Reform of the Tax on Reversions of Excess Pension Assets

Journal of Pension Economics and Finance, Vol. 8, No. 1, pp. 107-130, January 2009

42 Pages Posted: 27 Jun 2007 Last revised: 29 Sep 2009

See all articles by Gaobo Pang

Gaobo Pang

Mark J. Warshawsky

Towers Watson; Mercatus Center at George Mason University

Date Written: July 7, 2008

Abstract

This study quantifies the possible consequences to stakeholders of reforms to the excise tax on reversions of excess pension assets. Under the U.S. Pension Protection Act of 2006 (PPA), funding in defined benefit plans is likely to improve significantly. Many plans may become overfunded over time, owing to the shortfall amortizations mandated by the PPA, as well as to precautionary contributions by sponsors and to plan investment returns. This analysis shows that a more moderate excise tax rate together with a reasonable funding threshold for asset reversions would not only enable sponsors to spend the excess funds on other corporate needs, thereby lowering the cost of sponsorship of defined benefit plans, but also would open a considerable revenue source for the government, with only a small increase in bankruptcy cost for the PBGC. Plan participants could also gain in an alternative reform, which would require a partial transfer of excess assets to them along with a still-lower reversion tax rate. These findings also hold for plan sponsors with various degrees of risk tolerance or only making the PPA-required minimum contributions.

Keywords: excess asset reversion, excise tax, defined benefit pensions, Pension Protection Act

JEL Classification: G23, H21, H23, H32, J32, J38

Suggested Citation

Pang, Gaobo and Warshawsky, Mark J., Reform of the Tax on Reversions of Excess Pension Assets (July 7, 2008). Journal of Pension Economics and Finance, Vol. 8, No. 1, pp. 107-130, January 2009, Available at SSRN: https://ssrn.com/abstract=995541 or http://dx.doi.org/10.2139/ssrn.995541

Mark J. Warshawsky

Towers Watson ( email )

Arlington, VA
United States

Mercatus Center at George Mason University

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

No contact information is available for Gaobo Pang

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
93
Abstract Views
1,171
rank
380,220
PlumX Metrics