Allison's ode to the second moment


Welcome to the 32nd issue of Allison’s Ode to the Second Moment, a newsletter where everyone lives forever and we have no conceivable way to pay for it.

Debt bomb

The World Economic Forum (WEF) estimates that by 2050 the world will be $400 trillion short on funding old-age spending. This estimate includes shortfalls in public, private, and individual savings. Reasonable people might quibble with some of WEF’s assumptions, but no one can deny that developed countries face a serious risk of financial catastrophe. WEF likens the problem to climate change—a slow moving and potentially serious threat.

Similar to climate change, the costs of doing something now are much smaller than the expected costs associated with the wait-and-see approach. In both cases, we aren’t totally certain how they will turn out. In the case of pensions, people might die earlier than we expect, people might start having lots of well-educated babies, or we might experience a major productivity boom. But that’s a tail case—a good one, but not the most likely outcome. The costs associated with the worst-case scenario make a great argument for taking action now.

Not that there is any sense of urgency about the problem because it is political kryptonite to even acknowledge the extent of the problem. Look no further than what happened to Theresa May and her “dementia tax.”

How long are we going to live anyway?

The WEF expects many people born today to live to at least 100, which is much higher than our governments expect, but it could happen. The past century featured increasing gains in life expectancy.

Lately the growth rate has stalled or reversed because of obesity, smoking, and opioid abuse.

Assuming everyone lives the best possible healthy life-style, can we still expect life-expectancy to keep increasing at the same rate? Or has all the low-hanging fruit been picked and, even under the best possible conditions, humans are just not meant to live super long?

The FT spoke to scientists who believe we can maintain the same growth rate. They argue science can continue to make improvements in our old-age health. Maybe someday people will live to be 120.

Economists are having a similar debate about productivity. Some argue all the big improvements in living standards have been tapped out. Others think living standards can keep improving at the rate they did in the 20th century.

Life expectancy raises similar questions, though the implications are potentially even more important.

You may have been distracted by all the news on U.S. infrastructure last week

Yes, it looks like the fiduciary rule is set to go into effect. Now no one is going to argue against making advisors offer financial advice that’s in their clients’ best interest. Like many policy debates, we might agree on the objective, but disagree on the best way to achieve it.

Pension Geeks who read this newsletter know I am not convinced a fiduciary standard is the best way to ensure people get good advice. We still don’t even know what giving good advice means. I think good regulations are clear and well-defined, otherwise they just create lawsuits and confusion.

I am increasingly concerned that the only way we measure good financial advice is by scrutinizing investment fees. No one thinks low fees are important more than I do…well, maybe this guy does. But sometimes you pay a fee and get something valuable in return—like risk-reduction or diversification. I think lots of non-pension geeks forget that the retirement problem is a hard one and it remains unsolved.

We know one thing; fees are not an adequate way to measure the quality of an investment strategy. The goal should be consistent and reliable income over a lifetime. A new potential risk is a race to the bottom fee-wise. It might seem to benefit customers, but if asset managers/insurers start charging fees that don’t cover their risk exposure…well, that could be trouble for everyone.

Do Americans have enough savings?

Nope. I am not a total doomsayer on this, but I think it’s hard to argue the average American’s balance sheet is in great shape. Now that the economy has “recovered” debt is back.

The Wall Street Journal argues we needn’t worry about this. Households are in better shape than they appear because their debt-to-income ratios are still well below pre-crisis levels. The rising debt comes from financing assets that can increase lifetime income such as student loans. Meanwhile, credit card and mortgage debts are down.

Sure, maybe we don’t need to freak out about debt. The issue is that many are still in a precarious position. Many households can’t scrape together $400 in an emergency. Higher debt is fine with higher income, but what if you lose that source of income, still need to make debt payments, and have no savings?

Other news you may have missed during infrastructure week

The few Puerto Ricans who went to the polls voted to become a state. I am not sure if that will help them or not, but they need something.

Texas cities, on the brink, cut pension benefits, which is illegal in most states. Texans play by their own rules. Come to think of it, what is a pension obligation really? Does anyone really have a claim on it or is it a human construct that lacks any true meaning.

While we are revisiting the rights to future income, maybe we should eliminate all property rights, too.

Until next time, Pension Geeks!