Post-Retirement Increases in Pensions in the 1980s: Did Plan Finances Matter?
Steven G. Allen, Robert L. Clark, Ann A. McDermed
Many firms give post-retirement increases in pension benefits to retirees even though the pension contract does not require such increases. A leading explanation of this behavior is that benefit increases are part of an implicit contract where retirees accept lower initial benefits in return for the option of receiving a share of the plan's financial returns above the risk-free rate. The paper reports mixed evidence on the linkage between the financial performance of pension plans and post-retirement increases. Between 1980 and 1985, benefit increases were larger in plans with high funding ratios and lofty rates of return. However, the practice of giving post-retirement increases became much less widespread in the 1980s, despite dramatically improved financial performances across all pension plans.
Published: Research on Aging, Vol. 17, no. 2, June 1995, pp. 190-208.