Debt, Deregulation and Financial Crises
Chapter 4: ERISA moves savings into securities markets
Prompted by notable bankruptcies that resulted in the loss of promised pensions, the Employee Retirement Income Security Act (ERISA) of 1974 required companies to back pensions with assets. This requirement increased demand for securities in which plans could invest and initiated a move of household savings from bank deposits to the capital markets — a shift that increased risk for households, lowered their level of protection as bank deposit insurance covered a smaller share of savings, and increased the impact on economic activity of gains and losses in households’ net worth. Those risks intensified as falling asset prices eroded the value of the holdings of defined benefit plans and encouraged their sponsors to transfer potential losses to beneficiaries by switching to defined contribution plans.
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