Factors affecting corporate choices of postretirement benefits in the USA

Abstract

PurposeThe purpose of this paper is to examine the determinants of US firms' postretirement benefits choices.Design/methodology/approachThe paper uses empirical methodology (univariate and multivariate) to test the research hypotheses.FindingsIndustry norm, average employee age, financial structure, and firm size are significant factors in the determination of the proportion of compensation that is deferred. Industry norm, financial structure, and firm size are significant factors that determine the percentage of deferred compensation that is negotiated as defined benefits. Finally, industry norm, corporate tax rates, and cash flow help explain the percentage of defined benefits that are paid in the form of retiree health benefit plans.Research limitations/implicationsData requirements might bias the sample towards larger sized firms. Data availability limits the number of observations in 2000 and 2001.Practical implicationsThe trends in post‐retirement benefits reported in this paper are important for policy makers.Originality/valueThese findings have implications for the baby boomers. The trend to offer smaller proportion of compensation as deferred benefits reflects the increasing costs of deferral to the employers. This increases the employees' responsibilities to save on their own. This also would shift the retirees' dependence on the public pension system for their retirement income. The trend to favor defined‐contribution plans instead of defined‐benefit plans reflects the employers' attempts to diversify their risks of paying promised post‐retirement benefits by transferring the risk to the employee. On the other hand, the popularity of defined‐contribution pension plans also reflects the increased Government's incentives to encourage savings via 401‐k plans and employee's willingness to manage their own pension portfolios.