Pensions, Careers, And Retirement

Pensions and careers have changed.  Ramesh Ponnuru thinks the retirement changes are for the better and we heartily agree.  We will give an example and explain why it matters.  Ramesh thinks Americans should stop mourning the loss of traditional (defined benefit) pensions concludes:

These are changes that would build on, rather than attempt to reverse, the last few decades of developments in the American retirement system. Those developments, especially the rise of the 401(k), have largely been for the better.

Sidebar One: Pensions can be divided into defined benefit and defined contribution.  In a defined benefit plan you typically get a pension equal to then number of years worked * highest salary over three years * a percentage.  So if you work 30 years and your percentage is 1.8 then you get 54 percent of your highest salary.  A 401 (k) is an example of a defined contribution plan where a defined amount is invested and you get the result at retirement.  We often think that the worker takes the risk in a defined contribution plan and the company takes the risk in a defined benefit plan.  That is only true if the worker retires from that employer.  We will show details later.  End Sidebar One.

Sidebar Two: Risk is both upside and downside.  If a worker spends his entire career with one employer then a defined contribution plan is more risky because he might get much more or much less than a defined benefit plan.  End Sidebar Two.

The big reason for changing pensions is that the nature of careers have changed.  Years ago it was bad to have a resume that indicated you were a job hopper.  Now career advice is:

If you are changing jobs less than every three years, you are in the minority.
You may need to have a well-prepared explanation when you front up to your next job interview.

It also true that employers come and go.  Both of these are reasons why we should cheer at the increasing number of defined contribution plans.

MWG has a defined benefit pension plan.  It worked very well for us although it limited our opportunities, as it was intended to do, in the time close to retirement.  It worked very well for us because we spent nearly 40 years with one employer.  Thus, our paltry year salaries in the seventies and eighties were irrelevant and only the years mattered in the computation of benefits.  If we had of switched employers it would have been bad for us because our salary was so low. Another benefit was sick days.  In our case sick days accumulate and can be used to pay for medical insurance after retirement.  The sick day benefit is based on your highest salary but you must retire in order to get it.  Thus, because of both sick days and defined benefit, as retirement approached it was financial suicide for us to leave before retiring.  When we became eligible for retirement, the sick days became a powerful incentive towards retirement because workers had to pay for part of the cost of health insurance but retirees, like us, with lots of sick days did not.

For us and our employer, the defined benefit plan worked.  We got a nice retirement and they got us to work for less than market prices late in our career.  We are not sure if the intent of the pension was to get us to retire.  It was effective at that too.  We retired because the tax on working was over 100 percent.  That is, we had more disposable income in the first year of retirement then we would have had if we worked that year.

Defined contribution was a fair deal for us in another era.  Even then we were a minority in staying with one organization so long.  Now we would be a micro-minority.  Defined contribution is the way to go in the new environment.  We need to find incentives to increase them.  We have three suggestions:

First make health insurance benefits taxable to the recipient.
Second, increase social security benefits for the needy by means testing benefits for high income individuals.
Third, increase the tax benefits of Roth IRAs.  Make the contribution tax deductible and keep the returns not taxable.

The first would help by producing a bit of government revenue and focusing both employer and employee on the retirement issue.  The second would provide a safety net to the really needy.  The third would reduce complexity at retirement because everyone would go Roth and there wouldn’t be any taxes having an impact on decision making.

As Ramesh says, let us build on the success of 401 (k) plans.  Folks are looking for freedom.  The right incentives will help them make good choices.



Those Countries

The Donald has put his foot in mouth again by describing certain countries as shitholes or perhaps some other scatological comparison.  We think some of the reactions are silly and some are overwrought.  Let’s look at two:

A Facebook comment:

My ancestors came from a shithole country, Ireland, looking for a sustainable life, escaping famine.  [Emphasis added]

A comment on Jim Geraghty in the Morning Jolt:

The message from the president – and the subsequent refusal to deny, retract, or disavow the comments – is clear: people from these places have no value.

Wikipedia takes care of the Facebook comment in one sentence:

The famine was a watershed in the history of Ireland,[1] which was then part of the United Kingdom of Great Britain and Ireland.

So, in fact, those ancestors left the greatest economic and military power in the world to try an up and coming United States.  The folks in Ireland could have gone elsewhere but they were often looking to avoid the British who were near the height of their empire.

Jim’s comment might be more over the top than the one on Facebook.  Jim doesn’t like profanity and we would like to see less of it too but we can’t see how The Donald is saying people in those countries have no value.  He is denigrating the country rather than the people.  Denigrating the a country in a large meeting with both parties is not the height of wisdom.  Yet we do not want to end up as the overflow valve for failed countries.  We want countries to be able to verify their citizens for travel and other purposes.

We got the message.  It was poorly crafted.  It was especially poorly crafted considering the audience.  There is no need to try and create another message.

Income Inequality And Policy

We find income inequality a completely silly issue to be concerned about.   Economic growth, poverty rates, various measures of unemployment and employment and several others are interesting because if we find policies to ameliorate these problems then we can help people.  With income inequality there are three problems: First, changing income inequality won’t necessarily help anyone.  Second, we don’t have a goal.  What is the perfect Gini coefficient?  Third, we don’t know how to change income inequality.

We found evidence on the third issue recently.  A MWG double hat tip to Simon Constable and Instapundit.  They led us to Ugo Traiano’s [his first name drives spell-check crazy] working paper on the impact of taxes on income inequality.  Ugo is at the University of Michigan.  It is only a working paper which means that it hasn’t been fully peer reviewed.  Almost all working papers have some peer review and this one, like most, thanks a few folks so it is mildly reliable.  We are not suggesting that the paper is definitive.  Rather, we are suggesting if you really want to change income inequality you need a bucket-load of evidence to convince folks that some set of policies will lead to an outcome.

Ugo finds that increasing tax revenues leads to more income inequality.  He finds that the results are robust to measures of income inequality and econometrics.  Notice that Ugo did not use increasing tax rates but increasing tax revenues so it leaves some opportunity to argue that increased tax rates might have the opposite effect on income inequality.  After all, at some point, increasing tax rates leads to less tax revenue.

We don’t find income inequality an interesting statistic.  We don’t think that government policy should be looking to change it.  If you do then you need to have evidence that your policies will lead to the outcome and what the outcome is.  In addition we would like to know the impact of said policies on serious measures like economic growth.

If you support lower tax rates and not raising the minimum wage to reduce income inequality then we are all with you.  But it has nothing to do with income inequality.

Budget Math

We oppose a balance budget amendment (BBA) because of the accounting problems, the big impact, and the bad decisions that will flow from trying to balance the budget in the short term.  We recognize that we have an enormous problem but we don’t see BBA as a solution.

After we wrote that there would be a budget shortfall of a trillion dollars or so in fiscal 2019 we remembered the problem of budget math.  Our state has a biennial or two-year budget. It was always took some work to understand what the annual impact was.  Switching to the federal budget somebody might reply that we could fix the trillion dollar shortfall by eliminating the $1.51 trillion cost of tax reform.  The problem is that the tax reform score is over a ten-year period.  Eliminating tax reform would get you somewhere between a sixth and an eighth of the way there.

We need to work on entitlements. Other areas could help but that is where the money is.  The changes need to be gradual.  For example, we can start means testing on Social Security now but full implementation might come in 20 years. It also gives us time to fine-tune means testing because means testing is very tricky.

Say no to the BBA and always ask about the time frame on budget proposals.

Balanced Budget Amendment

George Will has come out again in support of a balanced budget amendment (BBA).  In fact, George thinks it should be job one for 2018:

We will discover that point [when debt influences growth]  the hard way, unless Congress promptly sends to the states for prompt ratification a constitutional amendment requiring balanced budgets. [Emphasis added]

He also has a explicit suggestion from Glenn Hubbard and Tim Kane on what it should be.  Hubbard and Kane’s proposal

would limit each year’s total spending to the median annual revenue of the previous seven years, allowing temporary deficits to be authorized in emergencies by congressional supermajorities.

We have lived under balanced budgets at the state level and found them particularly vexing because most spending is committed when the budget shortfall shows up and then you must cut where available.  It is not a system that leads to good decisions.  In addition, or perhaps related to the first problem, there are accounting problems.  In the states an obvious problem is pensions.  The WSJ highlights New Jersey recently.  New Jersey has a new governor, Democrat Phil Murphy.

As he takes office later this month, Mr. Murphy must confront the state’s biggest problem—a pension system that is about $90 billion short of what it needs to pay future benefits.

The federal government’s obvious accounting problem is entitlements.

We like the idea of a BBA but the problem of writing the amendment, bad budgeting decisions, and the accounting problem lead us to oppose a BBA.  The federal budget is such a disaster, however, we are willing to consider that the current circumstances are worse than a BBA.

Let’s assume that the BBA George suggests has passed by June 2018 and there are no supermajorities to substantially raise taxes.  We are already in fiscal 2018 so fiscal 2019 would be the first year it applies to.  FY 2019 has expected spending of $3.93 trillion.  The spending limit is trickier because it would seem reasonable to limit to actual data.  If so the limit would be $2.775 trillion.  If we include estimated years then the limit would be $3.021 trillion.  So there would be a need for cuts and tax increases from somewhere between just under a trillion dollars to $1.2 trillion.

Sidebar: We don’t see a solution in writing the amendment by making it effective in say, 2030.  Each party is aware of the problem.  There is little interest in fixing the problem as the last two presidential elections have shown.  End sidebar.

Neither party would want to pass such rule.  Spending GOP capital on a failure is a bad idea when they might do something useful in 2018.  We know that politicians always wimp out when the “out” years come.  That is they promise to make cuts later and never do.  Reforming entitlements gets harder every year.  We expect a disaster but see the BBA as an even bigger disaster.  Sorry George.




Hillary And Russia

James Freeman at Best Of The Web on the WSJ discusses the issue of how much trouble the previous administration should be in over its investigation into The Donald’s campaign and administration.  He is taking issue with the NYT over their recent reporting:

The NYT lays out a dossier-free explanation of the genesis of the federal investigation of the opposition political party [NYT follows]:

During a night of heavy drinking at an upscale London bar in May 2016, George Papadopoulos, a young foreign policy adviser to the Trump campaign, made a startling revelation to Australia’s top diplomat in Britain: Russia had political dirt on Hillary Clinton. [Emphasis added]

You should read it all if you are a subscriber.  We would like to take a different issue with the NYT: the words startling and revelation.  This is not startling.  It is not a revelation.  If you picked the Patriots to win the AFC East [either 2016 or 2017] at the same time you were not nearly as safe as George.  Is there any sentient being that thinks that Russia and several other countries do not have political dirt on Hillary and The Donald?  Even if you are not certain that Russia hacked Hillary’s email you know that Russia is serious about spying and Hillary is careless.  Of course Russia has dirt on Hillary and The Donald.  The difference is that Hillary knows that the press will keep her dirt under the rug unless somebody like Russia forces the issue.  The Donald doesn’t seem to care about the dirt.  The leverage that the dirt on Hillary would give Russia might matter.

What we can’t understand is why a top diplomat from Australia would be surprised about this.  Was it George’s certainty?  Australia’s diplomats don’t seem very up on world events.  Or perhaps it is the NYT that isn’t up on world events.

Exchange Rates Still Matter

Jim Geraghty’s Morning Jolt is discussing the history of protests and pundits relative to Iran.  Then Jim brings up the Iran ransom and gives two views of the situation:

This morning, Matthew Dowd looks back at the Obama administration’s Iran deal and laments, “I am wondering how many folks are aware that the money the US sent Iran as part of nuclear deal was actually Iran’s assets to begin with. It was their own money we returned. It wasn’t taxpayer money.” Yes, but we froze those assets after they raided our embassy, took American diplomatic staff hostage in violation of just about every international law and treaty, paraded them before the cameras, and beat them. Think of the seized assets as a criminal fine, one of the few ways we could punish the Iranians for their barbaric acts against our people.

We want to be more direct with Matt.  Most of it was taxpayer money.  Below (no, we don’t cite ourselves) we explain the deal.

Given the turmoil in Iran it is not a surprise that the USD has been the stronger currency over the past 37 years.  So when it is stated in millions of USD we say that we received $400 and paid $1,700 37 years later.  But when we put it in IRR [Iran’s currency], we say that we received 28 billion IRR (an exchange rate of about 71 to the dollar) and repaid 52,904 billion IRR (an exchange rate of 31,120 to the dollar).

So the decision to add interest increased the payment by a factor of four.  The decision to denominate the assets in dollars increased the payment by a factor of over a thousand.  The previous administration caved in every possible way to make a large parent to Iran.  It was a bad idea to give Iran anything but it took fancy accounting to give them $1.7 billion rather than $1 million or so.