Cost Saving and the Freezing of Corporate Pension Plans
65 Pages Posted: 22 Dec 2015 Last revised: 18 May 2020
Date Written: May 13, 2020
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: Pensions, Pension freezes, Pension cost, Retirement, Labor compensation, Firm value
JEL Classification: G14, G23, G32, J31, J32, J33
Suggested Citation: Suggested Citation