Employee Valuation of Pension Claims and the Impact of Indexing Initiatives

37 Pages Posted: 22 Aug 2007 Last revised: 6 Feb 2022

See all articles by James E. Pesando

James E. Pesando

University of Toronto; National Bureau of Economic Research (NBER)

Date Written: September 1981


There is discussion in both Canada and the United States of the government's requiring private pension plans to provide contractual cost-of-living protection. This paper employs both an auction and an implicit contract model to identify the compensating wage differentials required of possible indexing initiatives. The contract model, motivated by the prevalence (especially in Canada) of ad hoc cost-of-living adjustments to pensions in pay, presumes that workers have a call option on the investment earnings in excess of the interest rate assumption used to value the plan. The case for policy action would appear to rest on either (1) the assumption that workers misperceive the value (and, possibly, the security) of pension benefits or (2) the presumption that society should subsidize pension income by providing to pension plans an investment vehicle (such as an index bond) whose risk-return characteristics cannot be duplicated by portfolios of existing assets.

Suggested Citation

Pesando, James E., Employee Valuation of Pension Claims and the Impact of Indexing Initiatives (September 1981). NBER Working Paper No. w0767, Available at SSRN: https://ssrn.com/abstract=351320

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