IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2013-82.html
   My bibliography  Save this paper

Cost shifting and the freezing of corporate pension plans

Author

Listed:

Abstract

Many U.S. corporations have frozen defined benefit (DB) pension plans, replacing new DB promises with contributions to defined contribution (DC) plans. We estimate expected DB accruals from the age-service and salary distributions of a large sample of U.S. corporate pension plans with more than 1,000 employees. Comparing the counterfactual DB accruals to the actual increase in 401(k) and other DC contributions for firms that freeze, we find only partial compensation to employees for the lost DB accruals. Net of the increase in total DC contributions, firms save 2.7-3.6% of payroll per year, and over a 10-year horizon they save 3.1% of total firm assets. Workers would have to value the structure, choice, flexibility, or portability of DC plans by at least this much more to experience welfare gains from freezes. The forgone accruals and net cost effects are initially largest for older employees but over time become largest for middle-aged employees who plan to stay with the firms until retirement. Furthermore, the probability that a firm freezes a pension plan is positively related to the value of new accruals as a share of firm assets. While there are differences in the age-service distributions of firms that freeze versus those that do not, we find that the differential accrual effect is largely driven by differences in benefit factors and the relative importance of labor in the freeze firm's production function. The results overall support the hypothesis that pension freezes affect overall compensation and therefore that they change compensation costs relative to a worker's marginal product.

Suggested Citation

  • Joshua Rauh & Irina Stefanescu & Stephen Zeldes, 2013. "Cost shifting and the freezing of corporate pension plans," Finance and Economics Discussion Series 2013-82, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2013-82
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/feds/2013/201382/201382abs.html
    Download Restriction: no
    File URL: http://www.federalreserve.gov/pubs/feds/2013/201382/201382pap.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Anil Shivdasani & Irina Stefanescu, 2010. "How Do Pensions Affect Corporate Capital Structure Decisions?," The Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1287-1323, March.
    2. Edward P. Lazear, 1983. "Pensions as Severance Pay," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 57-90, National Bureau of Economic Research, Inc.
    3. Leora Friedberg & Michael T. Owyang, 2004. "Explaining the evolution of pension structure and job tenure," Working Papers 2002-022, Federal Reserve Bank of St. Louis.
    4. Moshe A. Milevsky & Keke Song, 2010. "Do Markets Like Frozen Defined Benefit Pensions? An Event Study," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 893-909, December.
    5. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    6. Zvi Bodie & Alan J. Marcus & Robert C. Merton, 1988. "Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-offs?," NBER Chapters, in: Pensions in the U.S. Economy, pages 139-162, National Bureau of Economic Research, Inc.
    7. Mitchell, Olivia S & Fields, Gary S, 1984. "The Economics of Retirement Behavior," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 84-105, January.
    8. Poterba, James & Rauh, Joshua & Venti, Steven & Wise, David, 2007. "Defined contribution plans, defined benefit plans, and the accumulation of retirement wealth," Journal of Public Economics, Elsevier, vol. 91(10), pages 2062-2086, November.
    9. Friedberg Leora & Owyang Michael T & Sinclair Tara M, 2006. "Searching For Better Prospects: Endogenizing Falling Job Tenure and Private Pension Coverage," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-42, August.
    10. Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
    11. Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
    12. James J. Heckman & Vytlacil, Edward J., 2007. "Econometric Evaluation of Social Programs, Part I: Causal Models, Structural Models and Econometric Policy Evaluation," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 70, Elsevier.
    13. Andrew A. Samwick & Jonathan Skinner, 2004. "How Will 401(k) Pension Plans Affect Retirement Income?," American Economic Review, American Economic Association, vol. 94(1), pages 329-343, March.
    14. Daniel Bergstresser & Mihir Desai & Joshua Rauh, 2006. "Earnings Manipulation, Pension Assumptions, and Managerial Investment Decisions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(1), pages 157-195.
    15. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    16. Joshua D. Rauh, 2006. "Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans," Journal of Finance, American Finance Association, vol. 61(1), pages 33-71, February.
    17. Alicia H. Munnell & Mauricio Soto, 2007. "Why Are Companies Freezing Their Pensions?," Working Papers, Center for Retirement Research at Boston College wp2007-22, Center for Retirement Research, revised Dec 2007.
    18. Cathy Beaudoin & Nandini Chandar & Edward M. Werner, 2010. "Are potential effects of SFAS 158 associated with firms' decisions to freeze their defined benefit pension plans?," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 9(4), pages 424-451, November.
    19. Edward P. Lazear & Robert L. Moore, 1988. "Pensions and Turnover," NBER Chapters, in: Pensions in the U.S. Economy, pages 163-190, National Bureau of Economic Research, Inc.
    20. Mitchell A. Petersen, 1992. "Pension Reversions and Worker-Stockholder Wealth Transfers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 1033-1056.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Divya Anantharaman & Feng Gao & Hariom Manchiraju, 2022. "Does social responsibility begin at home? The relation between firms’ pension policies and corporate social responsibility (CSR) activities," Review of Accounting Studies, Springer, vol. 27(1), pages 76-121, March.
    2. Jessenia Davila & Luis Gomez-Mejia & Geoff Martin, 2024. "Family Firms and Employee Pension Underfunding: Good Corporate Citizens or Unethical Opportunists?," Journal of Business Ethics, Springer, vol. 192(2), pages 323-339, June.
    3. Duygun, Meryem & Huang, Bihong & Qian, Xiaolin & Tam, Lewis H.K., 2018. "Corporate pension plans and investment choices: Bargaining or conforming?," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 519-537.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rauh, Joshua D. & Stefanescu, Irina & Zeldes, Stephen P., 2020. "Cost saving and the freezing of corporate pension plans," Journal of Public Economics, Elsevier, vol. 188(C).
    2. Vafeas, Nikos & Vlittis, Adamos, 2018. "Independent directors and defined benefit pension plan freezes," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 505-518.
    3. Goto, Shingo & Yanase, Noriyoshi, 2021. "Pension return assumptions and shareholder-employee risk-shifting," Journal of Corporate Finance, Elsevier, vol. 70(C).
    4. repec:eee:labchp:v:1:y:1986:i:c:p:305-355 is not listed on IDEAS
    5. Hieu V. Phan & Shantaram P. Hegde, 2013. "Pension Contributions and Firm Performance: Evidence from Frozen Defined Benefit Plans," Financial Management, Financial Management Association International, vol. 42(2), pages 373-411, June.
    6. Joshua Rauh, 2007. "Risk Shifting versus Risk Management: Investment Policy in Corporate Pension Plans," NBER Working Papers 13240, National Bureau of Economic Research, Inc.
    7. Michael Kisser & John Kiff & Mauricio Soto, 2017. "Do Managers of U.S. Defined Benefit Pension Plan Sponsors Use Regulatory Freedom Strategically?," Journal of Accounting Research, Wiley Blackwell, vol. 55(5), pages 1213-1255, December.
    8. An, Heng & Huang, Zhaodan & Zhang, Ting, 2013. "What determines corporate pension fund risk-taking strategy?," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 597-613.
    9. Li, C. Wei & Yao, Tong & Ying, Jie, 2024. "Investment policies and risk sharing by corporate pensions," Journal of Economic Dynamics and Control, Elsevier, vol. 165(C).
    10. Leora Friedberg & Michael T. Owyang, 2004. "Explaining the evolution of pension structure and job tenure," Working Papers 2002-022, Federal Reserve Bank of St. Louis.
    11. Brown, Jeffrey R. & Liang, Nellie & Weisbenner, Scott, 2006. "401(k) matching contributions in company stock: Costs and benefits for firms and workers," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1315-1346, August.
    12. James Poterba & Joshua Rauh & Steven Venti & David Wise, 2007. "Defined Contribution Plans, Defined Benefit Plans, and the Accumulation of Retirement Wealth," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 2062-2086, National Bureau of Economic Research, Inc.
    13. Douglas Cumming & Fanyu Lu & Limin Xu & Chia-Feng (Jeffrey) Yu, 2024. "Are Companies Offloading Risk onto Employees in Times of Uncertainty? Insights from Corporate Pension Plans," Journal of Business Ethics, Springer, vol. 195(3), pages 579-598, December.
    14. Comprix, Joseph & Muller III, Karl A., 2011. "Pension plan accounting estimates and the freezing of defined benefit pension plans," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 115-133, February.
    15. Kandice Kapinos, 2011. "Changes in Firm Pension Policy: Trends Away from Traditional Defined Benefit Plans," Working Papers 11-36, Center for Economic Studies, U.S. Census Bureau.
    16. Comprix, Joseph & Muller, Karl A., 2011. "Pension plan accounting estimates and the freezing of defined benefit pension plans," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 115-133.
    17. Bartram, Söhnke M., 2018. "In good times and in bad: Defined-benefit pensions and corporate financial policy," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 331-351.
    18. Guan, Yanling & Tang, Dragon Yongjun, 2018. "Employees' risk attitude and corporate risk taking: Evidence from pension asset allocations," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 261-274.
    19. Romaniuk, Katarzyna, 2019. "Premiums of the Pension Benefit Guarantee Corporation and risk-taking by pension plans," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 301-307.
    20. Michael J. Alderson & Neil L. Seitz, 2013. "Pension Policy and the Value of Corporate-Level Investment," Financial Management, Financial Management Association International, vol. 42(2), pages 413-440, June.
    21. Zhao, Zucheng & Sutcliffe, Charles, 2024. "Why are pension schemes frozen, and how does a freeze affect the Employer's risk?," International Review of Economics & Finance, Elsevier, vol. 94(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2013-82. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.