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Why People Should Work Longer, but Don’t

Posted on February 19, 2019 by -

Financial advisors shouldn’t urge older workers to save more during the current low-return period, according to a new paper from the National Bureau of Research. Such under-savers would be wise to work longer and claim Social Security later.

Also new this week: an Issue Brief from the Center for Retirement Research (CRR) at Boston College says that factors like poor health, a spouse’s retirement, unemployment, a financial shock (good or bad), and the need to care for an elderly parent can all compel someone to retire early, but they don’t fully explain why so many Americans do.

Adapting to stagnation

The first paper, “Retirement Implications of a Low Wage Growth, Low Real Interest Rate Economy,” grapples with a practical issue: If you reach mid-life and find out that your savings isn’t likely to grow as much as it used to, what action should you take?

The authors, Jason Scott, John B. Shoven, Sita Slavov and John G. Watson, who have written extensively on this topic, assert that when interest rates are low the best thing to do is to claim Social Security later, because the step-up in benefits for each year of delay (until age 70) is larger than the safe interest.

Delaying Social Security in a low interest rate environment offers the greatest benefits to married primary earners, they write. Single men, people in poor health with shortened life expectancies, and married secondary earners benefit less from delay. In a zero real interest environment, however, virtually everyone can improve his or her financial positions in retirement by delaying Social Security.

With respect to adapting to a low wage growth environment, their recommendations vary. If the individual faces low wage growth but economy-wide wage growth is high, Social Security benefits will rise and, in a sense, bail out the low-wage worker. If only the individual faces high wage growth, he or she should keep working because wage-indexed Social Security benefits won’t climb much.

Explaining early retirement

The second paper, “Retiring Earlier Than Planned: What Matters Most?” represents an effort to explain a conundrum. The percent of Americans who say they intend to work past age 65 tripled (to 48%) between 1991 and 2018. Yet many people report that they didn’t keep that promise and retired earlier than planned.

The authors surveyed reviewed years of household survey data containing responses from 58-year-olds to questions about their planned age of retirement. Within the sample studied by the CRR team, 21% said they planned to retire at 66 or later. But of those, 55% eventually retired earlier than age 66. Overall, 37% of the people in the sample retired earlier than planned. Clearly, delayed retirement is more an aspiration than a practice.

The brief’s authors, Alicia Munnell, Matthew S. Rutledge and Gregory T. Sanzenbacher, assembled a line-up of likely suspects to explain this behavior but couldn’t identify a culprit.

“Health shocks are most important in driving workers to an earlier retirement, followed by job-related changes and family transitions. However, these factors only partly explain early retirements, which suggests that other factors that are harder to measure also play a role,” they write.

“The factors considered here explain only about a quarter of early retirements. Future research should focus on what other factors may lead to early retirement, with “soft” factors not considered here – like the lure of leisure time in retirement – playing potential roles.”

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on February 14, 2019 by -

Murphy succeeds Reynolds at Great-West

Edmund F. Murphy III, 56, will succeed Robert L. Reynolds as President and CEO of Great-West Life & Annuity Insurance Company (GWL&A), the US subsidiary of Great-West Lifeco Inc. and the parent of Empower Retirement, according to a release this week.

Reynolds will shift to a new role as Chair of Great-West Lifeco U.S. LLC. He will remain president and CEO of Boston-based Putnam Investments, also a subsidiary of Great-West Lifeco US.

Last month the company announced it had agreed to sell, through reinsurance, substantially all of its individual life insurance and annuity business to Protective Life.

Murphy will assume leadership of all of GWL&A, which has $544 billion in assets for approximately 9.2 million customers (as of 12/31/18), and includes Empower Retirement, Great-West Investments and the company’s individual life insurance and annuity businesses. Murphy will remain president of Empower Retirement and will report directly to Great-West Lifeco President and CEO Paul Mahon.

Empower, the nation’s second largest retirement service provider after Fidelity, was formed in 2014 and serves approximately 39,000 retirement plans sponsors.

Before his 2014 appointment as president of Empower, Murphy had served as managing director of the Defined Contribution and Investment-Only business at Putnam Investments since 2009 and served on the firm’s Operating Committee. Previously, he held executive roles at Fidelity Investments in its institutional, private equity and retail businesses. He spent six years before that at Merrill Lynch.

Murphy holds a bachelor’s degree from Boston College and is a graduate of the General Manager Program at Harvard Business School.

AIG garners DALBAR awards

AIG Life & Retirement’s Individual Retirement business has received multiple customer service awards for annuity excellence from DALBAR, an independent organization for evaluating, auditing and rating business practices, customer performance, product quality and service in the financial services industry.

AIG’s Individual Retirement business was the only recipient of the DALBAR Communications Seal of Excellence for superior annuity policyholder communications this year, according to a release.

AIG received the top ranking for its variable annuity statements for the 17th consecutive year. For the 12th consecutive year, AIG received the DALBAR Annuity Service Award for its delivery of “consistent, best-in-class” customer service through its contact center.

Investors flock to emerging market ETFs: TrimTabs

Money has been flooding into emerging markets assets in the wake of the Federal Reserve’s dramatic shift in monetary policy, according to a report this week from TrimTabs research.

Emerging markets bond exchange-traded funds have been drawing record inflows.  Emerging Markets bond ETFs added $900 million (3.0% of assets) on the five trading days ended Friday, February 8, and the inflow of $1.5 billion (5.1% of assets) on the five days ended Tuesday, February 5 was the biggest five-day inflow on record. Inflows have occurred on all but two trading days this year.

Emerging Markets equity ETFs issued $2.7 billion (1.5% of assets) on the past five trading days, and the inflows of $3.5 billion (1.9% of assets) on the five trading days ended February 5 was the biggest five-day inflow since April 2014. These funds have not had a single daily outflow since late December.

“Demand for emerging markets assets has exploded as the Fed has turned dovish,” said David Santschi, director of liquidity research at TrimTabs Investment Research. “Traders are playing the Powell put aggressively, although they seem to prefer broad exposure rather than bets on particular regions.”

Latin America was the most popular emerging markets region last week as a percentage of assets. Latin America equity ETFs added $200 million (2.0% of assets).

DPL Financial to distribute Jackson National no-commission annuities

Posted on February 14, 2019 by -

In its first distribution partnership in the independent registered investment advisor (RIA) channel, Jackson National Life announced this week that independent RIAs can now buy two of its variable annuities and one of its fixed indexed annuities on DPL Financial’s no-commission online insurance purchasing platform.

“The DPL Financial platform gives us an opportunity to expand into the independent RIA channel where we had no footprint or available products,” Scott Romine, president of Advisory Solutions at Jackson National Life Distributors, told RIJ this week.

“The current focus of the Envestnet Insurance Exchange is on connecting insurance carriers with broker-dealer wealth management platforms, of merging the insurance and investment ecosystems,” he said. “The advisors there are IARs—investment advisor representatives—working for the corporate RIA.” The DPL platform works exclusively with independent RIAs.

The variable annuities are Perspective Advisory II, which offers lifetime income riders, Elite Access Advisory II, which is designed for tax-free accumulation in a wide range of investment options. The indexed annuity is MarketProtector Advisory. Perspective Advisory II was launched in 2017. All are no-commission versions of Jackson annuities.

“We’re model-agnostic,” Romine said. “Consumers like the fee-based model, but we’re also committed to the brokerage side. We believe in choice. We just want to make sure that we’re in both places.”

“Our model is effectively a referral model from RIAs,” DPL founder David Lau told RIJ. “We help educate RIAs about when insurance products can be beneficial to clients. They then refer clients to us. We serve as the licensed agent to execute the contract and then the RIA can be added to the contract to manage the assets.”

© 2019 RIJ Publishing LLC. All rights reserved.

A Mixed Economic Bag in 2019

Posted on February 14, 2019 by -

After the synchronized global economic expansion of 2017 came the asynchronous growth of 2018, when most countries other than the United States started to experience slowdowns. Worries about US inflation, the US Federal Reserve’s policy trajectory, ongoing trade wars, Italian budget and debt woes, China’s slowdown, and emerging-market fragilities led to a sharp fall in global equity markets toward the end of the year.

The good news at the start of 2019 is that the risk of an outright global recession is low. The bad news is that we are heading into a year of synchronized global deceleration; growth will fall toward – and, in some cases, below – potential in most regions.

To be sure, the year started with a rally in risky assets (US and global equities) after the bloodbath of the last quarter of 2018, when worries about Fed interest-rate hikes and about Chinese and US growth tanked many markets. Since then, the Fed has pivoted toward renewed dovishness, the US has maintained solid growth, and China’s macroeconomic easing has shown some promise of containing the slowdown there.

Whether these relatively positive conditions last will depend on many factors. The first thing to consider is the Fed. Markets are now pricing in the Fed’s monetary- policy pause for the entire year, but the US labor market remains robust. Were wages to accelerate and produce even moderate inflation above 2%, fears of at least two more rate hikes this year would return, possibly shocking markets and leading to a tightening of financial conditions. That, in turn, will revive concerns about US growth.

Second, as the slowdown in China continues, the government’s current mix of modest monetary, credit, and fiscal stimulus could prove inadequate, given the lack of private-sector confidence and high levels of overcapacity and leverage. If worries about a Chinese slowdown resurface, markets could be severely affected. On the other hand, a stabilization of growth would duly renew market confidence.

A related factor is trade. While an escalation of the Sino-American conflict would hamper global growth, a continuation of the current truce via a deal on trade would reassure markets, even as the two countries’ geopolitical and technology rivalry continues to build over time.

Fourth, the eurozone is slowing down, and it remains to be seen whether it is heading toward lower potential growth or something worse. The outcome will be determined both by national-level variables – such as political developments in France, Italy, and Germany – and broader regional and global factors.

Obviously, a “hard” Brexit would negatively affect business and investor confidence in the United Kingdom and the European Union alike. US President Donald Trump extending his trade war to the European automotive sector would severely undercut growth across the EU, not just in Germany. Finally, much will depend on how Euroskeptic parties fare in the European Parliament elections this May. And that, in turn, will add to the uncertainties surrounding European Central Bank President Mario Draghi’s successor and the future of eurozone monetary policy.

Fifth, America’s dysfunctional domestic politics could add to uncertainties globally. The recent government shutdown suggests that every upcoming negotiation over the budget and the debt ceiling will turn into a partisan war of attrition. An expected report from the special counsel, Robert Mueller, may or may not lead to impeachment proceedings against Trump. And by the end of the year, the fiscal stimulus from the Republican tax cuts will become a fiscal drag, possibly weakening growth.

Sixth, equity markets in the US and elsewhere are still overvalued, even after the recent correction. As wage costs rise, weaker US earnings and profit margins in the coming months could be an unwelcome surprise. With highly indebted firms facing the possibility of rising short- and long-term borrowing costs, and with many tech stocks in need of further corrections, the danger of another risk-off episode and market correction can’t be ruled out.

Seventh, oil prices may be driven down by a coming supply glut, owing to shale production in the US, a potential regime change in Venezuela (leading to expectations of greater production over time), and failures by OPEC countries to cooperate with one another to constrain output. While low oil prices are good for consumers, they tend to weaken US stocks and markets in oil-exporting economies, raising concerns about corporate defaults in the energy and related sectors (as happened in early 2016).

Finally, the outlook for many emerging-market economies will depend on the aforementioned global uncertainties. The chief risks include slowdowns in the US or China, higher US inflation and a subsequent tightening by the Fed, trade wars, a stronger dollar, and falling oil and commodity prices.

Though there is a cloud over the global economy, the silver lining is that it has made the major central banks more dovish, starting with the Fed and the People’s Bank of China, and quickly followed by the European Central Bank, the Bank of England, the Bank of Japan, and others. Still, the fact that most central banks are in a highly accommodative position means that there is little room for additional monetary easing. And even if fiscal policy wasn’t constrained in most regions of the world, stimulus tends to come only after a growth stall is already underway, and usually with a significant lag.

There may be enough positive factors to make this a relatively decent, if mediocre, year for the global economy. But if some of the negative scenarios outlined above materialize, the synchronized slowdown of 2019 could lead to a global growth stall and sharp market downturn in 2020.

© 2019 RIJ Publishing LLC. All rights reserved.

Quarterly reports from four annuity issuers

Posted on February 14, 2019 by -

Brighthouse Financial, Inc., reported this week that annuity sales increased 27% quarter-over-quarter and 10% sequentially in the fourth quarter of 2018, the highest since Brighthouse split off from MetLife. Higher sales of the Shield structured indexed annuity and fixed indexed annuities drove the increase, a release said.

Overall, Brighthouse reported net income available to shareholders of $1,442 million in the fourth quarter of 2018, or $12.14 on a per diluted share basis, compared to net income available to shareholders of $668 million in the fourth quarter of 2017.

The company ended the fourth quarter of 2018 with stockholders’ equity (“book value”) of $14.4 billion, or $122.67 on a per share basis, and book value, excluding accumulated other comprehensive income (“AOCI”) of $13.7 billion, or $116.58 on a per share basis.

For the fourth quarter of 2018, the company reported adjusted earnings* of $186 million, or $1.56 on a per diluted share basis.

The adjusted earnings for the quarter reflected $13 million of net unfavorable notable items, or $0.11 on a per diluted share basis, including a $26 million net favorable impact related to modeling improvements resulting from an actuarial system conversion and establishment costs of $39 million related to planned technology and branding expenses associated with the company’s separation from its former parent company.

For the full year 2018, the company reported net income available to shareholders of $865 million, or $7.21 on a per diluted share basis. The company reported full year adjusted earnings of $892 million, or $7.44 on a per diluted share basis, and full year adjusted earnings, less notable items, of $998 million, or $8.33 on a per diluted share basis.

Corporate expenses in the fourth quarter of 2018 were $233 million pre-tax, down from $242 million pre-tax in the third quarter of 2018. During the quarter, the company repurchased $63 million of its common stock under its stock repurchase program announced on August 6, 2018, resulting in a total of $105 million of its shares repurchased during 2018.

American Equity Investment Life

The holding company for American Equity Investment Life reported this week that total sales by independent agents for American Equity Investment Life Insurance Company (American Equity Life) increased 13% in the fourth quarter of 2018, relative to the previous quarter, while total sales by broker-dealers and banks for Eagle Life Insurance Company (Eagle Life) decreased by $23 million or 12% relative to the previous quarter.

Sales of FIAs were up 11% from the previous quarter, to $1.1 billion. They were driven by a 14% increase in sales for American Equity Life. FIA sales for Eagle Life, at $163 million, were down $1 million or about one percent from the previous quarter, the company said in a release.

“We experienced sequential and year-over-year increases in FIA sales in American Equity Life’s independent agent channel,” said John Matovina, chairman and CEO, in a statement. “Our higher new money investment yields allowed us to take several actions late in the third quarter and early in the fourth quarter to enhance our competitiveness in both the accumulation and guaranteed lifetime income market segments.

“The launch of AssetShield on October 9 was successful; it joins IncomeShield as one of our two top selling products. In the fourth quarter, combined sales for AssetShield and the Choice series, our other accumulation product in the independent agent channel, were greater than total sales of Choice in the third quarter. Choice and AssetShield accounted for 38% of sales in the fourth quarter compared to 35% of sales in the third quarter.

“In the guaranteed lifetime income space, we improved the competitive position of the IncomeShield series and our other guaranteed income products by increasing payout factors in early October. The IncomeShield series, which was the third best-selling guaranteed lifetime income product in the independent agent channel in the third quarter, accounted for 33% of our FIA sales in the fourth quarter.”

Commenting on the market environment and the outlook for FIA sales, Matovina added: “The market in each of our distribution channels continues to be challenging. However, we are pleased with our competitive positioning for both accumulation and guaranteed lifetime income products. Business activity in January 2019 was appreciably ahead of January 2018 and we are optimistic that the sales momentum we developed in the fourth quarter will continue in 2019.”

“In the bank channel, we are seeing meaningful sales from the large bank we referenced in our prior release and continue to expect this relationship to be a key account for Eagle Life. We are also continuing to build out our employee wholesaling model which will be a key initiative for Eagle Life in 2019,” Matovina said.

“Our intent is to use our employee wholesalers to target accounts that do not use third party wholesalers and to complement our third party wholesalers when possible. When accomplished, we will be able to serve banks and broker-dealers in the manner in which they desire while lowering our distribution costs.”

Policyholder funds under management at December 31, 2018 were $51.1 billion, a $441 million or 1% increase from September 30, 2018. Fourth quarter sales were $1.1 billion before coinsurance ceded and $1.0 billion after coinsurance ceded. Gross sales and net sales for the quarter increased 12% and 18%, respectively, from fourth quarter 2017 sales. On a sequential basis, gross and net sales increased 8% and 12%, respectively.

American Equity’s investment spread was 2.56% for the fourth quarter of 2018 compared to 2.67% for the third quarter of 2018 and 2.75% for the fourth quarter of 2017. On a sequential basis, the average yield on invested assets decreased by 3 basis points while the cost of money rose 8 basis points.

Average yield on invested assets was 4.51% in the fourth quarter of 2018 compared to 4.54% in the third quarter of 2018. This decrease was primarily attributable to a decline in the benefit from non-trendable investment income items from 11 basis points in the third quarter to 7 basis points in the fourth quarter. The average yield on fixed income securities purchased and commercial mortgage loans funded in the fourth quarter of 2018 was 5.02% compared to 4.97% in the third quarter of 2018 and 4.61% for the first six months of 2018.

The aggregate cost of money for annuity liabilities of 1.95% in the fourth quarter of 2018 was up 8 basis points from 1.87% in the third quarter of 2018. The benefit from over hedging index linked interest obligations was 3 basis points in the fourth quarter of 2018 compared to 7 basis points in the third quarter of 2018.

American Equity reported fourth quarter 2018 net income of $53.8 million, or $0.59 per diluted common share, compared to net income of $36.8 million, or $0.41 per diluted common share, for fourth quarter 2017.

For the year ended December 31, 2018, net income was $458.0 million, or $5.01 per diluted common share, compared to $174.6 million, or $1.93 per diluted common share, for the year ended December 31, 2017.

Non-GAAP operating income1 for the fourth quarter of 2018 was $90.3 million, or $0.99 per diluted common share, compared to non-GAAP operating income1 of $74.5 million, or $0.82 per diluted common share, for fourth quarter 2017. For the year ended December 31, 2018, non-GAAP operating income1 was $425.7 million, or $4.66 per diluted common share, compared to $285.1 million, or $3.16 per diluted common share, for the year ended December 31, 2017. Non-GAAP operating return on average equity excluding average AOCI1 for the year was 18.6% based upon reported results and 15.4% excluding the impact of assumption revisions.

Prudential Financial

Prudential Financial, Inc. this week reported year-end and fourth quarter 2018 results. Net income was $4.074 billion ($9.50 per common share) for the year ended December 31, 2018, compared to $7.863 billion ($17.86 per common share) for previous year.

After-tax adjusted operating income was $5.019 billion ($11.69 per Common share) for 2018, up from $4.652 billion ($10.58 per Common share) for 2017.

U.S. Individual Solutions, consisting of the Individual Annuities and Individual Life segments, reported adjusted operating income of $419 million for the fourth quarter of 2018, down from $639 million in the year-ago quarter.

The Individual Annuities segment reported adjusted operating income of $445 million in the current quarter, compared to $541 million in the year-ago quarter. Excluding the notable items above, results decreased $38 million from the year-ago quarter reflecting lower policy fees, net of associated risk management and other related costs, driven by a decrease in average variable annuity account values. These decreases were partially offset by favorable hedging results and a greater contribution from net investment spread results.

Individual Annuities account values were $151 billion as of December 31, 2018, down 10% from a year earlier, driven by market depreciation and net outflows over the year. Individual Annuities gross sales were $2.2 billion in the current quarter, up 38% from the year-ago quarter, reflecting favorable customer reaction to pricing actions and sales of our fixed index annuity product, which launched in the first quarter of 2018.

For the fourth quarter of 2018, net income attributable to Prudential Financial, Inc., was $842 million ($1.99 per Common share), compared to $3.765 billion ($8.61 per Common share) for the fourth quarter of 2017. After-tax adjusted operating income was $1.035 billion ($2.44 per Common share) for the fourth quarter of 2018, compared to $1.173 billion ($2.69 per Common share) for the fourth quarter of 2017.

Consolidated adjusted operating income, adjusted book value and adjusted operating return on equity are non-GAAP measures. These measures are discussed later in this press release under “Forward-Looking Statements and Non-GAAP Measures” and reconciliations to the most comparable GAAP measures are provided in the tables that accompany this release.

The Company’s ongoing operations include PGIM, U.S. Workplace Solutions, U.S. Individual Solutions, International Insurance, and Corporate & Other Operations. In the following segment-level discussion, adjusted operating income refers to pre-tax results.

PGIM, the Company’s global investment management businesses, reported adjusted operating income of $243 million for the current quarter, compared to $306 million in the year-ago quarter.

The decrease of $63 million from the year-ago quarter reflects a $67 million lower contribution from other related revenues, net of associated expenses, which amounted to $57 million for the current quarter. This decrease was partially offset by higher asset management fees, reflecting an increase in average assets under management.

PGIM assets under management of $1.161 trillion were $6 billion higher than the year-ago quarter driven by fixed income inflows partially offset by equity outflows and market depreciation. Unaffiliated third-party net outflows in the current quarter of $3.1 billion included a single institutional fixed income client outflow of $9 billion. Total PGIM net inflows in the current quarter were $9 billion.

U.S. Workplace Solutions, consisting of the Retirement and Group Insurance segments, reported adjusted operating income of $249 million for the fourth quarter of 2018, compared to $313 million in the year-ago quarter.

The Retirement segment reported adjusted operating income of $216 million for the current quarter, compared to $291 million in the year-ago quarter. Excluding the notable items above, results increased $25 million from the year-ago quarter reflecting a higher contribution from net investment spread results and an increase in underwriting gains from growth within our pension risk transfer business.

Retirement account values were $432 billion as of December 31, 2018, up 1% from a year earlier, reflecting positive net flows partially offset by market depreciation. Net flows in the current quarter of $6.2 billion included several pension risk transfer sales totaling $7.5 billion.

Lincoln Financial Group

Lincoln Financial Group this week reported net income for the fourth quarter of 2018 of $399 million, or $1.80 per diluted share available to common stockholders, compared to net income in the fourth quarter of 2017 of $816 million, or $3.67 per diluted share available to common stockholders.

Fourth quarter adjusted income from operations was $475 million, or $2.15 per diluted share available to common stockholders, compared to $440 million, or $1.98 per diluted share available to common stockholders, in the fourth quarter of 2017.

The Annuities segment reported income from operations of $258 million in 4Q2018 compared to $265 million in the prior-year quarter, as a lower reported tax rate as a result of tax reform was more than offset by a decrease in average account values driven primarily by the Athene reinsurance transaction completed in the fourth quarter.

Total annuity deposits of $3.8 billion were up 35% from the prior-year quarter as both variable and fixed annuities benefitted from product and distribution expansion. Variable annuity sales were up 15% versus the prior-year quarter and fixed annuity sales increased 102% over the same period.

Net flows were $675 million in the quarter, which included positive flows from both variable and fixed annuities, compared to net outflows of $222 million in the prior-year period.

For the full year, total annuity sales of $12.4 billion increased 42% versus the prior year. Net outflows of $139 million for the year improved from $2.7 billion in 2017. As a result of the reinsurance transaction in the fourth quarter, average account values decreased 8% from the prior-year period but increased 2% for the full year.

Retirement Plan Services reported income from operations of $45 million, up 10% compared to the prior-year quarter. The growth in earnings is attributable to a lower reported tax rate as a result of tax reform and lower expenses.

Total deposits for the quarter of $2.2 billion were down 11% while deposits for the full year increased 18% to $10.1 billion driven by a 32% increase in first-year sales and 8% growth in recurring deposits.

Net flows totaled $173 million in the quarter compared to $440 million in the prior-year period. For the full year, net flows totaled $2.5 billion, up 76% compared to the prior year. Average account values of $70 billion were up 5% from the prior-year quarter primarily driven by positive net flows.

Net income for the full year of 2018 was $1.6 billion, or $7.40 per diluted share available to common stockholders, compared to $2.1 billion, or $9.22 per diluted share available to common stockholders in 2017. Full year 2018 adjusted income from operations was $1.9 billion, or $8.48 per diluted share available to common stockholders, compared to $1.8 billion, or $7.79 per diluted share, available to common stockholders, for the full year of 2017.

Net income in the prior-year quarter and full year 2017 included non-recurring net favorable items of $417 million primarily related to tax reform.

“Fourth quarter adjusted operating EPS growth of 9% and ROE of 13.5% were strong and consistent with our record full-year results,” said Dennis R. Glass, president and CEO of Lincoln Financial Group.

“Significant accomplishments this past year include restoring positive flows in the Annuities business, outperforming our expectations for the Liberty acquisition, and executing on strategic transactions, which resulted in $2.5 billion of capital deployment. Given our positive momentum, we remain well positioned to drive long-term shareholder value.”

© 2019 RIJ Publishing LLC. All rights reserved.

Unsure how much to commit to Roth or traditional accounts? This rule might help.

Posted on February 14, 2019 by -

A simple rule-of-thumb for allocating savings either to traditional tax-favored savings accounts (contributions deductible, withdrawals taxed) and/or Roth accounts (contributions taxed, withdrawals untaxed) is provided in a recent paper from the Journal of Financial Economics.

“We propose a practical rule with two steps to determine the allocation of savings across traditional and Roth accounts,” wrote the authors, David C. Brown and Scott Cederburg of the University of Arizona and Michael S. O’Doherty of the University of Missouri. The two steps are:

  1. Households that currently fall into a low tax bracket (e.g., the 10% or 15% brackets in the 2015 tax schedule) should invest 100% of their savings in Roth accounts.
  2. Other households should allocate (Current age + 20)% of their retirement savings to traditional accounts with the remainder in Roth vehicles, subject to constraints on account access and investment limits.

“We demonstrate a large economic impact of optimally investing across traditional and Roth retirement accounts, and these effects remain significant in the presence of realistic contribution limits and constraints on account access,” the authors wrote.

“Conventional wisdom suggests that retirement savers with relatively low current incomes benefit most from access to Roth accounts,” while workers in higher tax brackets benefit more from tax-deductible savings account.

“We find, however, that higher-income investors have greater exposures to tax-schedule uncertainty, which can be managed using post-tax Roth options… Investors who believe that rates in the tax schedule are likely to drift upward (downward) prior to retirement should increase their allocations to Roth (traditional) accounts relative to our analysis,” the paper said.

“We do not explicitly model the risk of a [future] structural change in the tax code or the regulations for a particular retirement vehicle,” the authors wrote, they suggest that “a consumption tax system would favor traditional accounts relative to Roth, whereas a flat income tax structure would reduce the tax benefit of traditional investments and make Roth accounts more desirable.”

© 2019 RIJ Publishing LLC. All rights reserved.

How Government Policy Promotes Wealth Inequality

Posted on February 14, 2019 by -

Federal tax and spending policies are worsening the problem of economic inequality. But the tax breaks that overwhelmingly benefit the wealthy are only part of the challenge. The increasing diversion of government spending toward income supports and away from opportunity-building programs also is undermining social comity and, ironically, locking in wealth inequality.

Many flawed tax policies are rooted in the ability of affluent households to delay or even avoid tax on the returns from their wealth. By putting off the sale of assets, wealth holders can avoid tax on capital gains that are accrued but not realized. At death, deferred and unrecognized capital gains are exempted from income tax altogether because heirs reset the basis of the assets to their value on the date of death.

While individuals and corporations recognize taxable gains only when they sell assets, they may immediately deduct interest and other expenses. This tax arbitrage makes possible everything from tax shelters to the low taxation of the earnings of multinational companies.

Recent changes in the law have further eroded taxes on wealth. Once, the US taxed capital income at higher rates than labor income, today it does the reverse. For instance, the 2017 tax law sharply lowered the top corporate rate from 35% to 21%, but trimmed the top individual statutory rate on labor earnings only from 39.6% to 37%.

In theory, low- and middle-income taxpayers could use these wealth-building tools as well. But the data suggest that the path to wealth accumulation eludes most of them, partly because they save only a small share of their income. Even those who do save $100,000 or $200,000 in home equity or in a retirement account earning, say, five percent per year may never reap more than $1,000 or so in tax savings annually.

To understand what has been happening to the relative position of the non-wealthy, we need to dig a little into the numbers. Economics professor Edward Wolff of New York University discovered that in 2016 the poorest two-fifths of households had, on average, accumulated less than $3,000 and the middle fifth only $101,000.

Trends in debt tell part of the story. From 1983 to 2016, debt grew faster than gross assets for most households–except for those near the top of the wealth pyramid. It’s not that the government doesn’t aid those with less means. But almost government transfers support consumption, and only indirectly promote opportunity.

Consider the extent to which the largest of these programs, Social Security, has encouraged people to retire while they could still work. Because of longer life expectancy and, until recently, earlier retirement, a typical American now lives in retirement for 13 more years than when Social Security first started paying benefits in 1940.That’s a lot fewer years of earning and saving, and a lot more years of receiving benefits and drawing down whatever personal wealth they hold.

Annual federal, state, and local government spending from all sources, including tax subsidies, now totals more than $60,000 per household—about $35,000 in direct support for individuals. Yet, increasingly, less and less of it comes in the form of investment or help when people are young. Thus, assuming modest growth in the economy and those supports over time, a typical child born today can expect to receive about $2 million in direct assistance from government.

In the meantime, however, government has (a) scheduled smaller shares of national income to assist people when young and in prime ages for learning and developing their human capital, (b) reduced support for their higher education in ways that has now led to $1.4 trillion of student debt being borne by young adults without a corresponding increase in their earning power, and (c) offered little to bolster the productivity of workers.

Any number of programs could have a place in encouraging economic mobility, among them beefed-up access to job training and apprenticeships  for non-college goers; wage subsidies that reward work; subsidies for first-time homebuyers in lieu of subsidies for borrowing; a mortgage policy aimed more at wealth building; and promotion of a few thousand dollars of liquid assets in lieu of high-cost borrowing as a source of emergency funds—you get the point.

However, in one recent study, I found that federal initiatives to promote opportunity—many in the tax code—have never been a large fraction of government spending or tax programs and are scheduled to decline as a share of GDP.It would be naïve to assume that fixing any of this will be easy. Republicans seem committed to reducing (not increasing) taxes on the wealthy, while Democrats reflexively support redistribution to those less well off, even when their proposals reduce incentives to save and work.

But until we fix both sides of this equation, don’t expect government policy to succeed in distributing wealth more equally. After all, simply leveling wealth from the top still will leave a large number of households holding zero percent of all societal wealth.

© 2019 The Urban Institute.

Shekel by Shekel: How Israelis Save

Posted on February 14, 2019 by -

Like Americans and Europeans, Israelis have seen big changes in the way they fund their retirements. Until about 25 years ago, older Jewish Israelis in professional jobs could look forward to generous defined benefit (DB) pensions from one or more former employers.

“Once upon a time, it was simple in Israel,” Dan Galai, a fund manager and academic who has had a 50-year career here and in the US, told RIJ during a recent interview in his office in the Ramat Gam district of Tel Aviv.

Dan Galai

“If you were in the government, or affiliated with a university, or you had an army career, you got a pension that was paid out of the budget of the government. There were many different pension plans, and the government issued bonds for them with a guaranteed rate. It was an expensive subsidy.”

Equally unsustainable were private, multi-premium annuities, called pension insurance policies, said Abigail Hurwitz, an Israeli pension expert currently at the Wharton School in Philadelphia. “They insured individuals who didn’t belong either to the government or to any employee union,” she told RIJ. The annuity factor was set at purchase date, rather than at retirement. As life expectancies in Israel rose, these contracts turned out well for annuitants but disastrously for life insurers.

By 1995, the fragility of this fools’ paradise could no longer be ignored. The government eventually bailed out the big pension funds (at a reported cost of about $25 billion), closed them to new enrollment, and replaced them with a voluntary defined contribution system. The feckless practice of setting annuity factors at time-of-purchase for pension insurance policies was ended.

At the start of the 21st century, Benjamin “Bibi” Netanyahu (then Israel’s finance minister, now its prime minister) started rationalizing the economy. In 2003, the government broke the big banks’ cozy monopoly on financial services, forcing them to divest their mutual (aka “provident”) funds. In 2008, the government—acknowledging that the voluntary defined contribution (DC) system, as DC does in the US, left millions of workers without any retirement plan coverage—took a dramatic step and required all employers and workers to contribute to DC plans.

Here’s a pocket-sized overview of the post-2008 mixed retirement system to which Israelis have been adjusting. Most Israelis, like Americans, grope their way into retirement, with a grab-bag of DB pensions from long-past employers, pension insurance policies, unspent severance pay accounts, and new mandatory DC accounts. The different accounts from different periods are typically subject to different tax rules. The various elements often require a licensed pension advisor to sort out.

We’ll cover the high points of Israel’s safety-net pension and its mandatory DC program, which leads to mandatory partial annuitization. Warning: There’s a lot of information here. The Israeli retirement system was laid down in a succession of layers, and studying it requires a kind of archaeological excavation through the multi-dimensional strata of time and law.

Basic old age insurance (and health care)

This program, run by the National Institute of Insurance (NII) and funded by a payroll tax, resembles US-style Social Security, but gives all retires the same old age benefit, not counting certain supplements and adjustments. No one receives more than about $1,000 per month.

Abigail Hurwitz

The payroll tax has two tiers. There’s a 3.55% employer-paid tax on the first 6,164 shekels ($1,690) of income per month. Then there’s a 7.6% employer-paid tax and 7.0% employee-paid tax on income between 6,164 and 43,890 shekels ($12,043) per month. In addition, the employee pays a health insurance tax equal to 3.10% of the first 6,164 in salary and 5% for amounts above that, to 43,890 shekels.

Benefits start at the full retirement age (67 for men, 62 for women). Until age 70, benefits are means-tested, but not after age 70. The flat individual benefit is a modest 1,554 shekels (about $427 a month) in a country where the cost-of-living is comparable to that in the US. At age 80, the benefit notches up to 1,641 shekels ($451). Regarding health care: Israel has a public-private hybrid HMO-based health insurance system, funded by a combination of payroll taxes and co-pays. It continues in retirement.

A retired married couple can receive a spousal supplement of 781 shekels ($215), raising the couples’ pension to 2,335 shekels ($640) a month. Those with dependent children receive 492 shekels ($135) per child, up to two. For a retired couple with two dependent children, the pension would be $885 a month. “That’s peanuts,” a Tel Aviv cab driver told me. “Peanuts!”

Mandatory defined contribution

As Israel grew more market-driven under Netanyahu, the government wanted to shift financial responsibility for retirement onto the public. It made defined contribution plans mandatory, with fixed-percentage contributions from employers and employees.

Today, the employer contributes 6.5% of pay and the employee contributes another 6%. The employer contributes another 6% of salary toward an unemployment (“severance”) fund. If the employee never uses it, he or she can take it as a lump sum in retirement.

Employers in Israel aren’t plan sponsors per se and aren’t supposed to choose plan providers for their workers, although employers can choose their company’s default target date fund provider. Employees are intentionally given a lot of freedom to invest as they wish, and to switch investments (and providers?) at will. Every month, the employer sends a bulk contribution to a clearinghouse, which distributes each employee’s portion to his or her chosen fund provider.

Older Israeli in Jerusalem’s Mahane Yehuda market.

Employees typically send their contributions to a “pension fund” or a “provident fund;” the latter resemble mutual funds. The first offers a combination of retirement savings, life insurance and disability insurance, and contributions to them are capped because their returns are partly subsidized. Contributions to pension funds are tax-free up to a certain amount and excess contributions spill over into other investments.

The government evidently subsidizes the pension funds (not the provident funds) by allowing them to hold special government bonds, which yield a guaranteed 5.75% return (a slice of which 2% to the insurer that manages the fund). Up to 30% of a pension fund’s asset pool can consist of these special-purpose bonds.

The default investment options for participants in pension funds are like target-date funds. These funds have a 10% allocation to the subsidized bonds for people under 50. The allocation rises to 40% at age 50 ad to 60% at age 60 and thereafter in retirement. This glidepath, as in the US, serves as a buffer against sequence-of-returns risk.

Competition between fund providers is designed to keeps a lid on fees. Israelis pay a two-fold fee on their pension contributions. First, there’s an expense ratio for each contribution. Second, an expense ratio is charged on accumulated savings (assets under management). The fees for the two default funds, selected through a government bidding process in 2016, are especially low.

The two default providers are Meitav Dash Investments Ltd. and Halman Aldubi Investment House Ltd. Meitav Dash charges a one basis-point (0.01%) management fee on accrued savings and 131 basis points (1.31%) on each monthly deposit. Halman Aldubi collects an even slimmer one-tenth of one basis point (0.001%) management fee on accrued savings but charges 149 basis points (1.49%) on monthly deposits. As in the US, the default funds are popular.

In addition, employers may contribute on their employees’ behalf to tax-favored “study funds,” which can be withdrawn tax-free after a six-year minimum holding period. As in the US, contributions to pension funds and provident funds are tax-deductible up to a cap. The precise tax rules in Israel are too complex to address here.

Mandatory annuitization

Distribution from Israeli DC plans is more structured than distribution from 401(k) accounts in the US. In the US, distributions from tax-deferred accounts, either in the form of annuity payments, lump sums, or systematic withdrawals, are all taxed as ordinary income. Most US retirees resist taking distributions from tax-deferred accounts until the required age, 70½.

Israel, by contrast, drives partial annuitization (but only of savings since 2008) through a combination of requirements and incentives. Retirees must convert at least part of their tax-deferred savings to a lifetime income stream and pay no income tax on the portion that’s annuitized, up to a limit. Lump-sum withdrawals from pension funds can face up a significant tax. (Forced annuitization was less of a jolt to Israelis than it might be for Americans, since it mimicked their earlier DB pensions.)

Oded Sarig

Most of the new DC pensions are structured as life-with-20-years-certain annuities. “In order to qualify for the tax benefit, the retiree has to annuitize for life. But within that restriction you can select the number of years you want the benefits to last,” said Oded Sarig, a former chief of the Ministry of Finance’s Capital Market, Insurance and Savings Authority, in an interview with RIJ. “You can annuitize with 10 years or 20 years certain,” he added. “You can have joint-and-survivor contracts.”

The standard tax-free income stream is about 4,400 shekels or about $1,200 a month. A recent law, called Amendment 190, adds a new tax break for lump-sum withdrawals, a chance for additional tax-free monthly income from provident funds, and tax-free disbursements at death before age 75. (Amendment 190 is new and complicated, and this description could be flawed.)

An Israeli retiree who owns a provident fund would need to transfer it to a pension fund in order to convert to a monthly income stream. This would not entail buying an individual fixed income annuity from a life insurer, as in the US. The retiree would simply switch from contributing to his or her pension fund to receiving an income from it.

The first monthly payment is determined by dividing the retiree’s assets by a “conversion factor” based on gender, life expectancy at annuitization and an assumed interest rate (currently 4%). The current conversion factor for a payout from a post-2008 savings is about 200. Someone who saved a million shekels in a pension fund could, if they annuitize the whole amount, buy a 5,000-shekel-a-month annuity at today’s rates.

This income, like the income from a variable immediate annuity in the US, can rise or fall, depending on the returns of the underlying portfolio. A retiree’s portfolio would contain almost 100% bonds, 60% of which would be the subsidized special government bonds.

To spread the impact of potential volatility up or down, fund managers use a “smoothing” mechanism. Payments adjust to portfolio performance over rolling three-year periods instead of every month or year, so that the impact of a transient shock to the fund doesn’t fall on one unlucky cohort of retirees. “The participants bear the risks,” Sarig said. “It’s a form of mutual insurance. If the fund runs into problems, the retirees’ income comes down.”

If all this sounds like a hot mess, it is. In a coffee shop in Yehud, a 69-year-old retired electronics engineer and Army officer, Moshe Shahar, said his wife handles the details of his many retirement accounts. He’s nostalgic for the simpler, more generous DB pensions of the rapidly receding past. “The new system has turned out to be a nightmare,” he said, “You get much less than with the old pensions.”

© 2019 RIJ Publishing LLC.

A Genuine ‘Value Fund’ Is Hard to Find

Posted on February 7, 2019 by -

“Value” investors are the tortoises of the investing public, following the teaching and examples of Ben Graham and Warren Buffett. By purchasing funds that invest in companies whose share prices lag their fundamental “book” value, they expect eventually to outperform the “hares” —i.e., investors in “growth” companies with fast-rising share prices.

Martin Lettau, an economist at UC-Berkeley’s Haas School of Business, was a value fund investor for years. Then he studied the book-to-market ratios of the stocks—not just in his own funds but in a cross-section of active US funds from 1980 to 2016—and learned that he (and other value investors) have usually been rabbits in disguise.

Martin Lettau

“Many active value funds are closet growth funds,” Lettau told RIJ in an interview. “On average, they hold more growth stocks than value stocks. There are few exceptions. DFA’s [Dimensional Fund Advisors] value fund hold mostly value stocks. Only these funds are what I would call a ‘value fund.’ Growth funds, on the other hand, hold what you would expect them to.”

The upshot is that if you’ve been investing in value funds and are waiting for the value premium to show up and vindicate your patience, maybe you should stop holding your breath and look closer at your funds’ holdings.

“Characteristics of Mutual Fund Portfolios: Where are the Value Funds?” co-authored by Lettau, Sydney Ludvigson and Paulo Mandel, all of Berkeley (NBER Working Paper 25381) analyzed 2,638 actively managed funds in the CRSP/Thomson-Reuters Database. Of those, 574 identified as value funds and 1,130 as growth funds. The sample also included 955 exchange-traded funds and 114 hedge funds. The number of active funds, they note, rose eight-fold, from 185 to 1,424, between 1980 and mid-2016.

The authors reviewed several characteristics of the stocks held by the funds, including the book-to-market ratio. They sorted the stocks into five book-to-market quintiles, from low to high. Then they assayed each fund to measure the percentage of its underlying stocks that belonged to each quintile.

“‘Value funds’ are missing from the US equity market,” they concluded. Counter-intuitively, a larger percentage (24%) of the stocks in value funds came from the lowest book-to-market quintile than from the highest (13%). More than half of all value funds held a larger share of low book-to-market stocks than high book-to-market stocks. Only 7% of value funds held more than 25% of their portfolios in high book-to-market stocks.

“While there are over 1,000 mutual funds with consistently low b-to-m ratios, there are virtually no high b-to-m funds in our sample… Even funds with an explicit ‘value’ objective hold a larger share of low b-to-m stocks than high b-to-m stocks in their portfolios,” the paper said.

“One rationale for having value funds is to exploit the value premium. That is, to get a higher return in the long run than growth funds. Our results show that even the funds that call themselves value funds don’t exploit the value premium,” Lettau told RIJ.

It wasn’t a question of whether or not fund managers have abandoned the book-to-market metric in the age of hard-to-value tech stocks. “We looked at a whole list of measures of value and growth,” Lettau said. “We saw the same pattern for any measure.”

“This pattern is true going back to the 80s, so it’s been consistently true. It’s not style drift on the part of fund managers. It’s a consistent pattern. The purpose of our paper was to survey these facts, which are not well-documented.”

Why don’t most value funds hold value stocks? Lettau says that this question is still unanswered and further research is needed. When he presented his findings to an audience at one of the largest asset management firms, the fund managers there didn’t deny his findings. They suggested however that they are only giving the investing public what it wants. “They said, ‘We’re demand-driven.’

“Apparently it’s easier to sell sexy growth funds rather than boring old value funds. But that goes against the value premium, which says that, on average, cheap stocks will perform better in the long run. But, for whatever reason, investors seem to demand growth and glamour.” Just as surprising to Lettau, seemed to be the fact that the value benchmarks that value fund managers use, such as the CRSP value indices, did not necessarily include only what he considered true value stocks.

Dimensional’s value funds are the exception, according to Lettau. In response to an RIJ query, Dimensional’s co-head of research, Marlena Lee, sent a written description of her company’s process when building value funds. “Are we surprised by Lettau et al. finding for our value funds? No,” she wrote. “In our value strategies, one of their primary focuses is purchasing stocks with low prices relative to a fundamental measure of firm value. Price-to-book ratio is the primary way we do this. Among those stocks, we use their profitability, market cap, momentum characteristics, etc. to improve expected returns. Lettau et al. find that our value funds have a strong focus on stocks with low price-to-book ratios because that is how we have designed them.

“Valuation theory suggests that low market prices relative to fundamental measures of firm size combined with high expectations of future cash flows to shareholders should indicate high expected returns… However, the theory doesn’t tell you the best way to measure and pursue the value premium,” Lee wrote.

Lee sent RIJ a table comparing the 15-year net returns (as of 12/31/2018) of five DFA value funds with the average returns of the corresponding Morningstar Categories, and with the DFA fund’s rank among the funds in each of those categories. Performance was higher than the Morningstar average in each category and the rank was in the top 10% or better for four out of five of the DFA funds. The DFA US Large Cap Value fund showed an annualized return of 7.85% over 15 years. The Morningstar average was 6.52% a year.

“Among the variables we use to identify stocks with higher expected returns are price-to-book, profitability, and market capitalization. These variables can be thought of as capturing different angles of value investing, because they help us identify stocks that have low market prices relative to current fundamental measures of firm value and what future cash flows investors expect to receive.”

In her letter, Lee supported Lettau’s idea that the book-to-market ratio has not become less meaningful or obsolete as a value indicator during the tech-stock era. DFA’s analyses “have not shown any downward trend in the informational content of BtM,” she wrote. “In developed and emerging markets outside the US… the explanatory power of price to book in the past 15 to 20 years is similar to its long-term average.”

Lettau has shared his paper informally with a range of reviewers. “The reaction has been varied,” he said. “Some people are surprised by the degree of the tilt. The fund industry already knows there’s more interest in sexy growth funds. What is surprising is that there are virtually no high book-to-market mutual funds. Different market participants knew vaguely about this, but not the extent of the tilt. In academia, this wasn’t known.

“I had a value fund in my own retirement portfolio. I thought I would capture the value premium. But after writing the paper I looked closer at my fund and saw that it didn’t do what I thought it was doing. Even if the fund says ‘value,’ there’s no likelihood that it’s a value fund.”

© 2019 RIJ Publishing LLC. All rights reserved.

Fourth Quarter Fears are Disappearing

Posted on February 7, 2019 by -

The stock market’s decline in the fourth quarter suggested that the economy was on the cusp of slipping into recession.  As we turn the corner into a new year it is evident that many of those fears were exaggerated.

We now know that employers ignored both the partial government shutdown and stock market turmoil and added 304 thousand jobs in January.  The Fed has made it abundantly clear that it is on hold for the foreseeable future and will have to be persuaded to raise rates again.

Manufacturing firms experienced an impressive rebound in orders and production in January.  Thus, recent indicators provide reassurance that the economy is chugging along in the first quarter at a pace roughly comparable to other recent quarters.

Two things are fascinating about the 304 thousand increase in employment in January.  First, the partial federal government shutdown had no impact on hiring.  Second, the jobs market seems to be strengthening.  The economy cranked out 183 thousand jobs monthly in 2017, followed by 220 thousand per month in 2018, and 266 thousand in the most recent 3-month period.  Perhaps the labor market is not nearly as tight as what most economists believe.

Following the December FOMC meeting the Fed raised the funds rate one-quarter point to a range of 2.25-2.5%.  Fed Chair Powell indicated at that time that while the Fed may keep rates steady for a while, he expected two additional rate hikes in 2019.  However, this past week he said that the Fed will sit tight for some time and will need to be persuaded to raise rates beyond their current level.  That is a distinctly different tone.

The Institute for Supply Management reported that its index for conditions in the manufacturing sector of the economy rose 2.3 points in January to 56.6.  The increase was led by the two most forward-looking components – orders and production – which registered gains of roughly seven points.  The overall series remains below levels attained late last summer.

However, the current level of the index is consistent with 4.0% GDP growth.  While no one anticipates 4.0% GDP growth this year, this index certainly seems to throw cold water on the notion that the pace of economic activity is succumbing to stock market gyrations, slower growth in China, tariffs, or rising inflation.

On the inflation front, the employment cost index rose 2.7% in the fourth quarter and 2.9% for 2018.  Clearly, the seemingly tight labor market is forcing employers to pay up to attract the workers they need.  That means that workers are receiving fatter paychecks and that is a good thing.  At the same time some worry that rising labor costs will push the inflation rate upwards.

But thus far, there is no evidence that is happening because productivity growth is countering the increased labor costs.  Unit labor costs, which measures labor costs adjusted for the increase in productivity, have risen just 0.9% in the past year – a 2.2% increase in compensation partially offset by 1.3% growth in productivity.  The Fed has a 2.0% inflation target.  If unit labor costs are rising by 0.9%, it is quite clear that the tight labor market is not putting upward pressure on the inflation rate.

It is also worth noting that the ISM price component for January fell 5.3 points to 49.6 after having declined 5.8 points in December.   That is the lowest reading for the price component since February 2016 and suggests that the PPI for January will register a decline.  Clearly, there is no hint that the inflation rate is on the verge of accelerating any time soon.

The stock market’s slide late last year was unnerving and suggested to many investors as well as economists that an economic downturn was likely by the end of this year.  Our sense was that the economic fundamentals remained solid and that the selloff was nothing more than exaggerated stock market noise.  We are breathing a sigh of relief that, perhaps, we are on the right track.

All these tidbits of information are restoring the faith of stock market investors.  The S&P 500 index has recovered about 60% of what it lost during the fourth quarter and now stands just 7.5% below its previous peak level.

© 2019 Numbernomics.

Honorable Mention

Posted on February 7, 2019 by -

Sweeping bipartisan retirement bill re-introduced

The Retirement Enhancement and Savings Act (RESA) has been reintroduced in the new Congress. The bipartisan bill introduced on Feb. 6 is sponsored by Reps. Ron Kind (D-WI) and Mike Kelly (R-PA), NAPANet reported.

The bill includes provisions intended to improve the retirement plan options available to small businesses by allowing unrelated employers to adopt a multiple employer plan (MEP). The legislation would give employers additional time to adopt a qualified retirement plan for the prior year up until the due date of the tax return (with extensions). The legislation provides for greater flexibility for a business to adopt a safe harbor 401(k) plan. The bill reduces the premiums charged to cooperative and small employer charity (CSEC) pension plans like the ones sponsored by some rural electric and agricultural cooperatives and the Girl Scouts.

The bill provides a tax credit of up to $5,000 to defray the cost of starting a retirement plan and adds an additional tax credit for plan designs with an automatic enrollment feature. It also enhances automated saving by removing the 10% cap on automatic employee contribution rate increases.

OneAmerica and Broadridge create CIT data resource

OneAmerica, in collaboration with Broadridge Advisor Solutions, has created a new website that offers an online repository of collective investment trust (CIT) for is retirement plan advisors who are considering CITs as an investment option for participants in their plans, according to a news release.

CITs are popular due to their flexibility and cost effectiveness, but a disadvantage that exists is “The inability to quickly and easily find information about the funds and important documents such as a declaration of trust” have slowed the adoption of CITs, OneAmerica said. The new online portal is designed to remedy that.

“The overhead associated with compliance and regulation [of CITs] isn’t as time-consuming as traditional mutual funds, therefore making them a cost-effective option for plans,” the release said.

OneAmerica is the marketing name for the companies of OneAmerica. The firm provides administrative and participant services for some 12,000 retirement plans with over $63 billion in assets under administration.

Empower launches Snapchat and Instagram campaigns

Empower Retirement, the nation’s second largest retirement services provider, has expanded its social media strategy to reach Generation Z and more millennials.

The firm has launched video campaigns on Snapchat, a mobile messaging application widely used by young adults, as well as Instagram Stories. Both campaigns speak directly to young adults ages 18 to 34 about the idea that it’s never too early to start saving for their future financial freedom.

Empower Retirement is among the first retirement services firms in the nation to take its message to Snapchat, which reported 186 million daily active users in Q3 2018. Pew Research Center reports that 78% of 18 to 24-year-olds use Snapchat and 71% visit the platform multiple times per day.

The first campaign features five new animated videos, developed by Empower, that have some fun with a “rare artifact” theme. The videos will run nationwide now through the end of February.

The second campaign provides financial “pro tips,” and allows users to “swipe up” for additional educational content. Both campaigns, designed vertically, specifically for Snapchat and Instagram Stories, are part of Empower Retirement’s expansive social media effort to continue an on-going conversation with millennial savers and start one with Generation Z (born from the mid 1990s to the early 2000s) about the importance of saving early. Longer videos will be featured on Facebook, Twitter and Instagram.

Empower has had previous success in connection with younger generations on social media. In its last Snapchat campaign the number of users in the 18 to 34-year-age range watching the entire video was nearly double the completion rate of other social media platforms.

Millennials (born between 1981 and 1994) are on track to replace 75% of their income in retirement compared to Generation X workers who are on track to replace 61% and baby boomers that are on track to replace 58%, according to an Empower Institute survey of 4,000 working Americans ages 18 to 65.4.

Equity funds rebound in January: TrimTabs

Retail investors jumped back into the equity markets in January, with all equity mutual funds taking in $11.0 billion in January, the most since February 2014, according to a TrimTabs Investment Research estimate.

The inflow of $3.3 billion into U.S. equity mutual funds was the most since February 2015, while the inflow of $7.8 billion into global equity mutual funds was the most since March 2018.

The buying in January came just one month after all equity mutual funds lost a record $89.3 billion in December. “Flows shifted dramatically last month,” said David Santschi, Director of Liquidity Research at TrimTabs.

“Mom and pop investors may simply have been chasing performance, or perhaps they were reassured by soothing words from central bankers or seeking out active management amid higher volatility.”

Equity exchange-traded fund flows fell sharply last month, TrimTabs noted in its research note. U.S. equity ETFs had their biggest monthly outflow on record, shedding $26.1 billion. Global equity ETFs issued $4.2 billion, their lowest monthly inflow since September 2018.

Oregon auto-IRA program gathers momentum

OregonSaves, a state-based, auto-enrolled IRA program for workers whose employers don’t offer retirement plans, reported milestones this week: $12.8 million in total savings so far, the receipt of an innovation award from Pensions & Investments magazine and the Defined Contribution Institutional Investors Association, and the testimony of an OregonSaves employer at a recent US House committee hearing on retirement security.

Luke Huffstutter, the co-owner of Annastasia Salon in Portland and one of the first small business owners to embrace OregonSaves, testified before the U.S. House Ways and Means Committee in a hearing focused on “Improving Retirement Security for America’s Workers.” The committee is chaired by U.S. Rep. Richard Neal, D-Mass., and includes U.S. Rep. Earl Blumenauer, D-Ore.

“OregonSaves is easy for my employees, but it’s also easy for me,” Hufstutter told the committee. “OregonSaves has changed the future for the people in my company. Please consider making it easier for other states to follow in Oregon’s steps.” His participating workers, almost all women, have saved an average of more than $2,200 each, he said.

OregonSaves provides an employment-based retirement savings option to an estimated one million Oregonians who lack the ability to save at work. It is overseen by the Oregon Retirement Savings Board and managed by the Oregon State Treasury.

Illinois and California launched their own state-based versions in the past year, and several other states and municipalities, including New York City, are considering similar programs. Local officials recognize that Americans have a collective retirement savings deficit of $6.8 trillion, and that an under-saved elderly population will put pressure on taxpayer-funded safety net programs.

OregonSaves is available for workers who lack a savings option through their employer, and individual Oregonians who want to sign up on their own at http://www.OregonSaves.com. Workers are automatically signed up, and have the ability to opt out at any time.

A recent poll that found more than 80% of Oregon’s population support for the program, which is rolling out in phases statewide. The current phase is for employers with between 20 and 49 workers. The program will finish the rollout phase at the end of 2020, and at that time will be available to workers at companies of any size, if those companies do not offer a different retirement savings option.

The combined savings of participants in OregonSaves is now increasing by more than $1 million a month, according to Feb. 1 data.

New Social Security Bill Calls for Tax and Benefit Hikes

Posted on February 7, 2019 by -

With the threat of a 25% cut in all Social Security benefits looming in 2034 if Congress doesn’t act to prevent it, House and Senate Democrats have proposed new legislation that would keep the old age and disability insurance program solvent through at least 2100.

John Larsen (D-CT) re-introduced the Social Security 2100 Act, which he first introduced in April 2017, when Republicans controlled the House. The bill has more than 200 co-sponsors. A similar bill, S. 269, was introduced in the Senate a week ago by Richard Blumenthal (D-CT).

The bills emphasize balancing Social Security’s books by raising revenue instead of cutting benefits. It proposes slowly raising the payroll tax by 1.2 percentage points for employers and employees over the next 23 years, and applies the payroll tax to incomes above $400,000 in addition to those below $132,900 (per current law).

The philosophy behind the new bills starkly contrasts with the Social Security reforms proposed in 2005. Some of the 2005 reforms would have diverted a portion of payroll taxes into individual accounts where savers could invest in the stock market. The new bills reject of the supply-side economic thinking behind the December 2017 Republican tax cut.

The current bills proposes to:

  • Raise benefits. The bills increase benefits for all current and new beneficiaries by about 2% of the average benefit. Today’s average benefit is about $1,340.
  • Inflation-protection. The bill adopts a CPI-Elderly formula for inflation adjustments instead of the annual cost-of-living adjustment (COLA) formula, to reflect seniors’ exposure to health care cost inflation.
  • Raise the minimum benefit. The new minimum benefit will be set at 25% above the poverty line ($12,490 in 2019 for one person) and would be tied to increases in wage levels.
  • Raise the earnings cap. Presently, Social Security benefits are taxed if non-Social Security income exceeds $25,000 for an individual or $32,000 for couples. The new proposal would raise that threshold to $50,000 and $100,000 respectively. Almost 12 million Social Security recipients would see a tax cut.
  • Hold SSI, Medicaid, and CHIP beneficiaries harmless. The bill ensures that any increase in benefits from the bill won’t reduce SSI benefits or eliminate eligibility for Medicaid or CHIP (Children’s Health Insurance Program).
  • Apply payroll tax to highest earners. Presently, payroll taxes are not collected on wages exceeding $132,900. This legislation would also apply the payroll tax to the 0.4% of Americans with wages above $400,000.
  • Introduce a higher payroll tax rate gradually. Starting in 2020, the payroll tax would start to rise in annual increments from the current 6.2% for workers and employers to 7.4% each in 2043. The average worker would pay an additional 50 cents per week per year.
  • Establish a unified Social Security Trust Fund. This provision combines the Old Age and Survivors Trust Fund and the Disability Insurance Trust Fund into one Social Security Trust Fund, to ensure that all benefits will be paid.

The proposals’ political viability remains to be seen. It would need support from Republican Senators and the signature of a Republican president. But the measure might be so broadly popular that it could gather that support. Democrats might, in a sense, dare Republicans to oppose it as the 2020 election approaches.

“One might consider this bill a Democratic first bargaining position, [since] it cuts back on no or almost no benefits, even those that are poorly designed, and it finances current law promises and additional benefit increases through tax increases,” Eugene Steuerle, a former Social Security official, told RIJ in an email this week.

Alicia Munnell, an economist and director of the Center of Retirement Research at Boston College, told RIJ, that, speaking for herself and not for the Center, “I am supportive of the approach that maintains and even enhances benefits and brings in additional money to ensure the long-term solvency of the program.  In my view, it’s useful to spell out clearly what it would take to finance the program and see if the American people support it.

“I could quibble with parts of the bill.  For example, I’m not sure about the COLA indexing change.  And I’m a big fan of separating out Social Security’s legacy debt from the long-run cost issue and handling it differently from the ongoing cost of the program.”

Her colleague, Steven Sass, added, “Given the importance of Social Security in the nation’s retirement income system and its fast approaching cash flow shortfall, restoring the program’s solvency (and that of Medicare and Medicaid) should be at the top of the nation’s domestic policy agenda.  Given Social Security’s generally low level of benefits, especially for those who claim at or before their FRA [full retirement age], raising revenues is far less painful.”

If past is prologue, opposition will come from those who call Social Security a “Ponzi” scheme, who believe that Millennials will pay high taxes for a program whose benefits they may never see, and who believe that more spending on retirees will crowd out federal spending on, for instance, education and infrastructure renewal.

The life insurance industry might decide to oppose the measure. Though not all retirement experts agree on this, some have written that Social Security crowds out the market for private annuities. Its inflation-protected, joint-and-survivor benefits are more generous than any private life insurer could match.

It’s a stubborn fact that not everyone’s Social Security benefits will be exactly commensurate with their contributions, Steuerle points out. “The public does seem to place limits on how much it will accept in taxes, whether for political or economic reasons, and I think that such transfers should go for the priorities in society. There’s also a generational issue,” he told RIJ.

“The design of Social Security and Medicare for about 80 years (and projected forward into the future) provided greater net transfers to older generations and less net transfers to younger generations.

“So, for instance, I’m old enough [that] I paid Social Security taxes at a lower rate than you for more years for roughly the same benefit (relative to taxes paid). And when the birth rate falls, somebody’s got to pay somehow with more taxes or fewer benefits, and I think that burden should be shared.

“And, on the supply side front, I do think that all these years in retirement (people now retire for 13 years more than they did in 1940) does reduce personal income and government revenues to support those who need support, retirees and non-retirees alike.”

© 2019 RIJ Publishing LLC. All rights reserved.

Alliance for Lifetime Income Sponsors Rolling Stones’ New Tour

Posted on February 7, 2019 by -

Rock and roll will never die; that’s a fact. So how better to tout the financial benefits of life annuities than by associating them with something that will live (and collect payments) forever?

And who better represents the immortality of rock than the British band whose members, no matter how haggard and wasted they may look today, always seem to have one more live concert tour in their bones?

The Alliance for Lifetime Income must have been thinking along these lines when its members—two dozen of the largest life insurers and asset managers, and others—decided, at whatever outrageous cost, to sponsor a Rolling Stones tour in the US this spring.

Yes, it’s true. Deferred annuities with lifetime withdrawal benefits will headline with the world’s longest-running rock band—those laughing bad boys whose lyrics mock death: Painting it black, midnight-rambling, mailing dead flowers to ex-girlfriends, and confessing sympathy for the devil.

The news release was embargoed until 12:01 a.m. today:

The Alliance for Lifetime Income is proud to announce that it is the sole sponsor of the 2019 Rolling Stones “No Filter” Tour. The tour will take place in the U.S. from April to June 2019.

The Rolling Stones are age-defying icons who continue to operate at the cutting edge of entertainment and business. Similarly, the Alliance is at the forefront of financial security education, creating awareness and helping educate Americans about the need for protected lifetime income.

Jean Statler, Executive Director of the Alliance said, “This partnership with the Tour gives us a great opportunity to educate young and old about the need for protected lifetime income and financial security, so that whatever your age, whatever adventure or road you choose, you can keep doing what you love.”

The 16-show “No Filter” Tour will kick off on April 20th at the Hard Rock Stadium in Miami then [move] to Jacksonville, Houston, New Orleans, Glendale, Pasadena, Santa Clara, Seattle, Denver, Washington D.C., Philadelphia, Foxborough, East Rutherford (two shows) and conclude with two shows on June 21st & 25th at Soldier Field in Chicago.

The tour was first announced last fall and reported in Billboard magazine and at Salon.com. “The tour will mark the band’s first extended run of shows in the U.S. since 2015’s “Zip Code” tour, though they played Desert Trip in Indio, California, two Las Vegas arena gigs and two private shows in 2016. In the past two years, they have only toured in Europe. Unlike the marathon tours of the past, they did just 14 shows in 2017 and another 14 [in 2018],” the Salon reporter wrote.

From left: Richards, Jagger, Wood, and Watts.

Two well-informed sources have told me that the Alliance started out last year with a budget of around $50 million, raised from the two dozen member firms. In a press call today, Statler wouldn’t say how much the tour sponsorship cost, but said it was “cheaper than a Super Bowl ad” and an “incredibly efficient” way to reach 1.5 million Rolling Stones fans directly through concert attendance plus another 24 million people through social media chatter.

“Most importantly we’ll have co-branded signage that will highlight the Alliance’s association” with the famous band, she said. “You can’t always get what you want. But that doesn’t mean you have to live with risk in retirement.” She mentioned that the Alliance will have access to concert tickets. I’m guessing that they’ll be offered to distributors.

The Alliance’s goal was to launch a two-year campaign to boost awareness and brighten the image of annuities among the US public, in the spirit of the famous “Got Milk?” campaign of the 1990s.

Last year, the Alliance produced slick network television commercials, spots on National Public Radio and full-page newspaper ads featuring several professional daredevils—a diver who swims with sharks, a woman who drag-races rocket cars, a volcano wrangler—all of whom, despite their acceptance of huge occupational risks, own annuities with living benefits to dampen post-retirement financial risk. There’s also been a national tour where passersby at big events can enter a blue Alliance for Lifetime Income trailer and experience sharks, drag racing and volcanoes through virtual-reality headsets.

An “Alliance for Lifetime Income” banner will presumably hang above the performers during the shows. If so, some people might mistakenly interpret that phrase as the reason why these four septuagenarian musicians are collaborating on another sure-to-be sold-out American tour.

I applaud the effort to teach Americans about the importance of establishing sources of guaranteed income during retirement. Whether they buy an annuity or not, middle-class baby boomers, I believe, can’t afford to enter retirement not knowing what annuities can do for them. But marketing is tricky. I’ll be curious to see if this campaign is too subtle in its avoidance of the word “annuity.”

If the Alliance doesn’t mention annuities by name, can it build enthusiasm for them? The campaign has a fantastic hook, and it may break through the noise. But what’s the explicit call to action? Also, the Alliance members specialize in deferred variable or indexed annuities, which carry lifetime income riders. If advisors present that feature as a secondary characteristic of the product, will the messaging be effective?

For the record: Mick Jagger will turn 76 next July, Charlie Watts will be 78 in June, Ronnie Wood will be 72 in June, and Keith Richards reached 75 last December.

© 2019 RIJ Publishing LLC. All rights reserved.

Trim Tabs notes ‘Powell put’

Posted on January 31, 2019 by -

“The Powell put and lots of dovish central bank chatter seem to have reassured retail investors, who are adding money to U.S. equity mutual funds for the first month in almost four years,” said David Santschi, Director of Liquidity Research at TrimTabs Investment Research.

After pulling record sums from equity mutual funds in December, mom and pop investors have turned into net buyers in January. U.S equity mutual funds and global equity mutual funds lost a combined $89.7 billion in December, the highest monthly outflow on record.

Inflows this month have reached an estimated $7.6 billion, putting this month’s inflow on track to be the highest since February 2016. U.S. equity mutual funds alone have taken in an estimated $3.4 billion in January, set for their first monthly inflow since February 2015.

Flows of equity exchange-traded funds have turned flat to negative this month.  U.S. equity ETFs have shed $14.3 billion, putting them on track for their first monthly outflow since June 2018 and their biggest monthly outflow since at least February 2018.  Global equity ETFs have issued $3.2 billion, set for their lowest monthly inflow since at least October 2018.

© 2019 RIJ Publishing LLC. All rights reserved.

Aging boomers drive flows into fixed income

Posted on January 31, 2019 by -

The January 2019 issue of The Cerulli Edge–U.S. Monthly Product Trends Edition analyzes mutual fund and exchange-traded fund (ETF) product trends as of December 2018. It also includes special coverage on the historical trends of institutional asset management strategies, and those trends that look to continue in 2019.

Highlights from this research:

More than half of the top-10 Morningstar categories by mutual fund and ETF net flows are fixed-income categories, including ultra-short bond ($87.4 billion), intermediate-term bond ($23.6 billion), and muni national intermediate ($16.6 billion).

Particularly in retail client channels, equity market conditions and client demographics can help explain the strong net flows into fixed-income products. Advisors are focused on downside risk protection and they commonly use taxable fixed income (83%) and municipal fixed income (74%) to achieve the objective for clients.

Mutual fund assets dipped 7.1% in December, with total assets closing 2018 at $13.6 trillion, just a few months removed from an August 2018 all-time high of $15.4 trillion. Mutual funds suffered staggering net negative flows of $131.0 billion in December and $156.8 billion during 2018. ETF assets closed 2018 at nearly $3.4 trillion, down roughly 1% from year-end 2017. This marks the first annual decline since 2008. Poor global equity market performance is the main culprit, as investors poured nearly $320 billion in net new flows into ETFs during the year.

Higher long-term rates helped institutions with long-term liabilities, including derisking corporate defined benefit (DB) plans and insurance general accounts. Coincident with higher long rates, U.S. long-duration strategies experienced tens of billions in net inflows (despite negative investment returns in most taxable fixed income during the year). Assuming long-term rates move higher, Cerulli expects continued corporate DB de-risking activity, including more assets devoted to liability-driven investing and equity risk mitigation strategies.

© 2019 Cerulli Associates. Used by permission.

‘Digital design’: A new line of defense against ERISA lawsuits?

Posted on January 31, 2019 by -

Voya Financial and UCLA behavioral finance specialist Shlomo Benartzi have produced a new thought-leadership document that explores the potential influence of “digital design” on a participant’s retirement savings decisions and on his or her welfare in retirement, according to press release this week.

The paper, “The Digital Fiduciary: Overseeing Retirement Plans in the Digital Age,” was written by Benartzi and is being promoted through the Voya Behavioral Finance Institute for Innovation. It suggests that improving participants’ online user experiences could represent a new line of defense against breach-of-fiduciary-duty lawsuits.

“Enhancing the design of an enrollment website can increase the number of workers who personalize their enrollment by 15% and increase overall plan contributions by 10%,” the release said. It cites double or triple default contribution rates, without a reduction in enrollment, after changes in online enrollment experience. The “number of blank lines on a retirement plan website can help shape an employee’s level of diversification,” Voya said.

“In the 20th century, overseeing an employee benefit plan meant having a deep knowledge and expertise of investing and plan design. Now, in the 21st century, retirement security often depends more on fast decisions made on smartphones, and the designs that influence them, than on investment performance,” said Benartzi, in the release.

“By introducing the digital fiduciary concept, our goal is to underscore that if you want to do the right thing for your employees and plan participants — if you want to act prudently on their behalf — then you need to understand how people think and decide in the digital world. It is therefore essential for plan sponsors to add effective digital design to their skill set.”

Voya points out that ERISA (the Employee Retirement Income Security Act of 1974), requires plan fiduciaries to act with diligence “under the circumstances then prevailing.” The paper suggests that leveraging the power of digital design could theoretically help minimize the legal liability associated with providing a retirement plan if it satisfies participants and produces positive retirement outcomes.

The paper suggests these steps for plan sponsors and advisors to consider:

Making the right thing easy:  “Default” options can strongly influence decision-making. In the online world, defaults are used for saving rates and expected retirement ages. Rethinking existing defaults and considering more optimal defaults can be easy and effective.

Testing and retesting: Plan sponsors should select plan providers that routinely test different digital designs. Such testing must be done in a rigorous, reiterative and careful manner for constant improvement.

Establishing a digital policy statement:  Sponsors should consider establishing a statement for digital policies, comparable to an investment policy statement, describing the objectives of a plan provider’s digital designs and the process for measuring and improving those designs.

“Regardless of future fiduciary regulations, history teaches us that a reliable way to avoid potential litigation is to keep the success of plan participants front and center, and to develop processes for determining which digital designs and elements are most relevant for participant success,” said Benartzi.

© 2019 RIJ Publishing LLC. All rights reserved.

Three advisor technology leaders to collaborate on retirement software

Posted on January 31, 2019 by -

Envestnet, PIEtech, and former eMoney CEO Edmond Walters have started Apprise Labs to build software that addresses “estate planning, lifetime cash flow and client retirement needs,” according to a release this week. Walters will lead Apprise.

The software will add detailed short-term cash flow and tax information to Envestnet Logix and MoneyGuide. The add-ons will allow advisors to collaborate with clients through an interactive user interface to plan for their family’s legacy needs, the release said.

Clients using the MoneyGuide platform or the Logix tool will have access to more advanced and interactive estate planning options later in 2019.

“These new capabilities will use visual, interactive technology to help clients manage important financial decisions pertaining to home sales, retirement investments and assets, inheritance gifts, endowment contributions and more,” said Jud Bergman, chairman and CEO of Envestnet, in a statement.

Embedded and integrated add-on features that will be available to users for each platform include:

Estate Planning: Client assets are displayed and broken down in one portfolio dashboard.

Cash Flow: Advisors can compartmentalize cash flow by strategy or focus area, such as retirement savings, inheritance gifts, or endowment contributions.

Content Updates: Information and content strategy from financial experts.

Snapshot: All expenses are tracked and displayed for the advisor.

Advisors at the T3 Advisor Conference this week could see a demonstration of the new software. Additional information about Apprise will be released at the Envestnet Advisor Summit in Austin, Texas from May 1-3, 2019.

© 2019 RIJ Publishing LLC. All rights reserved.

Two Cheers for Population Decline

Posted on January 31, 2019 by -

Since China abolished its one-child policy on January 1, 2016, annual births, after a temporary increase to 17.86 million that year, have actually fallen, from 16.55 million in 2015 to 15.23 million in 2018. The baby boom that wasn’t should surprise no one.

No other successful East Asian economy has ever imposed a one-child policy, but all have fertility rates far below replacement level. Japan’s fertility rate is 1.48 children per woman, South Korea’s is 1.32 and Taiwan’s 1.22. China’s fertility rate will almost certainly remain well below replacement level, even if all restrictions on family size are now removed.

Population decline will inevitably follow. According to the United Nations’ medium projection, East Asia’s total population will fall from 1.64 billion today to 1.2 billion in 2100. Nor is this simply an East Asian phenomenon. Iran’s fertility rate (1.62) is now well below replacement level, and Vietnam’s 1.95 slightly so. Across most of the Americas, from Canada (1.56) to Chile (1.76), rates are already well below two, or falling fast toward it.

The clear pattern is that successful economies have lower fertility rates: Chile’s rate is much lower than Argentina’s (2.27), and wealthier Indian states, such as Maharashtra and Karnataka, already have fertility rates around 1.8. In the poorer states of Uttar Pradesh and Bihar, fertility rates over three are still observed.

We should always be cautious about inferring universal rules of human behavior, but, as Darrel Bricker and John Ibbitson suggest in their recent book Empty Planet: The Shock of Global Population Decline, it seems we can identify one. Since US and Western European fertility rates first fell below two in the 1970s, higher rates (for example, in the US, which averaged just over two between 1990-2010) occur only where first-generation immigrants from poorer countries bring those rates with them.

In all successful economies where women are well educated and free to choose, a below-replacement fertility rate is the average result of diverse individual behavior. Some women (typically around 15-20%) choose to have no children, many choose one or two, and some still more. All their choices should be respected; on average, they will probably tend to result in eventual gradual population decline.

Many people decry this demographic contraction, because it implies that fewer workers will have to support a growing cohort of elderly people. But while very rapid population decline, such as Japan may experience, would be difficult to manage, fertility rates moderately below replacement level (say, 1.8) would not only be manageable, but also beneficial for human welfare.

Pension systems can be made affordable by increasing average retirement ages, which will create incentives for societies to enable healthy aging, with people enjoying good physical and mental health well into what used to be considered old age. Slightly declining workforces, by making labor scarcer, will help offset the adverse impact of automation on real wages and inequality.

Meanwhile, at the global level, the lower the eventual global population, the less severe will be the competition over land use which results from rising demand for food, the need for some bioenergy in a zero-carbon economy, and the desirability of preserving biodiversity and natural beauty.

Eventual gradual population decline, provided it results from free choice, should be welcomed. By contrast, male chauvinist authoritarians such as Russian President Vladimir Putin, Turkish President Recep Tayyip Erdoğan, or Brazilian President Jair Bolsonaro, see population growth as a national imperative, and high fertility as a female duty. And even many non-chauvinist commentators assume that there is something unnatural or unsustainable about population decline, that aging societies must inevitably be less dynamic, and that large-scale immigration is the essential response to demographic decline.

But the exhortations of chauvinist authoritarians will be ineffective as long as women are free to choose. And those who propose immigration as the necessary solution to an overstated problem must face a simple reality: if all people on Earth enjoyed prosperity and free choice, immigration from other planets would not be a feasible response to the global population decline that would likely result.

© 2019 Project-Syndicate.