Irina Stefanescu (FED Board)

“Cost Saving and the Freezing of Corporate Pension Plans”

Abstract

The decision to freeze corporate defined benefit (DB) plans is related to variation in prospective cost saving, and freezing DB plans reduces total corporate compensation costs. Firms that freeze have at least 50% higher 10-year expected DB accruals than matched non-freeze firms. Comparing counterfactual DB accruals to increases in contributions to 401(k)s and other replacement plans, firms save 2.7-3.6% of payroll annually and 3.1% of total assets over ten years. Workers would have to value the flexibility or portability of DC plans by at least this much to experience welfare gains. For older workers, the sponsor’s savings are larger, consistent with renegotiation of implicit contracts. However, we also identify substantial savings from freezes of cash balance plans, whose accruals as a share of pay do not vary with age or service.