Do Pension Bailouts Create Moral Hazard? With Michael Dambra

2025-01-05

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:

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

Bibliography:

Arrow, Kenneth J. "Uncertainty and the welfare economics of medical care." American Economic Review 53, no. 5 (1963): 941-973.

Dambra, Michael, Phillip J. Quinn, and John Wertz. "Economic consequences of pension bailouts: Evidence from the American Rescue Plan." Available at SSRN 4406502 (2023).

Novy‐Marx, Robert, and Joshua Rauh. "Public pension promises: How big are they and what are they worth?." The Journal of Finance 66, no. 4 (2011): 1211-1249.

Online Sources:

Department of Labor Report Links:

http://www.dol.gov/newsroom/releases/ebsa/ebsa2024

Soundtrack:

The soundtrack is based on "Walk on a Funky Street" by MondayHopes. Thanks for the music and keep up the good work! Use is under the Pixabay Content License.

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