In his keynote address, Robert Merton chooses not to focus on the financial crisis. It is clear to him there were “fools and knaves,” as well as “many structural elements that would have happened even if people were well behaved and well informed” — risks are simply “embedded in our systems.” Instead, Merton explores how financial engineering is essential in preparing for the inevitable next crisis, and in solving critical challenges. “The world has changed; we can’t go back. Let’s talk about what we should do going forward.” To illustrate society’s need for financial innovation, Merton uses “a live case study:” the vast problem of retirement funding. In the past decade, stock market declines and falling interest rates have hit mainstream employer pension plans hard. Municipal pension plans may be underfunded to the tune of three trillion dollars. (“It makes the S&L crisis look like nothing.”) But people seek, and are due, “the standard of living during retirement they enjoyed in the latter part of their work life.” Generally, determining this standard of living means adding up likely medical, housing and general consumption costs, and Merton describes how to target such retirement income. The main ways to achieve the desired goal are by saving more, working longer or taking more risk. Merton would like to design a software-based tool for ordinary people, simple on the user end, complex on the provider end, which would serve as a “next generation pension solution,” offering a way to manipulate the key variables in retirement income and demonstrate potential financial outcomes. This tool would help users continuously optimize risk to help them reach their retirement funding goals. There are regulatory obstacles now to the implementation of such a method on a widespread basis, and a gap between how managers, advisers and financial institutions think about pension assets, and what Merton has in mind. Nevertheless, he says, “What we need to do for most of th...