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Cost Saving and the Freezing of Corporate Pension Plans

72 Pages Posted: 22 Dec 2015 Last revised: 2 Dec 2017

Joshua D. Rauh

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

Irina Stefanescu

Federal Reserve Board, Washington D.C.

Stephen P. Zeldes

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

Date Written: December 1, 2017

Abstract

Does freezing a corporate defined benefit (DB) pension plan decrease overall labor costs and increase firm profits? Firms are more likely to freeze defined benefit pension plans that have higher prospective accruals and thus higher potential cost saving. After incorporating the increases in current contributions to defined contribution plans, freezing saves firms 3 percent of total payroll in the first year and the equivalent of 13.5 percent of the long-horizon payroll of current employees. These cost savings would not be possible in a benchmark model in which i) labor markets are frictionless and all workers receive compensation equal to their marginal product and ii) workers value equally all identical-cost forms of pension benefits. Therefore our findings represent evidence that one or both of these assumptions do not hold in practice. We argue that cost savings arise in part because firms are reneging on implicit contracts to provide workers higher compensation through pension accruals later in their careers.

Keywords: Pensions; Pension freezes; Pension cost; Retirement; Labor compensation, Firm value.

JEL Classification: G14, G23, G32, J31, J32, J33

Suggested Citation

Rauh, Joshua D. and Stefanescu, Irina and Zeldes, Stephen P., Cost Saving and the Freezing of Corporate Pension Plans (December 1, 2017). Columbia Business School Research Paper No. 16-4; Stanford University Graduate School of Business Research Paper No. 16-4. Available at SSRN: https://ssrn.com/abstract=2706448 or http://dx.doi.org/10.2139/ssrn.2706448

Joshua D. Rauh

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Hoover Institution ( email )

Stanford, CA 94305-6010
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Irina Stefanescu (Contact Author)

Federal Reserve Board, Washington D.C. ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stephen P. Zeldes

Columbia Business School - Finance and Economics ( email )

3022 Broadway
Uris 825, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-2492 (Phone)
212-208-4699 (Fax)

HOME PAGE: http://www.columbia.edu/~spz1

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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