Postretirement Increases in Pensions in the 1980s

Abstract

Many firms give postretirement increases in pension benefits to retirees even though the formal pension contract does not require them. A leading explanation for the existence of postretirement increases is that they are part of an implicit employment contract that requires the firm to award postretirement increases when the financial performance of the pension fund is better than expected. Data from the 1986 Employee Benefit Survey is combined with financial information from the Form 5500 tax reporting forms for 1985 to estimate the determinants of postretirement increases in pension benefits between 1980 and 1985. The results indicate that financial factors are not closely related to the incidence of postretirement benefit increases but are important determinants of the magnitude of benefit increases. Other results reveal that proxies for the presence of an implicit contract are positively associated with the probability that a firm will award a postretirement benefit increase.