New conference paper: Reforming the Pension Benefit Guaranty Corporation

A paper I co-authored with Jeffrey Brown of the University of Illinois was presented as part of today's AEI conference Private Markets and Public Insurance Programs. There's the abstract:

The recent financial crisis and resulting government bailout of Fannie Mae and Freddie Mac highlights the need for policymakers to be aware of the potential costs of implicit federal guarantees to quasi-private institutions. The Pension Benefit Guarantee Corporation (PBGC) is a self-financed arm of the federal government designed to insure private sector defined benefit pension beneficiaries against the bankruptcy of the sponsoring employer. However, the terms under which the PBGC grants insurance to pension programs are set by Congress, not the PBGC, and in several important respects encourage underfunding and excessive risk-taking by plan sponsors. We examine the history and status of the PBGC and propose both incremental and wholesale reforms to agency policies. The key to reform of the PBGC is to allow market signals to inform employees, policymakers and markets regarding the adequacy of funding of future pension obligations. Reform has become more important as policymakers have placed more attention on implicit liabilities of the government and as the auto industry's financial condition becomes more precarious. We also critically discuss on the PBGC's recent decision to take on more equity exposure in its investment policy.

Click here for a pdf of the paper (draft) and here for the PowerPoint presented at the conference.