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Wednesday, January 25, 2006

Congress Seeks to Rein In Special Executive Pensions

Congress Seeks to Rein In
Special Executive Pensions
Proposal Would Push Firms
To Ensure Workers' Plans
Get Adequate Funding First
January 25, 2006; Page A1

WASHINGTON -- Rankled by the rich retirement payouts many troubled companies make to executives, Congress is moving to block such companies from funding the lavish packages.

The provision, tucked into legislation that would shore up the federal agency that provides a safety net for private-sector pensions, would keep financially troubled companies from setting aside any special pension benefits for top executives if their pension plans for rank-and-file employees weren't adequately funded.
I think this story provides a great illustration of something to watch out for when reading the news. What seems to be the story line that is emphasized sounds something like the following.

Congress has noticed that there are corporations with private pension plans for employees that are in financial bad shape. One example would be United Airlines which has had to significantly reduce promised pension payouts to employees. At the same time, at least some of the corporations in this trouble with their employee pension programs have been continuing to pay "executives lavish pensions." Perhaps one obvious conclusion to be drawn from this story is that corporations and corporate executives can indeed be very bad and selfish characters. Further, we might here this illustration used to question the reliance on unregulated economic activity in general.

It is this last point that one should be careful about. One may want to blame the incentives of markets for this sad state of affairs. But, as is often the case, what we see on the surface may not lead us to an accurate explanation for situation people are concerned with. I suggest that when you read a story like this it is important to always ask if government is already involved. It is often the case that politicians who are concerned about some evil of the market today are actually looking for a new public policy to fix a problem today that is the result of public policy in the past. Is that the case here? That's very possible.

The rest of the story involves a government program to insure private defined benefit pension programs. This program changes the incentives faced by the private companies. Specifically, this situation seems to me to be well described by the concept of moral hazard. If part of the risk of bankruptcy in a pension program is shifted to the taxpayers, then we can predict that private companies will respond with more risky choices in the pension programs. We can also expect more private pension bankruptcies than would be the case without the government insurance program. If a corporation can provide a pension program for employees with a government insurance backup, then it seems the corporation would see a change in incentives with respect to executive pension programs, assuming there are two different pension programs. That is, the government's insurance would free some resources that could be devoted to executive pensions as well as other activities of the corporation. So, it seems quite possible that efforts by politicians today might not have ever been thought of if Congress hadn't some years ago decided to use tax dollars to insure private defined benefit pension programs.

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