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US States with the Most Income Annuity Sales, 2017

Posted on February 1, 2018 by Editorial Staff -

Based on Cannex data for sales through its distributor customers, New Jersey represents nearly 11% of the annuities market.

Tax Cut Will Drive Global Growth: Chao

Posted on February 1, 2018 by Philip Chao -

Eight years after the end of the financial crisis, the global economy is much healthier and now growing in sync for the first time since 2010. The superb performance in equities/risk assets globally reflects the positive business and consumer sentiments, increased economic activities and more employment.

New tax law. The new U.S. tax law passed in December is not popular with those who are deficit hawks or who believe that the late-stage organic growth of the economy does not require pro-cyclical fiscal policy.

However, the law’s business-focused tax cuts and preferences for foreign asset repatriation have given a turbo boost to the economy for 2018, and their positive impact is rippling through the rest of the global economy. IMF credits 50% of the global economic upward revision to the impact of the U.S. tax bill.

Employment. Unemployment (U3) is at 4.1% and 8.1% for the broader U6 measure and we expect the U3 to be in the mid 3% range by the end of 2018 with a sub 8% U6.

Gross Domestic Product. The advance estimate of 2.6% for fourth-quarter GDP came in below the consensus estimate of 2.9%, and 2017 ended at 2.5%, which is at the upper range of the post-financial crisis era. With the new tax cut, we expect the GDP for 2018 to be at the 3% level.

Inflation. Inflation has been the missing ingredient, and indicators are showing its return. Some of the improvements in inflation may be statistical (i.e. a change in value from a very low starting point), but much will be “pushed” to our economy under a lower US dollar, increased and sustained energy prices, and other commodities regime. When wage inflation picks up, overall inflation will likely be “pulled” as well.

Interest rates. The 2017 FOMC has been signaling three interest-rate hikes in 2018. We expect four hikes under the new FOMC due to pro-cyclical effects from the new tax bill. Our projection is also due to a possible upside surprise in inflation expectation. The likelihood of an inverted yield curve in 2018 has been reduced, so the likelihood of a recession has been pushed out further into 2020 and beyond.

Securities markets. The seeming parallel universe that we have been traveling in (i.e. risk assets continue to advance despite geopolitical and other systemic risks) will continue, and as such, we are constructive/positive on equities globally.

Due to FOMC rate normalization (bad for short end), possible inflation surprises and the less attractiveness of U.S. long yields as other yields begin to move higher, fixed income will likely be delivering a lower to no return in 2018. Commodities have performed well, as they typically do at the late stage of an economic cycle.

Risks. Downside risks remain: geopolitical risks from rogue states, findings from the Mueller’s investigation into Russia’s meddling in the 2016 election and the possible Trump campaign’s collusion, and the mid-term 2018 U.S. election outcome.

Why Bruce Springsteen Is America’s Most-Likely Income Annuity Buyer

Posted on February 1, 2018 by Kerry Pechter -

New Jersey, though far from the most populous U.S. state, boasts the most income annuity sales. The Garden State is also home to folk-blues rocker Bruce Springsteen who, at age 68, has just recently surpassed the average age (67.5) for the purchase of an income annuity.

We know these facts—about annuities, not about the Boss (below right)—because Cannex has released its annual survey of single-premium immediate annuities (SPIAs), deferred income annuities (DIAs) and qualified deferred longevity annuity contracts (QLACs) sold in 2017 through distribution platforms that rely on Cannex’s carrier-approved contract pricing data. For survey pdfs, click here and here.

Perhaps the most notable statistic in the data set was that nearly 40% of the contracts sold included a cash refund option. (This option, which refunds unpaid-out premia to beneficiaries upon the death of all annuitants, reduces the contract owners’ annual income.) An additional 41% were either life-only (26%) contracts or life with 10 years certain (15%) contracts.

The client is using part of the premium to, in effect, buy enough life insurance to cover the risk that he might die before getting all of his premium back. Annuity purists would say that it’s inefficient to buy mortality and longevity protection from the insurance carrier at the same time—just as it would be inefficient to press the gas pedal and the brake pedal simultaneously.

Curiously, the report also shows that when advisors asked for Cannex to quote the income for a specific premium or the premium necessary for a specific income level, they often used income or premium amounts well in excess of the income or premium reported for contracts actually sold.

Cannex president Gary Baker said the reason for that wasn’t entirely clear. “The size of the average premium has always been somewhat of a mystery at CANNEX since we started this report five plus years ago,” he told RIJ in an email this week.

“Our hypothesis is either: a) for mass affluent/high net worth clients, the advisor is typically working with a bigger premium amount (e.g., 20% of a $1 million portfolio), but will split the purchase amongst two carriers to diversify crediting risk and match the state guarantee limit (@ around $100,000).

“Or, b) for middle-market/smaller savers, the advisor is looking to see how much of a guarantee a large portion (or all) of a nest egg could generate, and then dial back based on compliance requirements (i.e., some firms require that the advisor leave a certain percentage liquid in a client’s portfolio).”

The Cannex data represents much of the U.S. market. According to its report, 1,143,698 income annuity contracts were sold in the U.S. in 2017. Almost exactly two-thirds were immediate contracts and one-third were deferred. Single-life was the most popular (58%), followed by joint life (31%) and period certain only (11%).

Though the data doesn’t contain an average purchase premium, but the following statistics may help in imagining the most common types of contracts:

25% of the contracts (where the premium was given) had a premium of between $75,000 and $100,000.
17% had a premium of $100,000 to $200,000.
Those contracts represented 42% of the total and almost half of the contracts where the premium was provided.
40,000 QLACs were purchased.
61% of contracts were non-qualified.
Close to 60% of the contracts were purchased by people between the ages of 55 and 69, with 25% between ages 60 and 64.
65% of primary annuitants were male and 85% of the joint annuitants were female.
Almost all (94%) of the joint contracts were non-reducing on the death of the primary annuitant. Where payments were reduced, they were most often reduced by 50%.

My biggest takeaway from the Cannex data is that older people are clearly ready to concede a big chunk of the income from an income annuity just to be certain that if they are struck by a bus—that rogue bus that pursues annuity contract owners as ruthlessly as tornados target trailer parks in Kansas—the day after the free-look period ends.

They either don’t understand the principle behind longevity risk-pooling (highly possible) or they can’t sleep at night for worrying about the Stephen King-possessed bus and its effect on their heirs (also possible) or the advisor/agent who sells them the contract is hedging his or her risk of facing outraged beneficiaries in the future.

‘Missing’ group annuitants give MetLife a share shock

Posted on February 1, 2018 by Editorial Staff -

MetLife’s share price dropped by as much as 12% this week, to $48.48 on Wednesday from $55.15 on Monday, after the diversified insurance company, ranked 42nd on the Fortune 500, after the firm announced that it would increase its reserves by as much as $575 million and take an earnings hit as high as $195 million.

This week MetLife said it would delay its fourth-quarter and year-end 2017 earnings report and conference call to February 14 and would release its 2017 10-K on March 1. The earnings call had originally been scheduled for yesterday and today.

MetLife nonetheless reported preliminary fourth quarter 2017 results of $2 billion to $2.1 billion in net income, “including an after-tax benefit of $1.2 billion related to the impact of U.S. tax reform, which includes a negative impact to adjusted earnings of approximately $300 million.”

Investor concerns about MetLife are linked to “certain Retirement and Income Solutions group annuitants who have been unresponsive or missing over time,” MetLife revealed on its Dec. 15, 2017, Investor Outlook Call. The $50 billion company said it “was undertaking a review of practices and procedures used to estimate its reserves.”

In short, thousands of group annuitants hadn’t been sent or hadn’t received their pension checks because MetLife lost track of them through error or because they could not be located. “It’s not just embarrassing, it could cost MetLife future business,” wrote Canadian pension blogger Leo Kolivakis, referring to the business of pension risk transfer, or swapping group annuities for corporate defined benefit plan assets and liabilities.

News reports didn’t say which group annuity’s annuitants could not be found. Payouts to annuitants can last for decades, during which time some may relocate.

In the December statement, MetLife that it believed the group missing out on the payments represented less than 5% of about 600,000 people who receive a type of annuity benefit from the company via its retirement business. Those affected generally have average benefits of less than $150 a month, MetLife said.

“We are deeply disappointed that we fell short of our own high standards,” MetLife said. “Our customers deserve better. We are committed to making this right for our customers. We found the issue, we self-reported it, and we are committed to doing better.”

In its January 29 release, MetLife said “Management of the company has determined the prior release of group annuity reserves resulted from a material weakness in internal control over financial reporting. MetLife expects to increase reserves in total between $525 million and $575 million pre-tax, to adjust for reserves previously released, as well as accrued interest and other related liabilities.

“The total amount expected to impact fourth quarter 2017 net income is between $135 million and $165 million pre-tax, the majority of which represents a current period strengthening of reserves and will be reflected in Adjusted Earnings (formerly known as Operating Earnings). We expect the full year 2017 net income impact to be between $165 million and $195 million pre-tax,” the release added.

“To date, MetLife is not aware of any intentional wrongdoing in connection with this matter,” the company also said. Plaintiff’s attorneys responded immediately. Faruqi & Faruqi, LLP, for one, said it began investigating potential claims against MetLife, Inc.

In its release, MetLife said it “had previously informed its primary state regulator, the New York Department of Financial Services, about this matter and is responding to questions from them and other state regulators. The U.S. Securities and Exchange Commission enforcement staff has also made an inquiry regarding this matter and MetLife is responding to its questions.

A.M. Best issued a release affirming MetLife’s A+ (Superior) strength rating. “The Credit Ratings (ratings) of MetLife, Inc. and its insurance subsidiaries remain unchanged following the announcement that it will increase group annuity reserves,” the release said.

“MetLife has sufficient earnings capacity to absorb this charge, which is not expected to have a material impact on reported risk-adjusted capitalization ratios. While the charge has resulted in disclosure of a material weakness in MetLife’s internal control framework, A.M. Best believes this issue is confined to its PRT business segment only and not indicative of broader control risks throughout other business lines.

“Therefore, its ratings will remain unchanged at present. However, future disclosures relating to broader material weakness in its internal controls could result in a negative rating action, as would additional charges that materially impact MetLife’s level of risk-adjusted capitalization.”

Prudential plays the ‘index card’

Posted on February 1, 2018 by Editorial Staff -

Prudential Annuities, best known for its huge $161 billion book of variable annuity business, became an issuer of fixed indexed annuities for the first time this week with the announcement of PruSecure single-premium fixed indexed annuity (FIA) for accumulation, not retirement income, purposes.

Prudential is going after money on the sidelines, as FIA issuers characteristically do. The announcement noted that “investors fearful of down-market loss now hold $12 trillion in cash, CD and money market positions that offer little growth opportunity.” FIAs are also inexpensive for carriers to issue, since they present less risk and require less reserve capital than variable annuities.

In PruSecure FIA, earned interest can be linked to the performance of the S&P 500, MSCI EAFE, Dow Jones U.S. Real Estate Index or Bloomberg Commodity Index. PruSecure offers one-, three-, and five-year index term options. Initial cap rates provide “up to a 32% return” based on the chosen index, credit term, and surrender period.

The 32% figure refers to the cap on the interest that can be earned on a five-year term contract linked to the MSCI EAFE Index with a purchase premium of $100,000 or more, according to the latest rate chart.

Clients can mix and match indexes and crediting terms. Surviving beneficiaries will receive the current account value plus a portion of any growth earned before the end of the crediting term. There’s a single crediting strategy—point to point—for simplicity of understanding. There’s a choice of either a five-year or seven-year surrender period.

The fixed indexed annuity market has been dominated by Allianz Life, which currently accounts for about 15% of the market. Nationwide, Athene USA, American Equity Companies, and Great American Insurance Group are the closest followers, in that order, according to Wink.

In the past, the big publicly-held domestic life insurance companies, such as Prudential, MetLife and Lincoln Financial, have focused on the variable annuity market, which traditionally involved the broker-dealer distribution channel, rather than the FIA market, which for a long time involved primarily the independent agent channel.

But as FIAs have become more mainstream, both for manufacturers and distributors, they have attracted a wider range of issuers and distributors. Although the DOL fiduciary rule, in its original Obama administration form, could make it more complicated for fiduciary intermediaries to sell FIAs, that aspect of the rule is currently under review by the Trump administration.

FIA tend to sell well in low interest rate environments because their indirect exposure to the equity markets, through investments in equity index options, gives them more potential return than certificates of deposit. They also appeal to investors who want to reduce but not entirely eliminate their equity exposure. In short, they appeal to people who might otherwise just hold cash.

“Many investors remember the 2008 financial crisis and continue to be concerned about market risk,” said Dianne Bogoian, head of product for Prudential Annuities. “Fixed-indexed annuities like PruSecure offer downside protection plus upside opportunity—you don’t have to choose one or the other.”

High demand for bond mutual funds is ‘concerning’: TrimTabs

Posted on February 1, 2018 by Editorial Staff -

Demand for bond funds has exploded in January after moderating in November and December. Bond funds had negative returns in four of the past five months, and their popularity amid lackluster performance should concern contrarians, according to a release from TrimTabs, the investment research firm.

The inflow of $38.2 billion into bond mutual funds (MFs) and ETFs this month through Thursday, January 25 is on track to be the highest since October 2009, driven by an estimated inflow of $32.3 billion into bond MFs.

Global equity funds also saw dramatically accelerated inflows. The inflow of $33.4 billion into global equity MFs and ETFs in January is on track to be the most since April 2015. As with bond funds, retail investors have been driving much of the buying. The estimated inflow of $15.8 billion into global equity MFs this month is set to be the most since July 2015.

U.S. equity ETFs are drawing huge inflows for a fourth consecutive month. This month’s inflow has reached $30.0 billion. It is on track to be the most since December 2016. The inflow from October to January of $112.0 billion is on track to be the second-highest four-month inflow on record.

Buying of U.S. equity ETFs this month has been offset by redemptions of $22.2 billion from U.S. equity MFs, which are suffering a thirty-fifth consecutive monthly outflow.

Outsourcing will persist in management of insurer general account assets: Cerulli

Posted on February 1, 2018 by Editorial Staff -

Insurance general accounts remains “a strong, growing institutional asset management segment,” despite a pause in the allocation of assets to nonaffiliated third-party asset managers.

That’s according to the first quarter 2018 issue of The Cerulli Edge – U.S. Institutional Edition, which examines the recent hiatus and an anticipated increase in growth of insurance general accounts and investment outsourcing.

Between 2015 and 2016, the growth rate for the placement of assets with nonaffiliated managers largely flattened out,” said Cerulli director Alexi Maravel in a release. In that period, the percentage of total assets entrusted to nonaffiliated managers changed 0.3%, following a 1.0% change between 2014 and 2015, according to Cerulli’s calculations.

But stronger growth will resume in the next few years, Cerulli predicts, because asset managers will pursue it. “According to a 2017 survey by Cerulli, insurance offers the second-longest client relationship, after public DB plans, at 6.6 years,” Maravel said. “The attractiveness of the business and the potential for gaining long-term client assets should encourage institutional asset managers to attempt to engage insurance chief investment officers for many years to come.”

Nonetheless, “insurance-related merger and acquisition transactions in the asset management industry will likely cool in the near term,” she said. Respondents to a Cerulli survey of insurance asset managers showed that 81% plan to grow their insurance capabilities organically in the next 12 months and 82% report that they are unlikely to do an acquisition soon.

Cerulli believes that while the overall institutional asset management industry expects insurance client assets to grow, managers are pausing to “take stock of their investments, deepen client relationships, employ strategic hiring, and showcase strategies and capabilities that might be new to insurance companies.”

ISO seeks to support opportunities of aging

Posted on February 1, 2018 by Editorial Staff -

A recently formed International Organization for Standardization (ISO) technical committee (ISO/TC 314, Ageing Societies) aims to develop standards and solutions “to tackle the challenges posed as well as harness the opportunities that ageing populations bring,” an ISO press release said.

Dementia, preventative care, ageing workforces, technologies and accessibility are just some of the areas of standardization that the committee proposes to work on, said ISO/TC 314 Secretary Nele Zgavc from BSI, ISO’s member for the UK, in the release.

“Ageing societies have global implications,” she said. “Governments and service providers need to effectively cater to the needs of their populations as they age for the benefit of society as a whole. There is a crucial need for standards to support this.”

ISO/TC 314 is currently composed of experts from 30 different countries. Its creation follows the development of International Workshop Agreement IWA 18, Framework for integrated community-based life-long health and care services in aged societies, and the ISO Strategic Advisory Group (SAG) on Ageing Societies.

“In 2017, the number of people aged 60 years or over worldwide was more than twice as big as in 1980, and it is expected to double again by 2050 to reach nearly 2.1 billion,” the release said. “The changing demographics of our society brings with it pressures and challenges ranging from everything to healthcare to the local bus.”

A ‘Blueprint’ to Sell Income Annuities Direct

Posted on January 31, 2018 by Kerry Pechter -

Blueprint Income is the new name of what was Abaris Financial, a firm created in 2014 in Philadelphia to sell immediate and deferred income annuities via licensed phone reps to do-it-yourself Gen-Xers and others over the Internet.

Abaris stalled, but the new platform looks more viable. It has a friendly interface and a mission to sell not just single premium products but also multi-premium income annuities, or “personal pensions,” to people five or more years from retirement. It also boasts more than dozen carrier partners (including Nationwide, which has been running its own experiments with Internet-sold multi-premium income annuities in the Arizona market.)

Matt Carey, a co-founder of Abaris with Wharton School credentials, told RIJ this week that the company, whose website now indicates a Manhattan address, is delaying publicity until a hard launch of its new brand in a few weeks.

“We’re releasing a bunch of new tech in the next couple weeks, along with a funding announcement, so we’ve decided to hold off on talking to media outlets until then,” Carey said in an email. On its website, the company promises, “We put the customer first by taking lower commissions from insurance companies to offer you the highest possible rates.”

Recognizing the tainted image of annuities in the public mind, Blueprint Income has distanced itself from the most widely-sold products, even distinguishing between what it calls “good” annuities (income annuities, qualified longevity annuity contracts, plain-vanilla fixed deferred annuities) and “bad” annuities (indexed and variable annuities) on its website.

Virtually all of the major income annuity issuers are represented on Blueprint Financial’s quote engine. An RIJ request entered at the site for bids on a $100,000 deferred income annuity (DIA) for a 66-year-old male with a deferral to age 80 elicited monthly payout offers between $1,224 and $1,434 from New York Life, MassMutual, Guardian, Mutual of Omaha, Lincoln Financial, Principal, Pacific Life, Symetra, and AIG.

Mutual of Omaha offering the highest monthly payout. (See chart on RIJ homepage). Along with those quotes, the website indicated that it had information about additional contracts from USAA, Integrity Life, Nationwide, Americo and Foresters Financial.

The initial quote list from Blueprint Income did not give details about the contract structures. A comparable request sent to immediateannuities.com returned an average payout of $1,502 a month for a life-with-cash-refund DIA and $1,933 a month for a life-only DIA.

A January 5 post on the Blueprint Financial website said, “Frankly, the decision to update our name and brand has been an easy one. Abaris never clicked with users, investors or even us. Abaris, in Greek mythology, advised Apollo on important decisions. But not everyone knew that. And not everyone pronounced it the same way. We love how Blueprint Income gives us a way to talk about what we do and how we do it in a simple and emotive way.”

In past statements, Carey and co-founders Adam Colombo and Nimish Shukla have said they’re focusing on the self-reliant Gen-X market and female markets, with an emphasis on transparency and integrity and a website that follows the airy, colorful, simple, utterly unambiguous user-interface style that has for at least three years been the standard in the fintech world and beyond.

A just-published report on insurance fintech from Aite said Abaris/Blueprint Income said:

“Abaris is providing a great tool for consumers in the market for annuities to buy without guidance or solicitation. It is perfect for the do-it-yourself buyers who know what they want. Its extensive online application helps to complete the transactions online without additional carrier contact. Carriers are obviously comfortable with its approach, given the breadth of quality annuity providers brokering through its platform.”

“Abaris is convinced that purchasing annuities online will become the preferred annuity purchase method going forward. In fact, Abaris is so convinced of this approach that it is launching a companion website called Blueprint Income. Blueprint Income will focus on delivering what it calls “personal pensions” online and will target Generation Xers (people born roughly between 1965 and 1981).”

Back in 2014, Carey told RIJ:

“We have two business lines. First, we represent a new sales channel for insurers. We act as an insurance producer and work on a commission basis. We have relationships with seven insurance carriers in this market. As the largest fixed annuity underwriters (such as New York Life, MassMutual, and Northwestern Mutual) unveil their QLAC [qualified longevity annuity contracts] products later this year, we hope they will also join our platform.

“Our second business line is analytics. We’re building out a data-driven platform that will enable carriers to make more informed underwriting, marketing and new product development decisions. You glean a lot more about potential customers when they are researching and getting quotes online than when they are being sold a product offline. We think this shift to online research and purchasing represents an exciting opportunity for the carriers to harness data to make better decisions.”

The online income annuity sales landscape is by no means crowded—U.S. sales of immediate and deferred income annuities were just $7.9 billion in the first three-quarters of 2017, according to LIMRA. It has always been a bit complicated by the fact that the big mutual insurers, which are the main issuers of income annuities, have their own agents and don’t want to cannibalize that channel. But New York Life, for instance, has said it would like to stimulate third-party sales.

Blueprint Income enters an online annuity marketplace field populated with Fidelity’s income annuity platform, Kelli Hueler’s Income Solutions platform, and Hersh Stern’s incomeannuities.com.

In the past year, Nationwide has been testing direct online sales of multi-premium income annuities with a pilot program limited to the Arizona market. Stan “the Annuity Man” Haithcock, a champion of insurance-only annuities, has also announced a venture in direct income annuity sales.

Each of these firms has its own business model. Many if not most of the purchases on Fidelity’s platform are driven by Fidelity clients whose Fidelity-affiliated advisors recommend them. Income Solutions serves individuals and advisors, but its primary mission has been to serve people who are retiring from large 401(k) plans, including those of Boeing, GM and IBM, and all Vanguard-administered plans. Nationwide’s platform will be proprietary. Stern’s business is independent.

All of these platforms provide competitive bids from competing insurers. That gives consumers an informational advantage that they don’t have when buying from a captive agent who presents only his or her company’s product. Cannex, the Canadian-American annuity quote and price comparison site, is the biggest provider of real-time annuity quotes to the platforms (with the exception of Income Solutions).

Direct-selling annuities to consumers challenges the conventional wisdom that annuities are sold, not spontaneously bought, by the investing public. There’s also the obvious issue with regulation; sales of annuities require the intermediation of a licensed insurance agent, and fixed annuity issuers, sold online or not, have historically paid a one-time fee of 2% to 3% to independent agents. The purchaser doesn’t see that fee; it’s baked into the monthly payment.

But consumer habits have changed. It’s now assumed that not just Millennials but Americans of all ages have become accustomed to and may even prefer online financial transactions. Research has suggested that consumers feel more “in control” of the process when they buy online, where there’s little or no sales pressure and they may have an informational advantage.

Why DC Plan Sponsors Don’t Offer In-Plan Annuities

Posted on January 25, 2018 by Editorial Staff -

Source: Callan 2018 Defined Contribution Trends Survey.

Flat Rich: How Airbnb Saved the Quinteros’ Retirement

Posted on January 25, 2018 by Kerry Pechter -

The Baby Boomer retirement wave, the damage done to global social security systems by the financial crisis, and the exponential growth of Airbnb’s online lodging network, have more or less coincided over past ten years. If that convergence is an accident, it doesn’t quack like one.

For Jesus Quintero Alvarez, a 61-year-old topographical engineer in Seville, Spain, those three trends are the story of his life. Mr. Quintero was born midway into the post-WWII fertility boom, in 1955. As he and his wife neared retirement age, Spain reduced the generosity of its state pension. And he salvaged his retirement by becoming an Airbnb entrepreneur.

Mr. Quintero, his wife Rita, and his son Paulo, 35, a mechanical engineer, sat down at the dining room table in one of their two Airbnb apartments in Seville recently to tell their story. It’s a story about weakening social safety nets, personal resourcefulness and Airbnb, which, in a sense, has usurped life insurers as a provider of lifetime income for retirees worldwide.

You’re fired!

Mr. Quintero worked for 35 years at a multinational construction company that built homes, apartment complexes, roads and bridges. Only 52 years old when the eurozone’s financial crisis erupted in 2008, he survived several rounds of layoffs and expected to work until he reached full pension age at 65.

Spain’s social security pension is generous, to a fault. Its 80% initial replacement rate is twice the median replacement rate of Social Security in the U.S. It’s funded (or rather, underfunded; it’s running a government-financed deficit €18 billion a year) by a payroll tax of about 30% (25% from the employer and 5% from the employee).

But two years ago, Mr. Quintero’s employer, fired him without specific cause, leaving him five years short of full pension age. Unemployment benefits (which, like the pension, are richer in Spain than most other EU countries) helped ease the pain. As for severance pay, but he had to go to court to force his company to pay him the 30% (€43,000, or $53,340 at today’s exchange rate).

His involuntary early retirement would reduce his annual pension by 7.5%, he said. That shortfall alone might not sound crushing, but under Spain’s recent financial reforms, pensions are no longer indexed to inflation. By capping annual increases at 0.50%, Spain hopes to inflate away a chunk of its pension burden. The Quinteros would also be without a 401(k) type savings plan or a “spousal benefit” for Sra. Quintero; Spain has neither.

The Quinteros held a family meeting to decide what to do next. They didn’t need to worry about health care; it’s universal. But they still faced a future of steady declining purchasing power unless they found a source of supplemental income. But how to get it? Since they live in tourist-heavy Seville, the answer was rather obvious.

Spain’s tourism boom

Spain in general and Seville in particular have been major tourist destinations since tourism was born in the 19th century. But in recent years, Spain’s tourism industry has mushroomed. That’s a dividend, ironically, of the eurozone’s financial crisis, which hit Spain (along with Greece, Italy and Portugal) especially hard.

After Spain’s real estate bust in 2008, its citizens, banks, and government all woke up to a hangover of hundreds of billions of euros in external debt that it could never pay back. Bound to the euro, Spain couldn’t devalue its currency (and thereby revive its export competitiveness). So the whole country took a pay-cut of up to 15%. This “internal devaluation” sparked booms in manufacturing and tourism. In 2016, Spain, a country of 46.5 million, received 75.6 million foreign visitors. In July 2017, 10.8 million people visited Spain, setting a single-month record.

Tourists in general are using organized packages less often and switching to DIY travel. In Spain, one result has been that while hotel traffic grew only 4.1% from 2015 to 2016, the use of short-term apartments grew 23.2% (albeit from a smaller base). The number of Airbnb properties has been doubling every year. The online service now accounts for a reported 54.2% of all available vacation rentals in Spain.

At their family meeting, the Quinteros decided to enter the Airbnb business, and to do it seriously, not as a hobby. They are now among the 37% of Seville’s Airbnb hosts who have been with Airbnb for two years or more, the 69% who solicit bookings “regularly,” and the 36% with two listings, according to a University of Seville survey of 100 Airbnb hosts.

Bosch appliances, marble baths

With caution, the Quinteros crunched the numbers. First, they calculated their net income needs. Then they imagined the type of property that could generate enough top-line revenue to produce a satisfactory bottom line–after the considerable cost of a mortgage, utilities, maintenance, management and a 20% municipal lodging tax.

They needed a safe investment—a premium property that could maintain a reliable year-round occupancy rate in the face of competition with other Airbnb properties and with Seville’s bouquet of boutique hotels, which offer luxury rooms for $100 to $200 a night in winter and $200 to $350 a night in summer.

So they bought two flats in a strategic neighborhood. Seville is a 2,000-year-old city of about 700,000 people 120 miles north of Mediterranean beaches. Ornamented with Roman, Moorish and Spanish Imperial architecture, Seville’s oldest, quaintest section is Barrio Santa Cruz, a labyrinth of narrow alleys surrounding Seville’s landmark Giralda bell tower and Cathedral of Santa Maria de la Sede.

The epicenter of dining and lodging in the barrio is Calle Mateos Gago (pictured above), a cobblestone lane lined with orange trees and bistros, called tapas bars. There the Quinteros found an old building that had been gutted and converted into contemporary apartments, each with a small living room/dining room, a galley kitchen with a Bosch stove and dishwasher and two marble baths. If the apartment sold in line with prices of comparable properties, the Quinteros paid about €250,000 (about $300,000) for each.

Borrowing to buy two apartments was a big gamble to take late in life. But the Quinteros saw it as a multi-generational investment. The three of them handle all the chores. They charge $190 per night (discounted to $3,200 per month). By attending to detail (professional-grade photos for their Airbnb webpage; in-person welcomes; chocolate truffles for new arrivals), they’ve earned a five-star, 9.8 Airbnb rating from guests. Perfect user ratings are a key to success in the Airbnb game.

No coincidence

This story began with the question: Is it an accident that Boomer retirement, the damage inflicted on public pensions by the financial crisis, and the rise of the global Airbnb phenomenon have all occurred within more or less the same time period? Probably not.

Airbnb is in the right place at the right time. Almost as soon as the service appeared, older people and empty nesters with spare bedrooms or apartments recognized that rental income could cover their savings gaps. At the same time, Boomers with an itch for international travel in retirement recognized in Airbnb a way to see the world on the cheap. Four million properties in 191 countries now use the platform.

That doesn’t mean that hosting is easy. Once Airbnb’s potential for monetizing surplus real estate became clear, it was inevitable that entrepreneurs would turn it from an amateur endeavor to a cutthroat professional one. Airbnb’s low barrier to entry also makes it ruthlessly price-competitive and, inevitably, reduces the odds of success. The Quinteros say they understand the risks, and they’re ready to do what it takes to reap the rewards.

The World’s Priciest Stock Market

Posted on January 25, 2018 by Robert Shiller -

The level of stock markets differs widely across countries. And right now, the United States is leading the world. What everyone wants to know is why – and whether its stock market’s current level is justified.

We can get a simple intuitive measure of the differences between countries by looking at price-earnings ratios. I have long advocated the cyclically adjusted price-earnings (CAPE) ratio that John Campbell (now at Harvard University) and I developed 30 years ago.

The CAPE ratio is the real (inflation-adjusted) price of a share divided by a ten-year average of real earnings per share. Barclays Bank in London compiles the CAPE ratios for 26 countries (I consult for Barclays on its products related to the CAPE ratio). As of December 29, the CAPE ratio is highest for the US.

Let’s consider what these ratios mean. Ownership of stock represents a long-term claim on a company’s earnings, which the company can pay to the owners of shares as dividends or reinvest to provide the shareholders more dividends in the future. A share in a company is not just a claim on next year’s earnings, or on earnings the year after that. Successful companies last for decades, even centuries.

So, to arrive at a valuation for a country’s stock market, we need to forecast the growth rate of earnings and dividends for an interval considerably longer than a year. We really want to know what the earnings will do over the next ten or 20 years. But how can one be confident of long-term forecasts of earnings growth across countries?

In pricing stock markets, people don’t seem to be relying on any good forecast of the next ten years’ earnings. They just seem to look at the past ten years, which are already done and gone, but also known and tangible. But when Campbell and I studied earnings growth in the US with long historical data, we found that it has not been very amenable to extrapolation. Since 1881, the correlation of the past decade’s real earnings growth with the price-earnings ratio is a positive 0.32.

But there is zero correlation between the CAPE ratio and the next ten years’ real earnings growth. And real earnings growth per share for the S&P Composite Stock Price Index over the previous ten years was negatively correlated (-17% since 1881) with real earnings growth over the subsequent ten years. That’s the opposite of momentum. It means that good news about earnings growth in the past decade is (slightly) bad news about earnings growth in the future.

Essentially the same sort of thing happens with US inflation and the bond market. One might think that long-term interest rates tend to be high when there is evidence that there will be higher inflation over the life of the bond, to compensate investors for the expected decline in the dollar’s purchasing power. Using data since 1913, when the consumer price index computed by the US Bureau of Labor Statistics starts, we find that the there is almost no correlation between long-term interest rates and ten-year inflation rates over succeeding decades. While positive, the correlation between one decade’s total inflation and the next decade’s total inflation is only 2%.

But bond markets act as if they think inflation can be extrapolated. Long-term interest rates tend to be high when the last decade’s inflation was high. US long-term bond yields, such as the 10-year Treasury yield, are highly positively correlated (70% since 1913) with the previous ten years’ inflation. But the correlation between the Treasury yield and the inflation rate over the next ten years is only 28%.

How can we square investors’ behavior with the famous assertion that it is hard to beat the market? Why haven’t growing reliance on data analytics and aggressive trading meant that, as markets become more efficient over time, all remaining opportunities to secure abnormal profits are competed away?

Economic theory, as exemplified by the work of Andrei Shleifer at Harvard and Robert Vishny of the University of Chicago, offers ample reason to expect that long-term investment opportunities will never be eliminated from markets, even when there are a lot of very smart people trading.

This brings us back to the mystery of what’s driving the US stock market higher than all others. It’s not the “Trump effect,” or the effect of the recent cut in the US corporate tax rate. After all, the US has pretty much had the world’s highest CAPE ratio ever since President Barack Obama’s second term began in 2013. Nor is extrapolation of rapid earnings growth a significant factor, given that the latest real earnings per share for the S&P index are only 6% above their peak about ten years earlier, before the 2008 financial crisis erupted.

Part of the reason for America’s world-beating CAPE ratio may be its higher rate of share repurchases, though share repurchases have become a global phenomenon. Higher CAPE ratios in the US may also reflect a stronger psychology of fear about the replacement of jobs by machines. The flip side of that fear, as I argued in the third edition of my book Irrational Exuberance, is a stronger desire to own capital in a free-market country with an association with computers.

The truth is that it is impossible to pin down the full cause of the high price of the US stock market. The lack of any clear justification for its high CAPE ratio should remind all investors of the importance of diversification, and that the overall US stock market should not be given too much weight in a portfolio.

The Fragility of VA Living Benefit Guarantees

Posted on January 25, 2018 by Kerry Pechter -

There’s a potboiler waiting to be written about the boom and bust of the variable annuity market from the mid-1990s to the mid 2010s. Of that I have no doubt. In the meantime, two economists, Ralph Koijen of NYU’s Stern School and Motohiro Yogo of Princeton, have published a technical post-mortem of the VA debacle of a decade ago.

The equation-rich article, “The Fragility of Market Risk Insurance” (NBER Working Paper 24182, January 2018), isn’t an easy read for the non-economist, even on multiple readings. But it adds some accessible details to the history of VAs—a history that we need to study or risk repeating.

For their part, the authors claim to provide “a more complete theory of the supply side of insurance markets that explains pricing, contract characteristics, and the degree of market incompleteness.” I took that to mean: Why some VA issuers had to drop out of the business.

Check out the scatter charts

VA industry veterans won’t be surprised at some of the authors’ conclusions. Rich roll-up rates fueled demand for VAs with guaranteed lifetime withdrawal benefits (GLWBs) and rising fees depressed it. After the stock market and interest rates dropped in 2008, declines in the valuation of the reserves behind VA guarantees.

These declines led to shrinkages in supply, as issuers with too much “financial friction” (the difference between earnings from capital and the cost of capital) and less “market power” (the ability to raise fees and stay competitive) reduced their sales or fled the space entirely.

For the reader who wants information about specific companies, the most relevant aspect of the report may be two scatter charts in the appendix. Both charts populated by the names of VA issuers (though some names are unfortunately obscured by others in this version of the paper).

The first chart (below) shows the issuer-by-issuer relationship between VA sales growth and changes in reserve valuations (I took this as an indication of the decline in the value of assets supporting liabilities) between 2007 and 2010. Note the negative correlation between the two, and note the outliers.

AXA and Genworth had the biggest changes in reserve valuations and saw some of the biggest percentage drops in sales growth. Jackson and Prudential, during the same period, enjoyed the biggest increases in sales growth and saw some of the smallest increases in reserve valuations. Little mystery that they could keep selling VAs in volume after 2010. Note also that MetLife, AEGON and Sun Life experienced almost no change in sales growth even as they absorbed a fairly high increase in reserve valuation.

The second chart (below) shows the positive correlation between the percent of reserves reinsured and the changes in reserve valuations over that three-year period.

In this case, Jackson National and AXA again appear as outliers at opposite ends of the chart. “AXA increased the share of variable annuity reserves reinsured by 64 percentage points as its reserve valuation increased by 12 percentage points from 2007 to 2010,” the paper said. Jackson National, with a slight drop in reserve valuation, reduced its reinsured reserves by about 45%. A half decade later, Jackson would become the VA sales leader.

Cautionary note

Are sales of VAs with GLWBs down in recent years because of declining supply or because of declining demand? Are they too expensive for most life insurers to offer or too expensive for advisors to recommend to investors? Koijen and Yogo appear to offer evidence for either interpretation.

“The increase in fees during the financial crisis coincides with the decline in sales, suggesting an important role for a supply shock,” they write, while adding a page later: “Higher fees and lower rollup rates make variable annuities less attractive to investors, explaining the decline in sales.”

The authors conclude their article with two observations about the VA industry: First, that VA liabilities now represent a significant 34% of all life insurance company liabilities; second, that the reliance on VAs has made life insurers “more like pension fund managers because they have risky assets and guaranteed liabilities.”

Koijen and Yogo tack on a cautionary note at the end: “The persistent under-funding of pension funds may foreshadow similar problems for life insurers in the future. The fact that [some] life insurers are publicly-traded and subject to market discipline could lead to additional challenges that are not present for under-funded pension funds.”

What’s in the latest issue of Journal of Retirement?

Posted on January 25, 2018 by Editorial Staff -

The Journal of Retirement has released its Winter 2018 edition (Vol. 5, No. 3). As usual, the scholarly journal, published by Institutional Investor Journals and edited by George A. (Sandy) Mackenzie, contains a half-dozen or so authoritative articles by some of the most prominent academics and policy experts in the retirement field.

The latest issue features a mix of articles by familiar authors, including Mark Warshawsky, David Blanchette, John Turner, Michael Kitces, and others. Topics include safe savings rates during accumulation, safe withdrawal rates during decumulation, using term life to protect the purchasing power of a surviving spouse, comparative studies of pension systems in Hong Kong and Australia, reverse mortgages and others.

The contents of the Winter 2018 edition of the JoR are:

“Retire on the House: The Possible Use of Reverse Mortgages to Enhance Retirement Security,” by Mark J. Warshawsky. This study asks whether reverse mortgages can be used to fill at least some of this gap. He finds that 12%–14% of all retired households are suitable for, and might sensibly use, an HECM. He concludes with proposals to lower costs, increase demand for, and encourage the use of reverse mortgages.

“The Value of a Gamma-Efficient Portfolio,” by David Blanchett and Paul D. Kaplan. In 2014, the authors introduced gamma, a new metric designed to quantify the value of working with a financial advisor. Here, they find that the “average” investor is likely to benefit from working with an advisor who provides “comprehensive, high-quality portfolio services for a reasonable fee.” The actual benefits, they caution, will vary by investor.

“Maximum Withdrawal Rates: An Empirical and Global Perspective,” by Javier Estrada. The author evaluates different retirement strategies through a historical analysis of maximum withdrawal rates in 21 countries over 115 years with 11 asset allocations ranging from 100% stocks to 100% bonds.

“Optimal Longevity Risk Management in the Retirement Stage of the Life Cycle,” by Koray D. Simsek, Min Jeong Kim, Woo Chang Kim and John M. Mulvey. The authors look for the optimal asset allocation for a retired couple with uncertain life expectancy using term life insurance to protect against a drop in pension income for a surviving spouse. The solution depends on the couple’s longevity risks, the relative price of insurance and the size of any cut in pension benefits.

“Blending Growth, Income, and Protection to Create Default Post-Retirement Solutions for Australia and Hong Kong,” by Lesley-Ann Morgan, Paul Marsden, Clement Yong and Sean Markowicz. After looking at case studies of pensioners in Australia and Hong Kong, two countries that have reformed their social security systems, the authors conclude that retirees need a combination of protection and growth to produce enough income for a comfortable retirement.

“Life-Cycle Earnings Curves and Safe Savings Rates,” by Derek T. Tharp and Michael E. Kitces. By assuming smooth lifetime earnings growth for workers, analysts have overstated successful retirement rates (SSRs) for lower-income households and older households while understating SSRs for higher-income households and younger households, the authors say. Using more realistic earnings curves and Social Security benefits, the authors claim that only the highest-income households need to save more than 10% per year.

“Regulating Financial Advice: The Conflicted Role of Record Keepers in Pension Rollovers,” by John A. Turner. The recordkeepers of 401(k) plans manage roughly 40% of assets rolled over to IRAs. In this article, the author shows that recordkeepers can easily reword their communications to avoid the appearance of non-fiduciary advice while still effectively influencing participants to use the recordkeeper’s IRA rollover service.

Review of The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security, by George A. (Sandy) Mackenzie. The editor of the Journal of Retirement assesses the 174-page study issued in October 2017 by the Government Accountability Office, which was based on the input of a panel of 15 retirement policy experts.

2017 was another big year for Vanguard funds: Cerulli

Posted on January 25, 2018 by Editorial Staff -

Favorable market conditions and advisor sentiment about active management could lead to another year of positive active net flows, especially for strategies in which passive funds are not as competitive, according to The Cerulli Edge – U.S. Monthly Product Trends Edition for January.

Vanguard, in Bill McNabb’s final year as CEO, continued to dominate flows for all of 2017. Vanguard’s total flows for year were over $207 billion (DFA was second with $31 billion). The coming year will be Vanguard’s first under long-time heir-apparent Mortimer “Tim” Buckley.

Six out of seven of the funds with the most flows were Vanguard index funds (Total Stock Market, 500 Index, Total International Stock Market, Total Bond Market, Total Bond Market II, and Total International Bond Market).

In their first year of positive net flows since 2014, actively managed mutual funds and ETFs added net flows of $19.1 billion in 2017. Of that, $3.7 billion came from mutual funds and $15.4 billion from ETFs.

Flows into active ETFs equate to organic growth of 53%, helping boost assets to $45.2 billion at EOY 2017. On the passive side, assets closed the year above $6.6 trillion, with $3.3 trillion in mutual funds and $3.4 trillion in ETFs. Passive ETFs brought in more than $447.0 billion in 2017, up from $279.7 in 2016.

Cerulli said it expects assets managers “to continue to be selective in their product development efforts.” Here are a few more of Cerulli’s comments on various sectors of the fund market:

ESG criteria. An area of focus will be to build out new vehicle capabilities. Additionally, incorporation of environmental, social, and corporate governance factors/criteria into investment products and processes and development of strategic beta or quantitative capabilities will also be likely areas of focus.

Mutual funds. Mutual fund assets experienced growth of more than 18% during 2017, closing the year at greater than $14.6 trillion. Mutual funds reaped net flows of $249.7 billion for 2017, with taxable bond mutual funds collectively receiving the most flows of any asset class in 2017.

Exchange-traded funds. ETFs had another banner year in 2017, with assets improving 35% to more than $3.4 trillion. Net flows into the vehicle were a robust $463.2 billion, representing organic growth of 18.3%.

Liquid alternatives. The number of new open-end liquid alternative mutual fund product launches in 2017 was essentially on par with 2016. Options-based strategies led new product development activity, with 18 products launched in 2017.

Quantamentals. Within the multi-alternative and long/short equity category, there has been a growing trend of product development of quantitative strategies (factor-based with portfolio manager discretion). These strategies, often referred to as “quantamental,” attempt to combine the strength of fundamental research with quantitative investing.

Blooom surpasses $2 billion in advised assets

Posted on January 25, 2018 by Editorial Staff -

Blooom, the robo-advisor that aims to help 401(k) participants manage their accounts more efficiently, said this week that it has doubled its assets under management to over $2 billion less than six months after reaching the $1-billion milestone. According to CEO and co-founder Chris Costello, blooom now has more than 16,000 clients.

The company claims that its median client will save $41,456 in investment fees over their working careers. That figure is based on median blooom client 401(k) balance of $47,131, contributing $5,000 each year, with 30 years until retirement and an average annual expense ratio reduction, based on blooom recommendations, of 34 basis points.

Blooom has also discovered via an analysis of its accounts:

79% of 401(k) participants pay hidden investment fees
53% of 401(k) asset allocations were improperly aligned with retirement goals
39% of 401(k) participants were invested in one or more target-date funds with an average fee 45% higher than alternative investments.

Blooom charges each participant $10 a month and is indifferent to the investment selections it recommends. Once hired, blooom picks the optimal funds in the clients’ existing 401(k)s and reallocates on their behalf.

Book on mandatory ‘Guaranteed Retirement Accounts’ is reissued

Posted on January 25, 2018 by Editorial Staff -

The second edition of Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans, by economist Teresa Ghilarducci and Blackstone president Hamilton “Tony” James has just been published by Columbia University Press.

The authors elaborate on the concept of “Guaranteed Retirement Accounts” (GRAs) that Ghilarducci has called for in the U.S. GRAs have not attracted interest in Washington, D.C., however, and are unlikely to in the current political environment.

GRAs, as proposed, would be universal, mandatory, contributory (3% of pay, split evenly between employer and employee) notional accounts in a fund that would grow under the care of professional asset managers for 40 years, then become a life annuity.

The tax-deferred plan would not require a new tax expenditure. According to Ghilarducci, it would take the existing $100 billion tax expenditure for retirement savings in the U.S. (the annual cost of tax deferral on contributions to retirement accounts), and use it to pay for tax deferral on the mandatory contributions of all working Americans. Under the current system, the benefits of tax deferral are concentrated among those with the will, the means and the opportunity to contribute to a qualified plan.

Representatives of the 401(k) industry have been highly critical of the plan, which could replace all or most of the private voluntary defined contribution system with what amounts to a semi-public utility. Asset managers would compete for the opportunity to manage tranches of a collective national savings fund. There would be no leakage or rollovers to IRAs.

Ghilarducci and her allies have argued that the current voluntary tax-deferred defined contribution system falls far short of meeting the retirement savings needs of all Americans, that it’s too expensive and that it doesn’t offer a route for participants to convert savings to income.

The new edition includes:

A new forward by former Treasury Secretary Tim Geithner
Focus group test results
Feedback on the first edition
A new chapter on why the plan is effective for employers
The plan’s effects on deficits and taxes, according to the Tax Policy Center at The Urban Institute

The Ghilarducci-Blackstone plan has been endorsed by Michael Bloomberg and Robert Rubin. Bloomberg called the polan, “a smarter, more cost-effective way of securing the retirements of all Americans.” Rubin called the plan a “pragmatic approach to substantially enhancing retirement security for every American.” The book was first published in September 2016.

James is president and COO of Blackstone, the giant asset management firm. Ghilarducci is the Bernard L. and Irene Schwartz Professor of Economics at the New School for Social Research and the director of the Schwartz Center for Economic Policy Analysis and the New School’s Retirement Equity Lab.

Ghilarducci the author of When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them (2008) and How to Retire with Enough Money: And How to Know What Enough is (2015).

Financial Firms That Paid Bonuses in Wake of Tax Reform

Posted on January 18, 2018 by Editorial Staff -

Source: Americans for Tax Reform

Spain’s Pension Outlook: Sunny with a Chance of Austerity

Posted on January 18, 2018 by Kerry Pechter -

The historic center of Seville, Spain, is a labyrinth of shaded alleys and sunlit plazas. On a mild afternoon this week, clusters of silver-haired men and women began to congregate informally at some of the countless tapas bars and sidewalk cafes that you’ll find here.

Dressed too plainly to be tourists but too well to be unemployed, they could only be representatives of Spain’s 5.9 million pensioners. “Jubilacion” is the Spanish word for retirement and, indeed, they seemed to be enjoying what looked like a daily ritual.

As well they can. Spain has traditionally offered Europe’s second most generous state pension (after Greece). Averaging €12,000 ($13,200) per year (with a cap of around €36,000 ($43,200) per year, it replaces about 80% of final salary, on average. Retirees get 14 “monthly” checks per year.

But these are confusing times for Spanish retirees and near-retirees. The pension is changing. The government has been periodically tweaking the formulas that determine the pension payouts. With all the changes—some of which are being debated in Spain’s legislature right now—it’s hard for most people to tell if they’ll be net winners or losers.

“For most citizens facing the calculation of the pension is a real puzzle, a cumbersome issue that has been further complicated by the successive reforms of the system,” said a front-page article this week in El Pais, Spain’s biggest newspaper.

To study the Spanish retirement system, RIJ has temporarily relocated to Seville. Starting this week with a look at the public pension system (a contributory, pay-as-you-go system like Social Security in the US). Later we’ll cover workplace retirement plans (which, as in the U.S., cover about 50% of workers) and the market individual annuity contracts (which, as in the U.S., is small).

No option to devalue

While the U.S. keeps kicking its Social Security problems down the road—to the point where our Millennials don’t expect it to “be there” for them, where the “trust fund” or reserves is about to hit empty and where payouts will drop by about 25%s in 2034 if no reforms occur—several factors have forced the Spanish to deal with theirs.

Those factors include the crash in payroll tax revenues after the 2008-2009 financial crisis, an aging population with a low fertility rate (the median age is expected to reach 55 by 2050) and pressure from the European Union to put its fiscal house in order.

As you may remember, Spain was one of the four Mediterranean countries (with Greece, Italy, and Portugal) hurt most (and criticized most) in the European financial crisis and real estate bust. In depressions past, these countries might have devalued their currencies, but membership in the eurozone eliminates that option.

In 2012, the Spanish government began using its Social Security Reserve Fund for current spending and debt payments, according to press reports. The reserve dropped to €15 billion in 2016 from over €66 billion in 2011. The government recently loaned €10.1 billion interest-free to Spain’s social security system, which it used to pay out the two extra pension payments due in June and December. In 2016, the system registered its biggest deficit in its history (€18.1 billion), which was covered by the reserve.

Here are some essential facts about Spain’s public sector pension:

¶ Spaniards will contribute longer to their pensions and take their pensions later. From 2013 to 2027, the official retirement age will rise to age 67 from age 65. The number of contribution years required for the minimum pension remains at 15, but the requirement for the maximum pension has risen to 38.5 from 35 and the payout will be based on salaries in 25 of those years instead of the traditional 15. The legal age for early retirement will rise to 63 from 61.

¶ Spanish workers and their employers pay a lot in taxes for their pension and healthcare benefits, which are both covered by “social security” taxes. In 2017, according to Pricewaterhouse Coopers, “The general contribution rates as from January 2017 are 6.35% for employees… and 29.90% for employers, plus a variable rate for occupational accidents (e.g., 1% for office work).” The minimum monthly base was €825.60 ($1,006) and the maximum is €3,751.20 ($4,576) in 2017.

¶ About 5.9 million people (of a population of about 46.5 million) receive a retirement pension in Spain, which is called the Pension por Jubilacion Ordinaria. In 2016 the average state pension was €1,071 or about $1,250 per month (compared with $1,369 in the U.S.) Contributory retirement pensions in Spain are Europe’s second highest (after Greece) and equal about 81% of final salary levels.

¶ The maximum pension is currently €2,573.70 ($3,140) per month, but some recipients qualify for two extra payments per year so that the annual maximum is €36,031.80 ($43,960).

¶ Spaniards can retire early as age 60 if they started working before January 1, 1967 and have they’ve contributed to the system for at least 30 years of contributions. But the pension benefit is reduced by 8% for every year of retirement before the age of 65, so the pension at 60 is 40% less than the full pension.

¶ Delayed retirement has benefits here, as in the U.S. If someone reaches age 65 with 35 contribution years, two percentage points are added to the multiplier for every added year in employment. Those with 40 contribution years see an increase of four percentage points.

¶ Like several other European countries, Spain is adding a “sustainability factor” that will make sure that pensions don’t grow faster than resources. Starting in 2019, instead of indexing pension payouts to inflation, increases will be based on changes in life expectancy, the number of pensioners, “the level of pension payments over a duration of time, and the financial situation of the social security system,” according to pensionfundsonline. Since January 1, 2014, pensions have increased only if the system is in surplus.

Ready or Not for the Next Recession?

Posted on January 18, 2018 by Barry Eichengreen -

A sunny day is the best time to check whether the roof is watertight. For economic policymakers, the proverbial sunny day has arrived: with experts forecasting strong growth, now is the best time to check whether we are prepared for the next recession.

The answer, for the United States in particular, is a resounding no. Policymakers normally respond to recessions by cutting interest rates, reducing taxes, and boosting transfers to the unemployed and other casualties of the downturn. But the US is singularly ill-prepared, for a combination of economic and political reasons, to respond normally.

Most obviously, the US Federal Reserve’s target for the federal funds rate is still only 1.25%-1.5%. If no recession is imminent, the Fed may succeed in raising rates three times by the end of the year, to around 2%. But that would still leave little room for monetary easing in response to recessionary trends before the policy rate hits zero again.

In the last three recessions, the Fed’s cumulative interest-rate cuts have been close to five full percentage points. This time, because slow recovery has permitted only gradual normalization of interest rates, and because there appears to have been a tendency for interest rates to trend downward more generally, the Fed lacks room to react.

In principle, the Fed could launch another round of quantitative easing. In addition, at least one of US President Donald Trump’s nominees to the Federal Reserve Board has mooted the idea of negative interest rates. That said, this Fed board, with its three Trump appointees, is likely to be less activist and innovative than its predecessor. And criticism by the US Congress of any further expansion of the Fed’s balance sheet would be certain and intense.

Fiscal policy is the obvious alternative, but Congress has cut taxes at the worst possible time, leaving no room for stimulus when it is needed. Adding $1.5 trillion more to the federal debt will create an understandable reluctance to respond to a downturn with further tax cuts. As my Berkeley colleagues Christina and David Romer have shown, fiscal policy is less effective in countering recessions, and less likely to be used, when a country has already incurred a high public debt.

Instead of stimulating the economy in the next downturn, the Republicans in Congress are likely to respond perversely. As revenues fall and the deficit widens even faster, they will insist on spending cuts to return the debt trajectory to its previous path.

Congressional Republicans will most likely start with the Supplemental Nutrition Assistance Program, which provides food to low-income households. SNAP is already in their sights. They will then proceed to cut Medicare, Medicaid, and Social Security. The burden of these spending cuts will fall on hand-to-mouth consumers, who will reduce their own spending dollar for dollar, denting aggregate demand.

For their part, state governments, forced by new limits on the deductibility of state and local taxes to pare their budgets, are likely to move further in the direction of limiting the duration of unemployment benefits and the extent of their own food and nutrition assistance.

Nor will global conditions favor the US. Foreign central banks, from Europe to Japan, have similarly scant room to cut interest rates. Even after a government in Germany is finally formed, policymakers there will continue to display their characteristic reluctance to use fiscal policy. And if Germany doesn’t use its fiscal space, there will be little room for its eurozone partners to do so.

More than that, scope for the kind of international cooperation that helped to halt the 2008-2009 contraction has been destroyed by Trump’s “America First” agenda, which paints one-time allies as enemies. Other countries will work with the US government to counter the next recession only if they trust its judgment and intentions. And trust in the US may be the quantity in shortest supply.

In 2008-2009, the Fed extended dollar swap lines to foreign central banks, but came under congressional fire for “giving away” Americans’ hard-earned money. Then, at the London G20 summit in early 2009, President Barack Obama’s administration made a commitment to coordinate its fiscal stimulus with that of other governments. Today, almost a decade later, it is hard to imagine the Trump administration even showing up at an analogous meeting.

The length of an economic expansion is not a reliable predictor of when the next downturn will come. And the depth and shape of that recession will depend on the event triggering it, which is similarly uncertain. The one thing we know for sure, though, is that expansions don’t last forever. A storm will surely come, and when it does, we will be poorly prepared for the deluge.

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