Israel Goldowitz

Abstract

Public pensions can be poorly funded, and, if recent events are any guide, benefit promises may be impaired in municipal bankruptcies. Experience with private-sector pension plans suggests that responsible funding is the best protection against default risk. Studebaker’s default on promised pensions inspired the 1974 federal pension reform act, ERISA. The company’s pension plan was substantially underfunded when the company failed, despite periodic contributions under pre-ERISA standards. The plan’s assets first paid retirees’ benefits, leaving 7,000 younger workers with little to nothing in retirement. ERISA addressed this default risk through funding rules and PBGC insurance. ERISA’s minimum funding rules have not prevented pension plan failure; to the contrary, the PBGC and plan participants have absorbed some large losses. However, the funding rules remain the primary protection against default risk.

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