Pension Plans and Employee Performance: Evidence, Analysis and Policy.

• Author: Veall, Michael R.

By Richard A. Ippolito.

Chicago: University of Chicago Press, 1997. Pp. xiv, 259. $34.95.

Richard Ippolito has written 13/15 of a very good book. I am not so sure about the remaining 2/15.

Let us begin with the first 13/15. The author, who is chief economist for the Pension Benefit Guaranty Corporation and a former pensions expert for the U.S. Department of Labor, develops a thorough analysis of how pension plans might affect worker behavior and how firms might be expected to use these effects to shape and motivate their labor forces. Theory and empirical analysis are judiciously combined in a way that makes the book an excellent recommendation to someone beginning an applied economics Ph.D. thesis and searching for a style to emulate.

So how do pension plans affect worker behavior? Building on work by Burkhauser and others, Ippolito starts from the view that defined benefit pension plans are contracts designed to influence worker tenure in a way wage profiles cannot. Initially, the pension acts as a bond both to encourage worker performance and to reduce quitting, but at some point, ideally from the firm's perspective when the worker's value to it begins to fall, the plan also provides an incentive to retire because the value to the worker of the increase in the eventual annual pension benefit will be offset by the shortening of the potential collection period. Ippolito also provides convincing empirical evidence, both on the incentive effects of pensions on retirement and of the importance of more generous private pension early retirement benefits, in explaining the trend since 1970 toward early retirement by males.

After first establishing that there is considerable variation in pension provisions across firms, Ippolito then proceeds to explore how firms can use pension structure to affect their work force. He suggests that the recent shift to defined contribution pension plans (which now cover about one half of all workers covered by a pension plan, compared to roughly one sixth in 1979) is too large to be explained by changes in industry composition or by changes in regulatory cost. Instead, a good portion of the change is due to the introduction of 401(k) plans, which are like previous defined contribution plans except that they allow additional voluntary employee contributions and allow firms to match those contributions.

Ippolito shows that defined contribution plans will be the choice of some firms that do not need or expect...