnd that the positive effect of number of colleague retirements on own retire-
ment is robust to this specifcation. Women are more likely to retire, all else equal,
but we fnd no evidence that individuals are differentially impacted by their peers
as a function of their own characteristics. Second, we may expect that individuals
are more likely to respond to the behavior of those that are more similar or with
whom they interact more. Here we relax the implicit assumption in Section IIIA that
all coworkers are weighted equally as peers and test whether individuals respond
differently to similar peers. We fnd no evidence that individuals respond differently
to peer retirements if peers are of the same race/ethnicity or if they teach the same
subject area. As discussed above, we only fnd a small effect of shared gender. The
full set of results are presented in online Appendix Table A5.
Finally, we examine possible mechanisms through which the peer effect may
operate. While our instrumental variable strategy addresses threats to validity due to
unobservable differences in school quality, it is possible that retirements of colleagues
cause a change in working conditions at the school and that it is this change, and not
the retirement of others per se, that is affecting individuals retirement decisions in the
following year. Specifcally, schools may fll the teaching positions vacated by retirees
with less experienced teachers or, if teachers are in short supply, they may hire teach-
ers that are not fully credentialed or even leave positions unflled, altering the work-
place climate or workload faced by returning teachers. The change in the experience,
credentials, or number of teachers at a school has no discernible effect on individual
retirement decisions, but the effect of lag retirements remains virtually unchanged
and statistically signifcant in every specifcation, even when school fxed effects are
included. The results are available in online Appendix Table A6.
In online Appendix Sections III4 and III5, we further examine two possible mech-
anisms through which the peer effect may operate: a retirement-age norm, and how
individuals response to own fnancial incentives is modifed by others response to
their own pension fnancial incentives. We fnd little evidence that individuals are
affected by the retirement age of others, but we do fnd that the fnancial response of
others affects the way individuals interpret their own fnancial incentives.
V. Discussion and Conclusion
We use a unique dataset and features of reforms of the California State Teachers
Retirement System to identify and estimate the effect of ones peers on ones own
retirement decision and fnd a statistically and economically signifcant peer effect.
Our results suggest that for each additional peer retirement that is observed, a teach-
ers own likelihood of retirement increases by an additional 1.52.0 percentage
points. The reforms, which consisted solely of a change in pension fnancial incen-
tives allow us to directly calculate, in economic terms, the effect of unexpectedly
changing others pension wealth on ones own likelihood of retirement.
Our identifcation strategy highlights that peer effects can be identifed using a
natural experiment that has a differential effect on members of each group. This
identifcation strategy could be used in other settings, where a program has a dif-
ferential effect on group members. Further, in contrast to many studies that exploit
exogenous assignment to groups, we are able to examine the impact of an unan-
ticipated reform on existing networks of peers. In turn, such a setting may be more
relevant for cases in which changing the nature of networks and associations among
peers may be harder to accomplish.
Peer effects will play a role in shaping how individuals understand and respond
to both recent and future Social Security reforms and to changes to other retirement
savings programs, such as 401(k)s. Changes to benefts or program rules will have
both a direct effect on those targeted by the reform, and also an indirect effect on
those affected by the retirement decisions of others. To properly predict the effect of
a reform it is important to accurately estimate both the direct effect and the spill-
over effectthe behavior of one individual affects the behavior of his or her peers,
and so on. For example, when we extrapolate our results to the 2008 US population
of social-security-eligible workers ages 6569 that face a normal retirement age of
65, ignoring peer effects yields an under-prediction of 142,000 retirements, 3 per-
cent of the workers in that age-group.
We use our fndings to simulate two variations of a reform that raises the normal
retirement age, a common policy used to lower benefts.
26
We consider raising the
normal retirement age for all teachers from age 60 to age 62 and to age 65. We com-
pare the simulated effect of the increase in retirement age on retirement rates at each
age in the following year. In both cases, ignoring the effect of others response to
the pension reform (while allowing for other school-level characteristics to have an
effect) would lead to an underestimate of the reduction in retirement rates by 10.5
to 12.5 percent for those younger than age 60. Of particular interest is the differ-
ence for those at or above the postreform normal retirement age (62 or 65). These
individuals have no change in their own pension fnancial incentives, so when peer
effects are ignored the simulations refect no change in behavior. However, when the
26
See online Appendix IV2 for further details and the assumptions used.
effect of others is included, the simulated decrease in retirement rates at these ages
is 2.2 to 6.7 percent. The positive peer effect we fnd means that retirement patterns
will also be affected in subsequent years, and in turn, the composition of the popula-
tion will change. Hence, our results are conservative and limited to the immediate
one-year short-run response.
Various types of social effects mechanisms imply very different behavioral
responses to policy changes. If the retirement of individuals is a response to the
retirement of others, and people are infuenced by or mimic others retirement
behavior, then any change to a specifc segment of potential retirees will have far
reaching effects even on those not initially targeted by the policy. If the retirement
of individuals depends in part on being surrounded by better-informed peers or the
dissemination of information is highly dependent on peers, then the effectiveness of
any public information initiative is likely being underestimated. We examine some
possible mechanisms through which the peer effects may operate. We fnd no evi-
dence of school-specifc retirement-age norms, but fnd some evidence that others
pension fnancial maximization behavior has an effect on own maximization of pen-
sion wealth. Given the importance of identifying the mechanisms for public policy
design, in future research we hope to further examine the mechanisms underlying
the social effect at work in the retirement decision.
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When They're Sixty-Four: Peer Effects and the Timing of Retirement

Kristine M. Brown and Ron A. Laschever

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