Risky Pensions and Household Saving Over the Life Cycle

David Love and Paul Smith

Working Papers, Center for Retirement Research at Boston College from Center for Retirement Research

Abstract: Recent 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. In this paper we develop an empirical dynamic programming framework to investigate household saving decisions in a model economy with risky 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.

Pages: 32 pages
Date: 2008-10, Revised 2008-12
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Persistent link: https://EconPapers.repec.org/RePEc:crr:crrwps:wp2008-19

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