Cost Saving and the Freezing of Corporate Pension Plans

Cost Saving and the Freezing of Corporate Pension Plans

By
Joshua D. Rauh, Irina Stefanescu, Stephen P. Zeldes
Journal of Public Economics. August
2020, Vol. 188

Companies that freeze defined benefit pension plans save the equivalent of 13.5% 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 that would have provided workers with high pension accruals later in their careers and with shifts in employee valuation of different forms of retirement benefits.