Discontinuities in Pension Benefit Formulas and the Spot Model of the Labor Market: Implications for Financial Economists / James E. Pesando.

By:

Pesando, James E

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w1795.Publication details: Cambridge, Mass. National Bureau of Economic Research 1986.Description: 1 online resource: illustrations (black and white)Subject(s):

G - Financial Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: When analyzing tax and related issues, financial economists typically invoke the simplest and the most tractable model of the labor market. This is the spot model, in which the worker's cash wage plus accruing pension benefit must equal the value of the worker's marginal product in each and every period. This paper first identifies the discontinuities in a worker's cash wage that must occur under the spot model if the pension plan has typical"cliff" vesting and early retirement provisions. The paper then calculates the pension benefits actually accrued, at and around the dates of eligibility for these benefits, by members of five pension plans in Canada. Both exercises serve to discredit the spot model. The paper reviews the underfunding puzzle, the measurement of pension liabilities, and the recapture of surplus assets in overfunded plans in light of these findings.

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Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w1795 (Browse shelf(Opens below))	Not For Loan

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1986.

When analyzing tax and related issues, financial economists typically invoke the simplest and the most tractable model of the labor market. This is the spot model, in which the worker's cash wage plus accruing pension benefit must equal the value of the worker's marginal product in each and every period. This paper first identifies the discontinuities in a worker's cash wage that must occur under the spot model if the pension plan has typical"cliff" vesting and early retirement provisions. The paper then calculates the pension benefits actually accrued, at and around the dates of eligibility for these benefits, by members of five pension plans in Canada. Both exercises serve to discredit the spot model. The paper reviews the underfunding puzzle, the measurement of pension liabilities, and the recapture of surplus assets in overfunded plans in light of these findings.