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

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  • Jeffrey R. Brown

Abstract

This paper examines the economic rationale for, historical experience of, and current pressures facing the Pension Benefit Guaranty Corporation (PBGC). The PBGC is the government entity which partially insures participants in private-sector defined benefit pension plans against the loss of pension benefits in the event that the plan sponsor experiences financial distress and has an under-funded pension plan. The paper discusses three major flaws of the PBGC, namely, that 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. The paper then discusses potential ways to reform the PBGC so that it operates more in concert with basic economic principles.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13438.

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Date of creation: Sep 2007
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:13438

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References

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  1. Zvi Bodie, 2006. "On asset-liability matching and federal deposit and pension insurance," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 323-330.
  2. Pesando, James E, 1982. " Investment Risk, Bankruptcy Risk, and Pension Reform in Canada," Journal of Finance, American Finance Association, American Finance Association, vol. 37(3), pages 741-49, June.
  3. Julia Lynn Coronado & Steven A. Sharpe, 2003. "Did Pension Plan Accounting Contribute to a Stock Market Bubble?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 323-371.
  4. 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.
  5. 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.
  6. Jeremy Gold & Nick Hudson, 2003. "Creating Value In Pension Plans (Or, Gentlemen Prefer Bonds)," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 15(4), pages 51-57.
  7. 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.
  8. Deborah Lucas, 2007. "Valuing & Hedging: Defined Benefit Pension Obligations - The Role of Stocks Revisited," Money Macro and Finance (MMF) Research Group Conference 2006, Money Macro and Finance Research Group 169, Money Macro and Finance Research Group.
  9. Thomas Davidoff & Jeffrey R. Brown & Peter A. Diamond, 2003. "Annuities and Individual Welfare," NBER Working Papers 9714, National Bureau of Economic Research, Inc.
  10. Pennacchi, George, 2006. "Deposit insurance, bank regulation, and financial system risks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(1), pages 1-30, January.
  11. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(6), pages 1261-84, December.
  12. Bulow, Jeremy I, 1982. "What Are Corporate Pension Liabilities?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(3), pages 435-52, August.
  13. Sharpe, William F., 1976. "Corporate pension funding policy," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(3), pages 183-193, June.
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Blog mentions

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," Quantitative Studies in Economics and Population Research Reports, McMaster University 428, McMaster University.
  2. 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.
  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. David A. Love & Paul A. Smith & David Wilcox, 2009. "Should risky firms offer risk-free DB pensions?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2009-20, Board of Governors of the Federal Reserve System (U.S.).
  6. 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, University of Toronto Press, vol. 34(s1), pages 39-46, November.
  7. Jeffrey R. Brown, 2008. "Guaranteed Trouble: The Economic Effects of the Pension Benefit Guaranty Corporation," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 22(1), pages 177-198, Winter.
  8. Efraim Benmelech & Nittai K. Bergman & Ricardo Enriquez, 2011. "Negotiating with Labor Under Financial Distress," NBER Working Papers 17192, National Bureau of Economic Research, Inc.
  9. Love, David A. & Smith, Paul A. & Wilcox, David W., 2011. "The effect of regulation on optimal corporate pension risk," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(1), pages 18-35, July.

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