Tag Archives: economics

US Deficit Falls Faster Than Expected

Leave a reply

Social Security 3My Comments: It would be easy to get overly excited about this. Certainly it’s good news but to believe it’s a fundamental shift in the economy is stretching things. For one thing, the sequester that happened recently simply means that the Federal government is spending less money.

But for those of us looking for good economic news, this is worth a look. Keep your fingers crossed, however.

By James Politi in Washington | Financial Times

The US budget deficit is declining faster than expected as the rebound of the world’s largest economy helps the government collect more revenue from businesses, households and the two mortgage companies it rescued in the financial crisis.

The brighter fiscal outlook comes as other advanced economies are struggling to reduce their deficits through drastic spending cuts and tax rises at a time of weak or negative growth. Growth figures to be released on Wednesday are expected to show that the 17-country eurozone contracted again.

New figures released by the non-partisan Congressional Budget Office showed the US budget deficit falling to $642bn, or 4 per cent of gross domestic product.

The CBO figures mark a $203bn improvement over its earlier projection only three months ago and a sharp reduction compared with the $1.1tn deficit of 2012, or 7 per cent of GDP. The CBO predicted the deficit would decrease further to 3.4 per cent of GDP in fiscal 2014 and 2.1 per cent the year after, before it starts rising again.

The figures were released as the New York Fed said households were continuing to reduce debt, by $110bn in the first quarter of the year. The number of loans that are more than 90 days behind on a payment also fell from 6.3 per cent to 6 per cent. The figures show the improvement in household finances, but also suggest that consumers will only increase their spending slowly.

The much lower government deficits will reduce pressure on the White House and Congress to find a solution to the country’s longer-term debt woes, which remain as America faces soaring projected health and pension costs later this decade.

“You don’t want to use the progress we are making as an excuse not to fix the problem, and there’s a very real risk that will happen,” says Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget, which has been campaigning for a big deficit grand bargain.

The improved outlook is partly the result of increased tax revenues worth $105bn compared to the earlier projection from both businesses and individuals, as the economy continued to recover. The housing rebound also allowed Fannie Mae and Freddie Mac, the mortgage finance giants under government control, to make $95bn in payments to the Treasury. Automatic spending cuts known as sequestration were already factored into the CBO’s calculations, helping drive the declining deficits.

The better picture has also shifted the deadline by which the US needs to raise its borrowing limit to avoid a default on its debt from August until October or even November, the CBO said.

The US debt limit will be reached over the coming weekend but the US Treasury can take a series of “extraordinary” cash-management measures to stave off default in the absence of a deal on Capitol Hill.

The later timeframe for the US to raise its borrowing limit means congressional negotiations over a fiscal deal have advanced much more slowly than previously expected. Democrats, who control the Senate, and Republicans, who control the House, have been bickering over the process by which they could reconcile their two vastly different budgets.

Meanwhile, the US political debate has been consumed by other matters, from the immigration bill to this week’s furore over reviews of the Tea Party by US tax authorities.

The improving economic indicators have removed some of the incentives for President Barack Obama and congressional Democrats to accept the need for additional spending cuts, particularly if they hit popular government health and pension programmes such as Social Security and Medicare. It will also make Republicans even less willing to consider the need for higher taxes since revenues are already rebounding significantly.

“A lot of the energy and appetite for a substantial [deficit] fix is gone,” said Doug Holtz-Eakin, the former Congressional Budget Office director and head of the American Action Forum, a moderate Republican think-tank in Washington.

But that is not to say all momentum has stalled.

The White House has continued talks with Republicans in the Senate who would be the most likely brokers of a deficit deal, and the president last week played golf with Saxby Chambliss of Georgia and Bob Corker of Tennessee, who could help craft a bipartisan deal.

House Republicans are meeting this week to discuss their demands for a debt ceiling increase. The congressional tax-writing committees led by Max Baucus in the Senate and Dave Camp in the House are also feverishly working on their tax reform plans, which could spur momentum for a broader deal.

Gabe Horwitz, director of the economic programme at Third Way, the centrist Democratic think-tank, said he accepted that “the bigger the fire, the more response you’re going to get out of Congress”.

But he said there should still be the political will to do a big deficit deal. Although short-term deficits are declining, by the end of the decade the US fiscal picture will darken again, as the retirement of the baby-boomer generation drives sharp increases in health and pension costs.

In addition, the White House and many lawmakers on both the right and the left of politics are unhappy with the present composition of deficit reduction, especially the $1.2tn in sequestration cuts.

These reductions, which took effect in March, disproportionately hit domestic agencies and programmes beloved by Democrats and the Obama administration, and hurt the Pentagon much more than Republicans would like. US government agencies have tried to blunt their effect – the Department of Defence on Tuesday announced a decrease in the number of enforced leave days for its civilian workforce from 14 to 11 – but many are still suffering badly.

Move Over, Saudi Arabia, and Let North Dakota Take Over

Leave a reply

My Comments: How many of us saw this coming as little as five years ago?

By Gil Weinreich, AdvisorOne | May 14, 2013

A buyer’s market in oil is in the making and will bring about disruptive market change that should benefit American manufacturers and consumers and prove challenging for Middle Eastern producers and European refiners.

That is the International Energy Agency’s new forecast, released Tuesday in London, and the anticipated supply boom from North American oil fields in particular should contribute to what the IEA terms a “supply shock.”

America’s shale revolution, and abundant capacity in Canada’s tar sands, is well established, but “supply growth is even steeper than previously expected,” said IEA Executive Director Maria van der Hoeven at an oil summit in London launching the organization’s Medium-Term Oil Market Report (MTOMR).

Van der Hoeven noted the irony that the country that was the cradle of the oil industry 150 years go, but which eventually fell into what seemed like irreversible decline, has now become the center of an oil boom.

But today’s oil bonanza in the U.S., she said, has powerful compound effects as well.

“What makes the tight oil boom truly transformative is not just the sheer production volumes unlocked but the combination of volumetric production growth with other factors: the crude’s distinctively light quality, the unconventional nature of both the plays from which it is extracted and the technologies which have unlocked it, the economic and market impact of the new production, and the chain reaction it is creating in the global transportation, storage and refining infrastructure,” a summary of the report says.

While U.S. law continues to ban crude oil exports, the growth in oil supply should be a boon to U.S. refiners in the coming years. Long a top importer of refined products, the U.S. is already a large net exporter, and steep production surpluses are expected to push the U.S. share of refined products up even more.

As a news release announcing the report put it, “The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15.”

The report’s scenario was not entirely rosy for the U.S., citing three categories of challenge: infrastructural and logistical, legislative and regulatory, and environmental.

Though the U.S. contribution to oil production growth is expected to grow by 3.9 million barrels a day from 2012 to 2018, the market changes do not spell the end of OPEC but do suggest a lowering of its relative stature.

The Saudi Arabia-dominated oil cartel will also see its capacity rise, but by only 1.75 million barrels a day—about 750,000 barrels a day less than last year’s IEA forecast. The new report cites social and political turmoil in the wake of the Arab Spring as a factor in OPEC performance.

Another key IEA finding concerns the shift in demand from Western to emerging economies. While this development has been forecast before, the actual shift is expected to occur over the coming five years.

While emerging economies will blow past the developed world, the IEA sees a split within the developed economies—“a bifurcation has appeared between a North America energized by cheap natural gas and a euro area plagued by debt issues,” van der Hoeven said.
Beyond its slow growth and consequent tepid demand for oil, Europe will lose out in another significant way in the coming five years—specifically, it will cede its primacy as an oil refiner.

“OECD refining, notwithstanding a renaissance in the U.S., is increasingly relinquishing market share to the non-OECD region, a form of de facto offshoring not unlike the trend in other manufacturing sectors,” a summary of the IEA report says.

“Already most of the world’s refining capacity is located in non-OECD economies. In the next five years, virtually all net crude distillation capacity growth is forecast to take place in the emerging-market and developing economies.”

Stuck in the Mud: Beyond America’s Fiscal Trench Lines

Leave a reply

world economyMy Comments: I recall a conversation I had some three years ago where someone asked me if I followed Keynes or did I follow the Austrian approach. Not knowing at the time just what this person was asking, I responded “Keynes” since I knew more or less how Keynes mind worked and had no idea yet about how Hayeks mind worked.

Today that boils down to a political chasm between Democrats and Republicans. It need now be so but it is. And who is ulitmately right or wrong remains to be seen. Perhaps neither to the degree that today they are almost polar opposites. Meanwhile, the folks in Washington, those whom we presumably elected to represent us and every other citizen of this country, are mired in ideology and incapable of looking beyond their own narrow vision. Wish it were not so but …

By Edward Luce | The Financial Times | May 12, 2013

When historians look back on the meltdown of 2008 they will conclude that the country that triggered it – the US – was among the least bad in its continuing monetary and in its initial fiscal response. What a frustration, then, that the US finds itself endlessly relitigating the debate between Keynesians and anti-Keynesians.

In the past few weeks, the intellectual tide has turned sharply towards the former following revelations of errors by Kenneth Rogoff and Carmen Reinhardt. This has been assisted by the IMF’s change of heart about the merits of short-term stimuli. Moreover, austerians, such as Niall Ferguson, the Harvard historian, continue to aid their own discrediting by dredging up the canard about John Maynard Keynes’s “childless vision” – linking his homosexuality to an alleged reckless disregard for the long term.

Yet for all the academic sound and fury, US politics is unchanged and apparently unchangeable: mild fiscal contraction is set to dilute the US recovery for at least another year. Democrats are impotent against Republican stonewalling in the House of Representatives. And Republicans can do nothing about Barack Obama’s veto – or Democratic control of the Senate. Which means we are condemned to at least another year of hypothetical fiscal debates. Here, vindicated though they may be on counter-cyclical fiscal policy, Keynesians are guilty of sins of omission.

Like Gresham’s law, the fiscal debate tends to drive out others. Keynesians want bigger deficits. The Tea Party wants smaller government. The more dominant these battle lines, the harder it is to craft ways out. New federal investment may be off the menu. But US companies are sitting on almost $2tn in cash reserves and have almost the same again parked offshore – a multiple of any possible federal investment. Public action could crowd-in private investments without troubling the taxpayer. And the resultant boost to productivity would reduce the burden of future obligations. “What we need is not bigger or smaller government for growth, but narrower and stronger government,” says Paul Romer, the growth economist.

Might there still be ways in Washington around these entrenched positions? Next week, John Delaney, a freshman Democratic congressman, will test that proposition when he launches a bill designed with an eye both on what is economically useful and politically sellable. The Rebuild America Act would give companies that repatriate foreign earnings a tax break on whatever they invest in a new infrastructure fund. Unlike a public bank, the fund would underwrite bonds to fund state, local and municipal projects – there would be no new federal bureaucracy.

It is hard to see how Republicans could object on substance to a bill that gave tax breaks to companies to improve US infrastructure. We shall see if they treat it on merit or politics. It will also be interesting to see how many other Democrats, and Keynesians, embrace its logic. Mr Delaney, who had a long career in private equity, has an accurate diagnosis of US politics. “Intransigent partisanship is getting in the way of our country having a proactive, pro-growth government,” he says. “Our tired fiscal impasse is not only a daily headache in Washington, it’s become a real competitiveness issue for our economy.”

To be sure, his biggest challenge – and that of almost any legislator taking any initiative – will be to get around the scorched-earth caucus in the Republican party, that opposes anything that could be seen as a success for public action. But there are cynics on both sides. Last month, Barack Obama appointed an industry insider, Tom Wheeler, as the next head of the Federal Communications Commission. People who have donated generously to Mr Obama’s campaigns were happy with Mr Wheeler’s nomination. Others less so.

The FCC could make simple changes to stimulate more investment in the cable and wireless sectors, which would help return US average internet speeds to the top of international tables. Mr Wheeler could also accelerate the FCC’s dilatory schedule for auctioning off public spectrum. “In just the same way that mergers result in job losses, creating and licensing multiple platforms for technology will create jobs,” says Reed Hundt, who was Bill Clinton’s highly successful FCC chair in the booming 1990s.

Defenders of Mr Wheeler say he will be keen to establish his distance from an oligopolistic industry that hired him as their advocate. They make the same argument, too, for Mary Jo White, the new chair of the Securities and Exchange Commission, who has spent her career representing Wall Street. Recent SEC moves give little cause for cheer. In isolation, bills such as Mr Delaney’s, or the rulings of federal agencies, do not match the importance, or scale, of the fiscal debate. But the US budget is stuck in the mud. And there are other sources of growth.

It is worth remembering that Keynes was a champion of the “middle way”. Yet foes, and occasionally friends, reduce him to a free-spending caricature. “I suggest that the state encouragement of new capital undertakings by employing the best technical advice … and by lending the credit and the guarantee of the Treasury to finance them more boldly, is becoming an inevitable policy,” Keynes wrote in the 1920s. These are the thoughts of an economist looking to the long term. With the possible exception of the final clause, they are also a good description of Mr Delaney’s bill.

Will Americans Work Forever?

Leave a reply

My Comments: I’m an American and I intend to work until I drop. I enjoy what I do, I’m think I’m pretty good at it, I have people to talk with who want the skills I bring to the table, so why not?

By Maria Wood

Has the U.S. become the work forever society? According to a recent survey by Northwestern Mutual, a majority of Americans said they plan to work into their 60s and 70s, and some even into their 80s. Yet at the same time they indicate they intend to work longer, Americans are also unsure of their financial preparedness to actually fund their advanced lifespans.

Those findings came to light in Northwestern’s “2013 Planning & Progress Study,” which it conducted with Harris Interactive. About 1,500 Americans from age 25 and up were polled in an online survey in January.

According to the responses, only 6 percent expect to retire before the age of 60, while 52 percent expect to retire in their 60s and 32 percent in their 70s. Some 10 percent envision working into their 80s.

However, when asked about their financial preparedness, based on their current situation, future prospects and long-term plans, 56 percent said they are prepared to live to the age of 75; 44 percent to 85; and 35 percent to 95.

Those numbers stand in stark contrast to actual data that reveals that there’s a 50 percent chance a 65-year-old man today will live beyond age 87 and that a 65-year-old woman will live beyond age 90. If a couple, there’s a 50 percent chance that one spouse will live to age 94 and older.

Meanwhile, on average, pre-retirees said they will retire at 68, even though the mean age of retirement among those already retired is 59.

“The incredible contrast between how long people expect to work, and how financially prepared they feel to live long lives, dramatically underscores how far behind people feel in their financial planning,” said Greg Oberland, Northwestern Mutual executive vice president, in a statement. “We’re seeing the average retirement age being pushed further out, due in large part to widespread feelings of long-term financial insecurity.”

About half (51 percent) said they are less financially secure than they thought they would be at this point in their lives. Less than half – 43 percent – responded that they feel financially secure at the present time, while 32 percent do not, and the remaining quarter fell in the middle between not feeling strongly secure or insecure.

“Financial security” was defined as “a feeling of confidence that you will achieve the financial goals you have for yourself or your family through the actions you are currently taking.”

Despite those rather pessimistic statistics, Oberland said there are some positive signs: People are saying they intend to save more and “are aiming for slow-and-steady growth rather than swinging for the fences.”

Some subgroups expressed even less optimism for their financial future, specifically, singles and those with younger children. The breakdown is as follows:
• Sixty-two percent of single Americans say they’re less secure than they thought they’d be by now, compared to 43 percent of married people.
• Those with children under 18 are less financially secure now (56 percent) compared to where they thought they’d be, whereas those with older children (49 percent) or no children (49 percent) feel slightly more secure.
• Gen Y (59 percent) and Gen X (63 percent) are less secure now than they thought they’d be, but the Mature Generation (36 percent) is more likely to say they are just where they thought they’d be or are more secure than they thought they’d be.
Originally published on LifeHealthPro.com

Austerity Exposes the Global Threat from Tax Havens

Leave a reply

My Comments: Unless you have been to the Cayman Islands, or happen to make far more money than you actually need to live your life, the idea of an offshore tax haven is pretty remote. You’ve heard about them, but since they are so far removed from your reality, they seem to stay under the rug. Here’s an article from the Financial Times that suggests we should pay more attention to what they represent for all of us.

By Jeffrey Sachs

The curtain has been pulled aside on the once secret world of tax havens, and the scale of abuse is nearly beyond reckoning. Week after week, Americans and Europeans worn down by budget austerity have learnt about the secret accounts of their politicians, tax evasion by leading companies and hot money destabilising the world economy. The darker truth is that these havens are not gaps in the world’s financial system; they are the system.

How many politicians and political parties have secret accounts abroad? Inevitably, given the nature of the arrangements, we cannot say for certain – but the list of those that have come to light is long. US presidential candidate Mitt Romney was found to have huge wealth in the Cayman Islands, never adequately explained. In France, Jérôme Cahuzac has resigned in disgrace from his position as budget minister following the revelation that he held a secret account in Switzerland. He has since been charged with tax fraud. Spain’s ruling party has been making payments from secret Swiss accounts for years. One senior Greek politician has been sentenced to jail for falsifying financial declarations. Many more revelations will come, especially now that investigative journalists have their hands on the records of hundreds of thousands of offshore accounts.

Groups such as Apple, Google and Starbucks have been shown in recent months to have used outlandish accounting gimmicks to shelter their profits. These include Google’s claim, approved by the US Internal Revenue Service, that its intellectual capital resides in Bermuda. There are thousands more like them working with the tax authorities to keep their money out of reach. Banks such as HSBC and UBS have been caught in the money laundering that facilitates this process.

How much tax revenue is lost to the global havens? Here, too, we can only guess but the numbers are likely to be vast. Recent estimates by the Tax Justice Network suggest that deposits are in the range of $21tn.

The havens serve countless purposes, yet not one is for the social good. They support massive tax evasion. They underpin a global system of bribery to corrupt officials. They service the accounts of drug runners, arms traders and terrorist groups. They create veils of secrecy through shell companies, which allow tax evasion, land grabs and environmental destruction.

The prime movers of the world’s tax havens are the US, Switzerland and the UK. Indeed, many of the leading havens, including the British Virgin Islands, Cayman and Bermuda, are British Overseas Territories. The secreting of trillions of dollars in the Caribbean has been undertaken with the support of America’s IRS, and with the approval of the US political class and Wall Street.

These playgrounds of the rich and powerful were largely hidden from the public’s view during the long financial boom. In the new world of austerity following the 2008 crash, however, they are increasingly seen as a cancer on the global financial system that must be excised.

The public’s animus was greatly accelerated by the Cyprus crisis. The island has for many years been a notorious secrecy-and-tax haven, especially for Russian money. Yet this was winked at rather than controlled. Then Cyprus blew up – a reminder of how an unregulated financial centre can quickly turn into a mortal threat to the world economy.

Many of the reforms that are required are obvious. All foreign bank accounts in any jurisdiction should be reported back to the national tax authorities of the account holders. Unreported incomes diverted to overseas accounts in the past should then be taxed at national rates with penalties for evasion. The thousands of hedge funds and corporations domiciled in the Caribbean for operations in the US and Europe should be required to redomicile in the US and Europe. Beneficial ownership should be disclosed on all foreign-owned companies.

Angela Merkel, the German chancellor, François Hollande, the French president, and David Cameron, the UK prime minister, have recently acknowledged the need for a serious clampdown, yet the real actions still lie ahead. Barack Obama, the US president, has spoken in the past about cracking down but has not said much recently. All eyes are now turning to US and European leaders in advance of the summits of the Group of Eight leading nations in June and the Group of 20 in September to see whether the politicians are beholden to the needs of the public or to heedless and destabilising private greed.

The writer is director of the Earth Institute and author of the forthcoming book, ‘To Move the World: JFK’s Quest for Peace’

The New Deal for Europe: More Reform, Less Austerity

Leave a reply

My Comments: There has been a disconnect in this country, typically along partisan lines, whether or not austerity is the way to solve the so called debt crisis at the federal level. As an economist, and a Democrat, my instinct has been to set the stage for growth, and as growth and increased economic activity increase, revenue will increase and resolve the debt crisis. Starting with George Bush, and the bailout of the big banks in 2008, we have largely stayed away from pure austerity.

Europe, on the other hand, has largely gone the austerity route, and it’s not working. The rules that apply to a household with a finite time horizon, thought of as “micro economics”, are not applicable to a dynamic society such as the US, where “macro economic” rules apply. This article suggests that Europe is moving in our direction.

By Philip Stephens for the Financial Times April 26, 2013

The War of the Coding Error is a reminder that the economy is too vital to be left to economists

Britain and Spain once went to war over the severed ear of a ship’s captain. The annals of unusual conflicts will surely record that the 18th-century War of Jenkins’ Ear was a pretty unremarkable affair when set against today’s War of the Spreadsheet Coding Error.

Economists have taken up arms. One side has long claimed proof that high public debt suffocates growth. European governments have fallen in behind, rampaging across the continent under the flag of austerity. Now a rival army of academics says the statistical books were spiked. As things turn out, the causality may flow in the opposite direction: it is low growth that drives up debt.

The Harvard economists Carmen Reinhart and Kenneth Rogoff had posited that debt above 90 per cent of national income was almost always associated with significantly reduced growth. The implication was that deep retrenchment was the only route back to prosperity. Now, economists at the University of Massachusetts Amherst say the results reflected a data “coding error” and some questionable aggregation. The assumption that high debt always equals low growth is not sustained by the evidence.

I know whose side I am on, but, after the dismal experience of recent years (remember economists proclaiming liberal financial capitalism to be the philosopher’s stone?), it is tempting to shrug one’s shoulders. That would be a big mistake. This particular fight merits more than a knowing sigh. It is another salutary reminder that the economy is too important to be left to economists. More importantly, it presents policy makers with a chance to escape a flawed orthodoxy.

Excessive austerity has seen much of Europe mired in depression. In spite of swinging spending cuts and tax rises, debt is increasing. The crisis of the euro may be over, in the sense that the existential threat to the currency has been lifted. But the crisis within the euro is extinguishing political consent for European integration. The continent badly needs to reset its course.

The answer is not a new fiscal splurge. A heavy price must be paid for the unchecked spending and credit booms that ended in the global financial crash. But timing and pace matter. Governments with a demonstrable determination to raise long-term economic growth with supply-side reforms should be given more time to cut deficits.

During the past couple of years politicians have prized credibility with markets above real economic performance. It hasn’t worked. Bond traders such as Pimco’s Bill Gross now attack austerity, calling for measures to rekindle growth. Bond markets, like economists, are rarely known for their consistency. In this instance, though, Mr Gross is right.

The present confusion – visible in open debates at the International Monetary Fund – gives politicians and central bankers a chance to think again. The response should be a calibrated policy shift to combine accelerated supply-side reforms with flexible fiscal timetables and increased investment. To the extent fiscal restraint weighs on demand, it should be offset by policies to expand productive potential.

Britain is in as much trouble as the eurozone. After three years of austerity, the economy and borrowing are flatlining. Policies framed to win over financial markets have been rewarded by rating agency downgrades. Inexplicably, the Treasury has slashed growth-enhancing capital investment while increasing transfer payments to the over-65s. Britain’s borrowing will soon be higher than that of Greece.

Elsewhere, there are one or two encouraging straws in the wind. True, Germany is not about to sanction a big stimulus in peripheral eurozone nations; Chancellor Angela Merkel will keep a firm grip on her cheque book before and after the German election in September.

That said, German policy has become more nuanced. The most closely watched statistics in Berlin are measures of competitiveness. Of course, you hear German officials say, Spain, Portugal and others must cut borrowing and debt. But the indicators that matter most are relative unit costs, productivity and exports. Here Germany acknowledges tangible progress.

This leaves room for the new bargain between creditors and debtors. The advantage of an explicit trade-off between more aggressive reform and looser fiscal timetables is that it would at once offer a more palatable political message to voters and buy credibility in markets. Both would be assured that tough reforms offered a route out of the debt trap to the economic growth needed for sustainable public finances.

High unemployment in Europe is not just a reflection of recession. It often mirrors ossified labour markets that lock out young people and discourage investment and innovation. Raising the pension age generates not only more growth but also confidence in markets about fiscal sustainability – and promotes equity between generations.

Cutting taxes on labour encourages business expansion and jobs. Education and skills training are vital elements in competitiveness. Modernising essential infrastructure can secure a long-term income stream from a one-off expense.

What circumstance now demands of politicians is the confidence to break free of the defunct, and debunked, economic theorising. Economists are not always wrong; nor does the real problem lie with dodgy data. The mistake comes when policy makers invest the findings of a faith-based discipline with the certainties of science. They would do better to rely on common sense and observed behaviour. By underscoring this fairly simple lesson, the War of the Spreadsheet Coding Error may yet do Europe a huge service.

The Annuity Puzzle

Leave a reply

That's me, in 1941!

That’s me, in 1941!

My Comments: As a financial planner and investment advisor for the past 38 years, I recognize that we, that’s me and you, are moving into uncharted waters. While the future is always an unknown, what we are dealing with now is how whether many of us are going to have enough money to live with some degree of dignity when we reach age 90, age 95, age 100 and beyond.

Medical advances are allowing many of us to survive issues that 50 years ago simply resulted in death. Couple that with the “baby boomers”, those born in the years following WW II and you have enormous pressure on a system that is unprepared for it. One reaction in anticipation of this was Obamacare, something which those who perhaps don’t believe in global warming would rather decree we get rid of. Not going to happen. See my blog called This Train is Leaving the Station from earlier this month.

As a financial planner, I’ve steered people away from income annuities for years. It’s like handing your wallet to an insurance company and saying to them, “…send me a check every month for the rest of my life and you keep what’s left.” Just not an appealing thought.

But so many of us are now going to outlive our money that an insurance policy against living too long begins to make sense. At least for some of our money.


By Bob Seawright, Madison Avenue Securities

Since at least 1965 and the seminal research of Menachem Yaari, economists have recognized that retirees should convert far more of their assets into an income annuity at retirement than they do. That they so rarely do what they ought to do is known as the “annuity puzzle.”

In a new paper from the Journal of Economic Perspectives, Shlomo Benartzi, Alessandro Previtero and Richard Thaler offer their insights into why the annuity puzzle exists and how it might be solved. The authors frame the puzzle using Franco Modigliani’s famous formulation from his Nobel acceptance speech: “It is a well-known fact that annuity contracts, other than in the form of group insurance through pension systems, are extremely rare. Why this should be so is a subject of considerable current interest. It is still ill-understood.” It was true then (in 1985) and remains true today. Income annuities remain widely unpopular yet would help to solve a variety of complex problems with which retirees struggle and which cannot be solved otherwise.

The key problem dealt with by income annuities is longevity risk. This risk is increasing steadily in that life expectancies continue to expand throughout the developed world and is exacerbated because we are both retiring earlier and have less and less access to private pensions. Moreover, the distribution of longevity is wide – a 22-year difference between the 10th and 90th percentiles of the distribution for men (dying at 70 versus 92) and a 23-year difference between the 10th and 90th percentiles of the distribution for women (dying at 72 versus 95).

Income annuities hedge longevity risk simply and efficiently as risk pooling makes them 25-40 percent cheaper than do-it-yourself options. Thus retirees who purchase an income annuity assure themselves a higher level of consumption and guarantee it as well. As Benartzi, Thaler and Previtero point out, “You increase your consumption and eliminate risk at the same time… Who says there is no thing as a free lunch?”

A related problem faced by retirees who reject income annuities is the complexity that is added to their lives:
“Households who choose not to annuitize must learn a new skill, namely calculating the optimal drawdown rate over time. Given the complexity of this optimization problem, it is not surprising that retirees might err, either by under- or over-spending. These errors can easily be exacerbated by self-control problems if households have trouble sticking to their drawdown plans, either by spending too little or too much. By converting wealth into an annuity, individuals and households can simultaneously answer the conceptually difficult question of figuring out how much consumption is sustainable given the age and wealth of the consumer, and provide a monthly income target to help implement the plan.”

In general, Benartzi, Thaler and Previtero make the well-known case that greater reliance on income annuities would enable individuals to increase consumption, deal with uncertainty, and help people determine the right drawdown rate and timing of retirement. The puzzle, of course, is why so few people take advantage of them. In 2007, $300 billion was moved by retirees from defined benefit plans to IRAs while only $6.5 billion went to purchase income annuities. As stated by the authors, “the sum of this evidence makes a strong case that people should be making greater use of annuities, to increase their consumption level in retirement, deal with uncertainty, and help solve the cognitively difficult tasks of deciding how fast to draw down their wealth and when to start retirement. Why don’t they?”

One major hurdle is that the vast majority of 401(k) plans do not offer an annuitization option. That failure greatly reduces the number of retirees who will select annuitization – the easier default option wins a disproportionate amount of the time in virtually any setting. On the other hand, “when an annuity is a readily available option, many participants who have non-trivial account balances choose it.” In fact, in a study of a Swiss pension plan that made annuitization the default option, 73 percent elected the annuity, 17 percent elected a combination of the annuity and the lump sum, and the remaining 10 percent elected the lump sum in toto; for another plan where the lump sum is the default option, the take-up rate for the annuity was only 10 percent. Annuitization options should be provided and should be the default setting.

The authors also argue (perhaps a bit optimistically) that this failure to annuitize results more from the “choice environment” than from underlying preferences. An income replacement rate of 80 percent is more attractive than a 20 percent spending reduction. Framing matters. Thus an investment offering a $650 monthly return is selected only 21 percent of the time while a choice offering $650 of spending for life gets a 70 percent selection rate. The choice should be framed accordingly.

Similarly, a typical consumer perceives that he “is taking a considerable sum of money and putting it at risk – the risk being that the consumer will die young, making the purchase a bad deal.” Loss aversion comes into play here too. Since losing hurts about twice as much as winning feels good, the perceived monetary loss of dying early carries more weight than the possibility of monetary gain achieved by beating the actuarial tables, especially because a lump sum payment feels like a “sure thing.”

So-called “mental accounting” is another significant behavioral factor in this area, with investors reluctant to write a big check to purchase a series of small monthly checks, which seems like a bad deal to many. That’s because once we have something – and an account balance or a lump sum option makes us feel like we have something of real value – we are generally reluctant to give it up (loss aversion again).

Finally, Benartzi, Thaler and Previtero explore policy interventions that have improved savings accumulation behavior and which improve retirement income choices. They see the key challenge as helping consumers – who often see income annuities as a risk since they might die before getting their “money’s worth” – view income annuities as part of a risk-reduction strategy. This approach is particularly promising in that earlier research has shown that people fear outliving their money more than they fear death itself.

The authors proffer two general policy considerations worth exploring in this regard. With respect to Social Security, they suggest that since accrued Social Security benefits can keep growing through age 70, the Social Security Administration should stop labeling different retirement ages as “full” or “normal.” These labels may well be influencing selected retirement dates negatively. They also suggest a “claim and suspend” option for all retirees and that the SSA “encourage people to give careful thought to postponing taking benefits.”

The second category of recommended policy changes “involves increasing the supply of easy-to-find annuity options for those of retirement age with 401(k) and other defined contribution plans.” Doing so will take government action to make current regulations clearer and will also require employer cooperation.

The annuity puzzle is not insoluble. But solving it will require concerted effort by both government and the private sector so that more retirees will have assured lifetime income.

This Train is Leaving the Station

1 Reply

healthcare reformMy Comments: First, I’ve been a supporter of Obamacare since day one. Not because its a panacea for what ails us, but because without it, none of the stakeholders individually have enough leverage to effect meaningful change. By that I mean, doctors, hospitals, insurance companies, Big Pharma, and of course, patients like you and me. The only path to reform is a force with enough leverage so that those above mentioned stakeholders are forced to adapt.

I’ve also asserted that what we see ten years down the road will not resemble the PPACA as passed in any meaningful way. Implementation will force adjustments as unintended consequences surface and everyone tries to stake their claim to a legitimate piece of the action.

I’m also reminded of comments made in a recent Time magazine feature that focused on a new way unfolding to combat cancer. Egos are being squashed in the interest of team work and continued funding is a function of actionable and positive results, not how many scientific papers are published. It was said to be totally unworkable, until it became workable and there is no going back. What took ten years to get from idea to those with cancer now takes two years.

By Jim Toedtman

Mention health care costs, and Mark McClellan talks about train tracks.

Few people know more about the dynamics and details of the nation’s health care system than McClellan, the former director of the Food and Drug Administration and then the Centers for Medicare and Medicaid Services. One set of tracks, he says, carries the current train – with doctors, hospitals, insurance and pharmaceutical companies organized around paying for specific tasks performed.

What we must do, he continues, is construct a second set of tracks where health care is provided by teams delivering comprehensive care, where doctor’s payments are determined by the results, where digital records are widely shared and where costs are mitigated by a vastly expanded pool of people with insurance.

This is the heart of the health care reform that was approved by Congress, was affirmed by the courts and is being implemented this year.

We have a health care system that consumes 17 percent of the national economy and is unsustaintable if it follows the current tracks.

Today, new tracks are being built, complete with a set of guideposts, a checklist of both critical questions and potential milestones.

Will companies cover their workers? Employer-provided health insurance remains the linchpin of the nation’s health care system, covering nearly 60% of those under 65. But in a sluggish economy, companies may be tempted to curtail coverage.

Will the unisured enroll? This is really the heart of the effort. The 21 million 25 – 30 year olds must enroll, even though they may consider health insurance unnecessary, because their enrollment will help finance the system. Of the total 56 million now uninsured, the Congressional Budget Office projects 25 million will enroll by 2020. Those who delay enrollment face taxes that escalate as the years pass.

Is there adequate staff? Meeting the medical needs of the new enrollees will stretch the nation’s already thin workforce. A shortage of 91,500 doctors and 1.2 millin nurses is projected by 2020.

Are the state insurance marketplaces set? And are their base insurance policies affordable?

Patients, finally, have a critical role in helping refocus our system on results rather than the number of services provided, on individualized and preventive care rather than automatically utilizing the latest gadgets and technology.

As patients, we must engage and begin persuing smart health steps that prevent chronic disease. Attention stakeholders! All aboard!

Source: http://pubs.aarp.org/aarpbulletin/201304_DC?folio=3#pg3

The Disclosure Paradox: How Much Information Is Too Much?

Leave a reply

Too much information can be as harmful to retirement plan decisions as too little.

investment choicesMy Comments: Somewhere along the way during my last 40 years in the world of financial services, I read or was told that at some point you have to make a decision. You cannot simply attempt to absorb more and more information and expect to suddenly have a revelation about what to do. And many of us have heard the comment that says “paralysis by analysis.”

I’ve had clients who second guess every single decision made by their investment professionals who live and breathe this stuff 24/7, have lots of staff and mountains of computers and who live and work in New York. How someone in Trenton can expect to replicate their skills is beyond me. But it happens. Typically not for long however as I gently suggest they find a new advisor.

By the way, how many of you have read a mutual fund prospectus from cover to cover? This is what I do for a living, but I’ve never done it. But every client has to acknowledge receipt of such a document, since that implies you have read it cover to cover and your remedies if something goes wrong become severely limited.

By Michael Finke | April 1, 2013

The defined contribution revolution saw employers shift responsibility for funding retirement to employees who weren’t well equipped to become their own pension manager. One easy solution would seem to be information. Give people the right tools and they’ll be better able to select the right investments, the right advisors, and save the right amount of money. But is more information the key to improving retirement security?

New research provides insight into the promise and perils of disclosure as a policy tool. At its worst, disclosure is a waste of time and resources, draining millions of dollars from the financial services industry and achieving few measurable improvements in investor outcomes. At its best, disclosure can instantly achieve efficiency improvements within markets where it’s difficult for investors to assess price or quality.

KNOWLEDGE LIMITS
First, some basic consumer theory. Investors make the best decisions they can but are limited by their knowledge.

Collecting knowledge can be costly. A new employee must select among numerous investment options by reading through fund prospectuses or looking for cues of growth. Most people have made investments in learning a work-related skill in order to earn a living, but they haven’t made an investment in how to be their own pension manager. But creating 300 million pension managers doesn’t sound like a sensible public policy goal.

One way to help workers is to give them the information they need to make better choices. This is the appeal of information policy. If ignorance is the problem, then give them a detailed brochure that contains everything they’d need to know to make a better choice. Unfortunately, consumers may have no idea what to do with this information. And more information makes the problem worse.

There is perhaps no sadder example of failed information policy than the mutual fund prospectus. At an SEC roundtable, Don Phillips, Morningstar’s president of investment research, said that fund prospectuses were “bombarding investors with way more information than they can handle and that they can intelligently assimilate.” To its credit, the SEC tried to streamline the fund prospectus to only the most important information. Unfortunately, research shows that investors given a simplified prospectus still focus the most on fund characteristics that are irrelevant (like past performance) and ignore characteristics that matter (like fees).

Disclosure can even be counterproductive. In a 2011 paper, Sunita Sah, then at Duke University, and George Loewenstein of Carnegie Mellon University found that advisors were more likely to give self-serving advice if they first disclosed a conflict of interest to their client. When an advisor admits to a conflict of interest in a face-to-face transaction, this creates two problems. First, the client now feels that if they don’t accept the recommendation they are admitting they don’t trust the advisor—something that is taboo in human interactions.

The second problem is that the advisor now feels less pressure to make a recommendation that isn’t self-serving. It is as if one can absolve one’s sins by admitting to being a sinner. The authors found that recommendations given by participants in the role of advisor were significantly worse for the consumer if they had to disclose conflicts of interest.

Source: http://www.advisorone.com/2013/04/01/the-disclosure-paradox-how-much-information-is-too?utm_source=dailywire40113&utm_medium=enewsletter&utm_campaign=dailywire

Why an MRI costs $1,080 in America and $280 in France

2 Replies

My Comments:healthcare reform I spent time this morning with someone who is best described as a capitalist. He understands how money works, he understands the existing health care system, he understands the changes that are taking place, and he is actively looking for financial opportunities. He sees them everywhere.

I’ve posted before about the need for changes in the health care delivery system in this country. That we were and probably still are on path that is financially unsustainable. Changes are now being made and many people and organizations are frantically trying to figure out what is going on. More importantly, how they are going to survive and if they don’t who can they blame.

This article helps you better understand why changes are happening.

Posted by Ezra Klein on March 15, 2013 at 10:48 am

Steve Brill’s massive Time article focused national attention on the price of health-care services in the United States. Sarah Kliff got further data showing an MRI can cost anywhere from $400 to $1,861 in Washington, DC alone. But as startling as the price difference between one hospital and another, or one insurer and another, can be in America, the difference between America and other countries is even more extraordinary. I wrote this piece in March 2012. But it’s worth revisiting now.

There is a simple reason health care in the United States costs more than it does anywhere else: The prices are higher.

That may sound obvious. But it is, in fact, key to understanding one of the most pressing problems facing our economy. In 2009, Americans spent $7,960 per person on health care. Our neighbors in Canada spent $4,808. The Germans spent $4,218. The French, $3,978. If we had the per-person costs of any of those countries, America’s deficits would vanish. Workers would have much more money in their pockets. Our economy would grow more quickly, as our exports would be more competitive.

There are many possible explanations for why Americans pay so much more. It could be that we’re sicker. Or that we go to the doctor more frequently. But health researchers have largely discarded these theories. As Gerard Anderson, Uwe Reinhardt, Peter Hussey and Varduhi Petrosyan put it in the title of their influential 2003 study on international health-care costs, “it’s the prices, stupid.”

As it’s difficult to get good data on prices, that paper blamed prices largely by eliminating the other possible culprits. They authors considered, for instance, the idea that Americans were simply using more health-care services, but on close inspection, found that Americans don’t see the doctor more often or stay longer in the hospital than residents of other countries. Quite the opposite, actually. We spend less time in the hospital than Germans and see the doctor less often than the Canadians.

“The United States spends more on health care than any of the other OECD countries spend, without providing more services than the other countries do,” they concluded. “This suggests that the difference in spending is mostly attributable to higher prices of goods and services.”

On Friday, the International Federation of Health Plans — a global insurance trade association that includes more than 100 insurers in 25 countries — released more direct evidence. It surveyed its members on the prices paid for 23 medical services and products in different countries, asking after everything from a routine doctor’s visit to a dose of Lipitor to coronary bypass surgery. And in 22 of 23 cases, Americans are paying higher prices than residents of other developed countries. Usually, we’re paying quite a bit more. The exception is cataract surgery, which appears to be costlier in Switzerland, though cheaper everywhere else.

Prices don’t explain all of the difference between America and other countries. But they do explain a big chunk of it.

The question, of course, is why Americans pay such high prices — and why we haven’t done anything about it.

“Other countries negotiate very aggressively with the providers and set rates that are much lower than we do,” Anderson says. They do this in one of two ways. In countries such as Canada and Britain, prices are set by the government. In others, such as Germany and Japan, they’re set by providers and insurers sitting in a room and coming to an agreement, with the government stepping in to set prices if they fail.

Source: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/03/15/why-an-mri-costs-1080-in-america-and-280-in-france/?utm_source=linkedin&utm_medium=social&utm_content=2b6a34c1-5686-42c2-bc78-7391c1f87f77