The Usefulness of the Wind-Up Measure of Pension Liabilities: a Labourmarket Perspective

21 Pages Posted: 16 Jul 2004

See all articles by David M. Cutler

David M. Cutler

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Louise Sheiner

Federal Reserve Board - Division of Research and Statistics; National Bureau of Economic Research (NBER)

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: February 1985

Abstract

Financial economists have long favoured the use of a wind-up measure of the firm's pension liabilities. Yet the pension liabilities of the firm also represent the pension wealth of its workers. It is reasonable to presume that workers and shareholders have a common view of the pension contract. If the wind-up measure depicts the true pension liabilities of the firm, then the wage concession granted by its workers must reflect the fact that the firm may choose to terminate the plan at any time. Data on the wage-service characteristics of the membership of a sample of final earnings plans in Canada suggest,contrary to the implications of the wind-up measure, that workers' wages do not internalize accruing pension benefits on a year-to-year basis. Instead, the data suggest that pension plans may be a vehicle through which a significant portion of the total compensation of individual employees is deferred until their later work years, and that the wind-up measure may well understate the pension liabilities of an on-going firm.

Suggested Citation

Cutler, David M. and Poterba, James M. and Sheiner, Louise and Summers, Lawrence H., The Usefulness of the Wind-Up Measure of Pension Liabilities: a Labourmarket Perspective (February 1985). NBER Working Paper No. w1559. Available at SSRN: https://ssrn.com/abstract=227460

David M. Cutler (Contact Author)

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James M. Poterba

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Louise Sheiner

Federal Reserve Board - Division of Research and Statistics ( email )

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Lawrence H. Summers

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