Photo by Mathieu Stern on Unsplash
Hello,
Welcome back to Known Unknowns, a newsletter that is back from a book hiatus and ready to discuss all the pension geek news!
So much to catch up on!
Since I last wrote, the big news is that every right-thinking person has declared the economy is in a soft landing. Now, I was never on team hard landing, though I did expect inflation coming down to cause a wee bit more damage than it did—so far. And maybe I am just a contrarian, or superstitious, but now I am worried. I think once economists loudly proclaim we don’t need to worry about something, that is enough of a reason to assume we do have to worry about that something. I already can see the “why didn’t they see it coming, it was so obvious” headlines.
And there are other reasons to be worried: commercial real estate and corporate debt that will need to be refinanced at a higher rate in the coming few years, weakening consumer balance sheets, and an all-round less resilient economy. If we are faced with any shock we can’t anticipate, things could get ugly. It is still a little soon to declare victory: uncertainty around future inflation, which is still above 2%, is much increased and this shows little sign of changing. This is an issue that does not get enough attention. When people say, “inflation expectations are anchored,” they are always talking about expected inflation, but uncertainty around these expectations arguably matters more. If we do see prices inch up a bit, because of energy prices, wages or anything else, people will become less certain in their convictions and more likely to get spooked. More uncertainty also means higher bond yields, no matter what the Fed does, because it increases the risk premium.
Also, what makes a soft landing? If we end up having a bad recession in 2025 off the back of all these weaknesses that have been building up since 2021, does that mean we had a soft landing because the recession did not coincide with restrictive Fed policy?
One annoying feature of a higher-inflation world (in addition to making everyone poorer) is that not being able to distinguish between nominal and real interest rates becomes less tolerable. The Fed Funds rate is still around 2% when you account for inflation, which is still not that high.
Welcome to the end of the debt cycle.
Unions are back!
So many high-profile strikes this summer. When the labor market is so tight and inflation is up, why not ask for the moon and the stars if you are a union boss? I find it interesting that support for unions is at record highs, but no one actually wants to be in a union—though this might change if higher wages get passed on to customers, as people like free delivery and unlimited new content. If being in a union means $170,000 a year, then we may see a flip—everyone will want to be in a union, but no one will like them. Reality stars are already looking to sign on!
But what I find most curious is the demand to bring back defined benefit pensions. Auto makers thought they got that monkey off their backs. But this is actually a demand from Shawn Fein of UAW. Now, I am not against DB pensions in principle. But we should not romanticize them, because they were never that great for workers. And they make even less sense in the modern labor market.
But they are good for unions, because they make people more loyal to unions and their jobs. They also benefit older workers more, and they tend to be more active union members. So, I guess that’s why it is on the table, unless it’s just a bargaining chip. But this is not a productive conversation. If UAW is concerned about retirement security, they should make the 401(k) plan more generous and secure a good annuity plan.
Medicare
Drug prices are not the problem. In fact, we already negotiate on drug prices, or rather, the insurance companies that run Medicare part D do. And they are pretty good at it. Drug prices are not increasing as much as people think. Yes, we pay more than European countries because we subsidize innovation. What happens in Europe shows that if you have a single or large buyer, it is not a negotiation, it is a price ceiling. And if we take away the innovation subsidy, odds are we’ll get less innovation. At least, that’s what the Congressional Budget Office thinks.
We do need to reign in Medicare costs, even if they are moderating on their own. But even if costs continue to moderate, it still costs a lot—or more than we are willing to collect in taxes—and that’s a big reason for our exploding debt. Which means there will be trade-offs, and “negotiating” with pharma will not be the free lunch it is presented as. Fewer drugs will mean more expensive hospital stays in the future. And is that the trade-off we want to make?
In other news
To get people back to the office, employers should offer their workers restaurant vouchers, like they do in France.
Tom Easton, of the Economist, has a wonderful new Substack about the Indian economy.
Until next time, Pension Geeks!
Allison
Great to have you back
Here is a key reason why defined benefit pensions don't work for most people and the current structure of defined contribution plans also doesn't work well: https://www.bls.gov/news.release/pdf/nlsoy.pdf
Most people will have 12+ jobs by the time they are reaching retirement age. Defined benefit pensions rely on long employment at one job which is not the case for most Americans. Corporate contribution 401ks/403bs with multi-year vesting also don't help if people are unlikely to have that job for more than 1-2 years. "Universal" defined contribution plans where an employee and employer can simply pay into a plan that is not attached to the employer, but instead to the employee SSN would allow for more accumulation of assets over the long run for many Americans while reducing administrative costs for employers.
The one plan that is operated universally this way is Social Security. That is a key reason why so many Americans are solely reliant on Social Security in retirement, as the rest of the retirement saving system is unavailable, too cumbersome, or too complex for many people making above poverty level wages..
I heard your commentary on NPR about the auto industry fight over pensions as a key element of the current strike. You did a good job of talking about these various issues. The auto workers need a retirement plan that is not dependent on the auto industry continuing to exist in its present form to still provide promised benefits 40 years from now. It is likely that many of the young auto workers will have been forced to change employers and jobs at least once by the time they retire. The changes across the economy are massive when you look at the beginning and end of rolling 30 to 40 year periods. People need to be positioned to survive the change. This is difficult because people don't like change, especially when it is forced up on them through external events.