But, can both sides gain by a buyout deal? That may not always be so easy to do. The owners would have to be willing to pay workers more than they, the workers, are willing to accept. There are several reasons such a deal may be possible in many, but not necessarily all, cases. First, the workers could have a higher discount rate than the owners, and this may often be the case because the owners are more diversified than their workers in their investments. Workers tend to concentrate their capital, a main component of which is human capital, in their jobs. By agreeing to a buyout and receiving some form of lump-sum payment in cash (or even in a stream of future cash payments), the workers can diversify their portfolios by scattering the cash among a variety of real and financial assets. Hence, workers might accept less than the current (discounted) value of their overpayments just to gain the greater security of a more diversified investment portfolio. Naturally (and we use that word advisedly), the workers cannot be sure how long they will be around to collect the overpayments. By taking the payments in lump-sum form, they reduce the risk of collection and increase the security of their heirs.
Second, sometimes retirement systems are overfunded, that is, they have greater expected income streams from their investments than are needed for meeting the expected future outflow of retirement payments. This is true, for example, of the California State Employee Retirement System. Therefore, if the company can tap the retirement funds, as the State of California did in the mid-1990s, it can pay workers more in the buyout than they would receive in overpayments by continuing to work. In so doing, they can move those salaries “off budget,” which is what California has done in order to match its budgeted expenditures with declining funding levels for higher education.
We should also expect that workers’ fears will vary across firms and will be related to a host of factors, not the least of which will be the size of the firm. Workers who work for large firms may not be as fearful as workers for small firms, mainly because large firms are more likely to be sued for any retaliatory use of their discretionary employment practices (and efforts to adjust the work of older workers in response to any law that abolishes mandatory retirement rules). Large firms simply have more to take as a penalty for what are judged to be illegal acts. Moreover, it appears that juries are far more likely to impose much larger penalties on large firms, with lots of equity, than their smaller counterparts. This unequal treatment before the courts, however, suggests that laws that abolish mandatory retirement rules will give small firms a competitive advantage over their larger market rivals.
However, we hasten to stress that all we have done is to discuss the transitory adjustments firms will make with their older workers, who are near the previous retirement age. We should expect other adjustments for younger workers, not the least of which will be a change in their wage structures. Not being able to overpay their older workers in their later years will probably mean that the owners will have to raise the pay of their younger workers. After all, the only reason the younger workers would accept underpayment for years is the prospect of overpayments later on.
There are three general observations from this line of inquiry that are interesting:
1 The abolition of mandatory retirement will tend to help those who are about to retire.
2 Abolition might help some older workers who are years from retirement, who work for large firms, and who can hang on to their overpayments. It can hurt other older workers who are fired, demoted, not given raises, or have their pay actually cut
The market is a system that provides producers with incentives to deliver goods and services to others. To respond to those incentives, producers must meet the needs of society. They must compete with other producers to deliver their goods and services in the most cost-effective manner.
A market implies that sellers and buyers can freely respond to incentives and that they have options and can choose among them. It does not mean, however, that behavior is totally unconstrained or that producers can choose from unlimited options. What a competitor can do may be severely limited by what rival firms are willing to do.
The market system is not perfect. Producers may have difficulty acquiring enough information to make reliable production decisions. People take time to respond to incentives,
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