Do Pension Bailouts Create Moral Hazard? With Michael Dambra

Do Pension Bailouts Create Moral Hazard? With Michael Dambra

 

In this episode of 'Questions in Finance,' host Veljko Fotak dives into the complex world of moral hazard and pension bailouts with guest Michael Dambra, the Kenneth Colwell Chair of Accounting and Law at the University at Buffalo. They discuss the concept of moral hazard, its historical context, and its implications in modern economics, particularly focusing on recent pension bailouts under the American Rescue Plan (ARP). The conversation sheds light on how bailout expectations can alter financial behavior and risk-taking in the pension fund sector. Mike and Veljko discuss potential alternatives, but also political implications: why this plan was such an ineffective vote-buying scheme, and why taxpayers are the big losers.

 

 

Timeline:

 

00:00 Minus Kate, plus Mike

01:16 Understanding Moral Hazard

02:56 Historical Context of Moral Hazard

06:41 Welcome to Questions in Finance!

07:22 Mike Dambra's Background and Research

08:43 The Crisis in Pension Funding

18:18 The American Rescue Plan and the Butch Lewis Act

24:26 Research Design and Findings

35:01 Which Funds Get Bailouts?

38:30 Behavior of Plans Receiving Bailouts

41:06 Assessment and Alternatives

43:15 Comparing Pension and Banking Sectors

47:37 More on Alternatives

49:11 Bailouts, Politics, and Spin

51:36 Winners and Losers of the Bailout

54:42 Political Bias in Research

01:00:54 Who Cares?

01:05:41 Can Bailouts Impose Discipline?

01:08:58 How about a National Pension System?

01:09:49 Defined Benefits vs. Defined Contributions

01:11:11 Final Thoughts and Future Plans

 

 

Bibliograph

Episode Transcript

Veljko (00:00):
I'm feeling lonely.
Kate has abandoned me.
Or, well, she's not here for this episode.
She's busy dealing with theend of the semester, of the
academic semester, that is.
So, I figured I'll do what one alwaysdoes in those cases, give a call
to a friend and open a beer, right?
And chat about finance.

(00:21):
So I gave a call to Mike Dambra.
And Mike just happens to be theKenneth Colwell Chair of Accounting
and Law at the University at Buffalo.
And I figured, well, with such animpressive sounding title, Mike must
have something interesting to tell usabout finance and accounting, right?
So jokes aside, Mike is a verysmart guy, and I think you will

(00:43):
enjoy hearing his perspective.
I am truly excited about this episode.
But, then, within the first minuteof the interview that you're going
to hear, Mike goes on record saying"Veljko and I are not friends."
So, first, my better halfabandons me for the holidays.
And then my friend goes onrecord saying we are not buddies.

(01:04):
And now I'm totallydepressed for the holidays.
Jokes aside, Mike is going to behere with us today to talk about
moral hazard in pension bailouts.
And I hope you enjoy this episode.
Now, perhaps moral hazard doesneed a moment of introduction.
It's one of those technical soundingterms, it's almost intimidating.

(01:28):
And yet it's meaning is fairly simple.
By the way, I heard somebody recentlysaying that moral hazard sounds like
the title of an action movie setin a French bordello and I thought
that was one of the best definitionsof moral hazard that I had heard.
But jokes aside, Merriam Websterdefines moral hazard as a situation

(01:51):
in which a party is incentivized torisk causing harm because another
party is obligated to remedy theconsequences of the harm presumably
caused, and, that's a very complicatedway of saying that when somebody
else is guaranteeing our losses, ourincentives to take risks increase, right?

(02:14):
So, if you have kids, you probablyknow how hard it is to remind them
to lock their bicycles, right?
And if your kid does not lock theirbicycle and then it gets stolen and
you're the one buying a new one, well,you just encountered moral hazard.
Or when people drive a rentalcar a little bit faster than they

(02:36):
would drive their own vehicle,taking a little bit more risk.
That's moral hazard in action.
And so it's an intimidating term.
It's an intimidating word.
And yet, it is a conceptwe see in action every day.
And we shouldn't be scared of it.
And I did a little bit off digging here.

(02:56):
I wanted to find when was theterm moral hazard first used.
And it seems that the firstdocumented usage of the term
actually comes from 1867.
And Aetna or Aetna, I'm not sure how onepronounces that, the insurance company,

(03:17):
published, in 1867, this, handbooktitled, Aetna Guide to Fire Insurance.
And in it, they were specifyingthat fire insurance coverage would
cover losses emanating from whatthey called "natural hazards."
And those were described as naturaloccurrences such as earthquakes,

(03:39):
tornadoes, or other natural phenomenaand not cover damages created by what
they described or deemed "moral hazard."
And they described "moral hazard"here as damages originating
from carelessness or fraud.
And then they specified actuallyunder carelessness, actions such

(04:02):
as playing with matches, whichI thought was maybe humorous, or
oddly specific at the very least.
But the idea here being that moralhazard aims at describing damages
or risks that arise becauseof changes in human behavior.
In modern economics, we attributethe usage of the term "moral

(04:23):
hazard" to Kenneth Arrow.
Kenneth Arrow being a Nobel Prizewinning economist who in 1963 published
a paper titled "Uncertainty and theWelfare Economics of Medical Care."
in this seminal work, Kenneth Arrowpointed out that the insured used
more healthcare services to treata given illness than the uninsured.

(04:47):
We would consider that atypical example of moral hazard.
So, if I have health insurance, Imight use more services, but also
I might actually take more risks.
If my car is insured, I mightdrive a little bit faster.
In the world of finance, we have hearda lot about moral hazard recently, after

(05:07):
the Global Financial Crisis, there was alot of talk about whether bank bailouts
would subsequently incentivize banksto take even higher levels of risk.
So, these ideas behind moralhazard originate from insurance
and a lot of it had to do withmedical insurance in particular.

(05:28):
Subsequently, we've seen a lot oftalk about moral hazard in banking.
We know that moral hazard is oftenpolitically invoked when discussing
welfare and welfare benefits.
The idea that providingsafety nets to people reduces
incentives for people to work.
But today, Mike is going totalk to us about moral hazard

(05:50):
in a very different context.
And that is, pension bailouts.
We are gonna see that, over the recentyears there have been a couple of pension
bailouts, or bailouts specificallyof multi-employer pension plans.
These are large pension plans thatcover workers across multiple firms.

(06:11):
They're often associated with unions.
And, of course, the idea here is, dothese bailouts actually lead pension
funds to subsequently take on higherlevels of risk, or other forms of
behavior that Mike will talk to us about.
So the main question of the day isgoing to be, do pension bailouts

(06:33):
actually cause moral hazard?
This is with Mike Dambra, andI hope you will enjoy this
episode and this interview.

(06:53):
Welcome to Questions in Finance,

Kate (06:56):
a podcast where we translate academic mumbo jumbo to answer
interesting questions in finance.
I'm Kate Holland.

Veljko (07:04):
And I'm Veljko Fotak.
Kate and I met when we were PhDstudents at the University of Oklahoma.

Kate (07:10):
Today we're university professors and we spend our days
teaching and researching companies,markets, and all things related.

Veljko (07:19):
Welcome to Questions in Finance.
Today we have with us Michael Dambra.
Mike is the Kenneth Colwell Chair ofAccounting and Law, and he's also an
Associate Professor in a similarlynamed Department of Accounting and
Law, School of Management, Universityat Buffalo, which makes us colleagues.
We are next door, Mike, of course, in theAccounting department and me in Finance.

(07:42):
Mike and his work have been cited in theWall Street Journal, in the Financial
Times, Bloomberg, Forbes, if you canthink of it, he's been there most likely.
But I will say Mike'sresearch spans, right?
You've written about pensions,you've written about IPOs, you have
written about accounting disclosure.
I think if there is aconnection, if you will.
If there is a theme, right?

(08:03):
It's on the economic consequencesof regulatory changes.
And because of that, I think,as a testament to your impact,
Mike, I know you've been citedin congressional testimony.
You've been cited inSEC regulatory changes.
You've been cited in legal blogs.
You've been cited by the Treasury.
So, hats off to you, Mike.
And as you can tell, I did read the bio.

(08:24):
Anyways, welcome Mike.

Mike (08:25):
Thanks buddy.
And, happy to be here.
I'm glad you don't havevideo cause I am blushing.
Velko and I are colleagues.
We're not friends.
And so this will be anunbiased open, dialogue.

Veljko (08:34):
I'm glad yoUSaid it.
Accounting and Finance...
cats and dogs, right?
Can we be friends?
But okay, so the big topic of the day.
There is a crisis in pensionfunding all over the world, but
especially in the United States.
And you cite some research thatfinds there is a shortfall of about
six and a half trillion dollars.

(08:55):
I know estimates vary, but weknow the hole is big, right?
The demographics are headingin the wrong direction.
Our population is aging.
Our domestic labor population isshrinking, and we don't know whether
we're gonna make the right choicesin terms of immigration, right?
And what's gonna happen toour labor pool going forward.
So, I suspect that whateverproblems, whatever stresses we're

(09:19):
seeing in this sector, they'rejust going to get stronger.
If you're seeing bailouts, we're probablygoing to see more bailouts coming
forward, where I think your work isextremely timely, and important, right?
And of course, I'm talking aboutyour work regarding the American
Rescue Plan and the Butch Lewis Act.
This paper "On the economicconsequences of pension bailouts,

(09:41):
evidence from the American Rescue Plan."

Mike (09:45):
This paper was written with two great co authors, Phil Quinn,
who's an Associate Professor at theUniversity of Washington, and John
Wertz out of Indiana University.
And so, let me give yoUSome background.
Let's go back to the nineties whenpension plans in general were overfunded.
Market returns were really good.
With heavily unionized plans whenplans get overfunded, oftentimes

(10:09):
it leads to unions agitating formore benefits, because you have
excess assets and employers wouldtry to claw those when they could.

Veljko (10:17):
Sure.

Mike (10:17):
And so we consider those multi-employer pension plans and
we haven't talked about thisyet, Veljko, but I haven't even
defined what multi-employer is.

Veljko (10:24):
Please.

Mike (10:24):
So multi-employer pension plans are plans where it's going
to be multiple plans where all theassets and liabilities are pooled
within one organization, one group.
When these were set up decades ago,the main benefit was in, in firms or in
industries where there's not a lot of jobsecurity, you could leave FedEx and go

(10:47):
to UPS and you don't lose your pension.
And so it gives you a lot of job mobility.
And so this was made for the benefit ofthe employees and essentially allowing
them a little bit more job mobility.

Veljko (10:59):
And help me understand.
It seems to me like they're associatedwith unionized sectors, right?
Is that correct?

Mike (11:06):
So the way the governance works within a multi-employer plan,
they're going to be co run by an equalrepresentation between firms and unions.
So everything is collectively bargained.
How much are going tocontribute in the plan?
So the times in the nineties were good.
2000, 2010, we have thesebig economic shocks.
One is the dot-com downfalland then followed by that,

(11:28):
the great financial crisis.
A lot of these funds areheavily funded by equity.
Market returns were bad.
When you have these big shocks,oftentimes the obligations you
owe to retirees don't change.
The discount rates might, but what youowe to retirees in the future, with a big
market shock, that liability still exists.

(11:49):
And so more aggressive pension planstended to get in more financial trouble.

Veljko (11:55):
So, I have to admit that the first thing that surprised me
reading your paper was you haveinteresting history there, right?
Nice institutional detail.
Is this real?
I mean, this fact that these pensionfunds were actually doing well in
the nineties, we know they playgames with discount rates, right?
Because I'm European, right?

(12:17):
And the idea that a pensionfund could be solvent is...
were they really solvent in the 90s?

Mike (12:21):
They were overfunded, but you're very, it's a very fair point.
It's according to the rules.
And so the way we're going to dorules in these particular funds, the
discount rate is oftentimes not measuredin what we use as GAAP fair value.
You're going to use some estimate.
And so, the two particular pensionplans are the most stress In the

(12:44):
US are public sector plans andmulti-employer plans, which we focus on.
And here, the discount rate is going tobe based on the expected return of future
assets, which isn't really appropriate.
If you read research by Josh Rauh outof Stanford and Novy-Marx and their
seminal JF paper, they argue thatthese are unrealistic discount rates.

(13:05):
As so, for some background for thosenon finance savvy folks, the higher the
discount rate is the lower the presentvalue of future pension liabilities.

Veljko (13:16):
So sorry to interrupt you.
We got to say this twice.
We'll say it slowly, right?
You put a higher discount rate.
Is that the same as you're projectinghigher returns going forward?

Mike (13:25):
That's right.
That's right.

Veljko (13:26):
And so you need less money now, since it's going to
generate higher returns later on.

Mike (13:30):
No, that's right.
Okay.
So what happened with these pensionplans after this big market shock,
they got in more financial trouble.
What we study in this paper are whatwe refer to as private sector plans.
These are plans that are owned byfirms, some of them are publicly
traded, some are privately held, butthey're in the non government sector.

(13:51):
And so they're manufacturing firms,they're publicly traded firms,
you'd have General Electric in thesample, you'd have a lot of the
unionized pension plans and airlines.

Veljko (14:01):
Mike, this is personal curiosity.
Are we in here?
Like our teacher and professors andTIAA, which I think covers a lot of
the faculties, it sounds like a multiemployee pension plan to me by definition.
Don't exactly know.

Mike (14:20):
That's a great question.
So we are a multi-employer pensionplan the way that it works with
UB, but that's the public sectorand so that's all government plans.
What i'm focusing on this paper

Veljko (14:29):
all right

Mike (14:31):
are non governmental firms.

Veljko (14:32):
Okay.
I did read the paper carefully.

Mike (14:37):
So, the 6.
3 trillion you mentioned.
So, what Josh Rauh and Novy-Marx dothere in their seminal paper, is they
take more realistic discount ratesinstead of using these expected returns.
They're actually going to look atrisk-free rates because they argue that a
lot of this debt is essentially risk free.
And so these lower discountrates, higher obligations.
The 6.3 trillion is based on publicsector plans, and so New York State would

(15:02):
be in there, and so we'd be in that group.

Veljko (15:05):
Discounting it back to the risk-free rate makes sense,
you gotta pay this stuff, it's aguarantee that you have to pay it.
And yet if you're thinking aboutit in terms of this is generating
returns, you're not investingit in risk-free instruments

Mike (15:16):
You aren't no

Veljko (15:17):
What is my fallacy

Mike (15:18):
There's a disconnect, right?
Because you're thinking about notthe returns of the plan assets.
These are discount rateson the future liabilities.
And so, it's how likely is it thatthey're going to pay these obligations?

Veljko (15:28):
So that is free rate does make sense.
Yeah.

Mike (15:30):
But what we'd see under GAAP for liabilities is more like bond yields.
And GAAP rules are going to bemarket value of AAA rated bonds.

Veljko (15:41):
I've actually seen pension funds use numbers that were
a lot higher, even than that.
Are these multi-employer pension planssomehow actually not the worst offenders?
Because I've heard discussionabout pension plans, they were as
high as eight, nine, 10%, right?
Which sounds a lot higherthan anything bond related.

Mike (16:00):
Yeah.
It's because the public sector andthen multi-employer plans, they
follow the same approach where theyuse expected return on plan assets.
So, if I looked at the average here,it's probably somewhere in the range
of seven to eight and a half percent.

Veljko (16:12):
Oh, okay.
Okay.
Fair enough.
So that's higher than I thought.
Going back to where thisconversation started.
We started by saying in the 90s,these funds were properly funded,

Mike (16:21):
Right.

Veljko (16:22):
And yet it's not entirely clear what changed, or
at least it's not clear to me.
What is the big trigger?
Why do we have theseproblems all of a sudden?
Because I guess pension fundunderfunding can come from firms
are not contributing enough.
It can come from the funds are notperforming the way we expected.
As far as I can tell, your resultsare pointing more towards the

(16:45):
latter rather than the former.

Mike (16:47):
Particularly in the multi-employer pension plan sector,
they tend to be more equity based

Veljko (16:55):
Ok

Mike (16:55):
And so they have a little bit more risk.
There's been an impetus on liabilitydriven investment, having more bonds in
your holdings, that hasn't really been thecase for the multi-employer pension plans.
And so, I think the shockdifferentially, these financial
crisis, shock the dot-com boom.
I think they they differentiallyhit the multi-employers plans and

(17:18):
they've had a hard time catching up.

Veljko (17:19):
Makes sense.
I know that, at least in your paper, youattribute at least some of it to declining
union membership, just a lower base.

Mike (17:26):
No, that's right.
So anyways, these huge shocks cameand particularly in the multi-employer
pension plan sector, horribly underfunded.
Even with these higher discount rates.

Veljko (17:37):
Fair enough.

Mike (17:39):
In the U.
S., there's a backstop.
So, if private-sector pension plansfail, there's a group called the
Pension Benefit Guarantee Corporation.
And they backstop if a plan goes under.
They provide funding.
The PBGC, realizing there's afinancial crisis, a lot of these
multi-employer pension plans failed.
And so the PBGC came out in a statementin 2019, they said, there's a high

(18:03):
probability we run out of money by 2025,and by 2026, it's a near certainty.
So, the plans are horribly funded,they're going under, and there's
some concern that the governmentwon't have the money to back them up.
And so, there are a coupledifferent legislations, which
they coined the Butch Lewis Act.

(18:23):
They tried to pass it in, I believe, 2017.
Didn't work out.
They tried to pass it in 2019.
They couldn't get it throughCongress to provide funding.
And these original rules that theytried to push were these really
underfunded pension plans in themulti-employer sector, we're going
to give them a loan that they'regoing to pay back to the government.

(18:46):
So couldn't get consensus in 2017.
Couldn't get consensus in 2019.
In comes 2021.
Now we're in a COVID world wherethere's been a lot of stimulus.
And so this plan, this AmericanRescue Plan act was being passed
under the Biden administration.
It was going through Congress.
The biggest component of this plan wasgiving out 1, 400 checks to people who

(19:13):
were, restricted by COVID and there's someadditional COVID related stimulus funding.

Veljko (19:18):
And now you're talking about the overall ARP, right?
That's the American Rescue Plan.

Mike (19:22):
That's right.

Veljko (19:23):
Because the 1, 400 checks are not part of Butch Lewis, right?

Mike (19:26):
No, no.

Veljko (19:27):
Okay I'm still trying to wrap my head around it.
And yeah, so I think that thefull name, I had to look it up.
It's the Butch LewisEmergency Pension Relief Act.
And I guess I didn't know Butch Lewis was.
. He was a union organizer, right?
That has fought for pensions.
And I think that's very telling.
Because, to some extent, thisis very explicitly pro union.

(19:52):
This is very explicitly, we aregiving you a handout, right?
And quite a substantial one.
And the politics of these, I'llbite my tongue for the moment,
but they make my skin crawl a bit.

Mike (20:04):
Yeah.
Even though the 2017, 2019acts as proposed, which didn't
pass, were at least loans.
And so the thought is we loan money tothese horribly mismanaged pension plans
and then the pension plan has to payus back over time low interest rate.
So not risky, but there was fundingthat was eventually going to be
paid back to the US government.

(20:24):
So you're still unsure if this isgood policy, but at least it's a loan.

Veljko (20:30):
Sure.

Mike (20:30):
So with this American Rescue Plan act which is essentially a Covid
stimulus bill on the very back end of thebill, they end up tacking on this money
to subsidize these poorly run pensionplans that we're going to run on money.
And so I think the original projectionsby the Congressional Budget Office
were around 80 billion dollars.
And different than the iterations ofthe earlier suggested pension plan

(20:54):
legislation, these were cash bailouts.
Not necessarily no stringsattached, but there's no loan.
And so you provide the money.
There's some restrictions onwhat you can invest in, but it's
essentially here's 80 billion.
And the only reason that really gotthrough in 2021 is because we had a
unique situation in the US government.
At the time we had, for those ofyou unfamiliar with the way that the

(21:17):
government works, in the United States,you have two legislative bodies.
The U.
S.
Senate and the House of Representatives,they were both majority Democrat.
We also had a Democraticpresident at the time.
And so having all those threecomponents, both the executive branch
and the legislative branch, essentiallycontrolled by Democrats, made it
easier to pass this legislation.

Veljko (21:37):
The Biden administration started publishing very flattering reports of
the impact of this legislation, sometimesin November, right before the election.
And these reports, they start withhighlighting "no Republican voted for
this," It really is pretty shameless,the way this looks, from the outside.

(21:58):
And I look forward toyour more educated input.
But, when I was reading about these, itmade me angry and, and it's not often
that I read a finance or accounting paperand it just makes me flat out angry.
And I wonder, you're very balanced, right?
When you guys are describingthese, but what was the feeling

(22:18):
that got you to write about it?
Were you guys just disgusted bywhat you were seeing and decided
we gotta write about this?
Or, I mean, what was the impetus here?

Mike (22:26):
So this is a good segue in how I do research and how a lot of us do research.
I think really smart researcherscan read through the extant
literature in finance and accounting.
You find holes.
And then you fill those holes.
And that was never my wheelhouse.
And so my wheelhouse was more likereading the Wall Street Journal,
reading finance blogs and understandingwhat's going on in current markets.

(22:48):
And this is a one of a kind bailout.
This is the first time in underERISA in the past, probably 60 years,
we've actually just given a cashinfusion to a private sector company.
So this was a huge regulatorychange and I thought it had
impact because the public sector.
So where our pension plans are, Veljkoare oftentimes in much worse shape than

(23:09):
even these multi-employer pension plans.
So I thought this would be predictive.
And so the reason I got into it,huge shock, I thought it mattered.
And I thought it'd be interesting to studya lot of times when I focused, when my
research has pressed on these regulatoryissues, it's, it's great situations
because there's this built in tension.
Some people want the regulation.
Sometimes, you don't.

(23:30):
And in this situation, I wasprobably more on the don't side.
I'm a taxpayer.
This is coming out of my money, Veljko,this is coming out of your money, to
fund what has been horribly managedpension plans by unions and firms.
And was I disgusted?
Maybe disgust is too strong of aword, but it didn't seem like good
fiscal policy to reward bad behavior.

Veljko (23:53):
There are some pretty nasty anecdotes behind some of the pension
funds that were receiving bailouts here.
I think that one of the biggestrecipients was the, oh, I'm drawing
a blank now on the name, the one thatwas associated with Jimmy Hoffa, right?
They were buying casinos back in the day.
Now they're bankrupt andnow we're bailing them out.
Right.
And, but I have a lot of follow onquestions about that, but I feel like

(24:17):
I'm getting a little bit off track here.
So let's get out of the way the mainfindings of the paper and then we can get
into the nuances and the implications.

Mike (24:26):
So what we want to do is we want to look after the passage of the
American Rescue Plan Act, which was 2021.
What we try to do is follow the moneyand we wanted to see if multi-employer
pension plans would have revisedexpectations of future bailouts.
So we see this bigreward for bad behavior.

(24:47):
And so as researchers, asarchivalists, we're like, "well,
this is pretty interesting.
I wonder if it's going tochange the behavior of the
pension plans in the sector."
There's a lot of research in the bankingsector that say bailouts can affect
a whole sector or a whole industry.
Well, let's apply this to our setting.
And so we have this groupof plans that is affected.

(25:08):
And so we consider thosethe multi-employer.
So multi-employer pension plansare plans where it's going to
be multiple plans where all theassets and liabilities are pooled.

Veljko (25:17):
I saw that the numbers are pretty big, right?
That same report in November mentionsthat the Butch Lewis Emergency
Pension Relief Act already dispensed69 billion of assistance to about 1.
2 million people, if I remember correctly.
I know I've seen the average, like theaverage plan is like 4,000 people on
it, which seems pretty large, right?

(25:40):
And, 1.2 million participantssounds huge, right?
And yet the numbers are huge too.
I had to do the math a couple of timesin my head with the zeros, right?
Because I went 69 billion, 1.2million participants around
60,000 dollars per participant.
And then I went, there's no way.
And it is 60,000 dollars per participant.
This is, a heck of a per capita benefit.

Mike (26:03):
And one of the reasons for that is a lot of these multi-employer pension
plans were just so poorly funded.
And so what we try to do in the study iswe, we want to isolate a group where their
bailout expectations fundamentally change.
So we stay in the multi-employer pensionplan sector, but we try to focus on those
groups that haven't received a bailout.
So when you receive the cashfrom the US government, there are

(26:27):
restrictions on what I can invest in.
And so there are limitations andwe thought of the cleanest group.
We're like, okay, let's stay in themulti-employer pension plan sector.
And let's look at the plansthat haven't been bailed out.
And see how they respond.

Veljko (26:41):
And that's a bit counterintuitive, right?
You're looking at the impact ofthis legislation or at least the
unintended consequences on thefunds that were actually excluded
or not covered by it, right?

Mike (26:52):
Yeah.
Yeah.
Our theoretical prediction was thisbailout pop, it really happens and
it affects a subset of pension plans.
And you're right, we exclude theones that are already bailed out
because their behavior is now strictlymonitored by the government, there's
restrictions on what they can invest in.
There's restrictions on whatthey can do with the money,
how much fees they can make.

(27:13):
And so what we wanted to focus onwere multi-employer pension plans that
didn't receive the cash yet becausewe thought that was the cleanest group
where expectations would be revised.
And then we try to focus on, what group isnot affected at all by this pension plan?
And so we look at singleemployer pension plans.
Those are the more traditional ones.
You have one firm one plan.

(27:33):
There was no bail out there.
The funding within thePBGC is really good.
They're well funded plans on average andwe try to understand, before and after,
how does behavior change for that groupthat has revised expectations of bailouts?
So that's the setting.
So we're going to look at the twoyears after the passage of the ARP,

(27:54):
and then we're going to look at thingslike what are they, investing in?
Where are they investing their assets?
Is it going to be in super conservativethings like cash, like government debt,
or is it going to be more aggressivethings like equity, private equity?
So we're going to look attheir, their asset allocations.

Veljko (28:11):
So you're trying to get a sense of how risky and
how aggressive they are, right?

Mike (28:15):
Right, right.
And a lot of this is, mightbe even human behavior.
If I engage in risk and I lose moneyon these investments, Uncle Sam is
there in the future to bail me out.
The one incentive, these plans are goingto have, even the ones that didn't get
bailed out, they're still underfunded, butthe incentive for these plans is that, if
I take on more risk and my assets go up,I have to pay less pension contributions

(28:39):
or I have more capital to pay off mypension contributions in the future.

Veljko (28:43):
You can just say they're revising their expectation of the likelihood of
a bailout coming into the future, right?
So they take on a little bit more risk.

Mike (28:51):
Yeah, no, that's right.

Veljko (28:52):
But you know, I know how I feel right now about paying
my kids college fees, right?
There have been a coupleof bailouts, right?
Of people that took student loans, right?

Mike (29:05):
A hundred percent.

Veljko (29:06):
And right now I feel like an idiot for paying for college in the first place.
So I'm wondering if there'ssomething similar here with
this pension funds going...
we were the well behaved ones.
We didn't overpay ourselves.
We didn't boost our earningsby taking outside risks and
there's no reward, right?
Or rather the rewards are going tothe unethical and professional ones.

(29:27):
And so who am I being an idiotfor being well governed, right?
But I guess it leads usto the same spot, right?
But different nuance.

Mike (29:35):
We end up in the same spot, and you can see that even in the
student loan sector now, right?
The repayment rates have gone downbecause there's some expectation
of future government intervention.
And so, yeah, what you're seeingnow is very similar to what
we see in the pension sector.
So the first thing we lookat is asset allocations.
And what we find is the group,these multi-employer pension plans,

(29:58):
after the ARP, tend to engage in,they have riskier asset holdings.
What I mean by riskier, things likeinvestment in equity, in particular
investment in private equity.
That goes up relative to singleemployer plans, which don't have this
revised expectation after the ARP.
So that's the first main findingthat there's an uptick in
risk that wasn't there before.

Veljko (30:20):
This part of your findings, I don't know how to feel about managers.
Because in some sense I'm going,well, you're taking advantage of
taxpayers to some extent, right?
And yet this sounds consistentwith your fiduciary duty to
the pension fund member, right?
I mean, all else equal, a highprobability of a bailout, I should

(30:40):
take a little bit more risk evenif I'm objectively maximizing the
objective function of my savers, right?
Or or my pension found members.
And so here I'm, if there is anyadverse consequences, I'm tempted to
blame the regulators more than I'mtempted to blame the fund managers

(31:02):
that are taking advantage of it, right?

Mike (31:05):
Yeah.

Veljko (31:05):
But I know you have another layer of findings that seems
to cast a little bit of a lesspositive light on managers, right?

Mike (31:12):
Let's stick on that point because I think it's super interesting
because this paper is essentially,fundamentally about moral hazard.
Moral hazard being you're goingto act in such a way that a party
that was not really involved inthat decision bears the costs.
And here's the taxpayers , as yoUSaid.
So on that point, what, Are thesemanagers acting in terms of maximizing

(31:38):
or just good fiduciary duty?
And I think I'd have two things Iwant to quibble with you about that.
And I'd love your opinion.
On the equity side.
I would say I wholeheartedly agree that,with this revised expectation of a future
bailout, then, well, maybe I should takea lot more risk as yoUSaid, but what's
interesting about our study is whenwe really get into the nuts and bolts

(32:01):
where yoUSee the biggest increases onthe PE side, you're going to know from
the finance literature that PE returns,typically they don't outperform, but
one thing they clearly do is cost more.
And so investment fees go up a lot.
And so if that's benefiting retirees,I'm not sure because there's a pool of
money and there's now a bigger slicebeing paid out to investment managers.

(32:24):
So that's not great.
And then the second thing that arethe managers acting in the way to
maximize fiduciary duty, I'm not sure.
Because when you're engaging in morerisk and the bottom falls out, we don't
know are we going to have a purelyDemocratic led house Senate and President?

(32:46):
This was a very unique situation,it was an era in the United
States where there's a lot offree money through COVID stimulus.
So even though they have revisedexpectation of future bailouts,
it's still not a hundred percent.
In particular, if these plansunderperform again, are we
really going to pay them again?
I really don't know.

Veljko (33:03):
And yet, in some sense, Mike, all that's equal, the probability
is a little bit higher, right?

Mike (33:07):
Yep, that's right.

Veljko (33:09):
And I do feel like you are trying to have your lunch and eat it too, right?
Because on one side you're sayingthere's a higher expectation of bailouts,
which creates moral hazard, right?
But okay, fair enough.
I do understand when you're sayingthis might not ultimately be in their
own self interest and you're sayingthey're increasing, potentially their
own fees and revenues to the financialsector by allocating to private equity.

(33:32):
But I think you have alsosome other results that speak
directly to fees, right?

Mike (33:36):
Yeah.
Yep.
That's right.
So we also find that fees go up andso fees are going to be, are going
to be a mix of administrative fees.
And so those are for the sponsors ofthe plan and also investment fees.
And we see that multi-employerplans, their fees go up relative
to single employer plansafter the passage of the ARP.

Veljko (33:55):
Fair enough.

Mike (33:56):
I think the clearest evidence that we have of moral
hazard is there's great data.
This data comes, it'sall publicly available.
These are called the form5, 500 and there's a box.
It's an indicator variable or a zeroone that says, did these pension
plans change their pension planagreement such that benefits increased?

(34:17):
Yes, no.
Did these plans change their agreementsuch that benefits decreased?
And so there's a couple boxes andwhat we find, multi-employer plans
after the ARP are more likely toincrease benefits, as compared to
single employer plans after the rule.

Veljko (34:32):
Which again goes back to that fiduciary duty, right?

Mike (34:34):
We don't have to quibble on whether the managers are executing their duty.
As empiricists, we just test things.
We wanted to see what happenedafter, after these, this
massive regulatory change.
And this is what we find.
And we find it interesting whetheror not it's, you know, good
behavior on the fiduciary side.
I think you and I will argueabout which is totally fine.
Whether this is good for taxpayers.

(34:55):
We bear the brunt of this Veljko. And that's frustrating because as
yoUSaid, we're rewarding bad behavior.

Veljko (35:01):
Yeah, I'm not going to quibble with that part
of your findings, certainly.
I find the details of what you do inyour analysis extremely interesting
and extremely intriguing and Ifind the results very convincing.
There are a couple of things,if I were to nitpick here.
One of the things that keeps going tomy mind when I look at this paper is,
I still don't know why some of theseplans are getting aid and some are not.

(35:24):
There is a hint there thatthere is an application process.
So they do have to actually apply for SFA?
But I'm still stuck into, is theresomething fundamentally different about
the multi employee pension plans that donot apply for aid and do not receive it?
I constantly have this lingering questionand I know you do a lot, statistically

(35:45):
to dispel these doubts, with, paralleltrends, assumptions and whatnot.

Mike (35:50):
Yeah.
No, that's good.
You're a good researcher Veljkobecause that's probably the number
one question is, you know, is itfundamentals or are just these
multi-employer pension plans so different?
Let's start with the first question,it's how do we get this funding.
The way it got set up, the guarantor, thePension Benefit Guarantee Corporation,
took applications, and the applications,whether or not I get what's referred

(36:13):
to as "Special Financial Assistance,"it's going to be dictated by how
well funded your pension plan is.
Basically, am I going to run out of money?
Within the next 30 years as the criteria.
And so the way that the governmentdictated, there's a couple of different
rules, but the hard and fast rules aredictated by what was your pension status.

(36:36):
They tried to prevent firmsfrom manipulating this stuff.
And so the rule change happened in 2021.
You're going to use criteria from 2019.
What are your pension assets?
What are your pension liabilities?
And so if your funding ratiowas below a certain level.
Meaning, I'm going to take your pensionassets, divide it by the present

(36:58):
value of your pension liabilities.
If that's below a certain threshold,you can become eligible for a
special financial assistance.

Veljko (37:04):
So you can't all of a sudden just lower your discount
rate and make yourself look worse

Mike (37:09):
No.

Veljko (37:10):
But you do have some findings later on in the paper
where they do exactly that...

Mike (37:13):
So, yeah, I'm glad you read the paper so thoroughly, Veljko

Veljko (37:18):
Actually, Kate sent me some notes.

Mike (37:20):
Okay, cool.

Veljko (37:20):
Kate read the paper very carefully, yes.

Mike (37:23):
The only thing that, where you have a little bit of flexibility
is on your discount rates.
And so there is a little bit offlexibility and that's your discount
rate here is gonna be based on yourexpected return on plan assets.
And so there are two criteria in which ifyou basically lower your discount rate.

(37:49):
You can get below one of these key fundingthresholds, but for that for it's only
that's only available for a handfulof pension plans, Because you have to
be close to these one of these fundingthresholds The time to apply for special
financial assistance is through the endof, I think they can apply through 2025.
So the majority of plans are sortof locked in where they either

(38:11):
get benefits or they don't.
There's a couple of criteria that aregoing to be based on your funding ratio.
And for those plans that have somewiggle room, we're talking basis points.
We see some evidence of those plans arereally close to becoming eligible tend
to press their discount rates downward.

Veljko (38:28):
No, that's really fascinating.
But, I guess one of the reasons whyI keep coming back to, why some of
these plans are getting aid and someare not, is because when Kate read
your paper carefully, we noticed thatthe plans that actually do receive
bailouts, the SFA, they actuallyare not increasing risk behavior.

(38:50):
If anything, they seemto be buying more bonds.
And they don't increaseadministrative fees.
It's the one they're not receiving.
that are engaging into thiskind of behavior, right?
So, to play devil's advocate here, areyou being a little bit unfair here?
Because the actual recipients ofthe program are behaving well.

(39:11):
And is that a problem here?
That the program is discretionary?
In a sense, I remember, A long time ago,trying to write a paper about TARP, the
Troubled Asset Relief Program, right?
Following 2007, 2009.
And one of the controversialprovisions there was every

(39:32):
bank had to accept it, right?
Because it didn't want tohave this kind of moral hazard
incentives on the ones that didn't.
Now, as you already hinted at earlier,pensions and banks are not the same
and there are a lot more collectiveaction problems with banks and whatnot.
And yet it does strike me, it's one ofthe lessons, if the moral hazard problems

(39:56):
here are particularly hitting the fundsthat are not receiving aid, would a
better approach have been inject cash inevery single multi employee pension plan?

Mike (40:04):
Interesting.
So the one thing I would say that thegovernment should pat their back on,
you make a very salient observation thatthose plans that received the bailout
funding seem to be acting better.
One of the reasons you see that is becausethey're contractually obligated to.
So when you get this funding,you have to put two thirds of it

(40:25):
into safe debt based securities.
So they're not allowedto invest in all equity.
There's also maximums where theycan charge for administrative fees.
And so I think there is some goodcongressional input that came out of it,
that those that got funding were limitedin the ways they can use those funds.
And so I think from a legislativestandpoint, those were good additions

(40:51):
to the bill, but it's also difficultto interpret that, those that are
getting funding are behaving better.
Yeah, because they have to.
You know, not because they wantto, but there are some regulatory
tweaks in there that, that I thinksort of force better behavior.

Veljko (41:06):
I know that, I've been reading a lot of commentary on this and a
lot of this commentary is political.
This is a political act after all.
And, some of this commentary was faultingthe Biden administration for injecting
money without fixing the problem, right?
And my first instinct was, yeah, that'sexactly what this feels like, right?

(41:28):
And but yet a more careful reading ofyour findings, leaves me a little bit
more nuanced here because the fundsthat are actually taking the money
are being asked to change behavior andthey do seem to be changing behavior
in a positive direction, right?
And again, stop me if you don't wantto go there yet, but at some point in

(41:48):
this conversation, I would love to askyou, I guess it's a joint question.
The first part is, are bailouts necessary?
And the second one is, is this acriticism of bailouts in general?
Is this a criticism of thisparticular bailout program?
I mean, what do I takeaway from here, right?

(42:09):
And maybe we can step back a moment.
When I read your paper, I find that,you know, you're staying nuanced.
But I caught you once in the paperwhere you called ARP a "firestorm
of moral hazard, where sponsors,administrators, and union leaders
engaged in numerous risk-shiftingand self-serving behaviors," right?

(42:33):
But no, I like strong statements.
So I was happy to find that in there.
But, so the take away here isa bailout creates moral hazard.

Mike (42:44):
That's right.
Yeah.

Veljko (42:45):
And, you know, I don't want to take away anything from
your contribution in the sense.
This is an important program.
It's a big one.
Your evidence is strongand well identified.
Where, what I have, a little bitmore questions really is, what are
the alternatives, is moral hazard justinevitable and we just have to find a

(43:05):
way to design a bailout that generatesthe least amount of moral hazard...
Or what am I taking away from this?
Bailouts, there's abetter way of doing it?

Mike (43:14):
Probably the latter.
What we thought was interesting aboutthis sector independently, seeing
it from banking, it's the firsttime ever in the pension sector.
And there's another bailout potentiallycoming, which is what sort of, Josh Rauh
had forewarned about on the public sector.
So you have plans like Chicago andthese are trillions of dollars.
This unusual subset of plans,multi-employer private sector, it's

(43:39):
probably a sixth of the size, but it'sa good microcosm of what maybe we can
expect from behavior in the future.
And so you're right that, for the plansthat got bailed out so far, we have not
seen adverse behavior, but anecdotallywe're still seeing bankruptcies.

Veljko (43:56):
Sure.

Mike (43:56):
Yellow, is a major transportation company.
They went bankrupt.
They got funding.
And so what our quibble with thisbailout, it's only a temporary fix.
It gives these plans 30 years of capital.
And so you essentially kick the candown the road for the next generation.
So in 30 years, they'regoing to run out of funding.

(44:18):
And so it's a temporary fix, though, maybeif there's a, it's a medium fix, right?
It's not short term.
It's not long term.
It's a medium fix.

Veljko (44:27):
Even fix feels generous, but more of a fix is a plug, right?
I mean, you're not really fixing anything.
You're just bailing a little bit of water.
It's still leaking at thesame speed in some sense.

Mike (44:38):
And we thought it was going to be different.
One of the reasons we thoughtabout, what have we seen in the
banking sector generally you've seenbailouts, increased moral hazard.

Veljko (44:46):
Sure.

Mike (44:47):
And so we thought, there's two big differences in the pension sector
that you don't see in the bankingsector . One, you have unions involved,
and it's a little bit different.
We weren't sure if the unions would beas risk seeking, and so we thought they
might create a hedge against increasingequity allocations, increasing P.
E.
allocations.

(45:07):
You know, ex ante in our hypothesis.
That wasn't the case.
It seems like the unions were okaywith it, which was a surprise to us.
And second, there's very strictfiduciary responsibilities.
And so I think that was one of thecriteria that I thought distinguished us
is there's very strict under these ERISAregs about how much I can contribute.
You need to keep a balancedasset allocation portfolio.

(45:30):
You need to maximize, returns, not takeon excess risk and then minimize costs.
And we don't see aminimization of costs for sure.
Cause we see administrativefees, their fees go up.
And so I think those were thetwo distinguishing criteria that
we thought were interesting.
But it's fair to give us a debateon, is this what you expected?

(45:51):
I think when we've presented this paperin workshops, what's cool about this paper
is we get two very distinct viewpoints.
We have some audience members thatsay, well, Mike, this is obvious.
We've seen this in the banking sector.
And then, the person nextto them says, there's no way
this increases moral hazard.
And so I think from the audience,we've been happy with that.

Veljko (46:11):
I was trying to wrap my head around it too.
And it's such a very differenttake on moral hazard, right?
Because when you're thinking about thebanking sector, you're always thinking
about depositors making their owndecision, and how we avoid bank runs.
And here with these pension plans,the participants are captive.

(46:32):
You're not expecting the participantsto bail out and walk to a better
found because it's better funded,they just don't have that option.
It almost feels like the more youknow about this literature, the
less it feels the same, right?
At first you go yeah, of course,moral hazard, both sides, right?
And yet the more you think about it,the more you realize that the mechanisms

(46:54):
for moral hazards that are there inthe banking sector are not here, right?

Mike (46:58):
Yeah.
And one more thing on that argument,when I was talking to a bank researcher,
they're like, well, Mike, this isnothing like banking, because when
yoUSee bailouts in the bank sector,it's related to systemic risk.
There's not systemic risk here.
This is a sort of subset ofretirees that aren't getting money.
His argument was this bailout is moreexogenous than what yoUSee in the

(47:19):
banking sector because it's not systemic.
And then there's a lower probability,maybe I'm speaking on both ends here, but
there's not a guarantee of this happeningin the future, particularly because it was
sort of thrown into a COVID stimulus bill.
Will the next pensionbailout look like this?
Probably not.
This was a very uniquetime in the United States.

Veljko (47:37):
But okay, to go back to what's the alternative, right?
So 69 billion dollars, 1.
2 million participants, 60,000dollars per participant.
I'm going to wager that if youhad actually, you know, polled
people and asked, do you want us torecapitalize your pension fund or to
send you a check of 60,000 dollars?

(47:59):
I suspect most people would havetaken the 60,000 dollars check, right?

Mike (48:03):
That's right.
That's right.

Veljko (48:04):
Do you guys have a view on this?
This is a massive amount of money.
Would it be a better idea to justwrite a check to people and let
them manage their own pension funds?
Why are we bailing out these pensionfunds instead of bailing out people?

Mike (48:14):
No, that's a very good point.
So, when you read through some ofthe Congressional testimony in the
Butch Lewis Act, some of the actuariesand some of the pension experts were
saying, well, you know, a bailoutfundamentally shifts incentives.
And so, if we're bailing out butnot fixing the problem, you're
going to have these issues.

(48:35):
And so, there's other things thatdidn't change that don't exist
in the multi-employer group thatexists in the single employer.
For instance, under the single employergroup, you have to make contributions
based on a function of your underfunding.
And so basically you take theunderfunding loosely speaking, you
divide it by seven and there's a tranche.

(48:55):
You have to pay that.
So.
You're forced to play catch up.
That doesn't exist in themulti-employer pension plan sector.
The real rule, the rules are that it hasto be contractually negotiated between
the union and the firm such that theplan eventually becomes fully funded.

Veljko (49:11):
To me, that sounds like unions have a lot of lobbying power and
they were able to extract benefits.
I'm not sure about thewelfare optimality, right?
But which goes back to the samequestion of, at this point, why
are we bailing them out again?
I really got stuck in this labordepartment report published
on November 1st, right?
Of 2024, which again, I thought thatthe timing was very suspicious, right?

(49:36):
You have this thing going onfor a couple of years and right
heading into an election, you'rehighlighting the benefits, right?
But the report startswith actually anecdotes.
They're talking about John Smith, whocouldn't afford the medical operation
and Joe Doe, who didn't have enough moneyto send their kids to school, right?

(50:00):
And so they're making this very, personal,that they're putting a face to this.
And they're constantly portrayingthis whole plan as being something
given to the people, right?
We are bailing out people, right?

Mike (50:15):
Yeah.

Veljko (50:16):
And yet, In the back of my mind, there is another spin off.
You're bailing out firms, orrather you're allowing firms
to under fund pension plans.
Nowhere in these White House andLabor Department reports, is there

(50:36):
any hint to the fact that there arebenefits accruing here to employers?
It's all about the little guy, right?

Mike (50:42):
Right.

Veljko (50:43):
And okay, I get the political spin, but I'm still struggling
with wrapping my head around this.
Who's the big winner here, Mike?
Is it the workers that, areclearly the recapitalization of the
fund is helping them out, right?
Or is it the firms that, are now

(51:03):
going forward going to keepunderfunding these funds?
And you're hinting at the Miller andModigliani equilibrium here, right?
Where employers are going to expecta higher level of pay if they know
the pension fund is underfunded.
And of course, that requires some heroicassumptions about discount rates and,

(51:24):
full transparency and full understanding.
But even if you assume all ofthese, I don't think, you know,
that's the way people think.
How did you guys think, I mean,is this a benefit to workers?
These are benefits to firms?

Mike (51:35):
That's great questions.
When we put together these winnerand loser columns, I would say clear
winners would be retirees, right?
They were going to run out of money.
There's no money toback it up in Congress.
And so clearly the workers benefited,maybe not as much as your alternative
solution of giving them checks.
Maybe that would have been better off.
There's no increase in fees.

(51:55):
There's less risk, right?
They just get cash.
And so I think workers won to some extent.
I think firms won to some extent becausethey got free money from the government.
I mean that people likefree, I like free money.
But the losers are pretty interesting.
I think the losers for sure are taxpayers.
Number one.
So we have some of our taxmoney being given to bad actors.

(52:18):
I don't think that's great.
And the second interesting loserI think is the political party.
What was super interesting about this andwhat I find still fascinating, this was
essentially a democratic bill, 80 billion.
The biggest recipient ofthis funding were Teamsters.
Okay.
So teamsters were oneof the biggest bailouts.

(52:39):
They did not endorse KamalaHarris this past political cycle.

Veljko (52:43):
I love the fact that you're going, I was going to wonder if you were going
to be willing to go there and because Ihad a whole list of questions about it.

Mike (52:50):
It's fascinating, right?
They paid essentially forvotes and they didn't get them.

Veljko (52:54):
And they paid a lot.

Mike (52:56):
Yes.

Veljko (52:56):
This is a 60,000 dollars per vote, right?
And, I literally had that questionin front of me here, right?
It doesn't seem to have worked.

Mike (53:05):
No, no, but it depends.

Veljko (53:07):
Should Joe Biden have been a little bit smarter and signed
those checks with his name, right?

Mike (53:11):
Yeah, maybe that political process, maybe you're right, Veljko.
If Biden just paid the workers directcash rather than it coming from this
weird regulatory firm based pensionpayment, maybe it would have worked
out better for the political party.
Cause it doesn't seem like thedemocratic party got an ROI
from this hugely costly bailout.

Veljko (53:34):
I think you could also argue that there still would have been some
moral hazard if they had done that.
And yet, perhaps moral hazard fromthe point of view of the firm, this
feels like they can still underfund.
And yet, if I'm a fund administrator,and the cash is going straight
to people, that's not creatingmoral hazard to me, right?
So at least you would haveavoided that shift to riskier

(53:57):
investments, in many ways, right?
So yeah, it seems like itwas a bit clumsy in that way.
But
I guess there is also scale issue herethat we really haven't spoken about.
We are identifying theproblem in trillions.
We are talking aboutsolutions in billions, right?

Mike (54:19):
Yeah.

Veljko (54:21):
I know how the Labor Department report highlighted,
specific states and they kept makinga big deal about how big one impact
this was in Pennsylvania, right?
Which was, of course, a very contestedstate, I think they highlighted
that, Pennsylvania had 65, 000recipients, and they kept highlighting
that in press reports and whatnot.

(54:42):
Since we are at this hyperpolitical part of the conversation,
let me ask you about this.
This is the part that did strike me.
I'm not going to put words intoyour mouth, but I think that you
lean a little bit more right than I.

Mike (54:55):
Right.
I think that's fair.

Veljko (54:56):
Yeah.
And, I don't even know how toidentify myself politically, because
I feel like I don't belong toeither party in the United States.
And yet I do feel like I'm alittle bit left of center nowadays.
And I recently wrote a paper on tradetariff exemptions that was extremely

(55:16):
critical of what the Trump administrationdid in 2018 2019 on the Chinese tariffs,
effectively what we are showing in ourpaper is that firms that contributed to
Republican politicians, were actuallya lot more likely to get exemptions
under this Republican administration,firms that contributed to Democrats were

(55:38):
less likely to get exemptions, right?
So A paper that's somehowcritical of behavior of the
Trump administration, right?
And I strongly believe in thedepth of my heart that I'm trying
to objectively present facts.
Right?

Mike (55:55):
Yep.

Veljko (55:55):
And, and I do believe that the facts that we are presenting in that
paper are absolutely correct and asmuch as possible free of bias, right?
You are now writing a paperabout something bad that happened
under a Democrat
administration.
And I know you as a researcher.
I know your heart is that, Iknow that you are free of bias

(56:18):
when you are analyzing your data.
And yet Are we both guiltyof editorializing in choosing
the stuff that we work on?
And are you in any way, shape or formsecond guessing yourself because of that?

Mike (56:33):
Uh, yeah, this is a fair point.
When you do a lot of researchon regulatory changes.
Sure.
You try to come in unbiased, but youtry to pick areas of interest that
are maybe not politically sensitive,but of interest to the business press.
And so I think I founddifferent regulations.

(56:55):
I've done a lot ofresearch on the Jobs act.
That was an Obama act that was successful.
We find evidence that it increased IPOs.
And so I found some evidencethat deregulation from
Democrats has been a good thing.
And so we've also done research on SPACs.
Our research on SPACs say maybeSPACs weren't all that great.
And, and so I, I've done severaldifferent research, you and I have

(57:21):
been doing research long enough wherewe're going to do studies on Democratic
regimes and Republican regimes.
Of course.
So I think the time series makesme less worried about that.
You just, your research, like myresearch, you come up with an interesting
question and research design and youjust let the data tell the story.
And I think that's what we had here.

Veljko (57:40):
No, I mean, I appreciate you saying that.
And I think that in many ways,that's exactly the same way I
would have answered that questionif somebody, you know, asked me.
I'm genuinely, becoming a littlebit more self conscious about my
own biases in some sense, right?
God knows that when yoUStartdoing research about, as you say,
regulatory changes, unintendedconsequences of politics, you do

(58:02):
find dirt on both sides, right?
And yet it's interesting that,in our objectivity, you have
ended up with a paper criticalof a left wing administration.
And I ended up with a paper criticalof a right wing administration.
Now, you have a better defense to it.
You're saying, you have other workon the other side of the spectrum.
I don't even have that defense.

(58:23):
I have started to second guess myself.
YoUStay as objective as possiblein the treatment of the topic.
And yet, our time is limitedand there is a subjectivity in
the choice of topic you cover..
And that's where I'm secondguessing my own biases.
Let me just put it that way.

(58:44):
But I guess a little bit of soulsearching is always going to help.

Mike (58:48):
But let's talk a little bit bigger.
There's a publication bias inthe field where in a couple of
different ways, number one, it'sreally hard to publish null results.
And it's just the way it is.
And so we did this study and we didn'tfind a shift in moral hazard that would
just be shelved in our desk or on ourdatabases and it wouldn't be published.

(59:08):
And that's, it's a sad state of affairs,but that's sort of the way it works
in social sciences, unfortunately.
And there's also a bias where you'regoing to have a hard time publishing
things that go against the viewsof the editor, which are oftentimes
randomly assigned to the reviewer.
And so if you're doing a paper ongender or diversity, and you find

(59:32):
that gender or diversity are bad forwhatever reason, I don't do studies
in those areas, I think that paperwould be really hard to publish.
And I think some of thatis publication bias.
And so am I self consciousabout my research topics?
I tend not to be, I think tenure sortof protects us on that kind of stuff.
So I've never really been worried aboutit, but I would be absolutely cautious

(59:54):
to publish a paper that was extreme, if Ifound evidence, even if I believe in that
evidence, it was extremely controversial.
I think that would sortof get me in hot water.

Veljko (01:00:04):
All right.
That's, and you don't meancontroversial politically.

Mike (01:00:08):
Right.
I mean, more socially.
I think it's a little harderbecause the world is so split,
50 50 between left and right.
And I think you and I areboth closer to the center.
Sure.
So those kind of topics,I might get rejected by a
biased editor and that's okay.
But I think the next time I submit,maybe I'll get a better shake,
but something that's more sociallycontroversial, I think I would be

(01:00:32):
worried about trying to publish.

Veljko (01:00:34):
And yet, that's a sad statement about our profession.

Mike (01:00:38):
Yeah

Veljko (01:00:38):
Because we should be able to ask the tough questions, right?

Mike (01:00:42):
Right, right.

Veljko (01:00:43):
But yeah, fair enough.
I won't say I disagree with you.
I mean, I think I do feelabout it very similarly.
So, let me let me go throughsome quick questions here for you.
The first one is, when you talk aboutthe contributions of your paper, you
said your paper should be of interest toscholars, regulators, and practitioners.
Which I think is a very honest assessment,and yet, as a taxpayer, I'm pissed, right?

(01:01:09):
I mean, a lot of our listeners arenot scholars, they're not regulators,
and they're not practitioners.
And yet, I suspect most ofus are taxpayers, right?
What do we take away from this?
Are we just pissed andsharpening the pitchforks?

Mike (01:01:25):
Yeah.
I mean, we're supposed tovote with our feet, right?
Isn't that the argument?
So as taxpayers, and maybe that shouldbe another comma in the contribution
section, but the public in generalshould be aware of this regulation
because it is taxpayer money and Idon't think it's being spent optimally.
And, you know, if you're upset withcertain regulation, then you vote . And

(01:01:49):
right now it seems like people havebeen doing that to various extents.

Veljko (01:01:53):
Of all the determinants of the last election, the American
Rescue Plan, I don't know Mike, butno, big picture, I agree though.
All right.
So if we were to try a scale of one to10, where 10 you're like happy and one
you're ready to burn the world down.
How happy upset should I be about this?

(01:02:13):
If I'm group A, a union member whose planis directly affected, it gets a bailout.
Am I a 10?

Mike (01:02:22):
You're not a 10 because I actually like your alternative
story of straight cash.
I think that's better.
So you're not a 10, butyou're probably an eight.

Veljko (01:02:31):
Okay.

Mike (01:02:31):
Particularly for the retirees.
It makes funding for 30 years,which is probably going to span
the life of a lot of the retirees.
And so your hard, hard earned moneywill be secure the rest of your life.

Veljko (01:02:44):
So what about a union member of a plan that wasn't bailed out?

Mike (01:02:50):
I would say you are still happy I would say because you
have a new government backstop.
The PBGC is running out of money.
Maybe your friends and colleagueshave been worried about the
security of their pension plan.
And so it seems like there's newsecurity that didn't exist before.
And so I would put you not as aneight, but let's call it a six.

Veljko (01:03:11):
Fair enough.
What about a firm that has an MEPP?
I'm the CEO of a firm that hasa multi employee pension plan.

Mike (01:03:20):
I think they're the biggest winners.
I would put them as a 10.

Veljko (01:03:22):
Yeah, that's, that, that's my sense too.
And finally, taxpayers.

Mike (01:03:27):
It didn't make you happy.
Where are you on the scale, Veljko?

Veljko (01:03:30):
Oh, I'm sharpening the pitchforks.
No jokes aside.
I thought, it wasn't just the plan itself.
When I was looking at the details of thisplan, there was a lot that bothered me
and what bothers me more than anythingis, the bailout without the reform.
And it's like it's just reallyremindful of what happened with the

(01:03:52):
bailouts of student loans, right?
You know, let's just give a bit of cashfor everybody buy a bunch of votes and
not change absolutely anything, right?

Mike (01:04:01):
What's frustrating about that , but it's certain people, right?
It's not everybody.
Union representation orpeople that went to college.
And so it's selectivebailouts, which are not fair.

Veljko (01:04:11):
I agree with you a hundred percent on that point.
Yet, there is also, in the back of myhead, a small voice that keeps asking,
is there a better alternative, right?
And I also, I'm sensitive tothe narrative of there have been
some mistakes made in the past.
They're not necessarily the responsibilityof the workers that are affected by them.

(01:04:33):
And, there is a little bit of humanityleft in me, even after the Ph.
D.
and all these research years to say, well,maybe some people need some help, right?
And, you know, without takingaway, anything from your
moral hazard findings, right?
But perhaps there just isn't a better wayof doing this and we have to face some of

(01:04:56):
the adverse consequences of moral hazard

Mike (01:04:58):
We're not running a switching regression where we can see what
would have happened if regulationwas put together this way.

Veljko (01:05:04):
Sure.

Mike (01:05:05):
I would have been curious to see what would have happened with the non
bailed out plans if a loan was requiredinstead of just a cash infusion.

Veljko (01:05:12):
Okay.
Yeah, I love that.

Mike (01:05:13):
That would have been super cool and your alternative explanation
of straight cash to the retirees.
I don't know if firms would act thesame way if it's a straight cash
bailout because the firm, well, Iguess their liabilities are reduced
anyways, because you're, you'reproviding cash infusion, but I think
a loan would be pretty interesting.
Maybe it wouldn't be as aggressive

Veljko (01:05:35):
I'm not sure, I mean, by the cash infusion, I meant, a cash infusion to
people, so I'm not sure that, liabilitiesof the patient fund will be reduced.
Yeah, one thing that strike me is, Ifound an article in Forbes, and this
was actually talking about the CentralStates bailout, which was a almost like
a third of the ARP all together, right?
And it's quite nasty in the detailswhen yoUStart looking at it,
because again, that's the one Iwas not remembering earlier, right?

(01:05:58):
The Hoffa affiliated one.
And, okay.
But, what did strike me is aninterview, with somebody named,
I can't find the first name.
Last name is Godbaum and he's theformer Director of the Pension
Benefit Guaranty Corporation.
And, he actually comments on theARP by saying "what's worth noting,"

(01:06:19):
and I'm quoting him here, "what'sworth noting is that the bailouts
create incentives for reform.
And he says, this isessentially a 30 year fix.
Any pension plan that thinksthere's going to be another one
in 30 years is kidding themselves.
They know they have to get to their housesin order," But it's actually interesting
because he's not the only voice.

(01:06:40):
if you actually read some of theregulatory documents, they're actually
saying there is signal and shame,I guess, in receiving this bailout,
which is going to create discipline.
And, I was just wondering, haveyou guys found these arguments on
the other side of the spectrum thatsaying a bailout actually increases

(01:07:02):
discipline and I wish our listenerscould see you, your body language
says everything about what you thinkabout this argument, but, any comments

Mike (01:07:11):
yet to your point earlier, it's not a fix.
It's a plug in 30 years.
So the way that SFA works, these cashinfusion, the amount of money you get
as a bailed out firm only guaranteesthat you have enough money to pay out
disbursements over the next 30 years.
Beyond that, it's.

Veljko (01:07:32):
Sure.

Mike (01:07:32):
You're blank again.
You're out of money.

Veljko (01:07:34):
30 years, 30 years is most people's professional lives, right?

Mike (01:07:38):
That's right.
But firms last forever though.
I shouldn't say that, but if wedo a discounted cashflow analysis,

Veljko (01:07:45):
I'm used to treating firms as perpetuities and yet I
also know that the incentives ofmanagers are not always aligned
with the incentives of firms, right?
I get it from the point of viewof the firm, 30 years is nothing.
But from the point of view of any humanfacing agency costs, 30 years is eternity.

Mike (01:08:03):
I think towards Josh's points, there are some restrictions within
the Regulation that restrains theability of the plans that got bailed
out to, it restrains our abilityto invest aggressively, restrains
benefits, restrains administrative fees.

(01:08:24):
But what we study are those thathave revised expectations, right?
And so we find that the incentive togamble goes up for those recipients
that have not yet received bailouts,which I don't think is good to the
extent that there's another huge.
Financial crisis and the stockmarket tanks again, these plans
are over investing equity willbe disproportionately hurt.

(01:08:46):
And so maybe Josh is right thatnext 30 years, these plans will
be safe, but there's a lot ofmulti-employer pension plans out there.
And a lot of them don't haveenough assets to meet their
future obligations at this point.

Veljko (01:08:58):
Many other countries in the world put everybody under
the same pension system, right?
And, it seems to me like some of theissues here are from the fact that,
you're building out some workers,you're creating more hazards for the
ones that are not bailed out, right?
One solution to this islet's bail out everybody.

(01:09:21):
Another solution to this is, should wejust have a national pension system?

Mike (01:09:27):
If you believe that things operated by the government are run more
efficiently, then you know, maybe be anadvocate of that, but okay, tend to be
a Rochester free markets kind of guy.
And so I don't know if that'sthe best sort of solution
for these kind of problems.

Veljko (01:09:43):
Fair enough.
Fair enough.
And for full disclosure, Ispent the last 20 years writing
about government inefficiencies.
But, we are actually putting togetheranother episode for Questions in
Finance which is going to deal withthe more direct question of was
the shift from defined benefits todefine contributions a mistake, right?

(01:10:06):
And without giving everythingaway, we do have at least some
research finding that the shift ledto a lot of underfunding, right?
And perhaps a little bit more risk.
Any thoughts in regards or is that tooabstract from where your research is at?

Mike (01:10:24):
Cliff Smith, who's a famous corporate finance professor of
Rochester always said sort oftongue in cheek options have value.
And so I think it's nice for when youstarted at Buffalo, when I started at
Buffalo, we had a choice between DBdefined benefit, defined contribution.
I appreciate the choice.
I went for a defined contributionplan because I like having

(01:10:49):
things under my control.
I also thought there was a lowprobability of me getting tenure.
And things work out.
So it worked out.
Did you choose DB or dC?

Veljko (01:10:58):
I also chose the defined contributions.
Which makes me a hypocrite.
Given that now I'm critical of the shift.
And yet that's an interesting point.
That's a good way tothink about it, right?
Okay, fair enough, Mike.
Is there anything that we haven'ttouched upon that you were
hoping to talk with us today?

Mike (01:11:18):
No, I think you did a good job covering it.
I also want to thank Kate foractually reading my paper.
So good on you, Kate.
But yeah, it was, super fun to talkabout, pensions and our research.

Veljko (01:11:29):
No, thank you very much, Mike.
And by all means, it was funfor us as well, or fun for me.
And, we will rely yourthanks to Kate, of course.
I hope that one day you're goingto come back and talk to us,
about some of the other veryinteresting research that you have.
I have always been fascinated byyour work on the Jobs Act, right?
But, thank you very much for takingthe time, for talking to us and good

(01:11:53):
luck with the publication process.
We know how challenging that is.
This is a great paper, but alittle bit of luck always helps.

Mike (01:12:00):
Thanks buddy.
I appreciate it.

Veljko (01:12:02):
Cheers.