Working Paper: NBER ID: w1370
Authors: Robert C. Merton; Zvi Bodie; Alan J. Marcus
Abstract: The manifest purposes of integrating an employer-provided pension plan with social security are:(1) to ensure retirement income adequacy for all covered employees; and (2) to ensure retirement income equity, defined as equal total replacement rates for all employees regardless of salary level. The focus of this paper, however, is on an equally important (and perhaps latent) consequence of integration: the alteration of the risk-bearing relationships between employees, employers and the government vis-a-vis social security benefits. The main alteration is that the employer in effect insures his covered employees against adverse changes in their social security retirement benefit. Using the option-pricing methodology of modern contingent claims analysis,we develop a formal model to explore the quantitative aspects of this change.While the focus of the analysis is on full integration, we do explicitly deal with various degrees of partial integration as is currently practiced. We also analyze the effects of a switch from a non-integrated to an equivalent-cost integrated plan when private benefits are fixed in nominal terms and when they are indexed. In this connection we examine how integrated plans are affected when the sponsor makes ad hoc post-retirement benefit increases. We also consider the incentive effects on worker mobility of the adoption of integrated plans. The analysis is also used to highlight what we believe to be important unintended consequences of integrating pension plans with social security.
Keywords: Pension Plans; Social Security; Risk Sharing; Insurance
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Integrating pension plans (H55) | Risk-bearing relationships between employees and employers (J53) |
| Employers (J23) | Insurance against adverse changes in social security benefits (H55) |
| Integration of pension plans (H55) | Reduction in the uncertainty surrounding employees' retirement income (J26) |
| Employers (J23) | Benefits of increases in social security payments (H55) |
| Integration of pension plans (H55) | Guaranteed minimum income for employees (J38) |
| Insurance provided by integration (G52) | Cost to employees (J32) |
| Social security benefits falling below certain thresholds (H55) | Employees worse off (J79) |