Retirement Plans: 401(k)s, IRAs and Other Deferred Compensation Approaches 10th Edition by Allen, Joseph Melone, Jerry Rosenbloom, Dennis Mahoney

Exercise 10

Economists have often argued that pension benefits are a form of deferred compensation accepted by employees in lieu of higher present wages. Assume that the employees of a firm ask you how much the pension benefit they earned this year is actually worth in current dollars. In general terms, how would you perform this valuation? What types of assumptions would you need to make? If the employees told you that they would forfeit the entire pension attributable to employer contributions if they were terminated within five years of the time they were originally hired, how would you factor this information into your analysis?