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

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  • 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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  • Ippolito, Richard A, 2001. "Reversion Taxes, Contingent Benefits, and the Decline in Pension Funding," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 199-232, April.
    • Handle: RePEc:ucp:jlawec:v:44:y:2001:i:1:p:199-232
    DOI: 10.1086/320278
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    References listed on IDEAS

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    1. Ippolito, Richard A, 1988. "A Study of the Regulatory Effect of the Employee Retirement Income Security Act," Journal of Law and Economics, University of Chicago Press, vol. 31(1), pages 85-125, April.
    2. Andrei Shleifer & Lawrence H. Summers, 1988. "Breach of Trust in Hostile Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 33-68, National Bureau of Economic Research, Inc.
    3. Stone, M, 1987. "A Financing Explanation For Overfunded Pension Plan Terminations," Journal of Accounting Research, Wiley Blackwell, vol. 25(2), pages 317-326.
    4. Ippolito, Richard A., 1998. "Pension Plans and Employee Performance," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226384559, June.
    5. Thomas, Jacob K., 1989. "Why do firms terminate their overfunded pension plans?," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 361-398, November.
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    Cited by:

    1. 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.
    2. Annamaria Lusardi & Jonathan Skinner & Steven Venti, 2003. "Pension Accounting & Personal Saving," Just the Facts jtf8, Center for Retirement Research.
    3. Leora Friedberg & Michael Owyang, 2004. "Explaining the Evolution of Pension Structure and Job Tenure," NBER Working Papers 10714, National Bureau of Economic Research, Inc.
    4. Kandice Kapinos, 2009. "On the Determinants of Defined Benefit Pension Plan Conversions," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 30(2), pages 149-167, June.
    5. Ashby H. B. Monk, 2008. "The Knot of Contracts: The Corporate Geography of Legacy Costs," Economic Geography, Clark University, vol. 84(2), pages 211-235, April.
    6. Kandice Kapinos, 2012. "Changes in Firm Pension Policy: Trends Away from Traditional Defined Benefit Plans," Journal of Labor Research, Springer, vol. 33(1), pages 91-103, March.
    7. Kandice Kapinos, 2009. "On the Determinants of Defined Benefit Pension Plan Conversions," Journal of Labor Research, Springer, vol. 30(2), pages 149-167, June.
    8. 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 - Leibniz Institute for Economic Research at the University of Munich, vol. 2(04), pages 3-11, October.

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