Working Paper: NBER ID: w27251
Authors: Joshua D. Rauh; Irina Stefanescu; Stephen P. Zeldes
Abstract: Companies that freeze defined benefit pension plans save the equivalent of 13.5 percent of the long-horizon payroll of current employees. Furthermore, firms with higher prospective accruals are more likely to freeze their plans. Cost savings would not be possible in a benchmark model in which i) all workers receive compensation equal to their marginal product and ii) workers value equally all identical-cost forms of pension benefits. We find evidence consistent both with firms’ reneging on implicit contracts to provide workers with high pension accruals later in their careers and with shifts in employee valuation of different forms of retirement benefits.
Keywords: Pension Plans; Cost Saving; Corporate Finance; Defined Benefit; Defined Contribution
JEL Codes: G14; G23; G32; J31; J32; J33; J38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pension freezes (H55) | cost savings (D61) |
| higher prospective accruals (G32) | pension freezes (H55) |
| pension freezes (H55) | renegotiation of implicit contracts (D86) |
| cost savings (D61) | compensation equality model (J33) |
| cost savings from freezing DB plans (J32) | older workers (J26) |
| cost savings from cash balance plan freezes (J32) | cost savings from traditional DB plan freezes (J32) |