Working Paper: NBER ID: w0767
Authors: James E. Pesando
Abstract: There is discussion in both Canada and the United States of the government's requiring private pension plans to provide contractual cost-of-living protection. This paper employs both an auction and an implicit contract model to identify the compensating wage differentials required of possible indexing initiatives. The contract model, motivated by the prevalence (especially in Canada) of ad hoc cost-of-living adjustments to pensions in pay, presumes that workers have a call option on the investment earnings in excess of the interest rate assumption used to value the plan. The case for policy action would appear to rest on either (1) the assumption that workers misperceive the value (and, possibly, the security) of pension benefits or (2) the presumption that society should subsidize pension income by providing to pension plans an investment vehicle (such as an index bond) whose risk-return characteristics cannot be duplicated by portfolios of existing assets.
Keywords: Pension claims; Indexing initiatives; Wage differentials; Employee valuation
JEL Codes: J32; D81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Indexing initiatives (C43) | Employee pension valuation (H55) |
| Indexing initiatives (C43) | Compensating wage differentials (J31) |
| Absence of indexing (Y70) | Undervaluation of pension claims (J32) |
| Indexing initiatives (C43) | Transfer of nominal benefits into real benefits (F16) |
| Indexing initiatives (C43) | Changes in wage structures (J31) |
| Indexing initiatives (C43) | Reduction in initial pension benefits or wages (J32) |
| Employees willing to allocate more toward pensions (J32) | Changes in wage structures (J31) |