POSTRETIREMENT INCREASES IN PENSIONS IN THE 1980S - DID PLAN FINANCESMATTER

Many firms give postretirement increases in pension benefits to retire es even though the formal pension contract does not require them. A le ading explanation for the existence of postretirement increases is tha t they are part of an implicit employment contract that requires the f irm to award postretirement increases when the financial performance o f the pension fund is better than expected. Data from the 1986 Employe e Benefit Survey is combined with financial information from the Form 5500 tax reporting forms for 1985 to estimate the determinants of post retirement increases in pension benefits between 1980 and 1985. The re sults indicate that financial factors are not closely related to the i ncidence of postretirement benefit increases but are important determi nants of the magnitude of benefit increases. Other results reveal that proxies for the presence of an implicit contract are positively assoc iated with the probability that a firm will award a postretirement ben efit increase.