Private Pensions as Corporate Debt

This paper begins by examining the ways in which pension liabilities are and are not like corporate bonds. Some conceptual issues involved in valuing future pension obligations are then discussed. The second section considers the advantage to firms of fully funding their pension obligations and the reasons why many firms nevertheless choose to have unfunded obligations. The third section then summarizes the results of research on the effect of unfunded pension liabilities on the equity value of firms. The first three sections thus consider the role of pensions at the level of the individual firm. The two sections that follow focus on the current and future role of pensions in the national economy. More specifically, section 4 examines the effect of private pensions on the nation's saving rate, paying special attention to the implication of unfunded pension obligations. The fifth section then discusses the impact of inflation on the private pension system and the likely future for indexed and unindexed private pensions.