Cost Saving and the Freezing of Corporate Pension Plans

50 Pages Posted: 2 Jun 2020 Last revised: 18 Jun 2021

See all articles by Joshua D. Rauh

Joshua D. Rauh

Stanford Graduate School of Business; Hoover Institution; National Bureau of Economic Research (NBER)

Irina Stefanescu

Board of Governors of the Federal Reserve System

Stephen P. Zeldes

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

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.

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Suggested Citation

Rauh, Joshua D. and Stefanescu, Irina and Zeldes, Stephen P., Cost Saving and the Freezing of Corporate Pension Plans (May 2020). NBER Working Paper No. w27251, Available at SSRN: https://ssrn.com/abstract=3615447

Joshua D. Rauh (Contact Author)

Stanford Graduate School of Business ( email )

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Hoover Institution ( email )

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Irina Stefanescu

Board of Governors of the Federal Reserve System ( email )

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Stephen P. Zeldes

Columbia Business School - Finance and Economics ( email )

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