ABSTRACT
Defined benefit (db) pension freezes in large healthy rms such as Verizon and IBM, as well as terminations of plans in the struggling steel and airline industries, highlight the fact that these traditional pensions cannot be viewed as risk-free from the employee’s perspective. In this chapter, we develop an empirical dynamic programming framework to investigate household saving decisions in a simple life cycle model with DB pensions subject to the risk of being frozen. e model incorporates important sources of uncertainty facing households, including asset returns, employment, wages, and mortality, as well as pension freezes. Applying a compensating variation measure of household welfare, we nd that pension freezes reduce welfare by about $6000 for individuals with a high school degree and about $2000 for individuals with a college degree. We close by highlighting a few important issues to be addressed in future work, including a more realistic labor supply decision and the e ects of alternative market-clearing conditions in the labor market.
