Inflation, Pension Benefits, and Retirement

Participation in an employer pension plan will influence the retirement decision of older workers. This paper derives the change in the expected present value of the lifetime flow of wages and pension benefits from an additional year of work under a defined benefit pension plan using an earnings formula. Pension and personal characteristics are explicitly modeled and their effect on the accumulation of pension benefits as a worker approaches retirement is examined. Increases in inflation are shown to reduce the value of this pension compensation and also to lower the present value of lifetime benefits. Thus the relatively high rates of inflation that have prevailed in the United States throughout the 1970's have altered the real pension wealth and annual total compensation of older workers through pension effects.