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Abstract
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There are currently several proposals for pension funding reform in the US. We propose that a fundamental component of any set of pension funding regulations should be that the plan sponsor be allowed to deduct the plan's normal cost. This change could be layered on to existing regulations or be part of a new set of regulations. We demonstrate that expanding the existing U.S. funding rules to allow sponsors to deduct contribution at least equal to the normal cost results in less volatility of contributions and of the pension fund, more flexibility for the plan sponsors and more benefit security for plan participants and beneficiaries. We explore the impact of the change with dynamic asset returns and dynamic valuation interest rates. We assume that demographic assumptions are always met and that the population is stationary with respect to the given demographic assumptions. As a final point of interest, we apply our analysis to the Bush administrations proposed pension funding reform for comparison. |
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