Government Incentives and Defined Benefit Pension Investment

Abstract

This study investigates the association between government incentives and defined benefit pension funding. The government provides tax incentives to defined benefit plans to buoy pension funding. In addition, sponsors of these plans must pay insurance premiums to the Pension Benefit Guarantee Corporation (PBGC). This agency charges underfunded plans higher premiums, designed to encourage pension funding. While tax benefits provide positive reinforcement for pension contributions, PBGC premiums serve as negative reinforcement for firms that fail to fund their defined benefit plans. Since millions of beneficiaries and retirees rely on pension income, it is important to understand whether government incentives effectively motivate pension funding. I find tax benefits and PBGC premiums to be significantly positively associated with defined benefit pension contributions. This implies that firms contribute to their plans in order to achieve tax savings and that risk adjusted premiums effectively incentivize defined benefit investment. Finally, I find that plan sponsors make higher excess pension contributions following the election of President Trump. This suggests that firms boost pension contributions in anticipation of a decrease in corporate tax rates.