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Tax Aspects of Corporate Pension Funding Policy

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  • Jeremy I. Bulow
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    Abstract

    This paper explores four models of firms' pension liabilities. All of the models yield the result that if it is the stockholders who gain or lose from a change in the market value of pension fund assets, a pension fund invested entirely in bonds will maximize that gain. If a firm's pension liabilities are considered to be no more than the present value of accrued benefits, then most plans for salaried employees would maximize the pension's value by having their assets entirely in bonds. However, for less well funded plans such as most union plans, holding both stocks and bonds or even all stocks may maximize the value of the firm.. Implicit contracts on the liability side of the pension balance sheet can encourage holding some stock, but implicit contracts on the asset side are likely to encourage increased bond holdings.

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    File URL: http://www.nber.org/papers/w0724.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0724.

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    Date of creation: Jul 1981
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    Handle: RePEc:nbr:nberwo:0724

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    1. Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March.
    2. Jeremy I. Bulow, 1979. "Analysis of Pension Funding Under Erisa," NBER Working Papers 0402, National Bureau of Economic Research, Inc.
    3. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
    4. Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
    5. Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
    6. Martin Feldstein & Lawrence H. Summers, 1979. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Working Papers 0312, National Bureau of Economic Research, Inc.
    7. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, vol. 3(3), pages 183-193, June.
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    Cited by:
    1. Martin Feldstein, 1983. "Should Private Pensions Be Indexed?," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 211-230 National Bureau of Economic Research, Inc.

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