Economic Implications of Erisa

Abstract:     
If the intent of the Employee Retirement Income Security Act, ERISA, was to assure that beneficiaries of insolvent pension plans receive adequate pension benefits, sharp increases in nominal rates of interest have blunted that purpose. Without an increase in these rates, the Pension Benefit Guarantee Corporation, PBGC, the insurance agency established to guarantee benefits, faced large liabilities on the terminations of pension plans. We examine the economics of pension funds and the funding of pension funds before and after the enactment of ERISA. The Act changed the economics of pension funds. The PBGC, the employer, and the employees have interests in the assets of the pension plan. The PBGC can tax corporations to pay off liabilities and to fund guaranteed benefits; employers can terminate pension plans or overfund them; employees can ask for more benefits or claim the assets in the fund. Although the PBGC insures benefits, the insurance agent forbears, not acting quickly to protect its own interests. To prevent potential huge increases in its liabilities, the PBGC could require that employers hedge the guaranteed benefits, and fund their increases in promised benefits. Given its policies, these requirements could protect the PBGC.

Number of Pages in PDF File: 34

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