Allison's ode to the second moment
Welcome to the 23rd issue of Allison’s Ode to the Second Moment, a newsletter that—in these confusing and uncertain times—still can’t tell you how to beat the market. But at least it doesn’t charge you for advice.
Rethinking the fiduciary rule
So it looks like financial advisors may not be subject to the fiduciary standard after all. A memorandum on Friday asked the Department of Labor to review and revise, or possibly rescind, the rule. It sounds crazy to not make advisors act in their client’s best interest. But I don’t think a fiduciary standard leads to better advice and I know it destroys innovation. I’ll shed no tears for it.
The Wall Street Journal has an interesting story on the most important development in the labor market that you probably don’t know about.
There was a time everyone you encountered at work—admins, tech support, janitors, all the way up to the CEO—was an employee of the firm. Now more firms are out-sourcing these jobs. Odds are your admins, tech guy, and cleaner work for a temp firm, not the company. They haven’t outsourced CEOs—yet. This trend is called workplace fissure, and it can explain a lot about what’s going on in the labor market.
When everyone worked for the same company, there was more wage compression because firms couldn’t get away with HUGE pay disparities among their employees. So fissuring means less compression and more income inequality. Or income inequality caused fissuring because wage compression is more expensive when technology rewards some workers more than others. Let’s just say fissuring is a vicious cycle.
Fissuring also explains the trend of lower earners working fewer hours and high earners working more. When you are contractor, you only work the hours when there is work to do. When you are an employee, you get paid for a full day—no matter what you do. Contract employees earn more per hour, but they work fewer hours than employees, the difference adds up to less take-home pay for the contractors.
There is also concern fissuring will make work and income more risky. Lower pay and more risk doesn’t sound great. Though believe or not, it is not clear that fissuring has really made workers worse off in every way. Some people say they enjoy the flexibility and more leisure time. Fissuring is a big deal. The only certainty is we’ll be hearing more about it.
Who takes the most coffee breaks?
Speaking of work hours, a controversial new NBER paper measures which racial and ethnic group spends the most time at work not working. They estimate minorities spend less time engaged with work; the differences are small (like just minutes) but significant. This situation certainty can’t explain most of the pay gap between minorities and white Americans.
Women aren't saving enough
Diane Garnick has an interesting paper that estimates women should save 18% of their income for retirement; men only need to save 10%. This is because of many reasons: women work fewer years, are paid less, they invest in lower-yielding assets, and (just like dry-cleaning) retirement is more expensive for women.
Now saving 10% is a tall order for most households, let alone 18%. Another solution is more cross-gender subsidies, like in-plan annuities that must use the same mortality tables for men and women. When annuities can’t be priced based on gender, men subsidize women because men live for fewer years.
I have mixed feeling about gender-neutral annuity pricing. I do see the case to subsidize women’s retirement. After all, they have less money because they tend to do unpaid work the economy needs—like childcare and care-giving. But gender-neutral pricing makes annuities expensive for men and they might not buy them, which drives prices up further and risks a price death spiral.
Park slope co-op is so into active management
Did you see that the Park Slope Food Co-op pension plan is in financial trouble? Looks like they invested in high-risk, high-fee assets that didn’t pay off. Now they need $1 million to make the pension whole.
This raises so many questions. Why do they have a defined benefit plan to begin with? It’s so expensive and inefficient for a small company; they have only 90 employees. And this is not an old legacy plan. It was set up in 1992, long after ERISA made defined benefit plans prohibitively expensive for small employers.
But that was just their first mistake. Then they invested the pension assets in hedge funds: The Park Slope Co-op, that bastion of socialism. Seriously. They make everyone who shops there, work there, and you’ll see Park Slope Yuppies working the checkout counter and bagging groceries. And they invested in hedge funds that are in some “unsavory” stocks!?
Immigration policy gets risky
In the midst of our non-stop news cycle and hubbub of the executive orders, did you notice new legislation before the House of Representatives that will increase the earnings required for an H1-B visa to $130,000? This and other plans to increase H1-Bs restrictions are counterproductive. H1-Bs are how entry-level foreign students tend to get their first job. Research shows people with this visa typically go on to form businesses and important jobs natives won’t/can't do. Restrictions seem like a bad idea.
To be honest, I have never liked America’s immigration policy. Yes, confusion and discontent are terrible; I wish the situation were different. But at least people are more aware of, and engaged with, our immigration policy. Maybe something good will come of that.
What’s up with AARP?
Have you seen their ads announcing their solidarity with the Trump administration because of his promise to honor their “deal” with Medicare? Considering the political diversity of their membership—this seems like a bold choice. Perhaps they are speaking directly to the President.
Yet several things about this ad campaign are strange. First all, the Medicare reform proposals only impact people under 55. No one is questioning their deal. And no Baby Boomers haven’t paid in taxes what they’ll get in Medicare benefits (they paid less).
What deal did they make a long time ago anyhow? Does that deal include part D? Because that deal was pretty recent.
And doesn’t “protecting Medicare” require making it financially sustainable?
I hope we sort this out soon. EBRI released an estimate this week that out-of-pocket health care expenses, in retirement, average $350,000. That’s just the average. The variability is HUGE.
Until next time, Pension Geeks!