Pension Freezes and Household Saving Over the Life Cycle
Defined benefit (DB) pension freezes in large healthy firms such as Verizon and IBM, as well as terminations of plans in the struggling steel and airline industries, highlight the fact that these traditional pensions cannot be viewed as risk-free promises from the employee's perspective. Indeed, the current turmoil in financial markets and difficult economic outlook for many firms suggest that many more pension plans could be frozen soon. In this preliminary paper we develop an empirical dynamic programming framework to investigate household saving decisions in a model economy with freezeprone DB pensions. The model incorporates important sources of uncertainty facing households, including asset returns, employment, income, and mortality, as well as pension freezes. Applying a compensating variation measure of welfare, we find that pension freezes reduce welfare by a maximum of about $6,000 for individuals with a high school degree and about $2,000 for individuals with a college degree. We close by highlighting a few important issues that are missing from our preliminary analysis, including a labor supply decision and the effects of market-clearing conditions in the labor market. We hope to address these issues in future work.
|Date of creation:||Oct 2008|
|Contact details of provider:|| Postal: Williamstown, MA 01267|
Phone: 413 597 2476
Fax: 413 597 4045
Web page: http://econ.williams.edu
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:wil:wileco:2008-21. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stephen Sheppard)
If references are entirely missing, you can add them using this form.