Pension Plan Contributions and Tax Incentives: Evidence from the TCJA

To concentrate

This article uses the Tax Cuts & Jobs Act of 2017 (TCJA) as a natural experiment to show that sponsor contributions to corporate defined benefit pension funds respond to tax incentives. Pension plan sponsors can deduct retirement expenses from corporate tax returns. The TCJA reduced the US federal corporate tax rate from 35% to 21%. In turn, this reduction resulted in temporary tax relief on pension contributions. As a result, sponsors were encouraged to anticipate future planned contributions.


Our results suggest that plan sponsors are not limited – when establishing retirement plan strategies – by the amount of money they have. Tax incentives have a significant impact on the time profile of contributions. However, the changes made to these incentives do not leave a lasting imprint on the level of sponsor contributions or on the solvency of pension plans.


We find that the TCJA tax relief has worked exactly as one would expect from a temporary change in tax incentives. The sponsors have in fact anticipated future planned contributions. Consistent with the finding that the TCJA affected the time profile but not the overall level of respondents’ contributions, we find no evidence of a lasting impact on plan funded ratios. Contrary to reports in the financial press about the rebalancing of pension funds from equities to US government bonds during the 2017 TCJA tax relief, our estimates show that the TCJA had no impact on portfolios. diets. That said, the tax relief appears to have reduced corporate credit spreads.


We document that corporate pension contributions respond to tax incentives using the Tax Cut & Jobs Act (TCJA) of 2017 as a natural experiment. The TCJA reduced the federal corporate tax rate in the United States, temporarily increasing contribution incentives for sponsors of defined benefit pension plans. We exploit the cross-sectional variation of the ex ante exposure to these incentives. We find that tax relief induced an additional $3 billion in sponsor contributions to medium- and large-scale plans in 2017. no evidence of impact on plan asset allocation. Our results suggest that the TCJA did not have a lasting impact on corporate defined benefit pension funds.

JEL Rating: H22, H25, H26, H32, J32

Keywords: defined benefit pension plans, contributions, Tax Cuts & Jobs Act

Pamela W. Robbins