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Underfunding of Defined Benefit Pension Plans and Benefit Guarantee Insurance - An Overview of Theory and Empirics

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  • Mario Jametti

    (Department of Economics, York University)

Abstract

We review the theoretical literature on defined benefit (DB) pension plans, particularly focusing on the issue of plan underfunding and benefit guarantee insurance schemes. The literature shows that underfunding can, under reasonable assumptions, be an equilibrium outcome even in the absence of benefit insurance. The introduction of benefit guarantee funds was a reaction to the problem of underfunding, and we summarize the ensuing standard problems of moral hazard and adverse selection. We briefly discuss the small empirical research on the subject and propose directions for future research.

Suggested Citation

  • Mario Jametti, 2007. "Underfunding of Defined Benefit Pension Plans and Benefit Guarantee Insurance - An Overview of Theory and Empirics," Working Papers 2007_1, York University, Department of Economics.
    • Handle: RePEc:yca:wpaper:2007_1
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    References listed on IDEAS

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    1. Alan L. Gustman & Olivia S. Mitchell & Thomas L. Steinmeier, 1994. "The Role of Pensions in the Labor Market: A Survey of the Literature," ILR Review, Cornell University, ILR School, vol. 47(3), pages 417-438, April.
    2. Tim Besley & Andrea Prat, 2005. "Credible pensions," Fiscal Studies, Institute for Fiscal Studies, vol. 26(1), pages 119-135, March.
    3. Richard A. Ippolito, 1987. "The Implicit Pension Contract: Developments and New Directions," Journal of Human Resources, University of Wisconsin Press, vol. 22(3), pages 441-467.
    4. Ippolito, Richard A, 1985. "The Labor Contract and True Economic Pension Liabilities," American Economic Review, American Economic Association, vol. 75(5), pages 1031-1043, December.
    5. Cooper, Russell W. & Ross, Thomas W., 2001. "Pensions: theories of underfunding," Labour Economics, Elsevier, vol. 8(6), pages 667-689, December.
    6. Niehaus, Gregory R., 1990. "The PBGC's flat fee schedule, moral hazard, and promised pension benefits," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 55-68, March.
    7. Ippolito, Richard A, 1985. "The Economic Function of Underfunded Pension Plans," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 611-651, October.
    8. Cooper, Russell W. & Ross, Thomas W., 2003. "Protecting underfunded pensions: the role of guarantee funds," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(3), pages 247-272, November.
    9. 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.
    10. Fiona Stewart, 2007. "Benefit Security Pension Fund Guarantee Schemes," OECD Working Papers on Insurance and Private Pensions 5, OECD Publishing.
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    Cited by:

    1. Sule Sahin & Adem Yavuz Elveren, 2009. "A Cost Analysis of a Minimum Pension Guarantee for the Individual Pension System in Turkey," Working Paper Series, Department of Economics, University of Utah 2009_13, University of Utah, Department of Economics.

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    More about this item

    Keywords

    Defined benefit pension plans; underfunding; pension benefit guarantee;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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