Tax Incentives, Turnover Costs and Private Pensions

Abstract

There are a number of important motivating factors for both workers and firms that stimulate the formation of private pensions. Workers may desire a pension as a means of saving for retirement. Private pensions may be preferable to other types of retirement annuities because of the well known favorable tax treatment afforded pensions. By placing money in a private pension account, the workers can in most cases receive a higher return than from a comparable non-pension investment.' The demand for pensions, however, is tempered by their relative riskiness and illiquidity.2 One of the main motives of firms for offering a pension is to reduce costs and thereby increase profits. If turnover is costly to firms, such as when they invest in their workers' training, the reduction of quits can be profitable. Pensions with delayed vesting provision tend to reduce turnover by increasing the workers' costs of quitting. While it is certainly useful to isolate the important factors that influence the formation of private pensions, such analysis is necessarily incomplete. Private pension agreements are not reached in isolation, but are part of an overall agreement between a firm and its workers. The terms of a pension agreement are affected as well as do affect the path and magnitude of wages. In recent years there have been several interesting analyses of the role pensions play in labor contracts. Schiller and Weiss [10] have found empirical support for the proposition that the presence of pensions in a labor contract tends to reduce worker turnover. Barnow and Ehrenberg [1] consider the effects of pensions on labor turnover from the opposite perspective. They show that the cost of funding future pension benefits increases as the worker