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Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation

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  • Jeffrey R. Brown

Abstract

How did the Pension Benefit Guaranty Corporation, a government corporation created to insure the pensions of workers and retirees in bankrupt firms, end up facing financial distress of its own? How did an organization designed to strengthen retirement security come to be seen as contributing to retirement insecurity? The superficial answer is that the PBGC's current funding problem arises from the decline in stock market prices in 2000, which reduced pension assets, and the fall in interest rates at about the same time, which boosted the present value of pension liabilities. But more fundamentally, much of the blame for the poor financial state of the PBGC, as well as the defined benefit system more generally, lies in some major design flaws of the PBGC pension insurance program. Specifically, the PBGC has: 1) failed to properly price insurance and thus encouraged excessive risk-taking by plan sponsors; 2) failed to promote adequate funding of pension obligations; and 3) failed to promote sufficient information disclosure to market participants. Together, these three flaws produced a system in which many firms fail to adequately fund their pension obligations, knowing that in financial distress, they can dump their pension liabilities onto the PBGC. Though the Pension Protection Act of 2006 made some progress in improving the PBGC program, it failed to correct these three major problems fully. Absent further reform, substantial problems will continue to plague the private defined benefit pension system in decades to come. To prevent this deterioration, this paper concludes that Congress should transfer much of the responsibility for defined benefit pension insurance to compulsory private markets.

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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 22 (2008)
Issue (Month): 1 (Winter)
Pages: 177-198

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Handle: RePEc:aea:jecper:v:22:y:2008:i:1:p:177-198

Note: DOI: 10.1257/jep.22.1.177
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  1. David W. Wilcox, 2006. "Reforming the Defined-Benefit Pension System," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(1), pages 235-304.
  2. Jeremy I. Bulow & Myron S. Scholes, 1982. "Who Owns the Assets in a Defined Benefit Pension Plan," NBER Working Papers 0924, National Bureau of Economic Research, Inc.
  3. Jeremy Gold & Nick Hudson, 2003. "Creating Value In Pension Plans (Or, Gentlemen Prefer Bonds)," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(4), pages 51-57.
  4. Deborah Lucas, 2007. "Valuing & Hedging: Defined Benefit Pension Obligations - The Role of Stocks Revisited," Money Macro and Finance (MMF) Research Group Conference 2006 169, Money Macro and Finance Research Group.
  5. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
  6. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-84, December.
  7. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  8. Julia Lynn Coronado & Steven A. Sharpe, 2003. "Did pension plan accounting contribute to a stock market bubble?," Finance and Economics Discussion Series 2003-38, Board of Governors of the Federal Reserve System (U.S.).
  9. Pennacchi, George, 2006. "Deposit insurance, bank regulation, and financial system risks," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 1-30, January.
  10. Jeffrey R. Brown, 2007. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," NBER Working Papers 13438, National Bureau of Economic Research, Inc.
  11. Zvi Bodie, 2006. "On asset-liability matching and federal deposit and pension insurance," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 323-330.
  12. Bulow, Jeremy I, 1982. "What Are Corporate Pension Liabilities?," The Quarterly Journal of Economics, MIT Press, vol. 97(3), pages 435-52, August.
  13. Pesando, James E, 1982. " Investment Risk, Bankruptcy Risk, and Pension Reform in Canada," Journal of Finance, American Finance Association, vol. 37(3), pages 741-49, June.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Insuring America’s Pensions: A Troubled Portrait of the Pension Benefit Guaranty Corporation
    by Katharine Lusk in Journalist's Resource on 2011-02-28 21:54:10
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Cited by:
  1. Thomas Crossley & Mario Jametti, 2008. "Pension Benefit Insurance and Pension Plan Portfolio Choice," Quaderni della facoltà di Scienze economiche dell'Università di Lugano 0809, USI Università della Svizzera italiana.
  2. Jeffrey R. Brown, 2008. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," Journal of Economic Perspectives, American Economic Association, vol. 22(1), pages 177-198, Winter.
  3. Chen, An & Uzelac, Filip, 2014. "A risk-based premium: What does it mean for DB plan sponsors?," Insurance: Mathematics and Economics, Elsevier, vol. 54(C), pages 1-11.
  4. Cory Koedel & Shawn Ni & Michael Podgursky, 2014. "Who Benefits from Pension Enhancements?," Education Finance and Policy, MIT Press, vol. 9(2), pages 165-192, March.
  5. Mario Jametti, 2008. "Underfunding of Defined Benefit Pension Plans and Benefit Guarantee Insurance: An Overview of Theory and Evidence," Canadian Public Policy, University of Toronto Press, vol. 34(s1), pages 39-46, November.
  6. David A. Love & Paul A. Smith & David Wilcox, 2009. "Should risky firms offer risk-free DB pensions?," Finance and Economics Discussion Series 2009-20, Board of Governors of the Federal Reserve System (U.S.).
  7. Love, David A. & Smith, Paul A. & Wilcox, David W., 2011. "The effect of regulation on optimal corporate pension risk," Journal of Financial Economics, Elsevier, vol. 101(1), pages 18-35, July.
  8. Haitao Yin & Howard Kunreuther & Matthew White, 2009. "Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market Reduce Environmental Accidents?," NBER Working Papers 15100, National Bureau of Economic Research, Inc.
  9. Efraim Benmelech & Nittai K. Bergman & Ricardo Enriquez, 2011. "Negotiating with Labor Under Financial Distress," NBER Working Papers 17192, National Bureau of Economic Research, Inc.

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