Assessing Knowledge of Retirement Behavior (1996) / Chapter Skim
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5 RETIREMENT AGE AND RETIREMENT INCOME: THE ROLE OF THE FIRM
5 RETIREMENT AGE AND RETIREMENT INCOME: THE ROLE OF THE FIRM
Pages 149-194
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From page 149... ...
; 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.
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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.
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From page 151... ...
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)
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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.
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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.
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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.
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Setting up a payroll system or a pension plan requires a significant
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From page 156... ...
Each of these activities has significant fixedcost 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.
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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:~5 ,6~-1 = - 0.185 (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.
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From page 158... ...
, 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~.
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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)
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Consider the reported variation in post-retirement adjustments in benefits by collective bargaining status and plan size in Table 5-4. It would appear that post-retirement adjustments within pension plans of equal size are largely unaffected by collective bargaining status within plans of similar size.
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13) reports that "reversions" of overfunded pension plans terminating the program and capturing the value of the plan above the level required by ERISA (the pension's quit value)
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In the absence of legal restrictions, a firm can implement its age policies by rule, across broad classes of workers, or selectively, perhaps screening older workers more intensively than younger ones. Although job reassignment by rule at a given age is not unknown, most rules trigger separation from the firm (mandatory retirement)
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The S55 measure is strongly and negatively related to both firm size and unionism (Parsons, 1983~. The larger the firm size, the lower the fraction of the work force that is composed of older workers.
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There is substantial evidence that long-term-contract firms historically reduced the compensation levels of workers as they aged, almost exclusively through actuarially unfair adjustments to pension benefits that are now illegal. There is also good evidence that these accrual strategies have the expected effects on retirement behaviors (see below and the reviews in Kotlikoff and Wise, 1989, and Quinn, Burkhauser, and Myers, 1990~.
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These two quantity constraints are considered in the remainder of this section. Mandatory Retirement Rules Because of recent legislation to make mandatory retirement rules illegal, such rules have been the subject of considerable study by economists and others.
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There is strong evidence that large firms have high transactions costs in such matters, including the lack of exceptions to the mandatory retirement rules (see "The Aging Worker and the Firm" above)
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The fact that mandatory retirement rules do not appear to be targeted on the average worker suggests, however, that the answer to the question of why mandatory retirement rules exist must be sought somewhere other than the representative-worker models of Lazear or Blinder; the best evidence is that employers can move older workers out of their work places with appropriate uses of the pension carrot if they are long tenured in the firm; the stick is not needed. For excellent reviews, see Quinn, Burkhauser, and Myers (1990)
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From page 168... ...
Jobs with high values include delivery- and route-men in miscellaneous wholesale trade and janitors in medical and other health services (Hutchens, 1986:453~. Hutchens reports that the share of older workers that have been recently hired is highly and inversely correlated with other indexes of long-term contracting, such as tenure, premium earnings, pension coverage, and the presence of mandatory retirement rules.
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From page 169... ...
Not all pensions are the same, and discussions of both the point-in-time equilibrium and secular trends would be incomplete without partitioning pensions by type. It is useful to distinguish three types of pension plans: defined benefit plans, traditional defined contribution plans, and 401(k)
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Although 401(k) plans have characteristics in common with traditional defined contribution plans, they have unique features that warrant separate consideration.
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Chief among the set of alternative hypotheses is the agency argument, most systematically developed by Ippolito (1985, 1986, 1987~. Nonvested pensions provide a form of mobility and performance bond.24 Historically, employer-provided pensions were overwhelmingly defined benefit plans, with the firm promising longtime, "loyal" workers the equivalent of an annuity upon retirement, but offering nothing if the worker left without employer approval.
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They also argue that the losses implied by the quit-stay differential are rather small compared with even a modest raise, the end result, presumably, of a quit. Perhaps most compelling is their finding that the mobility-reducing effect of defined contribution plans, which have no significant quit penalty, is almost identical to that of defined benefit plans, which do (see also Even and Macpherson, 1992~.
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Although defined benefit plans have historically been the predominant form of coverage in the United States, defined contribution plans, often equated with savings plans, have grown rapidly in the last decade. Before a discussion of these trends, it will be useful to consider the factors that determine the industrial locus of pensions by type.
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That said, 401(k) -type plans appear to be the pension plan of choice for firms adopting pension plans for the first time, superior to both defined benefit and traditional defined contribution plans.
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The most obvious trend has been a negative one, the evertightening regulatory restrictions on the form of defined benefit plans. Not only have these regulatory shifts limited the usefulness of defined benefit plans to the firm, but the constant flow of regulatory changes has meant that firms with such plans have faced several decades of "one-time" transactions costs in order to bring their programs in line with changing regulations.
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From page 176... ...
The timing of this expansion is easily explained, since it was not until the early 1980s that the IRS clarified the conditions under which such a plan could qualify for tax deferral. A number of researchers have explored the causes of the shift toward defined contribution plans as a fraction of all pension plans, in most cases lumping together 401(k)
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The rising popularity of defined contribution plans has been attributed to a number of factors: (1) regulation-induced increases in administrative costs that are especially adverse to defined benefit plans (Hay-Hugging, 1990; Ippolito, 1992~; (2)
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argues persuasively that the absolute magnitude of the differential between defined benefit and defined defined contribution plans, is small in medium and large workplaces and would seem too modest to induce the observed shifts in these workplaces. Whether the remaining, unexplained shift toward defined contribution plans is due to the regulatory stifling of the bonding and wagesculpting features of defined benefit plans or to the regulatory encouragement of 401(k)
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Without question, retirement age and pension coverage are strongly shaped by firm size and union status. Not surprisingly, then, a substantial part of recent trends in pension coverage and type (defined benefit and defined contribution)
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worker data, including the usual socioeconomic and demographic characteristics. The review above suggests that because of the workplace-wide nature of employment and pension plans, the worker data must be linked not only with employer characteristics and policies, but with the characteristics of other workers in the same workplace.
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Administrative Cost Surveys Administrative costs are crucially important in forming employer responses to both employment decisions (monitoring and reassignment costs) and pensions (pension administrative costs)
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government changes in Social Security and aging policies. Pension coverage is strongly affected by plant and firm size and the declines in average firm size and union density have apparently contributed substantially to recent declines in defined benefit coverage.
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Aging and the Firm: Unfinished Business Priority Topics Age Profiles of Productivity More systematic development of lifetime productivity profiles would be valuable, especially the uncovering of environmental factors that influence the magnitude of productivity declines late in the work life. The "Ideal" Workplace Age Distribution Age accounting is becoming more prevalent in large firms, suggesting that firms may have preferences over the age
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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.
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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.
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Salisbury reports that 45 percent of all defined benefit plans offer lump-sum payouts.
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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.
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Beller, D.J. 1989 Coverage and vesting patterns in private pension plans, 1975-1985.
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McDermed, and M White 1992 Firm Choice of Type of Pension Plan: Trends and Determinants.
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1992 The stampede towards defined contribution pension plans: Fact or fiction? Industrial Relations 31(2)
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1979 Legislative Influence on Corporate Pension Plans. Washington, D.C.: American Enterprise Institute.
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1994 Recent trends in pension coverage rates.
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1976 Private pension plans, 1950-74. Social Security Bulletin June:3-17.
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Social Security Bulletin 52(0ctober)
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