Does including the expected salary increases in the pension liability on the balance sheet make sense?
Some economists contend that salary increases are cyclical, strongly correlated to consumer price index moves (i.e. inflation or deflation), and often tied to labor productivity. In addition salary increases are inversely correlated to the marginal product of capital and equipment productivity.1 However, other economists contend that salary increases are industry specific and strongly related to bargaining strength, degree of industry protectionism, budgets and tax revenues for public employees, strength of labor unions for blue collar workers and other non-quantifiable market realities. In response to FASB, numerous public companies have claimed that salary increases indeed aren’t guaranteed and therefore the estimates of a constantly growing salary liability should not be included in calculating the pension deficits. While salary increases in the United States aren’t contractually guaranteed, they typically outpace inflation by a small margin over the long term, although the reverse
