_________________________________________________________________
E M P L O Y E E B E N E F I T S , C O M P E N S A T I O N
& P E N S I O N L A W
Vol. 5, No. 11: June 3, 2004
_________________________________________________________________
Publisher: LSN Employment, Labor, Compensation & Pension Journals
a division of
Social Science Electronic Publishing, Inc. (SSEP)
and Social Science Research Network (SSRN)
Editor: PAMELA PERUN
Urban Institute
Mailto:pamela@planetnow.com
Copyright: SSEP, Inc. 2004. All rights reserved.
Leading Social Science Research Delivered To Your Desktop
http://www.SSRN.Com/
___________________________________________________________
Topic of This Issue:
Current Events
___________________________________________________________
SEARCHING THE SSRN ELECTRONIC LIBRARY
To search the entire SSRN Electronic Library by author, title,
JEL code, or full text of the abstracts in our database, please
visit http://papers.ssrn.com/
To browse all abstracts published in this journal, please visit
http://www.ssrn.com/link/benefits-compensation-pension-law.html
REDISTRIBUTION
Individual and professional subscriptions to the journal are for
single users. It is a violation of copyright to redistribute
this document electronically or otherwise without the explicit
permission of Social Science Electronic Publishing, Inc.
Site licenses for organizations are available by contacting
Mailto:Site@SSRN.Com
SIGN OFF
SUBSCRIPTION MANAGEMENT
You can change your journal subscriptions by going to the SSRN
User HeadQuarters at the following link: http://hq.ssrn.com
Please enter the email address where you received this email in
the "Your Email Address" field and click "Submit". Click on your
name on the next screen, and your User ID and Password will be
emailed to you. Once you have received your login information and
successfully logged in, you will be able to change your journal
selections. If you have questions or problems with this process,
please email UserSupport@SSRN.com or call 877-SSRNHelp (toll free
877.777.6435).
ALIGNMENT
If this document is misaligned, please set type face to a
non-proportional font such as Courier 10.
PAPER DOWNLOADS
If you need assistance downloading papers from our web site,
please contact Mailto:Support@SSRN.Com
T A B L E of C O N T E N T S
_________________________________________________________________
NEW and FORTHCOMING ARTICLES
"ERISA At 30: The Decline of Private-Sector Defined Benefit
Promises and Annuity Payments? What Will It Mean?"
EBRI Issue Brief, No. 269, May 2004
JACK VANDERHEI
Temple University
Risk Management & Insurance & Actuarial Science
CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
"The U.S. Consumption Tax: Evolution, Not Revolution"
Tax Lawyer, Vol. 57, No. 1, p. 1, 2003
DANIEL S. GOLDBERG
University of Maryland
School of Law
WORKING PAPERS
"Death Spiral or Euthanasia? The Demise of Generous Group Health
Insurance Coverage"
MARK V. PAULY
University of Pennsylvania
Health Care Systems Department
National Bureau of Economic Research (NBER)
OLIVIA S. MITCHELL
Wharton School
National Bureau of Economic Research (NBER)
YUHUI ZENG
University of Pennsylvania
Health Care Systems Department
"Social Security and the Evolution of Elderly Poverty"
GARY V. ENGELHARDT
Syracuse University
Center for Policy Research
Dartmouth College
Department of Economics
JONATHAN GRUBER
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
"Pay without Performance: The Unfulfilled Promise of Executive
Compensation, Part I: The Official View and its Limits"
LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
JESSE M. FRIED
University of California, Berkeley
School of Law (Boalt Hall)
"Corporate Governance, Executive Compensation and Securities
Litigation"
ERIC L. TALLEY
The Law School, University of Southern California
The RAND Corporation
GUDRUN JOHNSEN
Rand Corporation
S S R N I N F O R M A T I O N
_________________________________________________________________
* Partners in Publishing
* Administrative Information
- Missing issues & change of address
- Solicitation of abstracts
* Directors
* Subscription to SSRN Journals
_________________________________________________________________
ACQUIRING PAPERS
Download papers directly from the included web address or contact
the author or other contact person directly. Provide an address
to which the author or other contact person can send a paper
copy and mention that you saw the abstract in SSRN. Some of
SSRN's Partners in Publishing require a subscription or charge a
fee for electronic downloads.
EDITORIAL POLICIES
To provide the broadest coverage of research in Employee
Benefits, Compensation & Pension Law we do not referee working
papers. We accept abstracts of working papers in Employee
Benefits, Compensation & Pension Law whose topics suit the
coverage of the journal and which are part of the worldwide
scholarly discourse.
N E W and F O R T H C O M I N G Articles
_________________________________________________________________
"ERISA At 30: The Decline of Private-Sector Defined Benefit
Promises and Annuity Payments? What Will It Mean?"
EBRI Issue Brief, No. 269, May 2004
BY: JACK VANDERHEI
Temple University
Risk Management & Insurance & Actuarial Science
CRAIG COPELAND
Employee Benefit Research Institute (EBRI)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=550902
Contact: JACK VANDERHEI
Email: Mailto:TEMPLE@VANDERHEI.COM
Postal: Temple University
Risk Management & Insurance & Actuarial Science
489 Ritter Annex
Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122 UNITED STATES
Phone: 610-525-6139
Fax: 435-603-1422
Co-Auth: CRAIG COPELAND
Email: Mailto:COPELAND@EBRI.ORG
Postal: Employee Benefit Research Institute (EBRI)
Suite 600
2121 K Street, NW
Washington, DC 20037-1896 UNITED STATES
ABSTRACT:
This paper begins with an overview of the private defined
benefit plan system, with an emphasis on the various types of
retirement income risk that exist and whether they are addressed
(and if so, how effectively) by various plan designs. The focus
then turns to issues concerning sponsoring, funding, and
providing benefits to participants under the private defined
benefit system. Pension accounting and its potential impact on
the plan sponsor's income statement is described first, followed
by the minimum funding requirements for qualified defined
benefit plans. Cash balance plans are treated next and the
available empirical evidence regarding their potential impact on
plan participants is reviewed. Finally, the paper uses variants
of the EBRI-ERF Retirement Income Projection Model (RIPM) and
Retirement Security Projection Model (RSPM) to provide
quantitative assessments of the future financial security
implications of various types of moves away from defined benefit
promises and from annuity payments ("traditional"
employer-provided pensions) - a long-term trend that has been
well-documented since the enactment of the Employee Retirement
Income Security Act (ERISA) in 1974, and which has been
accelerating in recent years for a variety of reasons. This
analysis provides preliminary results on the impact of benefit
accrual freezes for pension plans, modifications to cash balance
plans, lump-sum distributions of retirement benefits, and
payment of retirement accumulations as life annuities. Decisions
are needed on the status of cash balance pension plans,
permanent funding rules, and interest rates to be used in plan
calculations, accounting treatment related to using smoothing
versus mark-to-market for investment returns and interest rates,
and rules and premiums under Title IV of ERISA and the Pension
Benefit Guaranty Corporation. Until these kinds of policy
decisions are made, further erosion of the defined benefit
system can be expected to continue.
JEL Classification: D31, J14
______________________________
"The U.S. Consumption Tax: Evolution, Not Revolution"
Tax Lawyer, Vol. 57, No. 1, p. 1, 2003
BY: DANIEL S. GOLDBERG
University of Maryland
School of Law
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=506862
Paper ID: U of Maryland, Pub Law Research Paper No. 2004-06
Contact: DANIEL S. GOLDBERG
Email: Mailto:dgoldberg@law.umaryland.edu
Postal: University of Maryland
School of Law
500 West Baltimore Street
Baltimore, MD 21201-1786 UNITED STATES
Phone: 410-706-3871
Fax: 410-706-4045
ABSTRACT:
The article expresses the view that the current Internal Revenue
Code has evolved into a hybrid income tax and consumption tax.
It begins by explaining the difference between an income tax and
a consumption tax and provides the backgrounds of the
alternative forms of consumption tax: (1) consumed income, (2)
yield exemption, and (3) point-of-sale taxation. Under the
consumed income tax model of consumption tax, the individual
taxpayer includes all items of income, both from labor and from
capital, in its tax base, and then subtracts or deducts the
portion of that income that he saves or invests. The resulting
amount represents the portion of his income that he has not
saved, (i.e., that he has consumed), and is the amount that is
subject to tax. In that manner, the consumed income tax would
levy the tax directly on consumption, and would be computed and
collected at the individual level.
A similar end result - taxing consumption, but not savings -
can be achieved without allowing a deduction for new saving or
investment but rather by permitting the returns from the
investment to be exempt from tax instead, regardless of whether
they are consumed or saved. Under certain assumptions this yield
exemption variation will have the equivalent effect of the
consumed income model, which taxes the proceeds from the
investment.
The article identifies the most important consumption tax
provisions of the current Internal Revenue Code, which include
the following: (1) the realization requirement, capital gains,
dividends, and stepped-up basis at death under section 1014, all
constituting either complete or partial yield exemption
provisions; (2) retirement plans, which involve consumed income
tax provisions because they allow a deduction upon contribution,
with the exception of the Roth IRA, which is a yield exemption
provision; (3) section 529 education plans, which provide yield
exemption for restricted savings dedicated to paying qualified
education expenses; (4) homeownership, which entails the yield
exemption benefits of non-taxability of imputed income from the
use of the home - a benefit similar to the periodic return on
the investment in the home - and excludability from income of
all or most of the gain on the sale of the home (for most
taxpayers), and also involves as a bonus the deductibility of
the home mortgage interest, subject to statutory limits, and
real property taxes; (5) business tax incentives, allowing a
full or partial deduction for expenditures that under income tax
principles would otherwise have to be capitalized and
depreciated over their useful life.
The article reflects on the implications of this evolution in
the tax law, including that it may no longer be appropriate to
analyze tax provisions under traditional tax expenditure
analysis, and concludes that the United States tax system would
best be described as an income tax/consumption tax hybrid, with
noticeable movement with each set of income tax code amendments
to a consumption tax.
______________________________
W O R K I N G P A P E R Abstracts
_________________________________________________________________
"Death Spiral or Euthanasia? The Demise of Generous Group Health
Insurance Coverage"
BY: MARK V. PAULY
University of Pennsylvania
Health Care Systems Department
National Bureau of Economic Research (NBER)
OLIVIA S. MITCHELL
Wharton School
National Bureau of Economic Research (NBER)
YUHUI ZENG
University of Pennsylvania
Health Care Systems Department
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=541681
Paper ID: NBER Working Paper No. W10464
Date: May 2004
Contact: MARK V. PAULY
Email: Mailto:pauly@wharton.upenn.edu
Postal: University of Pennsylvania
Health Care Systems Department
3641 Locust Walk
Colonial Penn Center
Philadelphia, PA 19104-6358 UNITED STATES
Co-Auth: OLIVIA S. MITCHELL
Email: Mailto:mitchelo@wharton.upenn.edu
Postal: Wharton School
Philadelphia, PA 19104-6365 UNITED STATES
Co-Auth: YUHUI ZENG
Email: Mailto:yuhui72@wharton.upenn.edu
Postal: University of Pennsylvania
Health Care Systems Department
3641 Locust Walk
Colonial Penn Center
Philadelphia, PA 19104-6358 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
Employers must determine which sorts of healthcare insurance
plans to offer employees and also set employee premiums for each
plan provided. Depending on how they structure the premiums that
employees pay across different healthcare insurance plans, plan
sponsors alter the incentives to choose one plan over another.
If employees know they differ by risk level but premiums do not
fully reflect these risk differences, this can give rise to a
so-called "death spiral" due to adverse selection. In this paper
use longitudinal information from a natural experiment in the
management of health benefits for a large employer to explore
the impact of moving from a fixed dollar contribution policy to
a risk-adjusted employer contribution policy. Our results
suggest that implementing a significant risk adjustment had no
discernable effect on adverse selection against the most
generous indemnity insurance policy. This stands in stark
contrast to previous studies, which have tended to find large
impacts. Further analysis suggests that previous studies which
appeared to detect plans in the throes of a death spiral, may
instead have been experiencing an inexorable movement away from
a non-preferred product, one that would have been inefficient
for almost all workers even in the absence of adverse selection.
JEL Classification: I11, G22
______________________________
"Social Security and the Evolution of Elderly Poverty"
BY: GARY V. ENGELHARDT
Syracuse University
Center for Policy Research
Dartmouth College
Department of Economics
JONATHAN GRUBER
Massachusetts Institute of Technology (MIT)
Department of Economics
National Bureau of Economic Research (NBER)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=541683
Paper ID: NBER Working Paper No. W10466
Date: May 2004
Contact: JONATHAN GRUBER
Email: Mailto:gruberj@mit.edu
Postal: Massachusetts Institute of Technology (MIT)
Department of Economics
Room E52-355
50 Memorial Drive
Cambridge, MA 02142 UNITED STATES
Phone: 617-253-8892
Fax: 617-253-1330
Co-Auth: GARY V. ENGELHARDT
Email: Mailto:gvengelh@maxwell.syr.edu
Postal: Syracuse University
Center for Policy Research
426 Eggers Hall
Syracuse, NY 13244 UNITED STATES
Paper Requests:
Full-Text downloads are available from SSRN Online for $5.
ABSTRACT:
We use data from the March 1968-2001 Current Population Surveys
to document the evolution of elderly poverty over this time
period, and to assess the causal role of the Social Security
program in reducing poverty rates. We develop an instrumental
variable approach that relies on the large increase in benefits
for birth cohorts from 1885 through 1916, and the subsequent
decline and flattening of real benefits growth due to the Social
Securing 'notch', to estimate of Social Security on elderly
poverty. Our findings suggest that over all elderly families the
elasticity of poverty to benefits is roughly unitary. This
suggests that reductions in Social Security benefits would
significantly alter the poverty of the elderly.
JEL Classification: I3, H3
______________________________
"Pay without Performance: The Unfulfilled Promise of Executive
Compensation, Part I: The Official View and its Limits"
BY: LUCIAN ARYE BEBCHUK
Harvard Law School
National Bureau of Economic Research (NBER)
JESSE M. FRIED
University of California, Berkeley
School of Law (Boalt Hall)
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=537783
Date: February 2004
Contact: LUCIAN ARYE BEBCHUK
Email: Mailto:bebchuk@law.harvard.edu
Postal: Harvard Law School
1563 Massachusetts Avenue
Cambridge, MA 02138 UNITED STATES
Phone: 617-495-3138
Fax: 617-496-3119
Co-Auth: JESSE M. FRIED
Email: Mailto:FRIEDJ@MAIL.LAW.BERKELEY.EDU
Postal: University of California, Berkeley
School of Law (Boalt Hall)
Boalt Hall
Berkeley, CA 94720-7200 UNITED STATES
ABSTRACT:
This paper contains a draft of the introduction and Part I of
our forthcoming book, Pay without Performance: The Unfulfilled
Promise of Executive Compensation (Harvard University Press,
2004). The book provides a detailed account of how structural
flaws in corporate governance have enabled managers to influence
their own pay and produced widespread distortions in pay
arrangements. The book also examines how these flaws and
distortions can best be addressed.
Part I of the book critically examines the arm's length
contracting view, which underlies much of the academic research
on executive compensation as well as the law's approach to it.
We show that boards have not been operating at arm's length from
the executives whose pay they set. While recent reforms can
improve matters, they cannot be expected to eliminate
significant deviations from arm's length contracting. We also
show that the constraints imposed by market forces and
shareholders' power to intervene are not tight enough to prevent
such deviations.
Other parts of the book are also available on the SSRN:
Part II: Power and Pay, is available at
http://ssrn.com/abstract=537810.
Part III: The Decoupling of Pay from Performance, is available
at http://ssrn.com/abstract=546105.
Part IV: Going Forward, is available at
http://ssrn.com/abstract=546107.
JEL Classification: D23, G32, G34, G38, J33, J44, K22, M14
______________________________
"Corporate Governance, Executive Compensation and Securities
Litigation"
BY: ERIC L. TALLEY
The Law School, University of Southern California
The RAND Corporation
GUDRUN JOHNSEN
Rand Corporation
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=536963
Paper ID: USC Law School, Olin Research Paper No. 04-7; and USC
CLEO Research Paper No. C04-4
Date: May 4, 2004
Contact: ERIC L. TALLEY
Email: Mailto:etalley@law.usc.edu
Postal: The Law School, University of Southern California
699 Exposition Boulevard
Los Angeles, CA 90089 UNITED STATES
Phone: (213) 740-4792
Fax: (213) 740-5502
Co-Auth: GUDRUN JOHNSEN
Email: Mailto:gudrun@rand.org
Postal: Rand Corporation
1700 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
ABSTRACT:
It is generally accepted that good corporate governance,
executive compensation and the threat of litigation are all
important mechanisms for incentivizing managers of public
corporations. While there are significant and robust literatures
analyzing each of these policy instruments in isolation, their
mutual relationship and interaction has received somewhat less
attention. Such neglect is mildly surprising in light of a
strong intuition that the three devices are structurally related
to one another (either as complements or substitutes). In this
paper, we construct an agency cost model of the firm in which
corporate governance protections, executive compensation levels,
and litigation incentives are all endogenously determined. We
then test the predictions of the model using a firm-level data
set including governance, executive compensation, and securities
litigation variables. Consistent with our predictions, we find
governance and compensation to be structural substitutes with
one another, so that more protective governance structures tend
to coincide with lower-powered incentives in executive
contracts. Also consistent with our predictions, we find
executive compensation and shareholder litigation appear to be
structural complements to one another, so that higher powered
incentives tend to catalyze more frequent litigation. In fact,
we estimate that each 1% increase in the incentive component of
a CEO's contract predicts 0.3% increase in the likelihood of a
securities class action and a $3.4 million dollar increase in
expected settlement costs. In addition, the complementarity of
executive compensation and litigation allows us to formulate new
ways to test for the effects of legal reform, such as the
Private Securities Litigation Reform Act of 1995. The results of
our preliminary tests appear inconsistent with the claims of the
statute's proponents that the PSLRA systematically discouraged
non-meritorious litigation without burdening meritorious claims,
particularly for firms with relatively low volatility.