New paper looks at how the Social Security trust fund would have been impacted had it invested in equities

In a new paper, Gary Burtless (along with four others) of the Brookings Institution looks at how investing in equities beginning with the Social Security reforms of 1983 would have impacted the trust fund. They write:

Our simulations suggest that equity investments would have been helpful historically and can be helpful prospectively.  Investing part of Social Security reserves in equities can reduce the need for future payroll tax hikes and benefit cuts. If equity investment had begun in 1984, for example, and if equity holdings had ramped up to 40 percent of the Trust Fund portfolio, reserves at the end of 2015 would have been $3.8 trillion compared with actual holdings of just $2.8 trillion.  A more helpful measure of the size of the reserve is the “Trust Fund ratio”—the amount of assets in the Trust Fund at the beginning of the year divided by expected Social Security payouts during the year. If equity investment had been phased in beginning in 1984, the Trust Fund ratio at year-end 2015 would have been 4.1 compared to the actual ratio of 3.1 (see Chart 1).  If equity investment had been phased in beginning in 1997, the ratio would have been 3.7.

Paper finds that labor force participation of older Americans increased after the Great Recession

Gary Burtless of the Brookings Institution has a new paper that looks at labor force dynamics and its implication for older workers. He finds:

Unlike prime-age Americans, who have experienced declines in employment and labor force participation since the onset of the Great Recession, Americans past 60 have seen their employment and labor force participation rates increase. Some of the shifts that account for the increase participation rate of older Americans:

  • Like workers in all age groups, workers in older groups saw a surge in monthly transitions from employment to unemployment in the Great Recession.
  • Unlike workers in prime-age and younger groups, however, older workers also saw a sizeable decline in exits to nonparticipation during and after the recession. While the surge in exits from employment to unemployment tended to reduce the employment rates of all age groups, the drop in employment exits to nonparticipation among the aged tended to hold up labor force participation rates and employment rates among the elderly compared with the nonelderly. Among the elderly, but not the nonelderly, the exit rate from employment into nonparticipation fell more than the exit rate from employment into unemployment increased.
  • The Great Recession and slow recovery from that recession made it harder for the unemployed to transition into employment. Exit rates from unemployment into employment fell sharply in all age groups, old and young.
  • In contrast to unemployed workers in younger age groups, the unemployed in the oldest age groups also saw a drop in their exits to nonparticipation. Compared with the nonaged, this tended to help maintain the labor force participation rates of the old.

California Public Employee Pension Fund sacrifices returns for socially responsible investments

Diana Furchtgott-Roth of the Manhattan Institute criticizes the California Public Employees Retirement System for sacrificing pension returns in order to follow a socially-responsible investment strategy. She writes:

CalPERS grew by only 0.6% in the fiscal year ending June 30, 2016. This follows last year’s below-target return of 2.4%. California pays its pensions on a defined-benefit basis. In order to meet those costs, CalPERS must grow substantially more rapidly than inflation. So California taxpayers are on the hook for paying hundreds of billions of dollars in unfunded liabilities. In contrast, CalPERS’ average return over the past 20 years has been 7.8 percent. But this year’s disappointing results, driven by the fund’s recent push for socially responsible investing, look set to bring that healthy clip to a crawl. CalPERS’ 2014 report, Towards Sustainable Investment & Operations: Making Progress, brags about its Environmental, Social, and Governance (ESG) investment strategy. This results in a choice of investments not solely by return, but by a variety of social and environmental criteria. Firms that CalPERS considers to be bad actors for a wide variety of reasons are not selected for the pension fund, even if they generate high returns.

Intergenerational Problems of Social Security

James Capretta and Tejesh Pradhan have an article in Real Clear Policy where they discuss Social Security’s intergenerational “conundrum.” They write:

The earliest generations of Social Security beneficiaries enjoyed the highest rate of return. A worker born in 1925 who earned the average wage would have gotten a 4.8 percent return on their payroll taxes. The rate of return dropped to 2.7 percent for those born in 1950, and to 1.7 percent for those born in 1975. For those born in 2000 or 2025, the program is expected to provide a very low rate of return — less than .25 percent in both cases. 

The trend is clear: over several decades, earlier cohorts of beneficiaries received benefits with an implied rate of return that would be viewed as sufficient for most retirement investments. But as changes have been made to the program, and the ratio of workers to retirees has declined, the trend has been toward higher taxes and benefits but a lower implied rate of return on lifetime payroll contributions.

The falling net rate of return for those entering the program in this century is a function of Social Security’s pay-as-you-go structure. Current workers pay the benefits for current retirees. That works well as long as the ratio of workers to retirees remains constant or rises. But when it falls — with declining birth rates and longer lives for retirees — it’s not politically feasible to take back benefits from those already in retirement. The only solution is to impose higher taxes and lower benefits on current and future workers. 

Some reasons why Generation Xers and millennials will retire later than expected

Sean Williams at The Motley Fool provides a number of reasons why Generation Xers and millennials will retire much later than the baby boomers. They include:

– Social Security isn’t on solid footing

– Medical inflation is handily outpacing the CPI

– You’re not saving enough

– You’re not investing wisely

– People are living longer than ever

FINRA to review actions by brokers to ensure they are working in the best interest of their clients

The Financial Industry Regulatory Authority (FINRA) will review whether securities brokers are acting in the best interest of their clients according to an article by Suzanne Barlyn and Ross Kerber at They write:

FINRA does not have authority to enforce the Labor Department rule, [FINRA chairman Richard] Ketchum said. “But we do have the authority to look and see whether firms are dealing fairly with their customers and not misleading their customers,” Ketchum said at the Reuters Global Wealth Summit in New York…Ketchum said he believes the Labor Department does not have enforcement authority over IRAs. Industry groups made a similar argument, among others, in a lawsuit filed June 2 in a U.S. District Court in Texas to challenge the rule.

401(k) balances vary with income levels

Emily Brandon at US News and World Report looks at how 401(k) plans compare among the various income levels. She writes:

The median 401(k) account balance was $18,127 at the end of 2014. However, most people tend to have either very high or low balances. Some 40 percent of 401(k) participants have less than $10,000, while 20 percent have more than $100,000, according to a recent Employee Benefit Research Institute analysis of 24.9 million 401(k) plan participants. Workers with a high salary and more years on the job are often more able and willing to tuck money into retirement accounts. The dollar value of the tax deduction for saving in a retirement account is also more valuable if you are in a higher income tax bracket.

States where retirees have saved enough

Ann Brenoff writes in Huffington Post that retirees in only three states—Alaska, Hawaii, and South Carolina—meet the rule-of-thumb threshold of income that represents 70% of pre-retirement income. She writes:

“These numbers help illustrate how underprepared many Americans are for retirement,” said Greg McBride, CFA,’s chief financial analyst, in a press release. “It’s especially important for millennials to save aggressively because they face the biggest retirement savings burden of any generation in American history.” To come up with these results, examined the U.S. Census Bureau’s 2014 American Community Survey. For each state and Washington, D.C., Bankrate divided the median annual household income for those who are 65 and older by the median annual household income for those between 45- and 64-years-old. “Income” was defined as wages, salaries, tips, Social Security, interest and dividends, pensions, income from defined contribution retirement plans (such as 401(k)s and IRAs, rental properties, royalties and other sources.

One problem with’s analysis is it uses household income rather than individual income. There is a good change that Americans in their 40s and 50s will still have children living at home: by the time they reach retirement age not so much so. Thus, the income of a household with earners ages 45 to 65 will have to support more consumers. As well, some of the younger households may have teenagers or college age children who work full or part-time, raising average household income. Not taking into account the size of household distorts the conclusions based on the results.

The article mentioned an interesting approach by policy-makers in Alaska: the state’s public pension system pays an annual 10% bonus to those Alaskans who remain in the state after they retire. Northern states and those with high state income taxes are susceptible to seeing state and local government workers leaving their states (when they retire) for more hospitable environs like Florida, which has warm weather year round and no income tax. I wouldn’t be surprised if other states adopt such an approach to keep retirees, and their spending, in-state.

A survey of individual’s biggest financial regrets

The website Bankrate has a new survey which asks individuals what their biggest financial regret is. The answer given the most (18%) was “not saving for retirement early enough.” Another 13% answered “not saving enough for emergencies.” On the other hand, 17% said they had no regrets. Not surprisingly, 27% of those 65+ regretted not saving earlier; while only 4% of 18-29 year old said this was their biggest regret.

Legislation looks to strengthen financial protection of seniors

Mark Schoeff Jr. has an article in Investment News which looks at proposed legislation by Senator Collins (R-ME) that attempts to strengthen financial protection for senior citizens. He writes:

Ms. Collins’ legislation would provide liability protection for people working for financial firms and the firms themselves for notifying appropriate agencies when they suspect that elderly clients are the targets of a scam. The measure was introduced last fall and has seven bipartisan cosponsors. But the legislation will need more support in order for it to be brought up and passed by the Senate Banking Committee and acted on by the full Senate, Ms. Collins said. “I’m optimistic that if we can show greater interest in the bill, we can get it approved by the Senate,” Ms. Collins said in a speech at a North American Securities Administrators Association conference in Washington. She hopes the full Senate would approve the bill by voice vote and the House would take it up in a lame-duck session late this fall. State regulators have made senior financial abuse a priority, and NASAA approved a model rule that is now being considered by individual states.

Fees charged by 401(k) plans are falling

Anne Tergesen writes in The Wall Street Journal that 401(k) fees are trending lower. She writes:

An explosion of information about plan fees has helped increase bargaining power for companies in negotiations with fund providers. And a wave of successful lawsuits against companies alleging their plans had high charges has also led many to seek out lower-priced options for employees. Meanwhile, a new Labor Department rule that would hold financial advisers to higher standards of behavior for retirement accounts will likely lead smaller plans—where fees remain highest—to cut costs, experts say. The result has been big savings for investors’ combined $4.5 trillion nest eggs. Plan administrative costs fell to their lowest level in a decade last year, consulting firm NEPC LLC said, and overall fees are expected to keep falling.

Event: Returning Puerto Rico to Solvency without harming the Municipal Debt Market

Congress is working towards providing a mechanism for debt relief for the Puerto Rican government, which has $72 billion in debt and an economy that’s been in a recession for a decade. Since Chapter 9 of the federal bankruptcy code does not apply to territories, Congress can either extend Chapter 9’s basic structure or else create something more expansive. It is currently leaning towards the latter.

Some suggest that how Congress resolves Puerto Rico’s debt crisis may serve as a precedent for states and municipalities, a number of which have debt levels that seem unsupportable in the long run, and that this perception may in turn impact the municipal bond market.  Others insist that there are no broader implications of any resolution to the island’s fiscal crisis, and that the important thing is to reach a bipartisan solution quickly.

Please join us for a discussion about the economic, market, and political implications of this debate.

Where: SD-G11 Senate Dirksen Office Building

When: Thursday, May 12th 4:00pm-5:00pm



Ike Brannon: President of Capital Policy Analytics and a visiting fellow at the Cato Institute.

Hector Negroni:  Co-Founder of Fundamental Credit Opportunities (FCO) and a Puerto Rican native.

Charles Sauer: President of the Market Institute and director of the Savings and Retirement Foundation

JW Verret: Senior scholar at the Mercatus Center’s Financial Markets Working Group at George Mason University

Outsourcing of investment advice more likely under new fiduciary rules

Greg Iacurci, in the Investment News, discusses how new Department of Labor fiduciary rules will lead to more outsourcing of investment advice in order to reduce liabilities. He writes:

Outsourced investment advisory services for 401(k) plans stand to reap the benefits of the Labor Department’s proposed rule to raise investment advice standards in retirement accounts. The rule would make fiduciaries of any 401(k) adviser giving investment advice, and advisers who take on more liability by constructing and monitoring a plan’s investment lineup as a result of the regulation may look to offload some of that risk. “Post-DOL, I imagine [outsourced services] will become even more popular,” said Anthony Domino Jr., managing principal at Associated Benefit Consultants.

A new paper by Mark Warshawsky and Ross Marchand looks at state and local pension problems

The April’s speaker at the Foundation’s monthly lunch will be Mark Warshawsky of the Mercatus Center. He and his colleague Ross Marchand have a new paper: The Extent and Nature of State and Local Government Pension Problems and a Solution. Among the reforms they recommend are:

  • Reporting requirements. All state and local governments should be required to file an annual report with the US Treasury that includes information on plan participant demographics and the funding status of their pension plans, using standardized conservative accounting assumptions, as is done in the private sector. Plans should be required to report this information to participants in plain language. Any states or municipalities that fail to comply should lose federal tax exemptions for the interest on their bonds.
  • Voluntary buyouts for plan participants. State and local governments should be allowed, but not required, to offer retirees below age 80 and older workers a lump-sum buyout of their pension benefits. The buyout amount should be calculated by taking the present value of the accrued retirement benefits and discounting it by 100 percent less the funded percentage of the plan, and then adding 5 percentage points. Basing the discount on the plan’s funded status would prevent the plan from becoming insolvent if many retirees opt for the buyout, while the extra 5 percent would serve as an additional incentive for participants to take the buyout.