Rich get richer under new pension law

An act passed by Congress in 2012 isn’t stimulating the investment and job creation promised by its proponents, according to new research from the School of Management.

A study forthcoming in The Accounting Review is the first to examine the consequences of the Moving Ahead for Progress in the 21st Century Act (MAP-21), which reduced the minimum amounts that firms must contribute to their pension plans.

The study’s author, Michael Dambra, assistant professor of accounting and law, found that rather than reinvest the funds, the average firm either holds the funds on its balance sheet as liquid assets or pays them out to shareholders.

“Congress, trade groups and pension plan sponsors claimed that pension funding relief would increase investment and facilitate job growth,” says Dambra. “I find little evidence that MAP-21 encouraged such activity. But while Congress has extended MAP-21 into 2023, firms are using the act to continue to underfund their pension plans and transfer wealth from pension holders to shareholders through stock repurchases.”

Dambra analyzed mandatory pension-contribution data provided by the U.S. Department of Labor immediately before and after the passage of MAP-21 to examine how firms’ capital budgeting and financing policies were affected. He found no average association between pension funding relief and capital expenditures, research and development, cash acquisitions, working capital or employment in the two years following MAP-21.

“Of the estimated $145 billion in pension funding relief provided by MAP-21, managers spent nearly $40 billion on stock repurchases and retained more than $52 billion on their balance sheets,” Dambra says.