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Employee Valuation of Pension Claims and the Impact of Indexing Initiatives

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  • James E. Pesando

Abstract

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

  • James E. Pesando, 1981. "Employee Valuation of Pension Claims and the Impact of Indexing Initiatives," NBER Working Papers 0767, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0767
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    1. Jeremy I. Bulow, 1979. "Analysis of Pension Funding Under Erisa," NBER Working Papers 0402, National Bureau of Economic Research, Inc.
    2. Siegel, Jeremy J & Warner, Jerold B, 1977. "Indexation, the Risk-Free Asset, and Capital Market Equilibrium," Journal of Finance, American Finance Association, vol. 32(4), pages 1101-1107, September.
    3. Burt S. Barnow & Ronald G. Ehrenberg, 1979. "The Costs of Defined Benefit Pension Plans and Firm Adjustments," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 523-540.
    4. Zvi Bodie, 1980. "Purchasing-Power Annuities: Financial Innovation for Stable Real Retirement Income in an Inflationary Environment," NBER Working Papers 0442, National Bureau of Economic Research, Inc.
    5. Martin Feldstein, 1983. "Inflation and the Stock Market," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 186-198 National Bureau of Economic Research, Inc.
    6. Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
    7. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-470, May.
    8. Liviatan, Nissan & Levhari, David, 1977. "Risk and the Theory of Indexed Bonds," American Economic Review, American Economic Association, vol. 67(3), pages 366-375, June.
    9. Arnott, Richard J. & Gersovitz, Mark, 1980. "Corporate financial structure and the funding of private pension plans," Journal of Public Economics, Elsevier, vol. 13(2), pages 231-247, April.
    10. Stanley Fischer, 1979. "Corporate Supply of Index Bonds," NBER Working Papers 0331, National Bureau of Economic Research, Inc.
    11. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    12. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
    13. Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
    14. Blinder, Allan S., 1977. "Indexing the economy through financial intermediation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 69-105, January.
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    Cited by:

    1. Martin Feldstein, 1983. "Should Private Pensions Be Indexed?," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 211-230 National Bureau of Economic Research, Inc.
    2. Zvi Bodie & James E. Pesando, 1983. "Retirement Annuity Design in an Inflationary Climate," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 291-324 National Bureau of Economic Research, Inc.
    3. Pesando, James E, 1985. " The Usefulness of the Wind-Up Measure of Pension Liabilities: A Labor Market Perspective," Journal of Finance, American Finance Association, vol. 40(3), pages 927-940, July.
    4. Steven G. Allen & Robert L. Clark & Ann A. McDermed, 1993. "Post-Retirement Increases in Pensions in the 1980s: Did Plan Finances Matter?," NBER Working Papers 4413, National Bureau of Economic Research, Inc.
    5. James E. Pesando, 1984. "Valuing Pensions (Annuities) with Different Types of Inflation Protection in Total Compensation Comparisons," Canadian Journal of Economics, Canadian Economics Association, vol. 17(3), pages 569-587, August.
    6. Benjamin M. Friedman, 1983. "Pension Funding, Pension Asset Allocation, and Corporate Finance: Evidence from Individual Company Data," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 107-152 National Bureau of Economic Research, Inc.
    7. Benjamin M. Friedman, 1982. "Pension Funding, Pension Asset Allocation, and Corporate Finance: Evidence From Individual Company Data," NBER Working Papers 0957, National Bureau of Economic Research, Inc.

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