AMERICAN private-sector workers face a problem. Too few of them have private-sector pensions, and the government scheme, Social Security, set up by Franklin Roosevelt (pictured) is less generous than it used to be. One study estimated that 20m elderly Americans will be living in poverty or near-poverty by 2035.
A new book* by Theresa Ghilarducci and Tony James has a plan to deal with the problem. It comes complete with a foreword and endorsement by Timothy Geithner, a former treasury secretary who had to battle the financial crisis.
The authors set out the problem in admirably clear fashion. Some 64% of women and 56% of men claim Social Security earlier than the official retirement age (which is rising in stages to 67), and thus suffer a reduction in their pensions. Those who retire at 62 get a Social Security cheque that replaces just 29% of a median earner’s income. The average monthly Social Security payment is $1,300.
That would not be a problem if recipients also had a private pension. But 24% of retired Americans have no source of income other than Social Security. Just 15% of workers have defined-benefit (DB) pensions, in which their retirement income is linked to their salaries. Most of those workers are in public-sector jobs.
More than half of private-sector workers are part of no private pension plan at all. Others are in defined-contribution (DC) plans which produce a savings pot on retirement, with no guarantee of any set income. A worker on the median income would need a $375,000 lump sum on top of Social Security payments to replace 70% of pay, often cited as a suitable target. But the median DC pot for workers aged 55-64 is just $80,000.
So what is the answer? All workers without a retirement plan would be enrolled into a scheme called the Guaranteed Retirement Account (GRA). Employees and employers would each put in 1.5% of pay and the government would add a flat $600 per year. The money would be pooled and managed collectively. No one could withdraw money from a GRA before retirement and the payments would be annuitised to provide a lifetime income. They would be guaranteed to get back at retirement at least what they had paid in.
It is not a bad plan, resembling an auto-enrolment scheme started in Britain in 2012. Since it would supplement rather than replace Social Security, it might not face much political opposition. And the government’s flat-rate contribution would go some way towards targeting tax benefits where they are most needed—at the lower end of the income ladder. At the moment the most affluent 20% of Americans get 70% of the benefit from tax breaks for payments into a pension scheme.
Whether the scheme would solve the retirement problem is more doubtful. Some parts of the book induce scepticism. (It does not help that Mr Geithner seems to confuse DC with DB schemes in his foreword.) The authors suggest, for instance, that guaranteed retirement accounts “will earn higher returns with lower risk”, a tricky feat. And they assume nominal returns on investments of 6.5% a year, which they describe as “conservative”.
But that number is not very conservative at all. The authors justify it in two ways. They cite projected returns on public pension plans of 7-8%. Alas, those assumptions are widely deemed too generous and have been dismissed by, among others, Warren Buffett, a famous investor, and Michael Bloomberg, a former mayor of New York and the founder of the financial-data firm that bears his name. It is very hard to earn such high nominal returns when you start from today’s low equity dividends and bond yields.
The authors’ second justification for their assumptions—the level of past returns—invites the same objection. Thirty years ago, the ten-year Treasury-bond yield was 10%. That made it much easier to earn a high nominal return. Now that yield is less than 3%.
Conventional DB schemes, which aim to pay out two-thirds of a final salary, require contributions of 20-25% of payroll. So it is hard to see how contributions of 3% or so into the GRA, even with tax relief, could replace 40% of median income for someone retiring at 62. (Added to 29% from Social Security, that would bring them within a whisker of the 70% target).**
The scheme will only work if more money is paid into it or if people retire much later. That may make it less politically acceptable. And the first workers to benefit from 40 years of GRA contributions would not retire until around 2060. The pensions crisis will hit before that.
* “Rescuing Retirement: A Plan to Guarantee Retirement Security For All Americans” by Theresa Ghilarducci and Tony James
** Shifting the retirement age to 65 alters the maths a bit, but not enough. Nor is it clear from the book whether retirees would buy an inflation-linked annuity or not, which would have a lower starting income. All British DB pensions (and many US ones) hae some imflaiton protection built in.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
Page not found | The Economist
'Find a solution!' Lord Hague demands EU shelve 'petty bureaucracy' to restart fish trade
Fukushima ‘failings’ add fuel to fire of world’s anti-nuclear movement | Climate News
Boris Johnson given 'final warning' to reach new deal with EU to stop Belfast riots
As GOP sticks with Trump, grassroots energy on the right has gone missing
FDA halts use of Johnson & Johnson Covid vaccine due to rare blood-clotting issues in six women
Nicola Sturgeon lifts travel ban as Scots to resume meeting outdoors from Friday
Remainers lose faith in EU and support Brexit after bloc's bitter vaccine threats
Biden, Congress to pay tribute to slain Capitol Police officer
Taiwan invasion unlikely for now – but there are other ways China can turn the screw | World News
EU army setback: Brussels' 'joint military ambitions' hit as defence budgets are slashed
World1 week ago
Deepak Chopra warns of disaster unless people address their well-being
Politics2 days ago
CEOs discuss pulling donations, additional public statements to fight voting bills
World1 week ago
Google will stop using Oracle finance software, switch to SAP
Latest News3 days ago
EU seating gaffe: European Council President Charles Michel ‘hasn’t slept well’ after seating arrangement incident | World News
Politics3 days ago
Expat warning: Expert tells Britons in EU to have paperwork in order or face chaos
Politics1 week ago
Sunak told to fork out extra cash for Britons forced to isolate 'No incentive to shield!'
Politics1 week ago
Dame Cheryl Gillan dead: Former Tory MP dies aged 68 as Boris Johnson pays tribute
Politics4 days ago
Prince Philip dead: Boris Johnson pays tribute to Duke of Edinburgh -'We mourn with Queen'