Cost Saving and the Freezing of Corporate Pension Plans

63 Pages Posted: 22 Dec 2015 Last revised: 3 Jun 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: May 31, 2019

Abstract

Does freezing a corporate defined benefit (DB) pension plan decrease labor costs for firms? We find that firms are more likely to freeze defined benefit pension plans that have higher prospective accruals. 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) all workers receive compensation equal to their marginal product and ii) workers value equally all identical-cost forms of pension benefits. 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 (May 31, 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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