Professor Robert C. Merton
On the evening of October 18 2018, Robert C. Merton , the prestigious Nobel Laureate in economics, delivered a lecture specialized for Peking University in Auditorium Alibaba. As one of the Wealth Lecture Hall series lectures, this lecture was jointly organized by National Financial Center for Research at Peking University and Guanghua School of Management at Peking University in collaboration with Management Case Study Center at Peking University and China Management Modernization Association Equity Investment Committee. The host of the lecture was Professor Qiao Liu, who is the Dean of Guanghua School of Management at Peking University. Approximately 500 people, consisting of the faculties and the students from PKU and some other universities as well as some other professionals from all walks of life, got together to listen to the words of wisdom by the master in economics, which demonstrated the tremendous popularity of this lecture.
Professor Qiao Liu
Professor Robert C. Merton is the School of Management Distinguished Professor of Finance at the MIT Sloan School of Management and John and Natty McArthur University Professor Emeritus at Harvard University. He won the Nobel Prize in Economics in 1997 for his outstanding contribution to the pricing theory of derivatives.
The topic of Professor Merton’s lecture at PKU was “SeLFIES-A Globally Applicable Bond Innovation to Improve Retirement Funding and Lower Government Financing Cost”. SeLFIES is short for Standard-of-Living indexed, Forward-starting, Income-only Securities.
First, Professor Merton defined the goal for a “Good” Retirement as “an inflation-protected income for life that allows you to sustain the standard of living you enjoyed in the latter part of your working life”. However, due to some critical factors such as the aging population, the increasing longevity, the difficult budget positions of governments running deficits, the current PAYGO retirement funding systems adopted by most countries in the world may not be sustainable.
To meet the global challenges of current inadequate and unsustainable retirement funding systems, Professor Merton put forward a kind of new, low-cost, liquid and safe ultra-long bond instruments-SeLFIES, whose payouts are designed to match a pension-like pattern desired by individuals for retirement. There is a deferred start of payouts until a specified future date (anticipated retirement date) and from that date on there are annual level payouts with indexing, until a specified ending date (a bit longer than life expectancy at retirement). SeLFIES’s payouts are indexed to aggregate per capita consumption, so that the holder is hedged against both consumption inflation and standard of living change risks. Compared with the Current Practice (Target Date Funds+ Annuity Purchase at Retirement ), SeLFIES definitely have lower risk. Not Only can SeLFIES contribute to the improvements of individual Retirement funding, but also aid institutional investors such as insurance companies to hedge the risk of their pension and annuity benefit liabilities effectively. At the same time, they are an ideal choice for investors who are seeking a well-diversified portfolio.
Then, Professor Merton pointed out that the government can benefit from issuing SeLFIES for some factors such as its imposition of value-added tax (VAT). By issuing SeLFIES, the governments doing infrastructure financing can improve maturity-matching of funding for infrastructure investments, which reduces re-financing risk and issuing costs. In the mean time, SeLFIES can also be used to manage government tax-revenue risk.
After the lecture, the audience asked questions actively. They raised questions from different angles, such as how to measure the return on SeLFIES，etc. Professor Merton answered each of the questions earnestly. After the Q & A session, Professor Liu expressed his gratitude to Professor Merton again for his coming to Peking University. At this point, Professor Merton’s lecture specialized for Peking University ended successfully. This lecture not only provides the faculties and the students of Peking University as well as other participants a chance to have a glimpse of the glamour of the Nobel Laureate, but also help them gain in-depth understanding of the issues related to national economy and people's livelihood, such as the retirement funding.
