Dan thinks the PBGC is an arcane policy and Ippolito’s discussion of why there is an increasing likelihood that taxpayers “will eventually be called upon to provide a bailout” is certainly worth reading. In light of some GOP Social Security proposals to let individuals choose the upside potential of stocks, while having the Social Security be the ultimate guarantor, the following from Ippolito’s analysis is on target:
First, because the PBGC stands as the ultimate guarantor of companies’ pension liabilities, plan sponsors have an incentive to invest their assets in equities rather than fixed-income securities of the same duration as the liabilities.
What causes this incentive? Later, Ippolito explains:
the incentives companies have to engage in moral hazard behavior… Firms hope that the average return on stock they hold will over time exceed bond returns, in which case they can get away with contributing less to their pension funds. On average, that reasoning is correct. But it adds considerable exposure to the PBGC.
In other words, some of the GOP Social Security privatization proposals, like the current structure of PBGC, would give private agents an option where they capture the upside potential of higher risk-taking with the government bearing the downside risk. Now if one is wondering if this sounds like the mistake we made with FSLIC insurance, an oldie but a goldie from the Cato Institute by Andrew Biggs agrees.