In June of this year Portland-based Western States Office and Professional Employees Pension fund told thousands of its members that most would see cuts of 30% in their pension checks starting October 1. While this is not particularly new in a long trend of pension cutbacks, what is more significant is that these cutbacks reflects a U.S. Treasury decision in 2014 that for the first time allows multi-employer pension plans to cut back pension benefits to those already retired (but under age 80). While pension plans have been cutting retirement benefits for younger workers and sometimes eliminating pension plans altogether, these new regulations have paved the way for a wholesale slashing of pension benefits that will only spread across the country. In the past, it was younger workers who worried about their pensions being cut. Now retirees can spend their retirement doing the same.
It's been a decade now since the U.S Federal Reserve Bank reacted to the busting of the U.S. real estate bubble by lowering interest rates to nearly zero, and keeping them there for most of the past decade (see graph below). The Fed's experiment has changed the financial condition and economics of the world, and overall, not for the better. One of the fundamental laws of nature, and economics, is reversal to the mean. Those areas that prospered by unnatural actions will reverse when those unnatural actions are removed. If the Fed's objective was to keep firm control on the world's financial and economic system, chaos and unpredictability are the inevitable results if the natural order ever takes the upper hand.
Last time I talked about how the Social Security program has nothing to show for trillions of dollars of past profits, and uses crony accounting to show profits for its program by including mythical interest on non-existent assets. This time we'll see that how the losses for the Social Security, Medicaid and Medicare programs are sharply increasing and spending on these programs is growing faster than the rest of government. Except for the nearly unthinkable scenario in which Social Security and Medicare (and Medicaid) benefits are substantially reduced, these programs will continue to crowd out the rest of the government, including the military. This is already happening as the “non-discretionary” programs of Social Security, Medicare and Medicaid are untouchable to government reductions, leaving just a small and shrinking slice of government spending with which to make spending cuts. Ironically, this will speed the process whereby these social welfare and insurance programs take over and become the U.S. federal government.
The recently released 2018 Social Security and Medicare Trustees Report outlined the continuing deterioration and vulnerability of the Social Security and Medicare programs and their future in America. The Trustees reports now projects that Social Security “Trust Funds” will be depleted by 2034, and that Medicare's Hospital Trust Fund will be depleted in just eight years, three years earlier than anticipated just a year ago. And as with all of their recent annual reports the trustees call for Congress and lawmakers to work to address the problems that have been building for decades. Unfortunately, the idea that another decade or two might pass before Social Security and Medicare is in trouble continues to provide excuses for lawmakers to do nothing to limit the damage to future government budgets, taxpayers and the economy. Among many politicians and within the general population, the false idea that Social Security has a trust fund to pay for future losses grossly distorts the true picture of how the Social Security program operates and how it unwisely spent its profits during economic boom times.
“Annual Income twenty pounds, annual expenditures nineteen six, result happiness. Annual income twenty pounds, annual expenditures twenty pounds ought and six, result misery.” - Charles Dickens, David Copperfield
It is generally accepted that financial stability for an individual, family, or business rests on generally having lower expenses than income. It is this margin that leads to savings and investment, personal and professional opportunities, financial security and peace of mind. Unfortunately, this perception often changes when talking about economics and the larger society. When a large population reduces spending - increases savings - it can lead to lower economic output in the short run. It is for this reason that many “experts” believe it is bad for consumers to be savers and lower spending (higher savings) is often said to be “dangerous” for the economy. Is it actually the case that overspending at the micro level is bad but doing so at the macro level is good? Many seem to think so.
There has been much fanfare and economic optimism since the Tax Cuts and Jobs Act of 2017 was passed by Congress in November, 2017. Supporters of the Act tell us that these tax cuts (explicit in the name of the Act) will benefit individuals, families and businesses, reducing taxes, putting more money in their hands and letting the economy expand as government gets out of the way. As a result of the tax changes, the Joint Committe on Taxation estimates that the Gross Domestic Product (GDP) of the U.S. will increase by 0.7% over the 2018-2027 decade (not yearly, but over the entire span), and personal consumption will be 0.6% higher a decade from now compared to if the law were not enacted. The law is also associated with higher projected federal deficits. The Congressional Budget Office (CBO) predicts that the tax law changes will add approximately $1.9 trillion to the federal debt over the coming decade, in addition to the estimated $9.8 trillion of debt additions already projected before the Act.
Last time I talked about some of the problems with retirement calculators. These calculators are designed to help retirees plan for their future, based on their assets, saving, income and lifestyle. Based on these calculations, retirees are told how many financial assets they'll need to retire, and when they'll be able to do so. Unfortunately, these calculators also often give biased advice, distorted by projected retirement income needs, investment return averages and other variables that don't reflect reality for the vast majority of their users.
For many, deciding when to retire will be the most significant financial decision they'll make. Mistakes here sometimes lead to very negative consequences. Retiring too early means potentially outliving financial resources and a lower standard of life. Retiring too late can mean work, saving and sacrifice instead of relaxation. To help with this very important decision, scores of financial calculators have popped up to assist potential retirees. Although there are some benefits to many of these calculators – namely getting future retirees to think in concrete financial terms about retirement – they're far from perfect. They cannot account for the personal circumstances unique to retirees. Also, the assumptions they use and the output that results sometimes leads to more confusion and worse advice than none at all.
Last time I tried to explain some of the variation in health and longevity across countries using traditional health benchmarks of smoking, alcohol and obesity rates. Yet I showed last time, that those benchmarks are not particularly good at explaining health differences across countries. Obesity rates and smoking rates have very little correlation with higher longevity across countries, and only very high levels of alcohol consumption, and especially spirits, seem to negatively affect a population in aggregate. Most of the differences in longevity across countries (and within) are due to wealth differences (see graph below), but we still see relative overperformers and underperformers around that general trend.
As I noted last time, when looking at longevity, there is a very high correlation between a country's healthcare (or medical) spending and their average longevity (see graph below). The variation around that strong trend reflects relative weakness or strength. The overachieving group of countries in terms of longevity for their respective healthcare spending include poorer ones like Bangladesh, Vietnam, Jamaica and Cuba, as well as richer ones like South Korea, Singapore, Japan and Spain. On the other side, lower- and moderate-spending countries like Mongolia, Indonesia, Kazakhstan, and Russia do poorly on relative longevity, even compared to their lower spending levels, as do higher-spending countries like Kuwait, Saudi Arabia and the U.S., the latter of which is the largest healthcare spender in the world by a large margin (all these spending figures are per capita, and after adjusting for Purchasing Power Parity (PPP), or countries' respective cost of living).
David A. Pace, CFA
Note: These comments and articles are for informational purposes only. Nothing in these articles are meant to provide specific investment advice and are not a substitute for professional advice from a qualified adviser. Since every investor's investment and personal circumstances are unique, he or she should always enlist the help of a competent and trustworthy professional in addressing their financial needs.