Working Paper: NBER ID: w0924
Authors: Jeremy I. Bulow; Myron S. Scholes
Abstract: The liability to employees in a defined benefit pension plan is the present value of vested benefits, the present value of the benefits that employees would receive on the immediate termination of the pension plan. This is the literal and simple definition of the liability. Although it leads to an understanding of the economics of the promise of a pension, several common provisions of pension plans make it necessary to expand the definition. Anomalies such as vesting, early retirement benefits, lump sum provisions, and ad hoc increases in benefits for retired employees indicate that employees accrue benefits that exceed their benefits on a termination of the plan. These anomalies, however, can be explained by requiring that employees as a group possess specific human capital. Although losing one or a few employees from the group would be a small loss, losing the group of employees would be a great loss. In this group model, employees bargain with the stockholders over the compensation of the entire group; they allocate . their compensation according to marginal product, returns from previous equity investments in the human capital of the group, and to purchases and sales of claims on this capital. The model explains the anomalies as a natural outgrowth of the transactions of members within the group. In addition, the model explains the use of defined benefit pension plans, and how employees could have claims, in excess of vested benefits, on the assets in the pension plan.
Keywords: pension plans; employee benefits; corporate obligations; ERISA
JEL Codes: G23; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| defined benefit plans (J32) | employee compensation structure (M52) |
| older employees (J14) | present value of pension accruals (H55) |
| younger employees (M51) | purchase equity rights from older employees (J26) |
| surplus in pension fund (H55) | shared ownership of pension assets (D14) |
| employees negotiate (J52) | total compensation package (J33) |
| negotiation process (C78) | distribution of pension fund assets (G23) |
| economic implications of ERISA (J32) | altered dynamics of ownership (G32) |