Earnings and Pension Compensation: The Effect of Eligibility

Abstract

Pension compensation is shown to rise with age and tenure until the worker becomes eligible to receive benefits. At this point, pension compensation drops sharply. If workers are paid their marginal product in each period, earnings grow at a lower rate prior to eligibility but must increase when the worker reaches the age of eligibility. This hypothesis is tested using data from the Retirement History Study, and earnings are found to rise significantly after eligibility. This finding supports the concept of spot market compensation and is in direct conflict with the predictions of Lazear-type lifetime contracts.