The Aleph Blog » Pensions

Archive for the ‘Pensions’ Category

Social Security Troubles

Thursday, July 31st, 2014

We have known for many years that Social Security’s Disability Trust Fund was in far worse  shape than the Retirement Trust Fund, which is also not in good shape.  The rolls for Social Security Disability have risen dramatically since 2009, with many applying for disability amid a time where jobs are hard to find.  Personally, I think that people should plan for their own possible disability, and it not be something that the government covers.

That said, the disability trust fund will run out of money in 2016.  The most likely result in my opinion, is that  the disability trust fund will borrow from the the retirement trust fund, accelerating the insolvency of the retirement trust fund, currently scheduled to make a change to payments in 2026, when it has only one year of payments left in the trust fund, and will have to pro-rate all payments, so that the payments will be made from existing tax payments plus assets on hand.  This means that social security retirement and disability payments will be cut by around 27%.

The politics of this is complicated, and I don’t pretend to have an absolute answer to how this will all work out.  My past dealings with these issues indicate that if the problem can be deferred, it will be deferred.   Borrowing from the retirement trust fund ruffles few feathers, and allows politicians 10 years or so of breathing room, after whichthey may have resigned or retired.

At some point in the future the following phrase will be common: “You got what you deserved, because you trusted the government.”  Add in the troubles at Medicare, where the trust fund also will run out before 2020.

If you are relying on Social Security, you are in a bad spot,  Either taxes will be raised, or benefits will be cut, either across-the-board, or selectively.

This will be a fight, as most other things in our government budget are, and there is no telling how it will turn out.  There is only one certain thing: if we had dealt with this 25-35 years ago, we would not be in this pickle now.  Shame on our parents’ generation, and shame on us, if you are over age 35.  More guilt to those who are older.

On Learning Compound Interest Math

Saturday, July 19th, 2014

When I read articles like this where people get scammed borrowing money, I say to myself, “we need to teach children the compound interest math.”

Even my dear wife does not get it, and she sends the children to me when they don’t get it.  But beyond learning the math, a healthy skepticism of borrowing needs to be encouraged, especially for depreciating items like autos.

The compound interest math is really one of the more simple items of Algebra 2.  Everyone should be able to calculate the value of a non-contingent annuity at a given interest rate.

Once people learn that, they might have more skepticism regarding the long-dated pension-like promises that the government makes, because they can look at the future payment stream, and say, “I can’t see how we fund that.”

All for now.

Pity the Multiemployer Pension Plans

Wednesday, July 2nd, 2014

Most of the efforts to encourage defined benefit pension plans in the US have been an exercise in wishful thinking.  Then there are the efforts to discourage defined benefit plans, which came about because the IRS felt that they were losing too much tax revenue to overfunded plans.  Thanks, IRS… many plans were not really overfunded, but you discouraged a healthy funding of DB plans.

But if things are bad with corporate DB plans, it is much worse with Multiemployer Pension Plans.  These are plans meant to cover union laborers in a given industry.  What led me to write this evening were the problems with pensions in the coal-mining industry.  From the article:

Union miners are among the 10.4 million Americans with retirements tied to multiemployer pension plans, the large investment pools considered low risk because they don’t rely on a single company for financing. Two recessions, industry consolidation, and an aging workforce have the multiemployer funds facing a $400 billion shortfall. Dozens already have failed, affecting 94,000 participants.

Strong investment returns helped lift the average funding level of pension plans by three points, to 88 percent, from 2013 to 2014, according to Segal Consulting, which advises multiemployer trust funds. Yet, more plans were added to the “endangered” or “critical” lists that require fund managers to take steps to improve their financial status, including adding cash or adjusting future benefits.

“In 2001, only 15 plans covering about 80,000 participants were under 40 percent funded,” the government pension agency reported June 30. “By 2011, this had grown to almost 200 plans covering almost 1.5 million participants.”

The pension plan for union miners had about $5.8 billion in liabilities in 2012 and was only 71.2 percent funded at the end of 2013, according to Labor Department filings.

The trouble with multiemployer plans is that as some employers fail, the remainder of the employers have to pick up the bill for pensions.  In a declining or cyclical industry, that is a recipe for disaster.  As a result UPS spent $6.1 billion to exit the multiemployer plan, while still guaranteeing benefits to its own employees.  The $6.1B was the ransom payment to escape something far worse in an underfunded multiemployer plan.

Though average multiemployer plan may be better funded, the average hides a lot, as there are more people expecting benefits from plans that are dramatically underfunded.  What’s worse, is that those in multiemployer trusts have a maximum guarantee that is around 30% of what a single-employer plan would receive.

As such, to the degree that unionized industries as a whole suffer, so will benefits to unionized laborers, present and past.  People need to understand that pensions aren’t magic.

  • Adequate contributions need to be made.
  • Investment returns must be adequate.
  • Benefits promised must be reasonable relative to contributions.
  • Anti-selection should be limited in multiemployer trusts.  Perhaps employers need to put up extra capital that they would forfeit if they wanted to leave the collective industry pension promises.

As it is, participants in the worst multiemployer pension plans will suffer losses, and the PBGC will guarantee small amounts of the benefits, and that is as it should be, because the ability to drag money out of a shrinking industry is hard, very hard.

So pity participants in multiemployer defined benefit pension plans.  A significant portion of them will get far less than they expected.

Post 2500: What is the Aleph Blog About?

Thursday, June 12th, 2014

Every hundred or so posts, I take a step back, and try to think about broader issues about blogging about finance.  Tonight, I want to explain to new readers what the Aleph Blog is about.

There have been many new followers added to my blog recently,  through e-mail, RSS, and natively.  This is because of this great article at Marketwatch, which builds off of this great article at Michael Kitces’ blog.

I am humbled to be included among Barry Ritholtz, Josh Brown, and Cullen Roche, and am genuinely surprised to be at number 4 among RIAs in social media influence.  Soli Deo Gloria.

What Does the Aleph Blog Care About?

I’m writing this primarily for new readers, because I’ve written a lot, and over a lot of areas.  I write about a broader range of topics than almost all finance bloggers do because:

  • I’m both a quantitative analyst and a qualitative analyst.
  • I’m an economist that is skeptical about the current received wisdom.
  • I like reading books, so I write a lot of book reviews.
  • I’m also a skeptic regarding Modern Portfolio Theory, and would like to see it discarded from the CFA and SOA syllabuses.
  • I believe in value investing, in both the quantitative and qualitative varieties.
  • I believe that risk control is a core concept for making money — you make more money by not losing it.
  • I believe that good government policy focuses on ethics, not results.  The bailouts were not fair to average Americans.  What would have been fair would have been to let the bank/financial holding companies fail, while protecting the interests of depositors.  The taxpayers would have been spared, and there would have been no systematic crisis had that been done.
  • I care about people not getting cheated.  That includes penny stocks, structured notes, private REITs, and many other financial innovations.  No one on Wall Street wants to do you a favor, so do your own research and buy what you want to own, not what someone wants to sell you.
  • Again, I don’t want to see people cheated, so I write about  insurance.  As a former actuary, and insurance buy-side analyst, I know a lot about insurance.  I don’t know this for sure, but I think this is the blog that writes the most about insurance on the web for free.  I write as one that invests in insurance stocks, and generally, I buy the stocks because I like the management teams.  Ethical, hard working insurance management teams do the best.
  • Oddly, this is regarded to be a good accounting blog, because as a user of accounting statements, I write about accounting issues.
  • I am a skeptic on monetary and fiscal policy, and believe both of them tend to sacrifice the future to benefit the present.  Our grandchildren will hate us.   That brings up another issue: I write about the effects of demographics on the markets.  In a world where populations are shrinking in developed nations, and will be shrinking globally by 2040, there are significant economic impacts.  Economies don’t do well when workers are shrinking in proportion to those who are not working.  (Note: include stay-at-home moms and dads in those who work.  They are valuable.)
  • I care about the bond market.  There aren’t that many good bond market blogs.  I won’t write about it every day, but I will write about i when it is important.
  • I care about pensions.  Most of the financial media knows things are screwed up there, but they do not grasp how bad the eventual outcome will likely be.  This is scary stuff — choose the state you live in with care.

Now, if you want my most basic advice, visit my personal finance category.

If you want my view of what my best articles have been, visit my best articles category.

If you want to read about my “rules,” read the rules category.

Maybe you want to read some of my most popular series:

My blog is not for everyone.  I write about what I feel most strongly about each evening.  Since I have a wide array of interests, that makes for uneven reading, because not everyone cares about all the things that I do.  If that makes my readership smaller, so be it.  My blog expresses my point of view; it is not meant to be the largest website on finance.  I want to be special, even if that means small, expressing my point  of view to those who will listen.

I thank all of my readers for reading me.  I appreciate all of you, and thank you for taking the time to read me.

As one final comment, I need to say this.  I note people unfollowing my blog at certain times, and I say to myself, “Oh, I haven’t been writing about his pet issue for a while.”  Lo, and behold, after these people leave, I start writing about it again.  That is not intentional, but it is very similar to how the market works.   People buy and sell investments at the wrong times.

To all my readers, thank you for reading me.  I value all of you, and though I can’t answer all e-mails, I read all e-mails.

In summary: the Aleph Blog is about ethics and competence.  I want to do what is right, and do what gives the best investment performance, in that order.


Book Review: The Investor’s Paradox

Sunday, April 27th, 2014

18593599Investing is paradoxical, as many that read my blog would know. The market has cycles.  There are overall boom/bust cycles.  There are minor cycles between the major cycles.  Strategies fall in and out of favor.  What is an investor to do?  Even harder, what should one who selects assets managers do?

It is hard to select talented investment managers.  I know this, because I have done it many times in my career.  This book points out the difficulties in selecting managers.  Were the returns due to skill, or did he hit a lucky streak?  If you are looking at the numbers only, it would be hard to tell.  Asking managers detailed qualitative questions could help, as could looking at the current portfolio, and asking:

  1. Does the portfolio fit the stated style of the manager?
  2. Does it fit his description of how he tries to make money?

This book summarizes many issues in picking managers:

  • Strict mandates vs looser mandates
  • The ways in which we deceive ourselves willingly, to believe a nice manager, or con man
  • How hedge funds grew and changed
  • Can managers adapt to new market environments successfully, or should they persist with their model which used to work, but is now out of favor?
  • How do you deal with funds that are too complex for the ordinary retail investor to understand? (I would say avoid them.)

The book includes a chapter on Madoff, and while it doesn’t break new ground, it does point out why custodians and auditors are important.  If there had been an independent custodian, or a real auditor, Madoff’s scam could never have happened.  I also appreciated the reference on page 125 as to the methods that scammers use to gain the confidence of those they scam.  This is one case where bright people get fooled.  I would encourage readers to read “The Big Con,” or even marketing books, to make themselves skeptical.

The book has a firm hand on what leads to risk/return among managers — Concentration, Directionality, Compelexity, Illiquidity, and Leverage.  LTCM is held out as an example of a disaster waiting to occur.

The book explains different types of investors, and why they take the risks they do.  Different investors take different risks.

The author gives his own summary of how to interview fund managers, though I found it to be light.  As a former buy-side analyst, I had to interview CEOs, and while I used a few techniques of the author, there are more techniques that can be used.  I appreciated the allusion to “Colombo,” because purposely dumb questions can reveal the honesty of the one being interviewed, and may reveal details that could not be gotten through a smart question.

At the end, he points out how pension plans will not be likely to meet their return goals.  He is right, and efforts to break that paradigm through allocations to alternative investments are also unlikely to work.  Hedge funds don’t respond well to volatility.

This is a good book, but I have one further main objection.


When the author discusses Simon Lack’s analysis of hedge funds (P 190), he wrongly dismisses the significance of dollar-weighted versus time weighted rates of return.  If a manager’s returns are so volatile that it leads investors to buy high and sell low, that is the manager’s fault.  Good managers limit risk so that their investors don’t panic.  Also, since dollar weighted returns are what investors receive as a whole, that is the actual result of the investing, and is the way that all investment managers should be measured.  And as such, Lack’s arguments are correct.  Investors would have gotten more out of investing in T-bills, which absolutely, would not be much more, but less is less.  Lack is correct, and the author is wrong.

Who would benefit from this book: If you hire mutual fund managers, you could benefit from this great book.  If you want to, you can buy it here: The Investor’s Paradox: The Power of Simplicity in a World of Overwhelming Choice.

Full disclosure: I asked the PR people for a copy of the  book, and they sent it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Also, it should be noted that value managers have client bases that often invest more in bad times, and take profits in good times, so their dollar-weighted returns are often higher than the time-weighted returns.  Educated, contrarian investors do better.

To Live off of, and Die from, the Equity Premium and Alpha

Thursday, April 10th, 2014

I’m working on my taxes.  I’m not in a good mood.  Okay, writing that made me chuckle, because I am usually in a good mood.

Let me divide my working life into four segments:

  • 1986-1998: Actuary — reasonably well paid, and significantly underpaid compared to the value I delivered.
  • 1998-2007 — Investment risk manager, Mortgage bond manager, Corporate bond manager, and Senior Analyst at a long/short hedge fund.  Paid well for my efforts, and the  rewards to clients were far more than what I was paid.
  • 2007-2010 — Almost no pay, as I deal with home issues, provide research to a small minority broker-dealer, and try to gain institutional asset management clients.  Living off of assets from earlier days.
  • 2010-2014 — Living off of asset income as I slowly build a retail and small institutional client base for my value investing.

The last two periods are the most interesting in a way, because I was drawing more income from investments than I was from any other source.  Even during my time at the hedge fund, I made more money from my own investing every year than I was paid, and I was paid well.  That said the mid-2000s were a hot time, particularly if you made the right calls on a growing global economy.

My net worth today is roughly where it was at the peak of the markets in 2007, despite my low wage income.  I have been bailed out by the returns of the equity market and my alpha.

This is not a comfortable place to be, because general equity returns are not predictable, and alpha, though I have had it for years, is not predictable either.  That said, my client base has been growing, and in another year or so, my practice should support my family even if the markets don’t do well.


Though I just told a story about me, the real story isn’t about me.  Think of all of the people who are trying to manage their lump sum in retirement.  They are relying on strong equity markets; they are hoping for alpha.  They are not ready for setbacks.

Unless you are seriously wealthy, when you are not receiving reliable income from a wage-like source, you can feel like you are in a weak position. I have felt that on occasion, but in general  I have not worried.

I write this because equity outperformance over bonds will likely be limited over the next ten years.  I peg equities at about a 5%/year average nominal return, with a diversified portfolio of bonds at around 2-3%/year.  Also the ability to add alpha is limited, because alpha is zero in total, and are you smart enough to find the managers that can do it?

In desperate times desperate men do desperate things.  Low interest rates are leading many to speculate more than they ordinarily would.  Equity allocations go higher.  Allocations to “alternatives” go higher.  People start using nonguaranteed income vehicles as if they had the structural protections of bonds.

As I always say, be careful.  Those trying to manage a lump sum for income in retirement are playing a dangerous game where if you try to draw more than 3.5%/year with regularity will prove challenging, because that is playing at the boundary of what the assets can deliver, and leaves little room for an adverse scenario.  Be careful.

Sorted Weekly Tweets

Saturday, March 29th, 2014

Rest of the World


  • Malaysia Plane Traced in Inmarsat Engineer London Huddle How they managed to figure out the area of the crash $$ $SPY Mar 30, 2014
  • UK Pension Revolution Putting Long-Term Bonds at Risk Need 2 match liabs drives demand 4 long bonds, lowers yields $$ Mar 30, 2014
  • Putin Has Exposed NATO’s Weakness US & NATO Europe willing to agree upon? What r they willing 2 risk? Be careful $$ Mar 30, 2014
  • China Said to Expand Property Survey Amid Oversupply Concern Will b difficult 2 end overinvestment by fiat $$ Mar 30, 2014
  • Chinese Pigs Eating Soybeans Cut US Supply to 1965 Low Chinese demand 4 pork drives demand 4 US Soybeans $$ Mar 30, 2014
  • Lira Fate Tied to Real Assets as Hot Money Flees In countries where inflation is a threat, invest in property $$ Mar 30, 2014
  • Business not ipso facto criminal: Tendency of presuming it guilty without proof is damaging India’s economy $$ Mar 30, 2014
  • Mr. Putin’s Revealing Speech Defender of Orthodox civilization as he sees it pushes back against encroahing NATO $$ Mar 30, 2014
  • Russian Forces on Border Stir Concern as Crimea Annexed Threats of more economic sanctions will not deter Putin $$ Mar 23, 2014
  • What the West Can Learn From Putin’s Other Neighbors Don’t make promises that u won’t keep; Putin is not scared $$ Mar 22, 2014


Financial Sector


  • So what is today’s nonbank business model? Legalized extortion done to “protect consumers,” objective is political $$ Mar 30, 2014
  • Wall Street Banks Cut Out of Prized Commercial Mortgages $MET $PRU originate commercial mortgages 2 fund own liabs $$ Mar 30, 2014
  • SEC Is Probing Dealings by Banks and Companies in Loan Securities Current CLO issuance drives loan issuance $$ $BKLN Mar 30, 2014
  • Pimco Chases BlackRock in ETFs as Money Returns to Bonds Amazing how people follow anything w/positive momentum $$ Mar 30, 2014
  • And if banks start lending aggressively, it will b time to radically shrink asset maturities in bond portfolios, velocity will b rising $$ Mar 30, 2014
  • Banks Lending Like It’s 2007 Belied by $10T Hoard But they aren’t lending heavy yet, if they do FOMC has 2tighten $$ Mar 30, 2014
  • Scandal-Hit British Banks Turn to ‘Weirdy Beardy’ “Why do you exist?” “Who r u?” Pondering existence bugs bankers $$ Mar 30, 2014
  • Josh Rosner: The Wrong Remedy for Fannie and Freddie Better to wind them up & get Govt out of the Mtge mkts $$ Mar 30, 2014
  • Iowa’s Friendlier Watchdogs Lead Insurer Pack to Des Moines Iowa DOI will regret embracing complexity, gtee funds2 $$ Mar 30, 2014


Market Impact


  • Which will win? $BRK.B or $IWM ? 3views: & & BRK will beat smallcaps $$ Mar 30, 2014
  • Americans Can’t Retire When Bill Gross Sees Repression Investments eventually reflect the underlying cash flows $$ Mar 30, 2014
  • Financial scars linger: 1/3 of investors wary of stocks Have 2 wait 4 these people 2 come & put in the top $$ $SPY Mar 30, 2014
  • 1999 Buffett: stocks can’t possibly meet public’s expectations. Internet? Notes how few got rich in auto &aviation $$ Mar 30, 2014
  • Declining Pension Benefits Leave Workers Uneasy Difficult 2 fund high benefits when interest rates r so low $$ $TLT Mar 30, 2014
  • Google Traders See Opportunity in Confusion on New Shares New nonvoting shares may allow 4 some arbitrage plays $$ Mar 30, 2014
  • Attention Suckers: Please Send Us Your Money @Ritholtz comments how the JOBS Act weakened investor protections $$ Mar 30, 2014


US Housing


  • High Prices Partly to Blame for Slow New Home Sales When markets near their peak, frequently volumes drop off $$ $LEN Mar 30, 2014
  • Time might be ripe for boomers to sell their homes and move on Sell them 2whom & @ what price? Lack move-up buyers $$ Mar 30, 2014
  • Finding a House That Won’t Destroy You Buy a house u can afford even under stressed conditions, reduce risk $$ Mar 30, 2014


US Politics, Policy & Economics


  • Florida’s Scott Travels on Corporate Tab as Lobbyists Tag Along Governors increasingly use corporate $$ 2fund trips Mar 30, 2014
  • IRS Takes a Position on Bitcoin: It’s Property Thus any trading of bitcoins involves capital gains &losses $$ $BTCUSD Mar 30, 2014
  • Google, EBay and the Roots of Collusion Some don’t want to annoy companies that r complementary 2their biz goals $$ Mar 30, 2014
  • The Individual Mandate Goes Poof Barack Obama undoes what House GOP would like 2undo, just not permanently totally $$ Mar 30, 2014
  • Global Warming Will Not Cost the Earth, Leaked IPCC Report Admits Will b interesting 2c how gets spun by bothsides $$ Mar 30, 2014
  • Economists: Rising interest rates are the biggest threat to recovery More evidence that rates will stay low $TLT $$ Mar 24, 2014
  • Kocherlakota: Don’t raise rates to head off possible crisis There may come a time when you will have no choice $$ Mar 22, 2014



  • Advice for a Happy Life by Charles Murray Marry young & someone similar 2u, don’t try2get rich, Groundhog Day $$ $SPY Mar 30, 2014
  • Why Runners Can’t Eat Whatever They Want Studies Show Heart Risks to Devil-May-Care Diets—No Matter How Much U Run $$ Mar 30, 2014
  • Speed Reading Returns Apps and Classes Help People Adapt 2Reading on Their Phones | More content 2 read everywhere $$ Mar 30, 2014
  • The book Scientology tried to ban Read about the *real* L. Ron Hubbard, from a book Church of Scientology hates $$ Mar 30, 2014



  • Wrong: Not Voting Should Not Be a Choice Seems fundamental that no one should b forced to vote; it’s a protest $$ Mar 30, 2014
  • Wrong: Japan Is Doomed Unless It Learns to Love Inflation More “hair of the dog that bit you solutions” $$ $JPY $JOF Mar 30, 2014
  • Wrong: Digital v human: the new debate We’ve seen transformational technologies b4, takes a while 4 new jobs 2show $$ Mar 30, 2014
  • Wrong: Fed’s Bullard: Yellen’s ‘6 Months’ Comment Doesn’t Represent Change in Policy Stance Could have fooled me $$ Mar 22, 2014


Notes, Comments, Reples & Retweets

  • RT @ReformedBroker: In November 1999, Buffett wrote this op-ed for Fortune on why he doesn’t bet on innovation. @pmarca @hblodget http://t… Mar 27, 2014
  • RT @felixsalmon: “This means Bitcoins are not fungible, and that makes it unworkable as a currency.” cc @pmarca @bar… Mar 27, 2014
  • RT @journalistjosh: Crowdfunding emptor: Attention Suckers: Please Send Us Your Money via @BloombergView Mar 27, 2014
  • We enjoyed having @susanweiner speak to us at the #CFA Institute – Baltimore; we can all benefit from learning to write more engagingly $$ Mar 26, 2014
  • ‘ @PlanMaestro Yes, I remember that piece and the series that followed it $$ Capital efficient Mar 26, 2014


The Idea of Contributory Defined Benefit Plans

Tuesday, March 18th, 2014

In the good old days, there were Defined Benefit [DB] plans for pensions, and only those.  Why were those good?

  • The sponsor took care of the investing
  • Participants received a level, or inflation-adjusted payment.
  • Payments offered longevity insurance — you could not outlive them.

Then, by accident, the 401(k) plan, and other defined contribution [DC] plans came into existence.  Employees could invest their money pretax, and make money during the bull markets of the ’80s and ’90s.  Many companies terminated their DB plans, and replaced them with DC plans, cash balance plans, etc.

DC plans were attractive to most participants because:

  • They could see the value easily — it was expressed in a single number, and a higher number is always better, right?
  • The employer match was an obvious source of value.
  • Since most of the plans were participant directed, many enjoyed control of the asset allocation, particularly in bull markets.
  • The benefits were portable, they did not rely on continued employment with the same firm.
  • They could take loans against their  balances.

After the bull market of the ’90s, what did participants in DC pension plans lose?

  • They weren’t natural investors, so they lost there through underperformance.  Fear and Greed led them to lose.
  • They lost longevity insurance — it is a lot cheaper to get it early, when you don’t need it.
  • As interest rates fell, so did the ability to buy a future income  by buying an annuity.  Yes, the balance was higher, but you could not earn as much from it with safety.
  • Managing a lump sum for income is a very tough task, and one that most average investors are not equipped to tackle.

This is why I would like to propose replacing DC plans with DB plans, but give employees the option of adding more to their DB plans, and making DB plans portable.  This would require:

  • Making DB plans tax-favored relative to DC plans.  Drop the tax-advantaged status for DC plans.
  • Have standard transfer assumptions for the valuation of DB plans.

The great advantage of contributory DB plans is that they divide responsibilities/advantages where they are best held:

  • Plan sponsors are better at investing than participants.
  • DB plans provide longevity insurance.
  • If participants want to save more, they can do so, buying streams of future income.

I know this piece is nonstandard — out of step with the current “reality.”  If pensions were structured this way, it would save many people a lot of headaches:

  • How do I invest?
  • How can I lock in a good future income for life?
  • How can I get more than what the company is putting aside for me?

Contributory Defined Benefit plans would divide the duties of pensions properly.  Participants would decide how much to save, and sponsors would invest and provide longevity insurance.  Can you think of a better way to do pensions?  I’m all ears.

Sorted Weekly Tweets

Saturday, February 22nd, 2014

Facebook & WhatsApp


  • Rags-To-Riches Tale Of How Jan Koum Built WhatsApp Into Facebook’s New $19B Baby Background on WhatsApp founders $$ Feb 22, 2014
  • WhatsApp Shows How Phone Carriers Lost Out on $33B Perhaps consortium of telephone companies should have bot them $$ Feb 22, 2014
  • Whatsapp and $19B Explains why $FB decided 2 get into mobile, & how WhatsApp may benefit their mobile push $$ $GOOG Feb 22, 2014
  • Zuckerberg Bonded With WhatsApp CEO Over Coffee and Dinners Promise made to respect the unique culture of WhatsApp $$ Feb 22, 2014
  • Facebook’s horrible, stroke-of-genius IPO @felixsalmon Makes point that overvalued $FB stock can b currency 4deals $$ Feb 22, 2014
  • How Much Sequoia Made On WhatsApp The funny part is how Zuckerberg pranked Sequoia 10 yrs ago, & regretted it $$ $FB Feb 22, 2014
  • Facebook Investors Shrug Off Concerns About $19B Deal also & $$ $FB Feb 21, 2014


US Politics & Policy


  • Companies bracing for 1-2 retirement punch Unlikely that Obama’s proposals would b enacted; hurts powerful people $$ Feb 22, 2014
  • White House to Propose New Limits on Overseas Corporate Tax Avoidance This will be difficult 2 enforce; complexity $$ Feb 22, 2014
  • Gold Rush Ghost Town Bodes Ill for California Power Flow Interesting article on how the drought is affecting CA $$ Feb 22, 2014
  • Peggy Noonan: Whose Side Are We On? We can have a “Cold War” vs those who hate democracy & human rights $$ $SPY $TLT Feb 22, 2014
  • NSA Official Warned About Threat 17 Years Before Snowden Warned computer system administrators had too much power $$ Feb 22, 2014
  • Fannie Mae Payments to US Will Exceed Bailout 2 bad, b/c government owns $FNMA & will keep it as a piggy bank $$ Feb 22, 2014
  • An anti-tech backlash in San Francisco Note to politicians: don’t bite the hand that feeds u 2 support malcontents $$ Feb 21, 2014
  • Good: Bumper profits threaten US ethanol support Time to free *all* energy sources from subsidies adj 4 pollution $$ Feb 21, 2014
  • Bottlenecks along the Industrial Revolution There is $$ 2b made in expanding energy infrastructure in America $$ Feb 21, 2014
  • CBO Is Right: Minimum Wage Hike Can Kill Jobs Suggests raising the Earned Income Tax Credit, which would add jobs $$ Feb 21, 2014
  • Obama Keystone Pipeline Review Roiled by Nebraska Judge Governor & Legislature bypassed Public Services Commission $$ Feb 21, 2014
  • Obamacare’s Latest Surprise for Taxpayers? @Asymmetricinfo says Obama Admin may extend risk corridors past 3 years $$ Feb 19, 2014
  • Detroiters Without Cars Seek Jobs in Vain as City Shrinks Cities r organic & they can die, like Detroit. Give up $$ Feb 19, 2014
  • UAW’s Devastating Defeat at a Tennessee Volkswagen Plant: 4 Blunt Points Give workers credit 4 rejecting bad deal $$ Feb 17, 2014


Market Impact


  • Frontier-Market Funds Pour in Boosted by Fixed Currencies 2 much $$ flowing into immature mkts via ETFs; avoid $$ Feb 22, 2014
  • Learning From a Literary Legend: The Importance of History Argues that 10-year stock returns will b below average $$ Feb 21, 2014
  • Income As The Outcome: Reframing the 401(k) Plan Int rates fall, 401(k) bond values rise, but future income falls $$ Feb 21, 2014
  • Wall Street Bond Dealers Renounce Treasuries That Lure Pimco This is a mess, &no one knows, but I remain long $TLT $$ Feb 19, 2014
  • FX Traders Facing Extinction as Computers Replace Humans True if all u r doing is matching trades not if profiting $$ Feb 19, 2014
  • Information asymmetry, bad incentives and Taibbi @izakaminska does an excellent takedown of Tabibi’s recent piece $$ Feb 15, 2014


Rest of the World


  • Japan Record Trade Gap Shows Risk of Abenomics Losing Steam High debts, trade deficit due 2 low yen, disaster $$ $FXY Feb 22, 2014
  • For Chinese, It’s Going to Cost More to Become Canadian Pity those that want to escape China 2 Canada w/their loot $$ Feb 22, 2014
  • Nigeria’s Delta Oil Thieves Scrape Out a Precarious Living Long piece shows a vignette of the troubles in Nigeria $$ Feb 21, 2014
  • Foreign Investors Scoop Up New Treasuries Even as Fed Cuts Buying Weaken your currency. Help exporters. Buy US Tsys $$ Feb 21, 2014
  • India Hedging at Two-Year High as Polls Shroud Outlook Fears of a minority govt have hedgers buying puts on Nifty $$ Feb 21, 2014
  • Samsung Investors May Discover World of Possibilities Pity about Sarbanes-Oxley. Samsung shares used 2 trade in US $$ Feb 21, 2014
  • Emerging Stocks Rise to Three-Week High on Record China Lending W/China overlending already a problem, not helpful $$ Feb 21, 2014
  • Invading Switzerland? Try Before 8 or After 5 The Swiss Air Force likes to have the evenings off. War can wait $$ Feb 21, 2014
  • UN warns North Korea’s Kim Jong-un w/a strongly worded letter Few things crueler than making a Mom kill own child $$ Feb 21, 2014
  • Bank of Japan Surprises Markets Expands Loan Programs, Keeps Main Policy Unchanged, builds bigger debt bubble $$ $FXY Feb 21, 2014
  • Japan’s GPIF Should Own $600B of Stocks, Ito Says Angling 4a nomination 2 the coveted “Putting in the top” award $$ Feb 21, 2014
  • As World’s Kids Get Fatter, Doctors Turn to the Knife Bariatric surgery on a 3-yo, as parents can’t say no re food $$ Feb 21, 2014
  • China Fund Shifts Focus Away From Energy to US, European Recovery Plays CIC shifts out of power & into real estate $$ Feb 21, 2014
  • Japan Growth Figures Disappoint GDP Increase Comes in Well Below Expectations, perhaps Abe will think twice $$ Feb 21, 2014
  • China Overtakes India as Gold Consumer When your property can b confiscated by gov’t, helpful 2 have gold 2 carry $$ Feb 21, 2014
  • US to Face G-20 Pressure Over Tapering If the emerging market nations are properly financed, US $$ policy won’t harm Feb 21, 2014
  • At Asia Air Show, Plenty of Competition for Sales of Drones Many uses 4 drones to monitor areas that r hard 2get2 $$ Feb 21, 2014
  • Russians Return to Cyprus, a Favorite Tax Haven But they won’t put $$ is Cypriot banks after losing much of it b4 Feb 21, 2014
  • Billionaire Niel Trains Geeks to Fix France’s Talent Mismatch Sets up a school in France that teaches programming $$ Feb 21, 2014
  • Elliott vs Argentina: 3 possible resolutions @felixsalmon Sovereign immunity, pari passu & bondholders’ ransom $$ Feb 20, 2014
  • Europe Mending as Markets Signal Even Portuguese Get Work Less clear than it seems, but Europe is getting better $$ Feb 20, 2014
  • Sochi Olympics: Vic Wild, American-Born Snowboarder Competing For Russia, Wins Gold Far better he got a good wife $$ Feb 20, 2014
  • What the Heck Is Going on in Venezuela? (Could the Maduro Regime Fall?) Yes, it could fall, but what will replace? $$ Feb 19, 2014
  • China Digs Itself Deeper Into Dollar Trap Buying Dollar assets supports the cronies of the party that export $$ $FXI Feb 19, 2014
  • Asia Has Crisis to Thank for Gains in Emerging Rout Emerging Asia, minus China, in better shape than 1997-8 $$ $FXI Feb 19, 2014
  • Swiss Fault Lines Exposed as Villagers See Risk to Postcard Life Urban vs rural & the “last settler” syndrome $$ $FXF Feb 17, 2014
  • Salmond Says Forcing Scotland to Drop Pound to Hurt UK Seriously doubt UK would giveup the seigniorage if Scots go $$ Feb 17, 2014
  • A Rebuke to Japanese Nationalism Japan needs 2 give up any sense that what they did in WWII was honorable $$ Feb 17, 2014
  • Indonesia Says Australian Defense of Spying Is ‘Mind Boggling’ My, but Snowden opened many cans of worms w/leaks $$ Feb 17, 2014
  • Saudis Agree to Provide Syrian Rebels With Mobile Antiaircraft Missiles Proxy war between Wahabis & Shia continues $$ Feb 15, 2014


Financials & Personal Finance


  • Wall Street Landlords Buy Bad Loans for Cheaper Homes Color me skeptical; when investors own homes, mkt overvalued $$ Feb 22, 2014
  • Energy Holdings Nears Bankruptcy After Creditor Talks Falter They overpaid & the debt was huge, even Buffett lost $$ Feb 22, 2014
  • Tender Offer for Insurer Divides a Boardroom $AFG ‘s offer for $NATL is more than generous, just tender yr shares $$ Feb 22, 2014
  • Putting Your 401(k) on Autopilot Would b better if we made plans where employees could buy defined benefit units $$ Feb 22, 2014
  • The growing case against ETFs Makes same point that Jack Bogle & I make, ETFs get traded badly by most investors $$ Feb 22, 2014
  • Americans Ramp Up Borrowing US Household Debt Posts Largest Quarterly Increase Since Before Recession $$ #seenthisb4 Feb 21, 2014
  • Has Small-Business Lending Really Improved? Qty available may b high, but yields r steep @ nontraditional lenders $$ Feb 21, 2014
  • The Current Opportunity Set Valuation-sensitive mgrs see fewer & fewer places 2 put $$ 2 work, so cash balances grow Feb 21, 2014
  • These Wells Fargo robbers were also tellers Comments, some think if banks r dishonest they should b stolen from $$ Feb 21, 2014
  • I, Claudius, caller of bank bonds Memo 2 bond investors: if you buy an odd bond, b sure 2 read the prospectus $$ $TLT Feb 15, 2014
  • When One Spouse Saves and the Other Spends I do not get how this person can be a financial advice columnist $$ $TLT Feb 17, 2014
  • Debt-Market Chill May Leave Banks Out in the Cold–Heard on the Street No January bounceback 2 make up 4 December $$ Feb 15, 2014

Companies & Industries


  • 10-Gbit Google Fiber is already real, just not from $GOOG $VZ has tested it & others 2, coming 2 biz, not home $$ Feb 22, 2014
  • Charter Seen Eyeing Cox After Time Warner Loss Cox family is pretty cagey; $CHTR would have 2 pay through the nose $$ Feb 21, 2014
  • ‘Candy Crush Saga’ Maker Files for an IPO Put King Digital in the “too hard” pile, hard to predict future success $$ Feb 21, 2014
  • Google to Push Its Fiber Rollout on Comcast’s Turf $GOOG experiments, $CMCSA will have hard time competing w/fiber $$ Feb 21, 2014
  • My Goldman Sachs Post-Traumatic Stress Disorder (And Why I’m Grateful) Toughened her up, made her more cynical $$ Feb 21, 2014
  • Chevron’s Free Pizza Offer Only Feeds Public’s Distrust It was a cheesy way 2 compensate people 4 their troubles $$ Feb 21, 2014
  • The Coal Plant an Illinois Town Couldn’t Give Away $AEE pays $DYN to take over a coal plant. Now $DYN wants 2leave $$ Feb 21, 2014
  • Rarest of Rare Iridium Gains as Growth Spurs Demand Cheaper than gold, Iridium is used in industrial applications $$ Feb 21, 2014
  • Buffett’s Coca-Cola Complacency Warning Foretells Troubled Year Listen to Buffett, his intuition is sharp $$ Feb 20, 2014
  • Steve Perlman’s Amazing Wireless Machine Is Finally Here If it works, it is a huge increase 4 mobile bandwidth $$ $T Feb 19, 2014
  • Actavis Agrees to Buy Forest Labs for $25 Billion Kudos 2 @Carl_C_Icahn Quite a string of victories $FRX $ACT $IEP $$ Feb 18, 2014


Fed Notes

  • Fed Puts Rate Increase on the Radar Move Before 2015 Unlikely, but Minutes Suggest Some Inflation Hawks R Circling $$ Feb 21, 2014
  • The Key Passages in the Federal Reserve’s Minutes Hawks start discussion on when the Fed Funds rate should rise $$ Feb 21, 2014
  • Yellen Leads Fed Damned Every Way by Emerging Market Angst Can’t win b/c developed mkt $$ policy swamps EM policies Feb 21, 2014


US Economics


  • Worsening US Divorce Rate Points to Improving Economy “We’re finally doing well, honey. Now we can afford2divorce” $$ Feb 21, 2014
  • Citi’s Economic Surprise Index Hits Zero As such, the economy is slowing & bond yields r falling. Who knew? $$ $TLT Feb 21, 2014




  • ‘Downton Abbey’ Is Downright Un-American If a servant wrote book about how nice her employer was it wouldn’t sell $$ Feb 21, 2014
  • Go Ahead, Let Your Kids Fail Fail & bounce back -> Kids gain skills & grit @asymmetricinfo is off on her book tour $$ Feb 21, 2014
  • I Took the GMAT With No Preparation. Here’s What Happened Journalist gets score good enough 2 go 2 biz school $$ Feb 20, 2014
  • Friedman and Hanke on Bitcoin But what happens when 1 party gets cheated in a Bitcoin transaction? Caveat emptor? $$ Feb 20, 2014
  • The Official Forecast of the US Government Never Saw This Winter Coming We don’t understand climate well $$ $TLT $SPY Feb 19, 2014



  • Wrong: In Buffett We Trust as Berkshire Annual Report Lacks Disclosure There is more than adequate info in the 10K $$ Feb 21, 2014
  • Wrong: Cut Off Harvard to Save America When u mess w/what is a nonprofit & not, u can’t tell what will b the result $$ Feb 21, 2014
  • Wrong: Is China at Risk of a Debt Crisis? Not Really,Bank Says China facing domestic banking crisis, like US 2008 $$ Feb 19, 2014


Comments, Replies and Retweets

  • “From what I glean, Zuckerberg romanced them & told them $FB wouldn’t touch their baby. We’ll see” — David_Merkel $$ Feb 20, 2014
  • “Well said. It is hard for China to give up forced investment and export promotion. It’s economic heroin” Merkel $$ Feb 19, 2014
  • Commented on StockTwits: This: and if I knew Spanish, could have seen it earlier:… Feb 18, 2014


Why are Pensions so Messed Up

Tuesday, February 18th, 2014

A few days ago, I was reading Felix Salmon’s piece Pension politics.  (Nice title, the type that Tadas likes — the shorter the better.)  I wrote a short response in the comments, largely agreeing with Felix.  Here it is:

Here are the facts:

1) DB pension funding accounting rules are more liberal than life insurance accounting rules.

2) Pension actuaries have long assumed investment earnings rates well in excess of what can be achieved.

3) Longevity has long been increasing for those that buy annuities, and take pensions.

4) Average people are lousy investment managers, they panic and get greedy at the wrong times. Pension asset managers aren’t great, but they largely avoid panic & greed.

5) The PBGC is horribly underfunded, as are most municipal pension plans.

6) Overseas, things can be bad, like Poland, Argentina, India, etc. In those cases being on your own is better. Our custodial systems here are pretty good. (Please ignore MF Global.)

7) Fees are generally too high in asset management, and most people should go for passive management, or a few clever value investors.

8 ) Hedge funds, commodities, and private equity are not the answer. Analyze the returns on an dollar-weighted [IRR] basis and they will be much lower than the illustrated buy & hold returns.

9) Highly paid workers lose out in bankruptcy. Multi-employer trusts are prone to a run on the pension plan if a major employer goes BK.

10) the average person is at best a budgeter, and not an investor. That said, buying inflation insurance is very expensive, if you can achieve it at all.

Summary: in general, you are right, Felix, but it is a question of cost to the corporations funding the DB plans. I think the cost is worth it, but maybe it needs to be shared with workers, taking pre-tax dollars to buy more future DB plan payments. How many people would do that? Sadly, not many.

Pensions have always been a bit of a compromise.  In order to get employers to create Defined Benefit [DB] pensions, the government allowed for funding methods that were liberal — a plan sponsor wouldn’t have to put in as much at the beginning; it can catch up over time.  More than that, the assumptions that DB pensions could use were far more liberal than what life insurers could use for similar contingencies.  Life insurers had to use best estimates and then add risk margins.  Pensions could dream of returns, with no risk margins.

The 401(k) was an accident.  It was tossed into a much larger bill, and no one noticed.  After passage, some benefits consultants, notably Ted Benna, found ways to use it, creating the boom in Defined Contribution [DC] plans.

Corporations initially added DC plans to their DB plans, but as the 90s ended, and equity performance sank, many terminated their DB plans.  Part of it was the asset markets, but another part of it was aging workforces, because the funding rules were weak (unlike life insurance).  Sponsors realized that they would have to spend a lot more on DB plans in the future than they would otherwise want to.  Now stingy corporations cut back on their DC matches, or accept kickbacks out of investment manager fees.

There are two great virtues in defined benefit plans: 1) Investing is handled by professionals.  2) Level payments are made.  Most people can budget.  Few can invest.  Yes, there is the problem of inflation, should it occur, but pensioners should have assets outside of their pension to deal with inflation.  They need longevity insurance, so that they avoid outliving their assets.

Though it might be hard managing a fixed income versus uncertain inflation over an uncertain lifespan, it is much harder to manage a lump sum over a full retirement.  When finances are tight, it is much harder to make the right decisions.  Hope biases average investors in favor of taking chances, whether the market favors taking chances or not.

Add in the troubles with defaults of DB plan sponsors, and significant benefits can be lost, particularly if you have been highly paid.

I would want to tell most asset allocators that there is little to no magic in alternative investments.  The alternatives face the same risk factors as ordinary investments, and they are not underinvested by pension investors.

Closing Notes

Sorry, I forgot to blame the IRS for limiting overfunding for tax reasons, when the overfunding was really funding, and would have been useful today.

Even without the introduction of the 401(k), corporations would have cut back on DB pensions because of costs.  A lot of that was due to bad funding methods, but without those bad funding methods, many DB plans would never have been done.

Just be grateful you don’t live in other parts of the world, where governments are more graspy, and pension assets are a target to plug holes in the government deficit.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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