Companies that freeze defined benefit pension plans save the equivalent of 13.5% of the long-horizon payroll of current employees. Furthermore, firms with higher prospective accruals are more likely to freeze their plans. Cost savings would not be possible in a benchmark model in which i) all workers receive compensation equal to their marginal product and ii) workers value equally all identical-cost forms of pension benefits. We find evidence consistent both with firms' reneging on implicit contracts that would have provided workers with high pension accruals later in their careers and with shifts in employee valuation of different forms of retirement benefits. • Why do firms freeze their defined benefit pension plans? We show that freezes significantly reduce firms' compensation costs. • Freezing plans save sponsors 3% of total payroll in the first year and 13.5% of the present value of payroll in the long run. • Cost saving is not possible in a model in which compensation equals marginal product and workers value equally all benefits. • Cost savings arise in part because firms are reneging on implicit contracts that would have provided high pension accruals.
