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

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  • Jeffrey R. Brown
Abstract
How did the Pension Benefit Guaranty Corporation, a government corporation created to insure the pensions of workers and retirees in bankrupt firms, end up facing financial distress of its own? How did an organization designed to strengthen retirement security come to be seen as contributing to retirement insecurity? The superficial answer is that the PBGC's current funding problem arises from the decline in stock market prices in 2000, which reduced pension assets, and the fall in interest rates at about the same time, which boosted the present value of pension liabilities. But more fundamentally, much of the blame for the poor financial state of the PBGC, as well as the defined benefit system more generally, lies in some major design flaws of the PBGC pension insurance program. Specifically, 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. Together, these three flaws produced a system in which many firms fail to adequately fund their pension obligations, knowing that in financial distress, they can dump their pension liabilities onto the PBGC. Though the Pension Protection Act of 2006 made some progress in improving the PBGC program, it failed to correct these three major problems fully. Absent further reform, substantial problems will continue to plague the private defined benefit pension system in decades to come. To prevent this deterioration, this paper concludes that Congress should transfer much of the responsibility for defined benefit pension insurance to compulsory private markets.

Suggested Citation

  • 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:aea:jecper:v:22:y:2008:i:1:p:177-198
    Note: DOI: 10.1257/jep.22.1.177
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    References listed on IDEAS

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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 2011-03-01 03:54:10

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    Cited by:

    1. David A. Love & Paul A. Smith & David W. Wilcox, 2009. "Should risky firms offer risk-free DB pensions?," Finance and Economics Discussion Series 2009-20, Board of Governors of the Federal Reserve System (U.S.).
    2. Guan, Yanling & Tang, Dragon Yongjun, 2018. "Employees' risk attitude and corporate risk taking: Evidence from pension asset allocations," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 261-274.
    3. 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.
    4. Thomas Crossley & Mario Jametti, 2013. "Pension Benefit Insurance and Pension Plan Portfolio Choice," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 337-341, March.
    5. Jeffrey R. Brown & Robert Clark & Joshua Rauh, 2011. "The Economics of State and Local Public Pensions," NBER Working Papers 16792, National Bureau of Economic Research, Inc.
    6. Jules H. van Binsbergen & Robert Novy-Marx & Joshua Rauh, 2014. "Financial Valuation of PBGC Insurance with Market-Implied Default Probabilities," NBER Chapters, in: Tax Policy and the Economy, Volume 28, pages 133-154, National Bureau of Economic Research, Inc.
    7. repec:hal:spmain:info:hdl:2441/eu4vqp9ompqllr09hi4ch92c6 is not listed on IDEAS
    8. Efraim Benmelech & Nittai K. Bergman & Ricardo J. Enriquez, 2012. "Negotiating with Labor under Financial Distress," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 1(1), pages 28-67.
    9. Chen, An, 2011. "A risk-based model for the valuation of pension insurance," Insurance: Mathematics and Economics, Elsevier, vol. 49(3), pages 401-409.
    10. Gaobo Pang & Mark Warshawsky, 2013. "Comparing Costs and Risks of Retirement Plans for Sponsors," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 16(2), pages 195-217, September.
    11. Qian, Linyi & Shen, Yang & Wang, Wei & Yang, Zhixin, 2019. "Valuation of risk-based premium of DB pension plan with terminations," Insurance: Mathematics and Economics, Elsevier, vol. 86(C), pages 51-63.
    12. 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.
    13. repec:spo:wpmain:info:hdl:2441/eu4vqp9ompqllr09hi4ch92c6 is not listed on IDEAS
    14. Tabassum, Tanjila & Ulm, Eric R., 2020. "Influences on Sponsor Voluntary Contributions to Defined Benefit Pension Plans in the US," Working Paper Series 21100, Victoria University of Wellington, School of Economics and Finance.
    15. 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.
    16. Haitao Yin & Howard Kunreuther & Matthew W. White, 2011. "Risk-Based Pricing and Risk-Reducing Effort: Does the Private Insurance Market Reduce Environmental Accidents?," Journal of Law and Economics, University of Chicago Press, vol. 54(2), pages 325-363.
    17. Almaghrabi, Khadija S., 2023. "Non‐operating risk and cash holdings: Evidence from pension risk," Journal of Banking & Finance, Elsevier, vol. 152(C).
    18. Romaniuk, Katarzyna, 2021. "Pension insurance schemes and moral hazard: The Pension Benefit Guaranty Corporation should restrict the insured pension plans’ portfolio policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 37-43.
    19. 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.
    20. 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, vol. 34(s1), pages 39-46, November.
    21. Vincent Touzé, 2011. "Le financement des retraites aux États-Unis," SciencePo Working papers Main hal-03461438, HAL.
    22. Love, David A. & Smith, Paul A. & Wilcox, David W., 2011. "The effect of regulation on optimal corporate pension risk," Journal of Financial Economics, Elsevier, vol. 101(1), pages 18-35, July.

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    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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