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

Jeffrey R. Brown

Journal of Economic Perspectives, 2008, vol. 22, issue 1, pages 177-198

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.

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This journal article can be ordered from
http://www.aeaweb.org/subscribe.html

Access Statistics for this article

Journal of Economic Perspectives is edited by Andrei Shleifer

More articles in Journal of Economic Perspectives from American Economic Association
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().