Employee Retirement and a Firm's Pension Plan

Abstract

The provisions of the pension plan in a large corporation are described in detail. The implications of the provisions are indicated by pension accrual profiles. These profiles are set forth, together with standard age-earnings and Social Security accrual profiles, in the form of life-time budget constraints. The plan provided very strong incentives to retire beginning at age 55. After age 65, negative pension and negative Social Security accruals effectively impose almost a 100 percent tax rate on wage earnings for many employees of the firm. Departure rates from the firm are compared with economic incentives inherent in the plan provisions. The inducements in the plan provisions to retire early have had a very substantial effect on departure rates from the firm. Over 50 percent of those employed by the firm at age 50 leave before 60 and 90 percent before age 65. The jumps in departure rates at specific ages coincide precisely with the discontinuities and kink points in the worker compensation profiles that result from the pension plan provisions together with wage earnings profiles and Social Security accrual.