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By Richard F. DeMong

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FIGURE 1 REAL VALUE OF PENSIONS FIXED AND INDEXED PENSIONS 5 10 YEARS 15 20 Perhaps one might say that the retiree should save part of the pension checks in the early years to accumulate a fund that can be used in the later years when inflation erodes the real value of the pension. Although this might be sound theory, it hardly accords with reality. One might consider as a n alternative the possibility of a pension indexed against inflation. Figure 1 shows that an indexed pension would retain its real value over the years, but that it would start out at a lower rate than a pension expressed in nominal dollars.

Z. Bodie, J. Light, R. Morck, and R. Taggart, "Funding and Asset Allocation in Corporate Pension Plans: An Empirical Investigation," NBER Working Paper No. 1315 arch 1984). " These authors second perspective on pension funding, the "corporate financial perspective," states that "defined benefit liabilities are just one more set of fixed financial liabilities of the firm. Pension assets, while collateral for these liabilities, are really just assets of the firm in that the surplus/deficit belongs to the firm's shareholders.

T h e impact of the federal government's pay-as-you-go Social Security system is hard to assess. A funded system might be better, but the impact of Social Security cannot be detached from the general question of the federal deficit. Smaller deficits when the economy is operating at potential would contribute to national saving and capital formation. Altogether, the economy is not currently suffering from a shortage of private-sector saving. References: Franco Modigliani. " Social Research vol. 33, no.

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