Known Unknowns


Welcome to Known Unknowns, a newsletter that takes the long view.

SECURE Act. Don’t Let the Actuaries Win This One

Some exciting news for pension geeks. The SECURE Act (finally) passed Congress, and the president is expected to sign it into law. It has many good features. It makes it easier and cheaper for small employers to offer 401(k)s, which should increase coverage. It makes it easier to offer annuities in 401(k) plans, which create an income option that is desperately needed. 401(k) statements also must offer income projections, not just asset balances, which studies show increase savings and gets participants to think about income instead of wealth. This is all good.

But, the devil will be in the details—and aspects of this legislation are too important to get wrong. For example, if bad annuities (high fee, overly complex) are the only ones offered, it will make consumers even more distrustful of them. And those income projections are more difficult to estimate than they appear. Industry experts say it is not hard, just use the current forward curve and mortality projections, estimate an annuity price—and you are done!

But here’s the problem. Interest rates change over time. If you are 20 or 30 years away from retirement, odds are that interest rates will change a lot--and you have a serious duration mismatch because the duration of an annuity in retirement is much longer than any fixed-income instrument you can buy. So, the average saver is exposed to interest rate risk. This means the projections will change—even go down (if rates go down) as the stock market goes up. This can cause confusion, distrust, or result in people making overly optimistic/pessimistic plans.

The good news is that rates are low right now; they will probably go up eventually, which means annuity prices will fall. So 401(k) participants will see bigger income projections over time. That’s good (people like more money, after all). It gives the Department of Labor wiggle room to figure out how to deal with everyone’s duration mismatch.


I admit it: I worry about inflation, which may make me sound like a crank in some quarters. I think the difference comes down to time horizon. As with all pension economists, I tend to think out 20, 30, even 40 years. Even mild inflation can make a difference (even if some inflation is healthy), and, if inflation becomes uncertain, it poses large costs because it is difficult to plan and invest. Do I think inflation will be a big issue in the next few years? Probably not. But the long-term is always unknowable, and inflation predictability is certainly a good thing.

I was dismayed that many young commentators are now questioning the Volcker legacy. They think he was too focused on inflation and fought it too hard. Easy to say if you’ve never experienced inflation. It also overestimates the precision of monetary policy. I don’t think we can overstate how valuable the Volcker legacy was. He not only conquered inflation in the short run. He gave the Fed credibility, which contributed to low inflation for decades. It was arguably the most successful era in monetary policy. And, if you think risk poses a cost, he conferred a substantial dividend on the entire economy that lasted well beyond his tenure.

It is hard to imagine a 50-basis point rate increase today, even if inflation was a little high. Policymakers seem much more worried about politics and public perception. They don’t make central bankers like Paul Volcker anymore.


I have another confession to make, I am also a die-hard techno-optimist. It could be all those years of growth theory, but, to me, innovation is the lifeblood of the economy. It is the only way to achieve sustainable growth. I think humans have a natural inclination to innovate. True, innovation was slow for most of human history and only took off in the last few hundred years, but there are several reasons for the sudden innovation in the industrial era, and those reasons are still true today. One is we had markets which rewarded risk taking. We also had a culture following the Enlightenment that encouraged people to question things and find better solutions.

Innovation isn’t just more stuff. It can be a better way to make existing stuff. It also creates new services or makes existing services cheaper. Innovation doesn’t just mean more physical goods. True, the last industrial revolutions did produce more physical goods; they once made luxury goods, like cloth, accessible to the masses. What makes the tech revolution interesting is that it makes once high-end services, e.g., financial planning, personal training etc., cheaper. I am not sure why that’s better or worse than cheap physical goods, though. We may need to reassess how we measure successful.

You might argue, but GDP growth has slowed, or productivity estimates are low, and clearly that means all the good stuff has been invented. Keep in mind, however, that sometimes an Earth-shattering technology takes years to be fully realized. It took more than 100 years for the steam engine to show up in productivity estimates. Granted, we may not be investing enough. The economy could be more dynamic. Sometimes investments don’t pay off—and the process is contributing to inequality and instability because often the gains from innovation accrue to the innovators first. But the Schumpeterian in me understands this process is often messy.

Sometimes you must consider the long term, too. If you’re complaining that Silicon Valley innovation does not show up in productivity immediately, you don’t understand how innovation or growth works.

In Other News

Primer on Chinese data quality

Teachers pay high fees on their 403(b)s. Does anyone know if these are supplemental to their DB plan or instead of? That seems like an important detail. Not that it justifies ripping off teachers, but it is still relevant. Oh, and why we are complaining about the teachers’ union not looking after its members for 403(b) fees, maybe we should also be concerned that they looked the other way when DB plans were underfunded.

Some people realize SESTA-FOSTA was a mistake

See you in the new year, Pension Geeks!