Allison's ode to second moment: Twelfth issue


Welcome to the twelfth issue of Allison’s Ode to the Second Moment, a newsletter where men are (still) men, financial markets are volatile, and pension accounting is transparent.

In honor of Labor Day, let’s talk about our largest and riskiest asset…

I am talking about human capital, or lifetime earnings. Each passing Labor Day we feel a little more wistful for those halcyon days when jobs were stable and income predictable. Our nostalgia makes us pine for idealized, union manufacturing jobs that no longer exist. Such feelings normally turn to worrying about the future of working class men. The changing labor market appears to be robbing them of their identity, place in society, and is tearing our social fabric apart. Some say there’s a crisis of masculinity—where many men aren’t working, feel displaced, and can’t provide for their families. Happy, Labor Day.

But, if you put it in a historical perspective—it’s ironic that the end of factory work is what’s causing a masculinity crisis. During the Industrial Revolution, factory work was what was considered emasculating. Moving from farm to factory changed men and how we view work. Back then, the concept of having to be somewhere all day and another man bossing you around was considered so demeaning, men couldn’t take it. Factories originally hired women and children because they were the only ones who could cope. It took years of social conditioning before we equated the factory-man with masculinity.

I had a conversation about the history and the future of work with my favorite economic historian, Joel Mokyr. He says moving from home production to factory was just as, if not more, disruptive to society then as the end of manufacturing is now.

Unlike everyone else, Mokyr is optimistic about the future of work. We can’t imagine what future jobs will be. But there will be jobs, and they may involve more gig work and telecommuting. If so, future work may involve a return to a more traditional and natural version of masculinity. Work in the future may feature men setting their own hours, choosing what tasks to do, and no boss to answer to.

It may be great—but it also means more risk, because there’s less stable income, benefits, and hours. We've built our economy around people relying on a single, stable employer. Our institutions must adapt to the changing nature of work. The future also requires everyone to have lots of motivation and an entrepreneurial spirit. I am optimistic most people can pull it off—they did before--when the economy was made up of small-scale artisans and farmers.

But maybe this time is different and people have changed. New research suggests it’s not just anecdotal, there really is an epidemic of young men playing video games in their parents’ basement and not working by choice. Erik Hurst speculates technology made non-employment more appealing than ever before. If so, some men will thrive in the future, but others will be too entranced with video games.

Update on the nerdiest rivalry in America

Great news, Pension Geeks! Remember a few weeks ago I wrote about the Society of Actuaries/American Academy of Actuaries not releasing a report that suggested pension plans use a discount rate that reflects risk? Well, wiser heads prevailed and the report will be published after all!

Final score:
Financial economists 3
Actuaries -1

Congratulations to Jeremy Gold and Ed Bartholomew for not backing down and bringing this issue to light. In the end it got more attention than if the actuaries just released the report in the first place.

If Chile can’t make Defined Contribution work–-who can?

When people ask me what’s the best pension system in the world, I always say Chile. It is an example of a DC system that does almost everything right. There are high savings rates and well-curated investment options. But where they really shine is a spend-down plan and well developed annuity market that helps people mange post-retirement risk. Most countries haven’t even thought about that part yet.

But many Chileans are unhappy because the pension does not cover informal work and women when they leave the labor force. There are calls to scrap the system and move to an unfunded defined benefit government pension.

Fair point, but I think they are throwing the baby out with the bath water. Perhaps Chile just needs a more comprehensive safety net. A few weak spots doesn’t mean the Chilean government/future tax payers must take on all risk.

Perhaps the conversation Chile (and every other country) needs to have is about risk sharing. How much should the government take? How much should be on individuals---and should that vary with income? They we can also make DC coverage more inclusive.

Taking stock(s)

But Chile is still miles ahead of the rest of us. Former PBGC Director Joshua Gotbaum reflects on the retirement landscape, ten years after the Pension Protection Act. Turns out there were many unintended consequences—it was the final nail in the coffin for DB plans and it didn’t increase DC coverage as much as policy makers hoped. Looking forward he would like to see life annuities become more popular.
I am not optimistic. The sudden obsession with low fees may also have unintended consequences too and shrink the annuity market—leaving retirees with few secure income options.

Speaking of secure income, The Financial Times recently ran an excellent series on the state of pensions in the US and UK. Now that low rates are here to stay, people are realizing that their pension savings may not grow as fast as they thought. It means savers, both individuals and large pension funds, will need to save more. Another alternative is taking on more risk.

As you know, I feel for savers and think low rates have consequences we are only starting to understand. But there was never a free lunch when it comes to asset returns. No one ever promised you an 8% return---at least not for 20 basis points.

Personally, I am less worried about lower expected returns than I am about risky assets. I worry they have become more volatile and if the price of safety is too expensive for most people. Forcing people to take on more risk than they want can radically change their behavior and consumption decisions. The cost of more risk and uncertainty may turn out to be larger than lost wealth from lower returns.

But hey. I don’t know if the stock market will be more volatile in the future, but it sure seems like income will be.

Until next time, Pension Geeks!