We discuss pension system risk in the USA, focusing on the investment policy and the methodology for the valuation of the liabilities of the Pension Benefit Guaranty Corporation (PBGC). We offer suggestions as to how the PBGC should consider modifying the Pension Insurance Modeling System. The issues of investment policy and liability valuation are not two distinct topics. As emphasized here, the proper valuation of liabilities provides a benchmark for the PBGC to use as a starting point for the establishment of its investment policy and then for assessing investment performance.

Is financial literacy a substitute or complement for financial advice? We analyze the decision by consumers to seek financial advice in the form of credit counseling. Credit counseling is an important component of the consumer credit sector for consumers facing debt problems. Our analysis accounts for the endogeneity of an individual's financial situation to financial literacy, and the endogeneity of financial literacy to exposure to credit counseling. Results show counseling substitutes for financial literacy. Individuals with better literacy are 60% less likely to use credit counseling. These results suggest that credit counseling provides a safety net for poor financial literacy.

When a private pension plan sponsor with an underfunded plan becomes insolvent, the difference between the value of the plan's assets and its termination liabilities represents a liability for the Pension Benefit Guaranty Corporation (PBGC). Hence, accurately modeling the joint statistical distribution over time of defined benefit pension underfunding and sponsor terminations is critical for estimating PBGC's prospective cash flows and evaluating its financial position. It appears that the current Pension Insurance Modeling System (PIMS) approach to modeling risk does a reasonable job of capturing its statistical properties effects on PBGC cash flows, although some of the aspects might be improved, and metrics expanded. The present paper outlines, how an option-based approach to modeling the joint distribution of defaults and underfunding in PIMS might be implemented, while preserving the strengths of the current model. Moving to an option-based approach would allow PIMS to be used to estimate the fair values of future liabilities. Such an approach could have a significant effect on the perceived financial position of PBGC.

This paper studies how hyperbolic discounting affects stock market participation, asset allocation, and saving decisions over the life cycle in an economy with Epstein–Zin preferences. Hyperbolic discounting affects saving and portfolio decisions through at least two channels: (1) it lowers desired saving, which decreases financial wealth relative to future earnings; and (2) it lowers the incentive to pay a fixed cost to enter the stock market. We find that hyperbolic discounters accumulate less wealth relative to their geometric counterparts and that they participate in the stock market at a later age. Because they have lower levels of financial wealth relative to future earnings, hyperbolic discounters who do participate in the stock market tend to hold a higher share of equities, particularly in the retirement years. We find that increasing the elasticity of intertemporal substitution, holding risk aversion constant, greatly magnifies the impact of hyperbolic discounting on all of the model's decision rules and simulated levels of participation, allocation, and wealth. Finally, we introduce endogenous financial knowledge accumulation and find that hyperbolic discounting leads to lower financial literacy and inefficient stock market investment.

The Pension Benefit Guaranty Corporation's (PBGC) Pension Insurance Modeling System model has taken on the Herculean task of modeling in detail and under many scenarios the cash outflows associated with the pension obligations, they have assumed. This paper's comments are focused almost entirely upon the PBGC's termination liabilities, and address four pressing issues: (1) the need to discount the liability stream by current riskless interest rates instead of using corporate bond rates that reflect credit risk, call risk, and other risks, or using some ad hoc prescribed average of past rates; (2) the need to use a term structure of interest rates; (3) the need to employ more useful investment management benchmarks; and (4) how to implement a relevant and rigorous liability benchmark.

This paper studies the role of taxation and bequest motives in households’ demand for life insurance. We develop a stylized three-period life cycle model of life insurance demand and test its predictions regarding tax changes and bequests motives. An unexpected halving of the tax exemption limit for interest and dividend income in Germany allows us to identify the impact of changes in taxation on the demand for life insurance in a difference-in-differences setting. In line with our theoretical predictions, we document that ownership of life insurance products increased significantly among households affected by the reform. We also find some evidence of a more pronounced response among households with stronger bequest motives.