ABSTRACT
There are practical and political reasons that the reform of pension investment practices is urgently needed. U.S. capital markets are increasingly short term and speculative, and pension funds increasingly contribute to this bias. In 1992, pension funds became, for the first time, a larger source of finance than commercial banks. At the same time, pension regulators ignore this role of the pension funds and the potential for pension funds to invest long term, a goal that is appropriate because pension funds have naturally long-term and predictable liabilities—workers’ future pension benefits.
The regulators also ignore workers’ needs for pension funds to be invested in ways that take into account their needs as participants, not just as future recipients of a pension check. To be sure, pension fund participants need their pensions to be wisely invested, but they also need continued employment to accrue pension credits. Pension investments can both earn a market rate of return and contribute to economic revitalization.
In addition, taxpayers should demand more from pension fund investments, because without government tax favoritism, most funds would not exist. Tax exemptions for pension fund earnings and contributions are the largest tax expenditure (loss of tax revenue) in the federal budget—$51 billion in 1992.
This chapter describes the role of pension funds in capital markets and the promising development in economically targeted investments (ETIs). Although we make policy recommendations for the federal government, we also encourage the maturation and fine-tuning of economically targeted investments on the state and local levels. We propose four regulatory changes that encourage fiduciaries both to develop a whole-participant, life-cycle portfolio strategy and to help move capital markets away from a short-term investment mentality as follows:
Mandate participant representation on corporate pension fund boards;
Provide strong incentives for long-term investing by taxing pension funds’ short-term gains and providing credits for long-term holdings;
288Develop rules and safe-harbor guidelines that encourage job-creating pension investments;
Via the Department of Labor, develop an intermediary, “broker” unit to make information available to pension fund managers about investment projects that promote long-term development.
