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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, June 29, 2007

Chason on Outlawing Pension-Funding Shortfalls

Eric D. Chason (William & Mary) has published Outlawing Pension-Funding Shortfalls, 26 Va. Tax Rev. 519 (2007).  Here is the abstract:

Before ERISA, employees faced a large risk that their employers would default or renege on pension obligations. By creating a federal guarantor of pensions (the PBGC), ERISA has greatly reduced this risk. All else being equal, low-risk pensions are worth more to employees but cost more to provide. Congress has never had a coherent policy on who should pay for these extra costs. Moreover, legal scholars have failed to create a theoretical framework for dealing with these costs, focusing instead on the supposed “moral hazard” that the PBGC guaranty creates. This Article inserts itself into the scholarly vacuum, asserting that employers should bear the full cost of providing low-risk pensions to their employees.

The only practicable way to force employers to bear these costs is by requiring pension plans to be fully funded. Current law, however, tolerates persistent pension-funding shortfalls with a set of accounting conventions that allow employers to defer and spread funding obligations over several years. Only the powerful tax incentives of the Internal Revenue Code have the potential to draw employers to full funding. Unprofitable employers, however, will not respond to these incentives, choosing instead the subsidized guaranty offered by the PBGC. Because the PBGC guaranty is essentially a guaranty of corporate debt, the subsidized guaranty distorts the efficiency of capital markets. Outlawing pension-funding shortfalls would eliminate these subsidies.

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Without allowing employers to reap the upside of overfunding of pension obligations, they are unlikely to always fully fund. Instead, such a solution would only accelerate the termination of defined benefit pension arrangements and their replacement by defined contribution plans - already well under way.

Posted by: I'd rather not say | Jul 2, 2007 8:13:33 AM