Get big or die trying

Finding a better way to deliver pensions

Nov 23rd 2013

PENSION funds have had a pretty good 2013: rising share prices and higher bond yields have reduced their funding deficits. Nevertheless, the combined strains of volatile markets and improved longevity are causing the industry to have a rethink, as a World Bank conference in Cape Town revealed this week.

Some funds in the Dutch system, long regarded as among the best in the world, have been forced to cut benefits to pensioners because of funding shortfalls. In Canada, the Ontario Teachers’ Pension Plan, often praised for its sophistication, has had to reduce inflation protection for workers who retired after 2009—a cut in pensioners’ real incomes.

These reductions reflect how seriously the Dutch and Canadian systems regard the issue of pension funding and the problem of inter-generational transfer. A pension scheme that is not fully funded implicitly depends on future workers and taxpayers to make up the shortfall.

Other systems have dealt with higher pension costs in different ways. Companies in America and Britain have shifted new employees away from defined-benefit schemes (in which retirement income is linked to final salaries) to defined-contribution ones (in which all the risk falls on the employee).

The American public sector has disguised the pension problem by optimistically assuming that nominal returns of 7.5-8% can be achieved in a world of low inflation and low interest rates. European public sectors have pay-as-you-go pension systems where the full costs are not made clear in the national accounts.

Although many pension experts accept that defined-benefit plans are too expensive, they worry that defined-contribution schemes are a lottery for employees. A worker who retired in 2000 when markets were buoyant would have ended up with a much bigger pension than one who retired in late 2008, after the collapse of Lehman Brothers.

So there has been talk in recent years of a middle way. The term of the moment is “defined ambition”, a phrase dreamed up by one of the doyens of the industry, Keith Ambachtsheer of the Rotman International Centre for Pension Management. (At 71, the sprightly Mr Ambachtsheer is a walking advertisement for the benefits of a prolonged career.) Steve Webb, Britain’s pensions minister, has just started a consultation on what a British defined-ambition pension might look like.

The underlying idea is that the best may have been the enemy of the good in pension reform. Early corporate pensions were little more than a vague promise, but over time governments tried to enhance workers’ rights, adding protections from inflation, benefits for spouses and safeguards for early leavers. These extras added significantly to the cost and so hastened the demise of final-salary schemes in the corporate sector.

Many workers might trade some of the extra benefits for a degree of certainty that they can keep the heating on in old agean assurance not offered by defined-contribution schemes. The calculations are made more complex by the interaction between the state pension (usually available to all citizens) and occupational retirement plans. The more that fiscally constrained governments chip away at state schemes, the more workers will rely on their occupational benefits to reach a decent level of retirement income.

One version of defined ambition, which attempts to give workers some certainty, is a “notionaldefined-contribution plan. Under such schemes (already in operation in Sweden and Latvia), each worker has an account and can see the likely level of future benefits; in some cases, a certain minimum level of benefits will be guaranteed, but additional payments will be subject to the financial health of the schemes, changes in longevity and so on.

Such schemes are easier to run on a large scale, and have so far been adopted solely by governments. The problem for any system that involves a guaranteed income is, first, that it is only as good as the guarantor and, second, that long-term guarantees are expensive. If occupational pensions are to be provided in future, they may have to be delivered by industry-wide schemes that can achieve the scale to control costs and manage risks. Indeed, that has been the trend in the Netherlands and Australia.

It is a historical oddity that pensions have been delivered by individual businesses, which are otherwise devoted to serving customers and making widgets. Pension provision needs to be left to the specialists.

Four Fallacies of the Second Great Depression

NOV 20, 2013


LONDONThe period since 2008 has produced a plentiful crop of recycled economic fallacies, mostly falling from the lips of political leaders. Here are my four favorites.
1)The Swabian Housewife. One should simply have asked the Swabian housewife,” said German Chancellor Angela Merkel after the collapse of Lehman Brothers in 2008. “She would have told us that you cannot live beyond your means.”
This sensible-sounding logic currently underpins austerity. The problem is that it ignores the effect of the housewife’s thrift on total demand. If all households curbed their expenditures, total consumption would fall, and so, too, would demand for labor. If the housewife’s husband loses his job, the household will be worse off than before.
The general case of this fallacy is the “fallacy of composition”: what makes sense for each household or company individually does not necessarily add up to the good of the whole. The particular case that John Maynard Keynes identified was the “paradox of thrift”: if everyone tries to save more in bad times, aggregate demand will fall, lowering total savings, because of the decrease in consumption and economic growth.
If the government tries to cut its deficit, households and firms will have to tighten their purse strings, resulting in less total spending. As a result, however much the government cuts its spending, its deficit will barely shrink. And if all countries pursue austerity simultaneously, lower demand for each country’s goods will lead to lower domestic and foreign consumption, leaving all worse off.
2)The government cannot spend money it does not have. This fallacyoften repeated by British Prime Minister David Camerontreats governments as if they faced the same budget constraints as households or companies. But governments are not like households or companies. They can always get the money they need by issuing bonds.
But won’t an increasingly indebted government have to pay ever-higher interest rates, so that debt-service costs eventually consume its entire revenue? The answer is no: the central bank can print enough extra money to hold down the cost of government debt. This is what so-called quantitative easing does. With near-zero interest rates, most Western governments cannot afford not to borrow.
This argument does not hold for a government without its own central bank, in which case it faces exactly the same budget constraint as the oft-cited Swabian housewife. That is why some eurozone member states got into so much trouble until the European Central Bank rescued them.
3)The national debt is deferred taxation. According to this oft-repeated fallacy, governments can raise money by issuing bonds, but, because bonds are loans, they will eventually have to be repaid, which can be done only by raising taxes. And, because taxpayers expect this, they will save now to pay their future tax bills. The more the government borrows to pay for its spending today, the more the public saves to pay future taxes, canceling out any stimulatory effect of the extra borrowing.
The problem with this argument is that governments are rarely faced with having to “pay off” their debts. They might choose to do so, but mostly they just roll them over by issuing new bonds. The longer the bonds’ maturities, the less frequently governments have to come to the market for new loans.
More important, when there are idle resources (for example, when unemployment is much higher than normal), the spending that results from the government’s borrowing brings these resources into use. The increased government revenue that this generates (plus the decreased spending on the unemployed) pays for the extra borrowing without having to raise taxes.
4) The national debt is a burden on future generations. This fallacy is repeated so often that it has entered the collective unconscious. The argument is that if the current generation spends more than it earns, the next generation will be forced to earn more than it spends to pay for it.
But this ignores the fact that holders of the very same debt will be among the supposedly burdened future generations. Suppose my children have to pay off the debt to you that I incurred. They will be worse off. But you will be better off. This may be bad for the distribution of wealth and income, because it will enrich the creditor at the expense of the debtor, but there will be no net burden on future generations.
The principle is exactly the same when the holders of the national debt are foreigners (as with Greece), though the political opposition to repayment will be much greater.
Economics is luxuriant with fallacies, because it is not a natural science like physics or chemistry. Propositions in economics are rarely absolutely true or false. What is true in some circumstances may be false in others. Above all, the truth of many propositions depends on people’s expectations.
Consider the belief that the more the government borrows, the higher the future tax burden will be. If people act on this belief by saving every extra pound, dollar, or euro that the government puts in their pockets, the extra government spending will have no effect on economic activity, regardless of how many resources are idle. The government must then raise taxes – and the fallacy becomes a self-fulfilling prophecy.
So how are we to distinguish between true and false propositions in economics? Perhaps the dividing line should be drawn between propositions that hold only if people expect them to be true and those that are true irrespective of beliefs. The statement, “If we all saved more in a slump, we would all be better off,” is absolutely false. We would all be worse off. But the statement, “The more the government borrows, the more it has to pay for its borrowing,” is sometimes true and sometimes false.
Or perhaps the dividing line should be between propositions that depend on reasonable behavioral assumptions and those that depend on ludicrous ones. If people saved every extra penny of borrowed money that the government spent, the spending would have no stimulating effect. True. But such people exist only in economists’ models.

Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

sábado, noviembre 23, 2013


House prices

Home truths

The recovery in housing is looking surprisingly shaky

Nov 23rd 2013

THE city that proved that America’s housing market is rising from the ashes was, fittingly, Phoenix. From property-bubble peak to post-financial crisis trough, house prices in Arizona’s biggest metropolis plunged by more than half, as demand dried up and foreclosures soared. But low interest rates and slowly reviving consumer confidence, plus a bunch of private-equity firms convinced there was an opportunity in buying up homes cheaply, eventually brought the market back to life. By September the median sale price of a single-family home in the Greater Phoenix area was $199,000, up 33% in a year.

Yet lately not all the signs from Phoenix have been positive. Initially, house prices and sales rose together. But according to a recent report by the Centre for Real Estate Theory and Practice at Arizona State University, they have started to diverge. In September the number of single-family homes sold was 9% lower than in the same month a year earlier; sales of town houses and condos were flat. Sincé July the Greater Phoenix market has “cooled dramatically”, thanks to a steep fall in demand. In 2014, the report predicted, prices will rise more slowly than the “furious pace we have witnessed over the past two years.”

A similar picture is emerging elsewhere, especially in cities where price and sales growth had been strong. The monthly index of housing conditions published by the National Association of Home Builders and Wells Fargo, a bank, published on November 18th, was flat since October and down from 59 in July to 54 now. (That is slightly positive; a score of 50 would mean that builders are evenly divided as to whether conditions are good or bad). The Case-Shiller index, which tracks house prices in 20 big cities across America, reported year-on-year price growth of 12.8% in August, but also noted an abrupt slowing of the monthly rate of growth as 16 of those cities reported more modest price increases in August than in July.

In October the Federal Reserve noted that the “recovery in the housing sector slowed somewhat in recent months.” This set the stage for the release of data on November 20th that showed a sharp 3.2% fall in sales of existing homes in October.

This is probably evidence of “stalling, rather than a reversal”, says Jim O’Sullivan of High Frequency Economics, a research firm. Would-be buyers are coming to terms with costlier mortgages; long-term mortgage-interest rates are up by a percentage point since the early summer. That can be a drain on a tight household budget. The housing-affordability index published by the National Association of Realtors, which combines average mortgage costs, average home prices and average family income, is down to 164 from a high of 214 in January, which is significant. Yet housing remains far more affordable than the historic average of around 125, which means that the recovery is likely to pick up before long, says Mr O’Sullivan.

What effect will this slowdown will have on builders? Previous busts have taught them to control the inventory of new properties coming to the market. If they react abruptly to falling sales by building less, the housing market may be “on the verge of a significant correction”, argues Ian Shepherdson of Pantheon Macroeconomics. Although residential construction is only 3% of GDP, in each of the past five quarters it has contributed around a quarter of America’s economic growth.

If residential construction turns down, asks Mr Shepherdson, where else will growth come from? Corporate America seems to be hunkering down and curbing capital spending. Exports? Maybe.

Higher consumption? Probably not while housing is losing momentum. Government spending seems unlikely to come to the rescue, even if the politicians behave themselves.
With luck, signs of a weaker housing market will concentrate minds in Washington, DC as the next decision over the debt ceiling approaches.

11/22/2013 04:57 PM

'Fat Cat' Backlash

Swiss Executive Pay Debate Gets Ugly

By Christian Teevs

 Photo Gallery: The Swiss Battle over Executive Pay

Switzerland votes this weekend on whether to limit executives' pay at twelve times that of their lowest-paid worker. In the run up to the referendum, the issue has become a national talking point, with both sides stoking public resentments and fears.

In Switzerland's current, polarized debate about executive salaries, Bern businesswoman Pia Tschannen could be considered a defector -- a woman in cahoots with the Young Socialists, the Social Democrats and the trade unions -- because she is campaigning for the 1:12 initiative, which is being put to referendum on Sunday.

The initiative's aim is to ensure managers cannot earn more in a month than a normal employee earns in a year. It would mean that nobody would be able to earn much more than 500,000 Swiss francs (€400,000) annually. "Ever higher salaries for managers imply that a company's success depends solely on one person. I don't believe that," says Tschannen.

In comparison, board members at Commerzbank, Germany's second biggest bank, were outraged at the government's insistence their pay be limited to €500,000 when the bank was bailed out with government money. Given Switzerland's historical association with Calvinism -- which is supportive of economic success -- the campaign has gathered surprisingly widespread support beyond the traditional left-wing. For a while, polls suggested advocates of the initiative were in a dead heat with their rivals, though support has now dropped.

War on the 'Fat Cats'

The referendum campaign focuses on what the young Socialists call "the fat cats" -- extremely well-payed managers in the business world. These include Daniel Vasella, former head of pharmaceuticals giant Novartis, who was scheduled to receive an exit payment of 72 million Swiss franc (€58 million) in spring 2013. Despite having waived the money following the outcry, Vasella is still seen as an archetypal greedy manager and his notoriety has fed the popularity of the 1:12 campaign, which would have had no chance of succeeding just a few years ago.

Public anger about golden handshakes -- clauses in executives' employment contracts allowing for generous severance -- has already lead to a tightening of the legislation regulating executive pay. A two-thirds majority of Swiss voters supported a ban on excessive exit and signing bonuses. Furthermore, shareholders will now be able to decide executive salaries.

The Young Socialists are already presenting the campaign as a success, irrespective of Sunday's outcome, because they have managed to break a taboo: Discussing salaries was long seen as inappropriate in Switzerland. Now citizens have been discussing executive pay for months and the Young Socialists' campaign has proven so effective that business groups have had to reply with a high-profile counter-campaign.

Fearmongering Counter-Campaign

"The arsonists from the Young Socialists want to ruin Switzerland's successful economic model," warns the Swiss Trade Association (SGV) in a pamphlet distributed to all the country's households. The front page features a photograph of stone-throwing anarchists in front of burning barricades. The Young Socialists' idea is a "socialist experiment," they say: Communists playing with fire.

The "arsonists" work from a trade union office in Bern, all six of them. Marco Kistler, one of the campaign's strategists, is working with his colleagues on using social media such as Facebook and Twitter to mobilize support during the final spurt of the campaign.

They connect with their supporters in all 26 of the country's cantons via live stream as the music from Johnny Depp's "Pirates of the Caribbean" plays in the background. "We've assembled all of the worst communists here," one of them jokes.

In truth none of the young activists look like class warriors. Twenty nine-year-old Kistler looks more like a shy computer science student. He answers questions briefly and deliberately, without a trace of revolutionary rhetoric.

"Obviously it's not funny being accused of being a Soviet communist," he says. "But the fact that we're being attacked this way proves our idea is really making people think" Why are Swiss voters now so critical of high executive pay? Kistler believes it can be tied to the financial crisis, "which showed that exorbitant salaries had nothing to do with performance." Major Swiss bank UBS paid bonuses despite the fact that it had needed to be bailed out by the Swiss government to the tune of 70 billion francs (€57 billion).

An Economic Model at Risk?

Kistler's opponent, Hans-Ulrich Bigler, head of the SGV, rejects these arguments. "The 1:12 initiative would only affect the salaries of about 4,000 people, but the consequences for the Swiss economy would be catastrophic."

Bigler points to projected losses in tax and social security payments. "Citizens, as well as small- and medium-sized companies would feel the difference." It remains unclear what the revenue losses would be. "But whatever scenario you choose, the damage to society is there," says Bigler.

You get the sense from Bigler that he's a little embarrassed by the crude scaremongering about communists and arsonists. Bigler's arguments are nuanced and he himself sees the dangers of economic elites disconnected economically from society.

Nevertheless he defends his counter-campaign, "In a political debate you always sharpen arguments." He believes Switzerland is in an enviable position: "Our economy is growing strongly. We have low government debt and almost full employment."

But he believes this success would be threatened if the state were to limit economic freedoms. Next year, voters decide on whether to tax large inheritances and use that money to support the state pension system. The trade unions also want to introduce a minimum wage of 22 francs (€18) per hour, which would result in a 4000 franc (€3,200) monthly minimum wage for a full-time job.

SGV head Bigler warns that a minimum wage set by the state would also damage Swiss companies' competitiveness. Pia Tschannen, however, is not worried, "our staff already earn that much as it is." Around 280 people work for Tschannen's consultancy and cleaning business. The vast majority of her staff are cleaning ladies.

Health & Wellness

Drinking After 40: Why Hangovers Hit Harder

The Reasons Moderate Alcohol Consumption Gets More Complicated in Middle Age

By Andrea Petersen

Nov. 18, 2013 7:14 p.m. ET

Why is it so much harder in your 40s to bounce back from a night of drinking than it was in your 30s or 20s? What happened? Andrea Petersen has answers on Lunch Break. Photo: F. Martin Ramin for The Wall Street Journal.
When you're in your 40s, it's pretty common to need reading glasses. You might need smaller wine glasses, too.
That's because alcohol hits people harder in their 40s and 50s than it did during their 20s and 30s. The reasons for this include changes in body composition to brain sensitivity and liver functioning. Lifestyle factors are at play, too. And since people tend to take more medications—both prescription and over-the-counter—as they age, there are more chances for uncomfortable and even dangerous booze-drug mixing.

"All of the effects of alcohol are sort of amplified with age," says David W. Oslin, a professor of psychiatry at the Perelman School of Medicine at the University of Pennsylvania. "Withdrawal is a little bit more complicated. Hangovers are a little bit more complicated."
Part of the issue is that people in their 40s and older simply tend not to drink as much or as often as those in their 20s and 30s, which lowers tolerance. "You're becoming more work-oriented, more family-oriented," says Robert Pandina, director of the Center of Alcohol Studies at Rutgers University.

So when you do drink "you might have a more sensitive response to alcohol because you've lowered your exposure to alcohol over all."
Some people swear that only certain types of alcohol—red wine, tequila—are a problem. Generally, doctors say there's little science indicating that some drinks make people drunker or lead to more miserable hangovers. It is true, however, that people at any age can develop sensitivities to sulfites and tannins in wine, which can cause headaches and an upset stomach, Dr. Pandina says. And the carbonation in sparkling wines or even in mixed drinks like whiskey and Coke "seems to increase how rapidly alcohol is absorbed," says Reid Blackwelder, president of the American Academy of Family Physicians and a practicing family doctor in Kingsport, Tenn.

About 52% of people age 45 to 64 are "regular" drinkers, meaning they had at least 12 drinks in the previous year, according to the Centers for Disease Control and Prevention's 2011 National Health Interview Survey.

Body composition starts to change as early as the 30s. As people age, they tend to lose muscle mass, while fat content increases.
Alcohol isn't distributed in fat. People also have less total body water as they get older. So if several people have the same amount to drink, those with more fat and less muscle and body water will have more alcohol circulating in their bloodstream. (This is also partly why women of any age tend to feel alcohol's effects more than men.)

"A lot of older people are borderline dehydrated. They have less body water just from the natural effects of aging," Dr. Blackwelder says. It helps to drink water and have a full stomach when knocking one back.

The majority of alcohol is metabolized by the liver, which changes when people hit their 50s. (A small amount is metabolized in the stomach and mouth.) The liver gets bigger as people get older, but the organ becomes less efficient. Blood flow decreases, as do the number of hepatocytes, the liver's functional cells, says Gary Murray, acting director of the Division of Metabolism and Health Effects at the National Institute on Alcohol Abuse and Alcoholism at the National Institutes of Health.

Certain enzyme levels dip, too, including one type of the enzyme alcohol dehydrogenase, which breaks down alcohol. Women of all ages tend to have lower levels of this enzyme in the stomach. But between the ages of 50 and 60, men see their levels slide, too. All these changes mean "you have a prolonged exposure to alcohol and possibly a little bit bigger buzz," when you drink, Dr. Murray says. There's also some evidence that hormonal changes around menopause can increase women's sensitivity to alcohol. Healthy young people tend to metabolize about one drink per hour, Dr. Murray says.

Stephanie Draeken used to enjoy a glass or two of wine several nights a week. "I have four kids. I need my wine," says the stay-at-home mother in Austin, Texas. But since turning 40 nearly two years ago, Ms. Draeken says if she has even one glass of wine now she'll "wake up in the middle of the night with a horrible headache and the next day is like a college-style hangover without the college-style fun," she says.

She tried switching to higher-priced wine, then stuck with white wine. She tried champagne. "It didn't matter," she says. She says she now rarely drinks wine and limits herself to an occasional vodka and soda.
Alcohol-drug interactions can become more of a problem, too, since older people are more likely to take medications. Alcohol and many medications are metabolized by the same enzymes in the liver, which can enhance the effects of alcohol or the medications. Heartburn drugs like Zantac interfere with the metabolism of alcohol, thus raising blood-alcohol levels. Acetaminophen (Tylenol) poses another problem because, combined with alcohol, it can damage the liver.

Mixing alcohol with blood thinners like Coumadin can be particularly dangerous, causing bleeding. "People on Coumadin shouldn't really drink at all," says Dr. Oslin. And taking alcohol with some pain medications and benzodiazepines (antianxiety drugs) can make you "more prone to sedation, more prone to cardiovascular risk and more prone to overdose," Dr. Oslin says.
People with certain medical conditions should also be cautious with alcohol, doctors say. Long-term alcohol use can raise blood pressure. And alcohol tends to irritate the stomach.
Barring health problems and medication interactions, doctors generally become concerned when people drink more than a moderate amount of alcohol. That is defined as up to two drinks per day for men and up to one drink per day for women, according to the latest federal Dietary Guidelines for Americans. (A standard drink is about 12 ounces of beer, 5 ounces of wine or 1.5 ounces of liquor, according to the CDC.)
In fact, there's some evidence that a moderate amount of alcohol can have health benefits. Studies have linked moderate alcohol consumption with a reduced risk of cardiovascular problems and death overall. Excessive alcohol consumption increases the risks of liver disease, stroke, high blood pressure, certain types of cancer and dementia, beyond the obvious accidents and injuries.
Particularly beginning in the 50s and 60s, the brain is more sensitive to alcohol. Booze basically enhances normal age-related cognitive decline. Neurons lose speed. Specifically, the insulating myelin sheaths around the axons of neurons—the parts responsible for transmitting information to other neuronsget smaller. As people age, "neurons are not as efficient. So you impair them with a little bit of alcohol, they are that much more inefficient," says Dr. Oslin. "Somebody who goes to a cocktail party at 65 can have one or two drinks and be really impaired."
Older people are also more affected by alcohol's impact on sleep, a fact that can turn a mild hangover into a must-stay-in-bed-all-day affair. "Alcohol in all ages wrecks our REM sleep," says Alison A. Moore, professor of medicine and psychiatry at the David Geffen School of Medicine at the University of California, Los Angeles. "Older adults are more likely to have poor sleep. [Alcohol] can make sleep even more fragmented."

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