Upcoming Events

06/18/2013

Lunch Forum: Optimal Annuitization with Stochastic Mortality Probabilities

Join us the afternoon of Tuesday June 18, 2013

For a Lunch Meeting with Guest Speaker:

                      

    Felix Reichling        and          Kent Smetters

                  Congressional Budget Office                 Wharton School                                  

Who will discuss a new CBO paper:

“Optimal Annuitization with Stochastic Mortality Probabilities”

Tuesday June 18, 2013

Noon-1:00 p.m.

RSVP

Location: 

Fidelity Investments

325 7th St. NW

Washington, DC

(Lunch will be provided)

Charles Blahous on the Chained CPI Index

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Charles Blahous article Reforming CPI:  Not a “Grand Bargain” but a Prudent Reform, which argues for introducing the chained CPI because it is a more accurate measurement of inflation.  He writes:

CPI reform is not Social Security reform, and for both tactical and substantive reasons should never have been presented as such. By itself, it won’t fix the long-term budget outlook, which task requires serious further reforms of Social Security and the health care entitlements. It would, however, improve the long-term outlook for the federal budget as well as for Social Security.

 

Not every distributional consequence of CPI reform will be to everyone’s liking, but that is true of any technical refinement of the federal government’s indexing methods. Altogether, CPI reform is a long overdue correction that would serve the interests of negotiators on both sides of the aisle, of taxpayers – and of the nation as a whole.

 

In a recent post I made a similar argument.

 

 

Pension Reform News: May 22

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ILLINOIS – The pension reform bill passed by the Senate would only save $5 billion, half of what was originally predicted for the plan, barely making a dent in the state’s $100 billion pension shortfall. Link

Illinois Governor Pat Quinn has directed that there will be no expansions in the state’s gambling laws unless accompanied by comprehensive pension reform efforts. Link

CALIFORNIA – The City of San Jose has voted to increase funding for the legal defense of its public pension reform efforts, which have recently come under fire from some labor unions. Link

PENNSYLVANIA – The Pennsylvania legislature has introduced new bills in an effort to allow public employes to switch to a 401k-style defined contribution retirement plan. Link

OHIO – Pension reform efforts in Ohio have led to an unexpected surge retirements as public employee are eager to collect benefits while they can. Link

Update: The California Secure Choice Retirement Savings Program

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A couple of days ago I posted a link to a paper on the California Secure Choice Retirement Savings Program.  I received an email from one of the staffers from the California state legislative committee which crafted the bill.  He provided some clarifications to some of my comments.

One comment I made was that the California plan was a government mandated 401(k) plan.  The staffer pointed out that I failed to mention that workers can opt out of the program if they wish.

A second comment was that currently employers are not required to make contributions to the plan.  I wondered if that might change in the future.  The staffer writes:

This cannot be done at the state level because it would then subject the program to ERISA and it would be pre-empted; essentially eliminating the program. Your point could lead a reader to believe that it is a fairly easy change to make. It would be extremely difficult at best.

I was wrong regarding this concern.

The third comment I made was in regard to the possibility that the taxpayers may have to bailout the fund if returns are not what were expected.  The staffer writes:

This is something that was dealt with in numerous ways. First of all, the program requires very conservative investing. Secondly, the program is required to have insurance to back up the program. And, finally, the statute states explicitly that taxpayers have no financial responsibility should the program fail, and participants are required to sign an acknowledgement of the state’s lack of liability.

I do have some quibbles with this explanation.  Future legislatures can easily change the law if they opt to do so–especially if they have constituents demanding a bailout.  Secondly, I think the requirement to sign an acknowledgement is wise.  The problem I see is there is precedence of people who sign contracts suing–and winning–lawsuits when the terms of the contract turn against them.

Finally, interest rates are near zero and not expected to move much if at all in the next couple of years.  This means that rates-of-return on the pension’s investments will be limited.  Then there is the interest rate risk when rates begin to rise.  Interest rates are inversely related to bond prices.  When rates rise, prices fall.  With interest rates at essentially zero, bond prices are maxed out.  Pension funds heavily invested in low-interest bonds could potentially face significant losses when rates rise and prices fall.

This is not meant to be a criticism–I think the plan has potential to help with people to better prepare for retirement.  It is when the government is involved, there is the potential for politicians to cave in and guarantee benefits where the market fails.