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Cash balance pension plan conversions and the new economy

  • Julia Lynn Coronado
  • Phillip C. Copeland
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    Many firms that sponsor traditional defined benefit pensions have converted their plans to cash balance plans in the last ten years. Cash balance plans combine features of defined benefit (DB) and defined contribution (DC) plans, and yet their introduction has proven considerably more controversial than has the increasing popularity of DC plans. The goal of this study is to estimate a hierarchy of the influences on the decision of a firm to convert its traditional defined benefit pension plan to a cash balance plan. Our results indicate that cash balance conversions have been undertaken in competitive industries with tight labor markets and can be viewed largely as a response to better compensate a more mobile labor force. Indeed, many firms appear to increase their pension liabilities through such conversions. The results also shed light on the possible determinants of the broader shift from DB to DC pension coverage.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-63.

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    Date of creation: 2003
    Date of revision:
    Handle: RePEc:fip:fedgfe:2003-63
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    1. John M. Abowd & Paul A. Lengermann & Kevin L. McKinney, 2002. "The Measurement of Human Capital in the U.S. Economy," Longitudinal Employer-Household Dynamics Technical Papers 2002-09, Center for Economic Studies, U.S. Census Bureau, revised Mar 2003.
    2. Leslie E. Papke & Mitchell Petersen & James M. Poterba, 1993. "Did 401(k) Plans Replace Other Employer Provided Pensions?," NBER Working Papers 4501, National Bureau of Economic Research, Inc.
    3. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
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