Employees, Pensions, and the New Economic Order
Jeffrey N. Gordon
Columbia Law School; European Corporate Governance Institute (ECGI)
COLUMBIA LAW REVIEW, June 1997
The "New Economic Order" in the United States is a regime of trade liberalization, a robust market in corporate control, and labor market flexibility. Among the consequences over the 1980-1995 period is a divergence between corporate profits and stocks prices, which have increased by approximately 250% in real terms, and wages, which have barely increased at all, except for the top quintile. Contrary to popular belief, employees have not significantly participated through their pension funds in this stock market appreciation. In the historically dominant defined benefit pension plan, the sponsoring firm, not the employee, is the residual claimant. Although employees are residual claimants of defined contribution plans, these funds have been underinvested in equity. In part this is because employees fear the volatility of equity returns. The article proposes a new capital market instrument, a "pension equity collar,"that would take advantage of the long-term nature of pension fund investing to provide a guarantee of a minimum return close to the long-term average equity return in exchange for giving up (or sharing) the upside above the long-term average. Such an instrument could encourage greater employee equity investment and thus help employees hedge their human capital investments and also widen the distribution of the benefits of the New Economic Order. The article proposes that the U.S. Department of Labor initiate a ruling-making project under Section 404(c) of ERISA to determine if such an instrument should be among the menu of choices provided to employees in defined contribution plans.
JEL Classification: J32, J38Accepted Paper Series
Date posted: March 28, 1997
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