Cost/Benefit Tradeoffs Relating To Reductions In Postretirement Health Care Benefits In The SFAS 106 Environment

Abstract

We investigate what factors help explain postretirement health care benefit (PRB) reductions around the adoption of Statement of Financial Accounting Standard 106 (SFAS 106). We find that firms with more motivation to make benefit cuts because of larger PRB-related obligations were more likely to decrease benefits.  Our primary contribution comes from examining the cost/benefit tradeoffs of making these reductions.  For example, we find a trade-off between reductions in PRB and increases in pension obligations, consistent with firms offering higher alternative forms of compensation to make up for the loss in PRB. In addition, firms with greater unionization among employees are somewhat less likely to reduce benefits.  Finally, we document that firms involved in more extensive efforts to reduce capacity and cut costs through firm restructurings are more likely to reduce benefits.