Allison's Ode to the Second Moment


Welcome to the 42nd issue of Allison’s Ode to the Second Moment, a newsletter with a fool-proof risk diet for the New Year.

Annual risk tune-up
The New Year is a time to reflect and do things that are unpleasant—but good for us—like going to the gym or not eating carbohydrates. For most people, even Pension Geeks, taking stock of our personal finances is as fun as a vegan/gluten-free meal. Yet it must be done, so this time of year you’ll see many personal finance checklists.

I have my own list this year, with a twist. Instead of the standard advice of maximizing your deductions and rebalancing your 401(k), my end-of-year advice is about personal finance risk management, so that whatever happens in 2018 your finances can withstand it. Risk management is what finance is supposed to be about, right?

In my travels this year, I’ve met many brilliant risk managers in unusual places from Nevada brothels to paparazzi trolling the streets of Manhattan to surfers on the North Shore of Oahu. Everyone had ingenious ways of managing risk in their jobs, but many didn’t know how to apply those ways to their own finances.[1] Many Americans are overwhelmed and manage their money poorly because we don’t teach them about personal finance.

It is not surprising that disparities in financial literacy are reflected in wealth inequality. Of course, there are many structural reasons for wealth inequality, but more education on how to manage household finances could make a big difference.

One common factor among the people I’ve met in my travels and my friends in New York City is that many don’t understand the basics of risk when it comes markets, credit, and debt. I don’t just mean their definitions, but rather misunderstanding the fundamentals of risk and return. I see people make sophisticated risk decisions in one sphere of their lives and then not apply them to their own money. I don’t think it is a stretch to bring it all together. It just takes more education.

Big-wave surfers are just like Pension Geeks, only with better tans
Talking about risk education, I wrote about some of the things I learned at the big-wave surfing risk conference. It turns out big-wave surfers are just like us! They sit in hotel conference rooms and look at PowerPoint slides too. I learned all sort of things and even got re-certified in CPR. Some of the more interesting moments involved the ongoing debate in the community about regulation.

In recent years, technology has made big-wave surfing safer and therefore more accessible. But that also means more people who lack the necessary skill and athleticism are trying to surf big waves. Weak surfers pose a danger to others by crashing into other surfers and requiring resources when they need to be rescued. Those resources are then not available for more experienced surfers. Safer gear also emboldens surfers to take more risk.

Each new innovation, now inflatable vests, raises questions about whether surfing safety gear should be easy to buy or if there should be restrictions on who can access it. If there are restrictions, who should monitor and enforce them, or should big-wave surfing require a license? No surfer I spoke to likes the license idea. They mostly self-regulate, but as technology changes, many worry this won’t be enough. That is why they need good risk conferences. Every industry should have one.

Can high-tax states survive with less SALT?
I don’t entirely understand the argument that limiting the SALT (state and local taxes) deduction will make high-tax states cut taxes and spend less. Maybe…maybe…they will cut taxes but I doubt they will spend less. I am not convinced they are spending too much to begin with. In many states there is hardly any room to cut spending. One big reason why U.S. infrastructure fell into disrepair is most infrastructure spending happens at the state level, and that spending isn’t happening as much as it used to. Then there are the pension obligations states need to pay for and those benefits can’t be cut. Or not.

California’s public-sector employees are fighting fairly modest pension reforms that will prevent them from “spiking” their benefits. They argue that a constitutional guarantee is a constitutional guarantee, and they were promised a benefit, even if it is unrelated to the years they actually worked. Not so fast says Governor Jerry Brown and California’s courts. It turns out there are some chinks in the guarantee. The plaintiffs only get “reasonable benefits.” This could be a big deal. As more states face financial stress and must pay benefits, they will need to find more revenue. Reducing the SALT deduction may limit their space to increase taxes, so they will be looking to pensions, which so far, have almost never been cut. Keep your eye on what happens in California.

The Wall Street Journal speculates taxes are driving people to low-tax states. I agree it could be a factor in addition to climate (low-tax states also tend to be warmer) and economic opportunity. But I doubt where a worker lives hinges on the SALT deduction. Maybe…maybe…it could convince retirees to leave the states they worked in, but even that decision is on the margin.

The retirement crisis isn’t what you think it is
Andrew Biggs brings more evidence we don't have a widespread retirement crisis. Lots of people have saved enough, and they may even be in better shape than previous generations. True, some haven’t saved, but some of them are entitled to other sources of income.

I think it is hard question. Some people are going into retirement prepared and others aren’t.
Savings isn’t always the problem. The problem is retirees, even those who have saved enough, don’t know what to do with their wealth. A new report from BlackRock argues people just aren’t spending. They estimate that 20 years into retirement most people still have 80% of their pre-retirement savings.

This may be promising news. Perhaps retirees have different sources of income and are keeping their wealth for health expenses and bequests. Or it could mean they are scrimping, afraid to spend their wealth because they fear out-living their assets, and don’t have adequate guidance to formulate a good spending plan.

Fed transition
The Fed increased rates, a little, which means almost nothing. Janet Yellen is stepping down. Few would deny she had a successful tenure. People have good things to say about Jay Powell and we should expect “more of the same.” But more of the same assumes Powell will face the similar economic conditions. Who knows what will happen during his term and how he’ll respond?

I am still wary of Bitcoin
Here’s a theory on Bitcoin: rates are low/steady and there’s hardly any volatility in the stock market, so maybe Bitcoin’s popularity is just because we just need to create risk when it feels absent. We’ll see how it holds up when markets get gnarly.

See you in the New Year, Pension Geeks!


[1] Actually, the ladies in brothel receive excellent financial literacy training and most are very good with their money—but that’s another story.