Strategic Bankruptcy and Private Pension Default

By Orr, Douglas V. | Journal of Economic Issues, September 1998 | Go to article overview

Strategic Bankruptcy and Private Pension Default

Orr, Douglas V., Journal of Economic Issues

A rapidly growing literature focuses on potential problems for both private pension plans and the Social Security system. Almost all of the literature addressing private sector pensions assumes that the firm promising to pay the pension has the desire to fulfill this promise and provides suggestions as to how potential problems can be eliminated or minimized. Proposed solutions range from expanding the tax write-offs allowed for sponsoring firms to privatizing the insuring of pension promises. This paper argues that the basic assumption underlying this literature, when applied to private pensions, may be incorrect. It argues that sponsoring firms may not have a desire to fulfill their promise, and in fact, there may be a strong desire to default on these promises. It also describes the evolving interpretations of existing laws that may provide firms with a mechanism to default on their pension promises. This mechanism is called strategic bankruptcy.

The primary goal of all true pension plans is to provide a stable level of consumption during retirement. Regardless of how pension plans are structured, they share the common characteristic that they shift some amount of current production to those who are no longer involved in the process of production. Thus, pensions are an inherently social institution that link one generation of workers to another and, as a result, elevate the common welfare above the concept of individual gain. Private firm-sponsored pensions are a long-term social contract between workers and firms that belies the neoclassical notion of an impersonal labor market.

Recently, some economists have incorrectly described pension plans as nothing more than a contractual savings plan in which each person sets aside her or his own individual saving today to provide for individual retirement consumption in the future. These economists reduce what is in fact a social relationship to an isolated individual act [Hayden 1989]. However, current saving provides for retirement consumption only to the extent that it allows the real output of society to grow. The purchase of financial assets with currently saved income provides a particular social/legal mechanism for claiming a share of output at some point in the future and nothing more. It is a mechanism that defines a social relationship as a financial one [Lawson and Lawson 1990]. When a claim is made by a pensioner, it will be a claim on then current output.

If current financial saving is put into real productive investment, the total amount of output in future years will grow. Thus, the financial claims will effectively be claims on real output. However, if current saving is channeled into nonproductive speculative activities that do not increase real output, the financial claims will be "hollow," and the amount of real output transferred to retirees will be less than expected.

The role pension plans play in creating power for firms is also obscured in much of the literature on pensions. Richard Ippolito [1985] correctly suggests that pensions constitute a form of deferred compensation. Workers provide effort today with the understanding that they will receive a stable level of income, provided by the firm, in retirement. He goes on to argue that it is rational for firms to not pre-fund this pension promise. Unfunded pension promises act as "performance bonds" to ensure that workers do not organize to "overly exploit" the firm. If the workers exert too much of their power, the firm will fail, and the workers will lose their deferred compensation. This analysis ignores the concept of power, except for that of organized labor, and is part of the conventional denial of the power exercised by the corporate sector [Munkirs and Knoedler 1987]. However, as the discussion below indicates, the firm's control over this pool of deferred compensation provides the firm increased bargaining power over current wages and benefits and the power to affect the mobility decisions of workers. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)


1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Cited article

Strategic Bankruptcy and Private Pension Default


Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25,

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.