Cost Saving and the Freezing of Corporate Pension Plans

65 Pages Posted: 22 Dec 2015 Last revised: 7 Nov 2019

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

Federal Reserve Board, Washington D.C.

Stephen P. Zeldes

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

Date Written: October 28, 2019

Abstract

Companies that freeze defined 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

Rauh, Joshua D. and Stefanescu, Irina and Zeldes, Stephen P., Cost Saving and the Freezing of Corporate Pension Plans (October 28, 2019). 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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