The Funding Status of Defined-Benefit Pensions

Abstract

The central thesis of this paper is that defined-benefit (DB) pensions in conjunction with taxpayer-backed DB pension insurance subject pension plan participants and taxpayers to much greater financial risk than current pension funding statistics suggest. Specifically, it is shown that: (i) current estimates of the funding status of DB pensions are based on an arbitrary full-funding construct; (ii) accurately measuring the true funding status of 1DB pensions would not be possible even if investment returns, labor turnover, and mortality were completely certain; (iii) government sponsored pension insurance is incomplete in the event that current funding norms are in fact too relaxed; and (iv) employers can effectively implement potentially profitable Ponzi schemes by underfunding their DB pensions, in which case DB pension plans will become progressively less viable as the U.S. labor force ages.