Economic, financial, and political trends commentary
Following the release of the “Truth About Annuities” digital brochure and presentation, the RSI was cited in the June 2010 article “Annuities 101: A Course for Advisers and Clients.” The article suggests that retirement savers will need education about complex products delivered through technology, a focal point of this well-written and insightful insurance industry publication.
We just launched the new edition of the guide “The Truth About Annuities and Retirement Income.” It is a very succinct presentation about what a fixed annuity is, how it fits into a retirement portfolio, and what its income generation potential is. The guide is presented from the risk mitigation point of view, namely sparing a retirement portfolio from burning out in later years.
This guide can be used by advisors of all stripes—whether an insurance broker, a retirement plan sponsor or other type of retirement plan fiduciary. With many calls for better education about retirement choices, limiting risk, and so on, this publication actually delivers.
ProducersWeb recognized its release.
In the recent report by the RSI, we allude to the case of Greece. And while the U.S. is not exactly in a similar predicament as Greece, it’s a cautionary tale. Markets are spooked by its hefty debt load. An International Monetary Fund official indicated that ‘the wider euro zone could retain social security programs while handling expanded state debt, suggesting pension benefits must be trimmed and higher inflation targets may be an option.’ He continues, ”The way out of debt in most countries is led by a reform of the pension or health care system,” he said, adding that raising the retirement age could be one way of cutting expenditure. Why can’t elected officials and stewards of money get on the same page? Basically this official reflects that the entire euro zone faces or will face the issues of Greece, to a lesser degree however.
Fortunately in the U.S. we have raised the age to receive social security benefits to address longevity prospects, but it won’t be enough. Medicare needs to be age and income-adjusted. We continue to kick the can further down the road. Public sector pensions and benefits have not been rationalized quite enough for continued sustainability for retirees and the taxpayer base. The next five years are very important to redress the imbalances of public sector debt and spending. And if there is to be a pullback in benefits owing to sustainability issues, people need to understand how they must plan or work longer to save for retirement. A politician that could smartly present what the case of Greece represents in a U.S. context might just be a winner. People understand the truth when they see it.
The train that left the station long ago, namely the post-war era of retirement benefits, needs an update that reflects the globalized, competitive world we live in. It would go a long way in restoring confidence in government within an economic model that is sustainable. Didn’t the financial crisis teach us anything about living beyond the collective or individual means?
A new study by Boston College’s Center for Retirement Research indicates that lifetime costs for a retiree household is $197,000 (present value). This includes insurance premiums, home health care, and out-of-pocket costs, but excludes nursing home costs. But a typical household also has a 5% chance costs will exceed $311,000. When nursing home costs are included, the typical couple’s bill rises to $260,000, on average, with a 5% risk of exceeding $570,000. And less than 15% of households have accumulated that amount in total financial assets. Bar none, nursing home or long-term care costs are the greatest risk to household retirement security, they report.
Long-term care expenses are an insurable risk.
National Underwriter recently picked up on a few choice ideas in the new report “Forecast 2010: Navigating Retirement Unknowns (and Charting a Course Anyway).” However, the scope of the report is much broader than how Boomers may impact asset pricing in the future.
We have also added a companion set of 47 slides into the mix, to help with identifying and tracking ideas and the flow of the report. I’m sure people will find ways to put them to use as well. It sort of offers an alternative view of the material, that might spark some stroke of genius. (At least that’s what I find when faced with the same material presented in different ways –but maybe not the genius part.) A sample of the seven follows.
In the early part of the report, an economic climate discussion and a summation of where we have been and where we are, takes place. There are occasional “outtakes” about the crisis for informational purposes, in addition to a section focused on crisis commentary. It’s important to view the crisis from different vantage points to make sense out of it for retirees and for helping them plan, if you are an advisor.
Some key points about demographics are presented, and how they relate to retirement security. In the section on longevity risk, a variety of forces which impact it are presented along with some common solutions. At present one of the few products that can guarantee against longevity risk is a fixed annuity, or a variable annuity with particular guarantees.
Following that discussion, the topic of heath care is covered, with a focus on Medicare’s challenges as it relates to retirement planning. We illustrate some of the growth trends which may help in anticipating future out of pocket expenses or areas for which one would want to insure against. Finally, some pressure points on the horizon are outlined such as: DB-DC tradeoffs, retirement ages’ issues and economic growth, asset prices and demographics.
One takeaway from this report would be that we are living in an era of uncertainty, even though some good news is occurring in spots. Be aware of the risks, and plan in a sensible way for their emergence. Be more vocal with those who represent your interests; ask questions of those who manage your resources. Understand the ways in which your retirement assets work, together and separately.
The link to the report page.
Yesterday, an industry trade group, the Insured Retirement Institute, said that Obama may mention annuities in his State of the Union address tonight. Whether he does or not, the insurance industry finally got some deserved recognition for one of the few products that did not unravel during the financial crisis –fixed annuities, which do not decline when markets falter, and their variable annuity counterparts that had added guarantees to curtail losses. You can read the IRI’s press release.
In a speech of Jan 3 to fellow economists, Bernanke pulls out all of his analytical tools to show that loose monetary policy, a common scapegoat, was not to blame for the housing bubble. He points to regulatory and supervisory laxness as a key source of housing market woes. Through a series of related slides and calculations, he illustrates that the availability of alternative mortgage products, the ARMs standard and exotic, which were inappropriate for many borrowers, contributed to the housing bubble and its subsequent demise when price appreciation finally halted. My analysis: Of course, there’s also the many financial institutions that invested in these mortgages too, causing financial market meltdown.
He also comments on the foreign capital inflows issue –the global savings glut hypothesis. Countries with more capital inflows had greater house price appreciation over the period 2001-2006. And one-third of house price appreciation is explained by this relationship of greater inflows. Further, 11 of the 20 advanced economies analyzed had tighter monetary policy alongside greater house price appreciation. So the fed’s accommodative policy did not necessarily contribute to house price appreciation.
More people entering the housing market, which shouldn’t have, and lax underwriting standards, indicate a regulatory response. Regulators, supervisors, and the private sector could have (should have) managed their risks better– regardless of continued dreams of house price appreciation. Bottomline: Monetary policy is a blunt tool for bubbles but can be a policy prescription sidekick when needed.
John Geanakoplos of Yale was asked by the Fed to present his views on the crisis at its peak in October 2008. His theories moved away from the efficient markets and rational expectations camps to a “leverage cycle” point of view. He shows how a group of certain types of investors that demand, say more “asset-backed” securities, encouraged banks to ’stretch’ their available supply of collateral like mortgage loans. “Using large amounts of borrowed money, or leverage, these buyers push up prices to extreme levels, ” writes the Wall Street Journal (Nov. 3, “Crisis Compels Economists…” by Mark Whitehouse). Under usual circumstances, the less leveraged buyer would not venture into these securities at higher prices; therefore this phenomenon violates the idea of efficient markets, that all available information is contained in prices of securities.
Basically, Geanakoplos says the banks created myriad debt securities to meet demand. Central bank models missed this leverage cycle because their models focus mainly on interest rates. If new thinking proves out, the way in which we have viewed the financial world will change. Whatever new ideas become accepted as the norm may be a welcome change: “Our policy seems geared toward rescuing banks and bankers.” per Geanakolpos. He hopes a paradigm shift will occur so that people are protected against the excesses of the financial markets. He suggests central banks should collect and publish data on the amount of leverage in the system. Sounds like a good start.
I am relieved to find an analysis of the financial crisis from a veteran which points to real causes underlying the crisis we’re recovering from. Wharton’s Jeremy Siegel, professor of finance, just makes sense. Here’s his take:
Rating agencies that rated subprime mortgages as investment grade made faulty assumptions about continuously rising home prices. The yields on these mortgages were high in spite of their investment grade rating (and markets were right to be suspicious of them, thus adding a higher risk premium). Wall Street, reaping fat rewards, and Congress, happy of the American Dream being realized by more, ignored red flags along the way. Government-sponsored Fannie Mae and Freddie Mac helped fuel the subprime boom.
This misreading of economic trends did not reside within the private sector. Large financial firms put their shareholders at risk and their leverage threatened the entire financial system. The Fed failed to see these problems. His summation: financial firms drove too fast, the Fed failed to stop them, and housing deflation crashed the banks and the economy. The Great Moderation — a period of less fluctuation in GDP, industrial production, and employment since WWII — is still alive though temporarily dazed.
See WSJ Opinion page Oct. 27, 2009, “Efiicient Market Theory and the Crisis.”
