The pension liabilities reported by firms fall far short of the true economic pension liabilities incurred by firms. Economic liabilities arise, not because firms have made a legally binding promise to provide a pension, but because workers have “deposited” savings with their firms in anticipation of receiving a pension upon retirement. Empirical evidence from labor market and stock market data strongly suggests that these savings flows are made by workers as if they expect a real pension at retirement and beyond.

The results suggest that corporations have, in reality, incurred liabilities far in excess of their legal liabilities. True economic funding ratios, for example, have been approximately 70 per cent during the postwar period and have varied widely across pension plans. If stock market participants calculate these true pension burdens inaccurately, or rely only on reported liabilities, then stock valuations are likely to contain large errors.