Public Pensions and Retirement: Evidence from the Railroad Retirement Act∗

Male labor force participation (LFP) 65+ declined by almost 50 percentage points over the 20th century and the share receiving social insurance increased from roughly zero to near universal, yet the precise role of public pensions in driving the decline is still an open question. This paper develops the earliest estimates of the effect of Defined Benefit (DB) public pension incentives on retirement timing by examining the Railroad Retirement Acts (RRA) of the 1930s, which nationalized private pensions, instituting an incentive structure comparable to Social Security. Using linked Decennial Census records between 1920-1930 and 1930-1940, I examine LFP by worker’s industries a decade earlier. I estimate the reduced form effect on retirement timing using an age-specific difference in differences research design leveraging variation in industry, time, and cohort. Railroad workers differentially exited only at eligible ages, explaining roughly 12% of the previously unexplained LFP decline 65-74. I next estimate elasticities of elderly nonparticipation with respect to benefits by exploiting the switch to progressive benefits in wages. The homogeneous estimate is roughly 0.2, far lower than existing pre-1970 estimates but similar to those from Social Security today. Elasticities are heterogeneous by private wealth and follow an inverse U-shape. Responsiveness is closer to 0.1 for renters and for workers with home values above the 80th percentile, with higher values in between. These estimates suggest the 100% increase to real Social Security benefits in the 1950s explains at most 25% of the historical decline in that decade. It appears other changes, notably coverage expansions, were more important in driving historical LFP declines. JEL Codes: H55, J21, J26, J32, N32, N42 ∗I am grateful to my dissertation committee Bill Collins (chair), Lesley Turner, Andrew Goodman-Bacon, and Kitt Carpenter for continued advice and support. Also special thanks to Brian Beach, Daniel Fetter, Pat Flynn, Rick Hornbeck, Joanna Lahey, Nic Maeder, Dan Mangrum, Paul Mohnen, Sarah Quincy, Craig Sylvera, and Ariell Zimran, as well as to Seminar Participants at Florida State University, Department of Economics, the 2021 Virtual Cliometric Conference, 2021 NBER Development of the American Economy Summer Institute, Economic History Association, Young Economists Symposium, Vanderbilt Empirical and Applied Microecomomics Seminar, Vanderbilt Economic History Tea, and Vanderbilt Graduate Student Advising Group. All errors are my own. The decline in male elderly labor force participation (LFP) over the 20th century, from roughly 65% in 1900 to 18% in 2000, constitutes one of the most significant changes to U.S. labor markets in modern history (Figure 1). Explanations for the period since the Social Security Act (SSA) of 1935 have often centered on Social Security (e.g., Krueger and Meyer, 2002; Coile, 2015) and elderly means-tested public assistance (Parsons, 1991; Friedberg, 1999; Fetter and Lockwood, 2018), largely motivated by vast growth in these programs. Yet, while estimates of pension benefit responsiveness for periods before the 1970s suggest a substantial role for pensions in driving this decline, those for today suggest little. 2 The current state of these trends is a Social Security system in financial peril, with annual costs expected to outpace the trust fund by 2030 (Social Security Administration, 2021). Proposed alterations to address financial inadequacy often feature heterogeneous changes to benefits. Any retirement responsiveness to benefit changes has implications for both program costs and tax revenue, but zero cross-sectional variation in parameters complicates estimating retirement responsiveness to benefits (Moffitt, 1987; Krueger and Meyer, 2002; Coile, 2015). This paper examines the nationalization of railroad pensions under the Railroad Retirement Acts (RRA) of the 1930s and uses variation in industry, time, cohort, and benefit formula to develop estimates of elasticities of elderly nonparticipation with respect to benefits for Defined Benefit (DB) public pensions. The RRA established the first national pension program for non-governmental employees in the United States. The voluntary pensioned retirement age was 65, compulsory retirement was imposed at age 70, and real benefits were substantially increased via a newly progressive benefit formula for workers in one of Similar declines have been documented in many industrialized countries (Costa, 1998a). Changes to the definition of LFP between 1930 and 1940 are discussed in greater detail in Section IV. Roughly 27% of male individuals 65+ received Old Age Assistance or Social Security in 1940; by 2000, the share receiving Social Security was over 95% (Carter et al., 2006, Series Bf634-648; Bf408-421). The growth of private pensions is an additional income-based explanation (Stock and Wise, 2008). Evidence for the pre-1930 decline is sparse, but Moen and Gratton (1999) document reliance on pension income prior to the Social Security Act, and Costa (1998a) shows that Union Army pensions were an important driver of exit at the beginning of the 20th century. For example, some proposals reduce benefits via the slopes and kink points of the benefit whereas others increase minimum benefits. A list of all proposed changes is provided here: https://www. ssa.gov/oact/solvency/provisions/benefitlevel.html#B5 DB often distinguishes earnings and work history-based pensions from Defined Contribution (DC). Here it is meant to distinguish from contemporary public programs that either were termed “pensions” or are referred to as such in the literature, but were not based on work history (e.g., Old Age Assistance) and often contained no rules relating eligibility to LFP (e.g., Union Army and WWI Pensions).