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Reversion Taxes, Contingent Benefits, and the Decline in Pension Funding

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Author Info
Ippolito, Richard A
Abstract

The evidence since the mid-1980s contradicts the axiom that firms maximize the arbitrage value of their tax-exempt pension funds. Instead, it suggests the emergence of a new minimum-funding paradigm. A prominent candidate to explain the change is a sequence of escalating reversion taxes enacted between 1986 and 1990. A valuable option to a pension plan sponsor is its ability to cancel the contingent portion of its pension obligations (pension promises beyond those legally required). As a result of reversion taxes, this option value is preserved only if the firm maintains zero excess assets and falls in proportion to the amount of excess assets retained in the pension fund. The potential for this tax policy to profoundly affect the economics of pension funding seems apparent. By 1995, the cumulative effect of the new contribution behavior resulted in a 60 percent reduction in excess pension assets. Copyright 2001 by the University of Chicago.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 44 (2001)
Issue (Month): 1 (April)
Pages: 199-232
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Handle: RePEc:ucp:jlawec:v:44:y:2001:i:1:p:199-232

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  1. Leora Friedberg & Michael Owyang, 2004. "Explaining the Evolution of Pension Structure and Job Tenure," NBER Working Papers 10714, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Annamaria Lusardi & Jonathan Skinner & Steven Venti, 2003. "Pension Accounting & Personal Saving," Just the Facts jtf8, Center for Retirement Research. [Downloadable!]
  3. James M. Poterba & Steven F. Venti & David A. Wise, 2001. "The Changing Face of Private Retirement Saving in the United States," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 2(4), pages 3-11, October. [Downloadable!]
  4. James Poterba & Steven Venti & David A. Wise, 2007. "The Changing Landscape of Pensions in the United States," NBER Working Papers 13381, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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