Coronado, J. L., and S.A. Sharpe, 2003, “Did Pension Plan Accounting Contribute to a Stock Market ‘Bubble’?,” Brookings Papers on Economic Activity, forthcoming.
Prepared by Calvin Schnure.
These data cover all pension plans, based on Form 5500 that plans must file with the Department of Labor. This form lists actual asset market values, rather than the assumed equity returns that are used to calculate reported earnings.
The discussion focuses on “economic” profits in the National Accounts, which provide the broadest measure of corporate earnings in the economy. Economic profits are free of many of the accounting distortions associated with firms’ earnings reports, and use actual contributions that firms make to pension plans as the measure of pension costs, rather than an estimate based on assumptions about future asset returns.
The 19 firms examined above accounted for nearly half this increase in contributions.
Projected Benefit Obligations (PBOs) are extremely sensitive to interest rates, and according to one estimate, each 50 basis point increase in interest rates reduces the PBO for S&P 500 firms by $60 billion (CSFB 2003).
However, to the extent that funding problems are concentrated in sectors with significant excess capacity—airlines and autos, in particular—the marginal impact on investment could be muted.
The PBGC also provides a multi-employer program to ensure plans that cover workers from many firms. This plan is much smaller and its total assets exceed total liabilities.
For 2003, the maximum pension guaranteed by the PBGC is about $44,000 per year for workers who retire at age 65 (lower amounts apply to younger participants).
The PBGC’s Annual Report (PBGC, 2002) notes “… we remain exposed to further losses from additional large plan terminations. It may be that PBGC’s current challenges require a policy response to restore the financial strength of the pension insurance system. Accordingly, we are reviewing every option available to ensure that PBGC remains on a fiscally sustainable path.” (p. 3). The PBGC’s takeover of the pension obligations of Bethlehem Steel in December 2002 was viewed as a bellwether action, designed to limit the further accrual of pension liabilities in advance of the company’s bankruptcy.
For example, the 19 firms examined above assumed returns of 8 to 10 percent during the 1990s. Actual returns on the S&P 500 between 1995 and 1999, in contrast, averaged over 25 percent. As a result, the income these firms booked on pension plan returns between 1997 and 1999 was $65 billion less than their actual gains over this period.
In June 2003, the Financial Accounting Standards Board tentatively ruled that companies will be required to disclose on a quarterly basis the amount of their pension plan contributions, details on plan investment returns, and information on pension costs.