Cost Saving and the Freezing of Corporate Pension Plans
63 Pages Posted: 22 Dec 2015 Last revised: 3 Jun 2019
Date Written: May 31, 2019
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: Suggested Citation