5
Retirement Age and Retirement Income: The Role of the Firm

Donald O. Parsons

Understanding the retirement behavior of American workers and their income security in retirement requires knowledge of the motivations of employers as well as workers and the government.1 For example, the federal government has implemented a wide range of laws to permit or encourage later retirement in the private sector. Legal restrictions were imposed on maximum age-of-hire rules and on mandatory retirement before age 70 in the Age Discrimination in Employment Act of 1967 (ADEA); both practices have since been effectively abolished. Other legislation has outlawed pension plans that stop pension accrual at age 65 or deny older new hires the right to participate in company pensions. In a different direction, the 1983 Amendments to the Social Security Act set up a time schedule for the raising of normal retirement under Social Security to age 67. At the same time, however, private employers are increasingly including special early retirement incentives in pension benefit formulas (Mitchell, 1992). Whether this trend is a passive response by employers to greater demands by workers for early retirement or an active attempt by employers to reduce the number of older workers is not clear, although one must at least entertain the second possibility.2

Firms contribute in two important ways to the income security of older

The comments of participants at the panel conference on retirement modeling, especially those of Dallas Salisbury and Eugene Steuerle, are gratefully acknowledged. I have also benefited from the suggestions of Robert Clark and Richard Ippolito and from the detailed comments of members of the panel.



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Assessing Knowledge of Retirement Behavior 5 Retirement Age and Retirement Income: The Role of the Firm Donald O. Parsons Understanding the retirement behavior of American workers and their income security in retirement requires knowledge of the motivations of employers as well as workers and the government.1 For example, the federal government has implemented a wide range of laws to permit or encourage later retirement in the private sector. Legal restrictions were imposed on maximum age-of-hire rules and on mandatory retirement before age 70 in the Age Discrimination in Employment Act of 1967 (ADEA); both practices have since been effectively abolished. Other legislation has outlawed pension plans that stop pension accrual at age 65 or deny older new hires the right to participate in company pensions. In a different direction, the 1983 Amendments to the Social Security Act set up a time schedule for the raising of normal retirement under Social Security to age 67. At the same time, however, private employers are increasingly including special early retirement incentives in pension benefit formulas (Mitchell, 1992). Whether this trend is a passive response by employers to greater demands by workers for early retirement or an active attempt by employers to reduce the number of older workers is not clear, although one must at least entertain the second possibility.2 Firms contribute in two important ways to the income security of older The comments of participants at the panel conference on retirement modeling, especially those of Dallas Salisbury and Eugene Steuerle, are gratefully acknowledged. I have also benefited from the suggestions of Robert Clark and Richard Ippolito and from the detailed comments of members of the panel.

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Assessing Knowledge of Retirement Behavior individuals: by providing jobs to those who want to work and by providing pension income to those who do not. The ability and willingness of private employers to offer jobs and pensions has been changing in the last two decades. Large changes have occurred, not only in age-based legislation, but in the economy's industrial base, the economic platform that provides both work opportunities and post-retirement income. Among other changes are the widely noted decline in the relative share of the large-firm, highly unionized sector and the expansion of the service sector. This sectoral shift offers both opportunities and dangers to older individuals. On the one hand, employment in the service sector appears to be much more open to older Americans (Ruhm, 1990; Quinn, Burkhauser, and Myers, 1990), so that older individuals should have greater access to jobs in the future. On the other hand, they may need to work for more years if the expanding sectors remain relatively ungenerous in their pension offerings. Indeed recent evidence indicates that pension coverage in the United States declined in the 1980s, driven in part by relative employment declines in high-pension-coverage sectors (Woods, 1989; Parsons, 1991b, 1994; Bloom and Freeman, 1992; and Even and Macpherson, 1994a), although preliminary evidence from the May 1993 pension supplement indicates that coverage rates have stabilized in the 1990s (Woods, 1993; U.S. Department of Labor et al., 1994). At the same time, there has been a shift in the composition of pension coverage away from the traditional final-salary-based, retirement annuity programs (defined benefit plans) and toward savings-like, lump-sum programs (defined contribution plans) with payouts dependent on the returns-to-plan assets.3 These compositional shifts can also be partly explained by the relative decline in industries that traditionally offered defined benefit plans, although both the general decline in pensions and the shift toward defined contribution plans are evident within industrial sectors as well. The trend toward defined contribution plans introduces an unwelcome element of uncertainty into policy planning because we lack broad experience with such plans. What are the strategies underlying employers' retirement and pension policies? How and, of equal importance, why do these strategies vary across firms, workers, and market structures?4 Although one can occasionally uncover direct evidence on employer intentions (Gratton, 1990), usually this information must be gleaned indirectly from observations of the age-related elements of employment conditions, including maximum age-of-hire restrictions, compulsory retirement rules, actuarially unfair pensions, age-restricted eligibility for retirement plans, and special retirement incentive programs or ''windows." The motivations for age-based policies are often ambiguous. With pensions, for example, the firm has two plausible objectives: (1) to serve as an efficient conduit for fringe benefits that its workers value, for example, as a mechanism for securing tax-deferred retirement income, and (2) to structure compensation in a way that induces desirable behavior from workers at least cost, shaping compensation

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Assessing Knowledge of Retirement Behavior profiles and bonding worker mobility and on-the-job performance. Evidence for each of these two objectives, which are not mutually exclusive, can be found in the literature, but the quantitative importance of each in molding the firm's behavior toward the aged remains unknown. Throughout this review, special attention is paid to the impact of firm size on retirement policies. To anticipate later conclusions, retirement age and pension coverage are strongly shaped by firm size and union status, and a substantial part of recent trends in pension coverage and type (defined benefit and defined contribution) can be explained by shifts in industrial structure away from the large-firm, unionized sector. The effects of firm size and union status on retirement age and retirement income can themselves be explained by transactions costs, especially firm size differences in (1) the administrative costs of sorting and reassigning older workers as their productive attributes evolve and (2) the administrative costs of providing retirement income to separated workers. Recent trends in pension structure can be explained by changes in these same administrative costs, especially those changes induced by shifting government regulations, although permissive legislation that has expanded the range of tax-favored pension vehicles to include 401(k) plans has also had a major impact on recent pension developments. Alternative hypotheses, notably broader transactions-cost hypotheses that stress agency problems and/or contract reliability, can explain many of the same behaviors, and more detailed data and more carefully developed implications are required to assess the relative importance of these competing, but not mutually exclusive, hypotheses. This paper proceeds in the following way. I begin in the next section by summarizing the "aging problem" as the firm might view it and then review aspects of the firm's employment contracting behavior that are of special relevance to aging policies. The function of this section is to gather together in one place a set of worker and firm behavioral characteristics that can explain the retirement and pension policies of the firm and the variation in these policies across firm size. In the section on "The Employment of Older Workers," I begin the review of what is known about the role of the firm in retirement behavior and retirement income, turning first to the employment question: what determines the firm's propensity to employ older workers? I examine the mechanisms firms use to alter the extent of employment of older workers—the age profile of compensation, mandatory retirement, and maximum age-of-hire. In the section "Employer-Provided Pensions," I then consider the closely related question of firm pension policies, again focusing on why firms establish the plans that they do. The answers to this question are then used to explain recent pension trends, in aggregate and by type of pension plan. I then conclude in the final section with a discussion of the data collection and research needed to develop more reliable retirement-age and pension policy models.

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Assessing Knowledge of Retirement Behavior THE AGING WORKER AND THE FIRM The Aging Worker The aging worker faces a variety of problems that potentially affect his or her productivity. (That these effects exist does not mean that firms correctly estimate their magnitudes; I return to the question of age bias below.) At the most basic level, mortality rates increase with age. This reality may limit the worker's usefulness to the firm, especially if substantial training is involved. Two additional dimensions of the aging process may be important: (1) that physical and mental attributes, especially physical attributes, decline on average with age and (2) that the decline is not uniform across individuals—some workers suffer declines and others do not.5 Self-reported health data from the National Center for Health Statistics illustrate the age profile of depreciation of the human "machinery" along several dimensions; see Table 5-1.6 As the table indicates, certain physical problems arise early. In the age interval 55 to 65, about 16 percent of both men and women report difficulty walking a quarter of a mile, while 5 percent of men and 8 percent of women report difficulty lifting a 10-pound weight. In the oldest category, those 85 years of age or more, 50 percent of men and 60 percent of women report difficulty walking a quarter mile. On average, mental skills decline later in life. TABLE 5-1 Health Statistics for Persons Ages 55 and Over in the United States, 1984, in Percentages Ages Annual Death Rate Have Difficulty Walking 1/4 Mile Lifting 10 lbs. Managing Money Males   55–64 1.7 15.5 5.2 1.0 65–74 3.8 21.9 6.6 2.8 75–84 8.4 29.1 9.9 5.4 85+ 18.1 48.3 19.9 19.0 Females   55–64 0.9 16.3 8.8 1.0 65–74 2.1 24.5 12.6 1.8 75–84 5.2 39.4 23.7 6.8 85+ 14.1 61.5 40.8 26.2   SOURCE: National Center for Health Statistics (1987): column 1, p. 7; column 2, p. 45; column 3, p. 46; column 4, p. 54. The activity data are based on the National Health Interview Survey 1984 Supplement on Aging.

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Assessing Knowledge of Retirement Behavior Self-reported difficulty managing money is almost nonexistent between 55 and 64.7 Even in the 75-to-84 age interval, only 5 percent of men report trouble "managing money," a proportion that increases to 19 percent by age 85 and over (for women the corresponding statistics are similar—7% and 26%, respectively). The data also make clear that the onset of self-reported impairments is not uniform across the population. Most older individuals do not have a problem with these basic physical and mental skills. Among the men 85 or older, 50 percent report that they do not have difficulty walking one-quarter mile, 80 percent that they do not have difficulty lifting a 10-pound weight or managing their money. It is reasonable to assume that work productivity is related to the individual's physical abilities and to his or her mental ones, with the relative importance of each dependent on the worker's job, so that work productivity in the population declines with age. Less clear, and in many ways less relevant, is whether the attributes of older workers decline with age. See Levine (1988) and Hurd (1993) for sympathetic reviews of the age/productivity literature. One could imagine a work environment sufficiently rigid in requirements and pace that all who continue working are of the same productivity; the overall decline in capabilities with age would be reflected in a reduced work rate. Certainly employers act as if abilities decline with age; the internal assessments of line managers in the Pennsylvania Railway Company, when that company first adopted a modern retirement and pension system at the turn of the century, reveal this to be the case, Gratton (1990). In a broader sample much more recently, Medoff and Abraham (1981) find evidence that productivity (as reported by supervisors) declines among older workers while pay increases. Kotlikoff and Gokhale (1992) use a novel methodology on data from a single large firm's personnel records to estimate employer perceptions of the productivity profiles for male managers, male and female office workers, and male and female salespeople. The basic proposition is that the present value of productivity and compensation should be equal at the time of hire. From wage histories and exit probabilities for workers with different ages of hire, they can estimate age profiles of productivity. There is persuasive evidence of declining productivity with age and also of large wage/productivity gaps at older ages for all but male salespeople and, somewhat more ambiguously, female salespeople, both of whom work on commission. Recall, however, that these estimates are based on employer beliefs of worker productivity. For a skeptical summary of employer beliefs in this area, see Levine (1988, chap. 8). A caveat is that employer perceptions may not reflect reality. It is unambiguous that individuals fall prey to various physical and mental impairments at an increasing rate with age and that employers design employment contracts to moderate the effect of the aging phenomenon on firm profitability. At a minimum, these firm policies are a form of statistical discrimination—workers are treated as a class, old—that legislators have in many cases chosen to prohibit.8 A deeper question is whether employers systematically overestimate the magnitude

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Assessing Knowledge of Retirement Behavior of this decline (Levine, 1988). Hurd (1993) provides a review of early efforts to deal with this difficult measurement issue. I suspect that empirical validation will be difficult. In situations in which objective productivity measures are available to the researcher, they are also likely to be available to the employer, but the greatest potential for bias occurs in situations in which productivity measures are the most ambiguous. In the remainder of this review, I assume that employers are reacting to what they believe to be the life-cycle productivity trend. Obviously aging is a problem for the worker as well as the firm; of special importance to the worker is insuring himself or herself against earnings losses following the onset of a disabling condition. Such protection can take one of two forms, disability insurance or "self-insurance," accumulating sufficient assets to provide adequate consumption for a terminal period of low or no earnings. Private disability insurance coverage is notoriously incomplete and Social Security disability benefits are subject to a stringent but error-prone disability screen, placing much of the burden of income maintenance in old age on retirement programs. Of course, not all workers are equally concerned about this danger, or indeed about the future at all. Of importance to the firm's incentive to provide a pension plan, workers with high rates of time preference will place little value on pension plans, especially when they are young. As a summary, I offer the following propositions about workers and aging:  Physical and mental attributes, especially physical attributes, decline on average with age, but the decline is not uniform across individuals—some workers suffer declines and others do not (W1).  Workers are underinsured, especially against the early onset of health conditions that reduce work productivity (W2).  Workers differ in the weights they place on the future; that is, they are heterogeneous in discount rates (W3). One additional aspect of worker preferences deserves special mention because of its unusual importance in the design of retirement and retirement income plans: downward adjustments in pay and responsibility are, on average, resented by the worker, the more so the more direct and obvious the adjustment and the more individual-specific it is (W4). The claim that workers resent negative job actions is consistent with empirical evidence in a wide set of situations, including employer design of wage and layoff policies (Bewley, 1993).9 For a more general statement of this proposition, see Kahneman, Knetsch, and Thaler (1986). Of special importance here, workers seem to more readily accept compensation cuts in the form of actuarially unfair adjustments in pension accrual than cuts in cash payments.

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Assessing Knowledge of Retirement Behavior The Firm Firm retirement policies and retirement income policies are largely a function of workplace characteristics, not individual ones (Slavick, 1966; Parsons, 1992). Although there is a major exception to this rule for part-time workers, age-based contract terms vary little within a given workplace for full-time workers.10 This workplace homogeneity is partly the result of government actions, such as nondiscrimination rules for qualified pension plans, but it is also the result of the firm's own decision calculus; when legal, one or two mandatory retirement rules have typically covered the whole workplace (Slavick, 1966). The firm's relationship with its workers can be conceptualized as a "contact."11 At the extremes, the employment relationship may be a spot-market transaction, with the firm's purchasing services from the worker for a relatively brief, well-defined interval, or a long-term contract, explicit or implicit, with the firm and workers' agreeing to an exchange of resources and services over a much more extended period. The primary economic factors that determine the length of the "contract" governing the employment relationship are the same as those that foster any sort of long-run contract, a relationship-specific investment on one or both parts (Williamson, 1975). In the employment contract, hiring costs and job training are believed to be investments of this type.12 The high correlation of general and firm-specific training (Mincer, 1988) implies that, other things being equal, high-skilled workplaces will have more enduring relationships than will low-skilled ones; the returns to these investments accrue over time and a significant part may be lost if the employer/employee pair separate. In general, workers and firms find it advantageous to have long-term relationships. The worker is spared the costs and uncertainties of finding another job; the firm is able to train its workers, assess them over a longer period of time, and assign each one to an appropriate position. The volatility of demand or complementary factors may make such relationships infeasible, however, and the net returns to such relationships are likely to vary, so that some types of firms will find it optimal to have short-term relationships with their workers. To summarize: high hiring and training costs and stable demand and supply conditions foster long-term contracts (F1). Beyond these real considerations, information processes are believed to play a major role in the determination of contract form. When compared with smaller firms, large firms appear to have two attributes important to these contracts: The costs of routine transactions are less in large firms (F2). The costs of individual, idiosyncratic decisions (in this case the assignment and monitoring of workers) are greater (F3). Economies of scale are almost invariably large when the same activities are repeated. Setting up a payroll system or a pension plan requires a significant

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Assessing Knowledge of Retirement Behavior fixed cost. As the scale of a single operation increases, however, important information is less and less likely to reach the appropriate decision maker, or to be fully comprehended if it does (Williamson, 1967). As a consequence, the idiosyncratic aspects of a particular circumstance are likely to be lost, and decisions are likely to depend more heavily on broad rules (Oi, 1983a, 1983b, 1991). In particular, large firms are likely to perform very poorly at assessing individual attributes and appropriately assigning individuals to tasks (Garen, 1985). As Oi (1983a:79) remarked about the product market, "Large firms specialize in the production of standardized goods, while small firms supply customized goods that are produced in small quantity." It is plausible that firm personnel policies follow a similar pattern. One can find ample support for propositions F2 and F3 in the retirement and retirement income literature. Scale Economies in Pension Administration Proposition F2 finds strong support in the administration costs of employer-provided pensions.13 Pension provision ultimately involves resource collection, management, and disbursement. Each of these activities has significant fixed-cost components, so that considerable cost savings result if the worker can costlessly pool his or her pension efforts with others; for example, searching for a portfolio manager need be undertaken once, not once for each worker. The administrative costs of a pension plan potentially include a variety of expenses incurred in the setup and maintenance of the plan and of individual accounts, including the collection of pension contributions, the tracking of workers until retirement, the financial handling of accumulated contributions, and the disbursement of funds at retirement. The cost functions of each of these various administrative activities—collection, portfolio management, disbursement, and others—may vary in form, but the total cost function seems well fitted by a log linear function (Caswell, 1976; Mitchell and Andrews, 1981). Consider then the following model which captures the major elements of past studies: (1) where C denotes total administrative costs, P denotes number of plan participants, A denotes total plan assets, F denotes the number of firms participating in the plan, X is a vector of other plan characteristics, and ∈ is a random element, assumed to be iid normal (independently and identically distributed). This model asserts that plan costs are a function of the number of plan participants, the assets per participant, the number of participants per firm (a measure of internal coordination costs), and possibly other factors. The crucial scale parameter is β1, which indicates economies of scale in pension administration if less than one (β1 < 1).

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Assessing Knowledge of Retirement Behavior Caswell (1976), using this model to estimate the administrative cost structure of multiemployer pension plans in the construction industry, found strong evidence of large-scale economies. Drawing his data from informational forms submitted on collectively bargained pension plans to the Department of Labor in 1970, Caswell reported pension administrative costs per participant of approximately 4 percent of total contributions. Holding firm size (P/F) constant, Caswell estimated that a doubling of pension plan size yielded about a 20 percent reduction in administrative costs: −1 = −0.202. Mitchell and Andrews (1981) estimated a log linear cost model similar to that of Caswell on a broader sample of multiemployer pension plans. Their data was drawn from 5500 Forms filed in 1975 in accordance with the Employment Retirement Income Security Act (ERISA) regulations. They considered only defined benefit trust plans, but did not limit their study to collectively bargained plans. In a multivariate analysis similar in form to Equation (1), they found evidence of scale economies in pension administration that were strikingly similar to Caswell's results for the construction industry. With assets per participant (A/P) held constant, a doubling of pension plan size yielded about a 20 percent reduction in administrative costs: −1 = −0.170.14 Also using data from Form 5500 filings, Turner and Beller (1989:438) report pension administrative costs per participant by plan size for (multiemployer) benefit plans in 1985. Although the Turner-Beller tables provide no data on many of the controls in the Caswell and the Mitchell-Andrews studies, estimation of the log linear model for defined benefit plans yielded estimates of scale economies similar to the earlier studies:15 (2) Evidence on administrative scale economies in single-employer plans is less abundant, because it is difficult to isolate pension administrative costs within the firm. An accounting cost study of single-employer plans by Hay/Huggins (1990) reveals, however, that scale economies in single employer plans are large as well. Hay/Huggins employs a task-pricing approach, estimating the cost of activities required to maintain a defined benefit pension plan for several different plan sizes. The study appears to emphasize accountancy costs—the purchase of actuarial services to design the plan, the accounting time required to prepare the annual report, and so forth. The cost estimates for the day-to-day functioning of management, record keeping, and disbursement are probably less reliable. The estimated economies of scale for ongoing administrative costs in a defined benefit plan is (absolutely) greater than in the statistical cost studies reported above: −1 = −0.324. Given the potential bias in the study toward accountancy costs with their large fixed-cost component, this figure does not appear inconsistent with the 20 percent estimates of the multiemployer plans. Given the magnitude of the scale economies in pension plan cost, a surpris

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Assessing Knowledge of Retirement Behavior ing finding is that small pension plans exist; indeed they exist in great number. In 1985 there were 800,000 single-employer plans covering 65 million participants, and 3,000 multiemployer plans covering 9 million workers (Turner and Beller, 1989:350). Apparently cross-firm pooling is expensive. Caswell's analysis indicates that the number of employers in multiemployer plans affects internal plan costs, perhaps owing to higher negotiation, coordination, and collection costs. Caswell's estimate of the effect on log costs of the log of (active) plan participants per firm (P/F) or is −0.153, which implies that a doubling of the number of employers, holding constant the total participant size of the pension plan, increases total administrative costs by 15 percent. These costs no doubt rise with heterogeneity, and it is not surprising that many existing multiemployer plans are industry-specific. Indeed many are the result of collective bargaining with a single union, a situation that is likely to provide a variety of cost savings. Union effects on pension coverage are most substantial in workplaces that would otherwise not naturally support them, for example, small firm industries in which interfirm mobility is high (Slavick, 1966; Freeman, 1985). Skolnik (1976) concludes his historical review on a similar note; multiemployer pension plans supported by unions in small-firm industries were apparently a major factor in the expansion of pension coverage in the 1950s and 1960s. Diseconomies of Scale in Idiosyncratic Decisions The evidence that large firms use rules rather than discretion is pervasive. Although more elaborate models of mandatory retirement can be developed (see below), mandatory retirement can be viewed as no more than the wholesale substitution of rules for discretion in the separation decision. Consistent with diseconomies of scale in idiosyncratic decisions, mandatory retirement rules were almost universal in very large workplaces and much less common in small ones (Slavick, 1966; see also Parsons, 1983). Slavick undertook an ambitious mail survey of establishments to ascertain their pension and retirement policies in 1961. The sample was "a random sample, stratified by size, of all business and industrial units with 50 or more employees reporting to the Bureau of Old-Age and Survivors Insurance in March 1956" (Slavick, 1966:8). In the first wave of the survey, 466 usable returns were obtained. The relationships of retirement policy by company size is reported in Table 5-2. The strong effect of company size on retirement policy is clear; in firms of size 50 to 249, 63 percent of all plants responding reported flexible retirement plans; in firms of 10,000 or more, 10 percent reported flexible plans. Only a modest number of establishments, under 20 percent in all firm size categories, reported mixed plans such as a flexible one for some workers, a mandatory one for others. Additional evidence that the pattern of mandatory retirement reflects the higher costs of sorting in large firms can be found in Table 5-3, in which differ-

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Assessing Knowledge of Retirement Behavior TABLE 5-2 Distribution of Local Plants by Company Size and Compulsory Retirement Status, 1961, in Percentages (Parentheses show number of local plants)   Retirement Policy Size of Company Flexible Mandatory Late Mandatory Normal Mixed Total 50–249 63.3% 6.7% 30.0% — 100.0%   (19) (2) (9)   (30) 250–499 40.0 11.4 42.8 5.7 100.0   (14) (4) (15) (2) (35) 500–999 33.3 13.3 36.7 16.7 100.0   (10) (4) (11) (5) (30) 1000–9999 14.2 17.0 53.8 15.1 100.0   (15) (18) (57) (16) (106) 10,000+ 10.3 37.9 32.8 19.0 100.0   (6) (22) (19) (11) (58)   SOURCE: Slavick (1966:77). Copyright © 1966 by Cornell University. Used by permission of the publisher, ILR Press, an imprint of Cornell University Press. TABLE 5-3 Distribution of Local Plants by Company Size and the "Percentage of Employees Reaching the Compulsory Retirement Age Who Were Excepted From Compulsory Retirement Policies," 1961 (Parentheses show number of local plants) Size of Company Percent of Employees Excepted 0% 1%–9% 10%–29% 30%–49% 50%+ Total 50–249 — 20.0% 40.0% 20.0% 20.0% 100.0%     (1) (2) (1) (1) (5) 250–449 36.4 — 63.6 — — 100.0   (4)   (7)     (11) 500–999 44.4 — 11.1 33.3 11.1 100.0   (4)   (1) (3) (1) (9) (50–999) 32.0 4.0 40.0 16.0 8.0 100.0   (8) (1) (10) (4) (2) (25) 1000–9999 71.8 10.3 12.8 — 5.1 100.0   (28) (4) (5)   (2) (39) 10,000+ 80.0 20.0 — — — 100.0   (12) (3)   (15)   SOURCE: Slavick (1966:114). Copyright © 1966 by Cornell University. Used by permission of the publisher, ILR Press, an imprint of Cornell University Press.

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Assessing Knowledge of Retirement Behavior experience distribution of their work forces. Firm efforts to balance their work force by age and experience when downsizing would suggest such an objective. For example, the military officer corps have target rank distributions that may provide insights into the nature of an ideal age distribution. Recent work on the theory of hierarchies (Demougin and Siow, 1994) might be useful here. Employment Practices in Small Firms Because employment practices in smaller firms are generally more informal, age-related practices in these firms remain largely unstudied. Andrews (1989) provides an important exception. The dismissal-demotion decision and the related pension/pay decision are no doubt less systematic in small workplaces. Age-related behaviors in high-skilled small firms are likely to be quite different than those in low-skilled firms. The growth of employment in these sectors and their importance to the aged as bridge jobs would argue for more detailed study. Pension Design Firm strategies behind many features of pension plans remain unconsidered. To take one example, there is, to my knowledge, no well-developed theory of the separate age and service criteria in pension benefit formulas. Early retirement provisions have become more common and early retirement benefits more generous in the 1980s (Mitchell, 1992). The reasons for these trends are not well understood. Oddly, Mitchell also notes that disability benefit provisions have become more stringent, increasingly requiring workers to qualify for long-term disability insurance. (The implications of early retirement for retirement income late in retirement is, to my knowledge, unstudied.) Pension Coverage and Pension "Receipt" Empirical studies of the linkage between pension coverage during the work life and pension receipt in retirement, focusing perhaps on the environmental factors that alter the linkage, would be useful. ERISA was passed in 1974 in part to tighten this link—vesting requirements were restricted and pension promises partly guaranteed. Nonetheless pension receipt remains linked to job mobility; vesting is imperfect (Sahin, 1989, 1989; Hay/Huggins, 1988; Turner, 1993); and inflation may diminish the value of pension rights that link past earnings with future benefits (Allen, Clark, and Sumner, 1986; Allen, Clark, and McDermed, 1992, 1995). The transition from defined benefit plans to defined contribution plans, which are much more likely to offer lump-sum payouts at job separations, raises the same basic issue in a slightly different way, will pension resources be available to support the consumption of older individuals? Emerging Issues Early Retirement Incentive Plans We know very little about early retirement incentive plans. Under one interpretation, they are the logical outcome of recent

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Assessing Knowledge of Retirement Behavior legislation to protect the jobs of older Americans—firms are forced to buy out workers whom they might otherwise force out. Some idea of the "price" of such buyouts would be useful: What percentage of the target group will accept a buyout of given size? How is the buyout function affected by worker characteristics? By the size of Social Security payments? Once these characteristics are better understood, we will be in a better position to understand why firms implement the policies. Lumsdaine, Stock, and Wise(1990) and Hackett (1995) offer a start on this research program.32 Unfortunately the temporary nature of these offers makes data collection difficult; at any single point in time, few firms have recently completed a buyout. Some choice-based samples will no doubt have to be constructed. Employer-Provided Health Insurance for Retirees The mushrooming of health care costs and accountant concerns about these liabilities has brought the issue of employer-provided health insurance for retirees to the fore. Scott, Berger, and Garen (1995) provide evidence that the indirect effect on the new-hire rate of older workers of providing this perquisite is negative and large in absolute value. Macpherson (1992) reports, from data drawn from the August 1988 Current Population Survey, that retirement health benefits are most prevalent in the same types of workplaces that offer defined benefit pensions—large, unionized firms with highly paid, full-time workers. Barron and Fraedrich (1994) confirm Macpherson's firm size results and also find a robust relationship between the firm's provision of retirement health insurance and the extent to which it trains new hires. They attribute this correlation to the self-screening properties of retirement health insurance, although the motivational attribution is not compelling. The issue of how coverage will evolve as costs continue to rise and the structure of pensions change is of obvious policy importance. NOTES 1.   The government, of course, is also a major employer. In the review to follow, I focus on private employers, though government employers face many of the same employment problems and in many cases adopt similar policies toward older workers. 2.   In his conference comments, Dallas Salisbury argued convincingly that it is important to separate equilibrium from disequilibrium situations. "The strongest unions have been the most successful in negotiation of early retirement ages. Employers in the public and private sector regularly attempt to negotiate these ages up, suggesting that it is primarily demand in the first instance, possibly turning to a reduction mode at points when an employer wishes to downsize (recent federal government buyouts support this pattern). 3.   In his conference comments, Dallas Salisbury stressed the diversity of defined benefit plans, noting that 45 percent of defined benefit plans offer lump-sum payouts. 4.   I introduce government actions only when they are designed to manage aspects of the employment relationship, and I consider the motivations for the government's actions only in passing. 5.   The data clearly indicate that morbidity or sickness rates increase with age. In an interesting study of track and field performance by age, Fair (1991:Abstract) reports: "For most of the running

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Assessing Knowledge of Retirement Behavior     events (400 meters through the half marathon), the slowdown rate per year [in maximum performance] is estimated to be 0.80 percent between 35 and 51. At age 51 the rate begins to increase. It is 1.04 percent at age 60, 1.46 percent at age 75, and 2.01 percent at age 95." It is important to distinguish these point-in-time results from trends in fitness by age, over which there is considerable controversy (Lee and Skinner, in this volume). 6.   Although the data are worker estimates, not firm estimates, they may still reflect social prejudices, ones accepted by the individuals themselves. 7.   Again it is important to point out that this pattern of reporting may be subject to social biases—admitting that one is having difficulty managing money is more socially acceptable at older ages. 8.   Straka (1992) provides a thoughtful review of the distinction between statistical discrimination and prejudicial discrimination. 9.   Blinder (1988) supports the inverse of this argument, that a worker would prefer to be the only one in an organization to receive a raise. He estimates that he would be equally happy with a 10 percent raise for himself alone and a 15 percent across-the-board increase to the entire Princeton University faculty. 10.   Preliminary estimates from the May 1993 pension supplement indicate that the coverage rate of full-time workers was 56 percent, that of part-time workers 15 percent (U.S. Department of Labor, 1994:50). 11.   For a review of the contract approach to the employment relationship, see Parsons (1986). 12.   For recent discussions of this proposition, see Oi (1983a, 1983b, 1991) and Parsons (1986, 1990). 13.   Beyond the studies summarized in detail below, see Andrews (1992). 14.   Mitchell and Andrews found much larger scale economies in assets per participant: − 1 = −0.730 15.   The dependent variable in this model was the log of average benefits rather than the log of total benefits and the estimated coefficient on participant numbers adjusted to correspond with the earlier estimates. The midpoint of the interval was used as the estimate of plan size in each category except that of the largest plans, which was unbounded. This category was omitted. 16.   This indexation rate dropped sharply in the 1980s; it was 22 percent over the 1980–1984 period and 10 percent from 1984 to 1988 (Allen, Clark, and McDermed, 1992:333). 17.   For related reviews of the material in this section, see Allen and Clark (1987) and Straka (1992). 18.   For a survey of earlier work on insurance aspects of long-term employment contracting, see Parsons (1986). 19.   Hutchens ignores the fact that mandatory retirement rules are typically uniform across the workplace and implicitly assumes that each worker is individually assigned mandatory retirement status at an appropriate age. This misspecification of the actual choice process is standard practice in the pension literature as well. See the next section. 20.   The nature of past jobs, particularly of the pension rights of those jobs, will affect the extent of underinsurance. In this discussion it is assumed that all past jobs have been in the sector not covered by private pensions. 21.   Ruhm defines a career job as the longest job the individual holds in his work life; Quinn, Burkhauser, and Myers define it as the last job held for 10 or more years. 22.   There are a number of excellent reviews of the pension literature. For a recent one, see Gustman, Mitchell, and Steinmeier (1994). 23.   As noted earlier, defined benefit plans are quite diverse in structure. Salisbury reports that 45 percent of all defined benefit plans offer lump-sum payouts. 24.   For recent discussions of worker bonding in a more general framework, see Parsons (1986), Carmichael (1989), and Akerlof and Katz (1989). 25.   Ippolito (1985) provides a modern variant on this old story, claiming that firms strategically

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Assessing Knowledge of Retirement Behavior     underfunded pensions as a bonding device against extreme union demands—any threat to the firm's economic viability was a threat to the workers' pensions. 26.   For a review of the literature on the latter two processes, see Parsons (1986). 27.   For a somewhat different approach to the same problem, see Lazear and Moore (1988) and Stock and Wise (1990). 28.   Turner (1993) notes that defined contribution plans can and do contain length-of-service rewards, for example, increasing employer contributions with tenure, although these features do not appear to be sufficiently common to overturn Gustman and Steinmeier's point. 29.   For a more complete discussion of the mobility attributes of alternative pension schemes, see Turner (1993). 30.   Even and Macpherson (1994b) note, however, that the negative coverage trend has continued for less educated male workers. 31.   For those workplaces with multiple "contracts," most commonly collectively bargained and not, multiple worker aggregations would presumably be useful—within contract groups and within the firm as a whole. 32.   Lumsdaine. Stock. and Wise (1990) estimate the magnitude of the acceptance response to a single large firm's early retirement incentive offer, and then assess whether the plan is optimal under alternative assumptions about the firm's objective. They argue that, if the objective is simply to downsize the workforce, they could do the job more cheaply using the information generated in their study to target the program to the most response segments of the work force. Hackett (1995) assesses data on the response of U.S. Navy officers to a series of early retirement incentive plans. He has data on internal promotion prospects—which are known to both the officers and the Navy—and finds that the acceptance rate of the plan is inversely related to the officer's likelihood of promotion. From the firm's perspective, the plan had desirable self-screening properties. REFERENCES Akerlof, G.A., and L.F. Katz 1989. Workers' trust funds and the logic of wage profiles. Quarterly Review of Economics August:525–536. Akerlof, G.A., and H. Miyazaki 1980. The implicit contract theory of unemployment meets the wage bill argument. Review of Economic Studies 47(January):321–338. Allen, S.G., and R.L. Clark 1987. Pensions and firm performance. In Human Resources and the Performance of the Firm. Industrial Relations Research Association Series. Madison, Wisc.: Industrial Relations Research Association. Allen, S.G., R.L. Clark, and A.A. McDermed 1992. Post-retirement benefit increases in the 1980s. Pp. 319–339 in J.A. Turner and D.J. Beller, eds., Trends in Pensions 1992. Washington, D.C.: U.S. Department of Labor, Pension and Welfare Benefits Administration. 1993. Pension bonding and lifetime jobs. Journal of Human Resources 28:463–481. 1995. Post-retirement increases in pensions in the 1980s: Did plan finances matter? Research on Aging 17(June):190–208. Allen, S.G., R.L. Clark, and D. Sumner 1986. Post-retirement adjustments of pensions. Journal of Human Resources 21:118–137. Andrews, E.S. 1989. Pension Policy and Small Employers: At What Price Coverage? Washington, D.C.: Employee Benefit Research Institute.

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Assessing Knowledge of Retirement Behavior Woodbury, S.A., and W. Huang 1991. The Tax Treatment of Fringe Benefits. Kalamazoo, Mich.: W.E. Upjohn Institute for Employment Research. Woods, J.R. 1989. Pension coverage among private wage and salary workers: Preliminary findings from the 1988 survey of employee benefits. Social Security Bulletin 52(October):2–19. 1993. Pension coverage among the baby boomers: Initial findings from a 1993 survey. Social Security Bulletin 57(Fall):12–25.