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Reforming the Defined-Benefit Pension System

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  • David W. Wilcox

    (Board of Governors of the Federal Reserve System)

Abstract

Defined-benefit pensions typically expose workers to a form of financial risk that they are ill positioned to bear and unable to hedge. If workers understand that risk, they will offer employers a lower “price” (in the form of salary concessions) than the capital markets would offer for the same cash flow. The resulting financial inefficiency reduces the value of the firm sponsoring the pension plan. The paper identifies reforms that would essentially eliminate the financial risk borne by workers and hence the financial inefficiency inherent in risky pensions. It would also essentially eliminate the substantial financial exposure currently borne by taxpayers. The key reform elements are tighter rules governing funding and portfolio investment, market-oriented pricing of the insurance offered by the Pension Benefit Guaranty Corporation, and improved disclosure of information related to pension plans in firms’ public financial statements, in the federal budget, and in statements provided to workers.

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 37 (2006)
Issue (Month): 1 ()
Pages: 235-304

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Handle: RePEc:bin:bpeajo:v:37:y:2006:i:2006-1:p:235-304

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Related research

Keywords: macroeconomics; defined-benefit pension; pension system; financial risk;

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Cited by:
  1. Mario Jametti, 2007. "Underfunding of Defined Benefit Pension Plans and Benefit Guarantee Insurance - An Overview of Theory and Empirics," Social and Economic Dimensions of an Aging Population Research Papers 200, McMaster University.
  2. Thomas Crossley & Mario Jametti, 2008. "Pension Benefit Insurance and Pension Plan Portfolio Choice," Social and Economic Dimensions of an Aging Population Research Papers 237, McMaster University.
  3. 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.
  4. David G. Lenze, 2009. "Accrual Measures of Pension-Related Compensation and Wealth of State and Local Government Workers," BEA Working Papers 0054, Bureau of Economic Analysis.
  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. Jeffrey R. Brown & David W. Wilcox, 2009. "Discounting State and Local Pension Liabilities," American Economic Review, American Economic Association, vol. 99(2), pages 538-42, May.

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