Smoothing the waves of pension funding: Could changes in funding rules help avoid cyclical under-funding?
Defined benefit pensions are still an important part of retirement income security for 44 million people. After 2000, these plans experienced extreme difficulties. Although the magnitude of the problem was unprecedented, its causes were not. Interest rate and asset prices decline in a recession, when earnings are low. Pension funding rules reflect this regularity. This requires additional contributions when times are bad. We address this counter-cyclicality through three proposed rule changes. We use a simulation model to evaluate these. Our results indicate that counter-cyclicality would have diminished, while funding adequacy would have improved.
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Volume (Year): 8 (2005)
Issue (Month): 2 ()
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- Alicia H. Munnell & Nicole Ernsberger (assistant), 1987. "Pension contributions and the stock market," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-14.
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