Must We Choose Between Jobs and Funding Pension Promises?

Do Contributions Go Down a Rat Hole?

April 2004

The Pension Funding Equity Act of 2004 received unusually broad support from both corporate sponsors of pension plans and unions. The Acts supporters argued that making contributions to underfunded pension plans is tantamount to pouring money down a rat hole. Here are some examples:

An employer organization: [Without this legislation, companies will be required to contribute] "hundreds of millions of dollars [that] would otherwise be used to increase spending on employment and on plant and equipment ..."

A labor spokesman: [This legislation will] "free up money to invest in production and creating jobs and paying wages, benefits ..."

A Congressman: [This legislation will relieve companies from having to] "take money from job creation and investment, and pour it into pensions instead."

An actuary: [Poor funding status and existing rules] "work to prolong a recessionary trend by requiring high contributions when financial resources are needed elsewhere to effectuate an economic recovery."

Institutional investors (from the CIEBA report): ""

Thus Americans are asked to make a tough choice between jobs and adequately funded pension promises.

But the statement of the choice reflects dubious economic reasoning. Let us look at it more carefully. Company X must decide whether to contribute $100 million to its defined benefit pension plan or to invest "productively" in its own business. Seen narrowly, Company X is choosing between pensions and jobs.

But where does the pension plan contribution go? Does it go down a rat hole? Certainly not. It goes into the capital markets where it buys stocks and bonds.

And where do companies with good prospects for productive enterprise raise the necessary capital? From those very same capital markets. Thus, the money contributed by Company Xs pension plan goes to Company Y where it is spent on plant and equipment and jobs.

So, pension funding does not destroy capital. It recycles it. And, as it does so, the capital markets redirect capital to those companies with the best prospects; those that will use the capital most productively and, in all likelihood, create the most jobs.

[Consider closing with quote from P&I re the valuable capital supplied by pension funds editor obviously wants to make things easy on sponsors, but recognizes that pension contributions are a plus, not a minus, for the economy.]

Pension Finance Institute
April 21, 2004

The Pension Finance Institute provides policymakers, plan sponsors, participants, journalists, investors and others with pertinent information and objective analyses regarding the costs, risks and social advantages of U.S. defined benefit pension plans. The Institute, reflecting the principles of modern finance, addresses pension funding, investment, accounting, plan design, standard actuarial practices and the role of the PBGC.