Cost Saving and the Freezing of Corporate Pension Plans
72 Pages Posted: 22 Dec 2015 Last revised: 2 Dec 2017
Date Written: December 1, 2017
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: Suggested Citation