Published online by Cambridge University Press: 02 September 2008
This study quantifies the possible consequences to stakeholders of reforms to the excise tax on reversions of excess pension assets. Under the US Pension Protection Act (PPA) of 2006, funding in defined benefit (DB) plans is likely to improve significantly. Many plans may become overfunded over time, owing to the shortfall amortizations mandated by the PPA, as well as to precautionary contributions by sponsors and to plan investment returns. This analysis shows that a more moderate excise tax rate together with a reasonable funding threshold for asset reversions would not only enable sponsors to spend the excess funds on other corporate needs, thereby lowering the cost of sponsorship of DB plans, but also would open a considerable revenue source for the government, with only a small increase in bankruptcy cost for the PBGC. Plan participants could also gain in an alternative reform, which would require a partial transfer of excess assets to them along with a still-lower reversion tax rate. These findings also hold for plan sponsors with various degrees of risk tolerance or only making the PPA-required minimum contributions.