States create useful money, but abuse it
To the extent modern monetary theory is true, it is unoriginal; to the extent it is original, it is false
Martin Wolf
The state is the most important of all our institutional innovations. It is the ultimate guarantor of security. But its power also makes it frightening. For this reason, people sometimes pretend it is weaker than it is. In one area of economics, this is particularly true: money. Money is a creature of the state. Modern monetary theory, a controversial account of this truth, is analytically correct, so far as it goes. But where it does not go is crucial: money is a powerful tool, but it can be abused.
L Randall Wray of the University of Missouri-Kansas City set out these ideas in Modern Monetary Theory. They have the following fundamental elements.
First, taxes drive money. This doctrine is called “chartalism”. Governments can force their citizens to use the money it issues, because that is how people pay their taxes. The state’s money will thus become the money used for domestic transactions. Banks depend upon the government’s bank — the central bank — as lender of last resort. The IOUs of banks — the predominant form of money in today’s economies — are imperfect substitutes for such sovereign money. They are imperfect, because banks may become illiquid or insolvent and so may default. That is why banking crises are common.
Second, contrary to conventional wisdom, no mechanical relationship exists between holdings of central bank liabilities by banks (that is, reserves) and creation of bank money. Since the financial crisis, central bank balance sheets and bank reserves have grown hugely, but broader monetary aggregates have not. The explanation is that the dominant driver of the money supply is the (risk-adjusted) profitability of lending, which is high in booms and low in busts. The weakness of credit also explains why inflation has remained low.
Third, governments need never default on loans in their own currency. The government does not need to raise taxes or borrow to pay its way; it is possible for it to create the money it needs. This makes it simple for governments to run deficits, in order to ensure full employment.
Fourth, only inflation sets limits on a government’s ability to spend. But, if inflation emerges, the government has to tighten demand, by raising taxes.
Finally, governments do not need to issue bonds in order to fund themselves. The reason for borrowing is to manage demand, by altering interest rates, or the supply of reserves to banks.
This analysis is correct, up to a point. It also has implications for policy. A sovereign government can always spend in order to support demand. Again, expansion of the central bank balance sheet does not make high inflation likely, let alone inevitable. Some believers in MMT argue that the power to create money should be used to offer a universal jobs guarantee or finance programmes such as the Green New Deal proposed by Democrats in the US. But such ideas do not follow from their analysis. These are just suggestions for where the state should spend.
What then are the problems with MMT? These are twofold: economic and political. An important economic difficulty, clear from painful western experience in the 1970s, is that it is hard to know where “full employment” lies. Excess demand may exist in some sectors or regions, and deficient demand elsewhere. Full employment is a highly uncertain range, not a single point.
A still more important economic mistake is to ignore the expectations that drive people’s behaviour. Suppose holders of money fear that the government is prepared to spend on its high priority items, regardless of how overheated the economy might become. Suppose holders of money fear that the central bank has also become entirely subject to the government’s whims (which has happened often enough in the past). They are then likely to dump money in favour of some other asset, causing a collapsing currency, soaring asset prices and booming demand for durables. This may not lead to outright hyperinflation. But it might lead to a burst of high inflation, which becomes entrenched. The focus of MMT’s proponents on balance sheets and indifference to expectations that drive behaviour are huge errors.
These mistakes are economic ones, but there is a related and far worse political error, as Sebastian Edwards of University of California, Los Angeles, has argued. If politicians think they do not need to worry about the possibility of default, only about inflation, their tendency may be to assume output can be driven far higher, and unemployment far lower, than is possible without triggering an upsurge in inflation. That happened to many western countries in the 1970s. It has happened more often to developing countries, especially in Latin America.
But the economic and social consequences of big spikes in inflation can be very damaging.
Yet the same is also true for high unemployment. So, in managing a modern monetary economy, one has to avoid two gross errors. One is to rely on private sector demand too much, since that can all too easily end up with highly destructive financial booms and busts. The opposite error is to rely on government-led demand too much, since that may well generate destructive inflation booms and busts.
The solution, nearly all of the time, is to delegate the needed discretion to independent central banks and financial regulators. Yet proponents of MMT are right that during a period of structurally feeble private demand (as in Japan since 1990) or a deep slump, a sovereign government must and can act, on its own or in co-operation with the central bank, to offset private weakness. There is then no reason to fear the constraints. It should just go for it.
STATES CREATE USEFUL MONEY, BUT ABUSE IT / THE FINANCIAL TIMES OP EDITORIAL
INVESTORS SHOULD BE WORRY AS PRIVATE EQUITY FIRMS SWITCH STRUCTURES / THE FINANCIAL TIMES OP EDITORIAL
Investors should be wary as private equity firms switch structures
It is only a matter of time before one of the big investment groups runs into trouble
Sebastien Canderle
In April, Blackstone announced it was converting to a corporation, ditching a partnership status that has shielded much of its income from corporate taxation © Bloomberg
Since Blackstone’s 2007 initial public offering, US alternative fund managers have scrambled to join the stock market, with the idea of giving their founders a way out — a notoriously challenging process in private partnerships.
As at accountancy and law firms, partners at investment firms are only offered the option to sell when they leave the organisation. Fellow partners are the main escape route — they buy the shares, preventing retiring partners from participating in any future upside.
Until recently, most private equity groups have retained a partnership structure to avoid the 35 per cent tax rate on US corporations. But now that US president Donald Trump’s 2018 tax changes have cut the corporate rate to 21 per cent, the advantages of a partnership are less clear. That has made a C-corporation structure a lot more palatable.
Ares and KKR were the first fund managers to take the conversion plunge last year. In April, Blackstone followed suit and in early May, Apollo Global Management made the same call. Blackstone’s Stephen Schwarzman said: “The decision to convert . . . should drive greater value for all of our shareholders over time.”
The advantages of switching seem obvious for founding partners, who are way past retirement age and need to buoy liquidity to ease future share disposals. Should public investors believe the argument that the new structure will also lead them to riches?
If history is any guide we can predict that it is only a matter of time before one of the big investment groups runs into trouble. There is a precedent: the Wall Street banks that morphed into corporations with hapless results.
Like today’s private capital firms, Salomon Brothers, Bear Stearns, Drexel Burnham Lambert, Lehman Brothers and Merrill Lynch were set up as partnerships and were avid dealmakers. They incorporated and experienced brisk, unrestrained growth in the 1980s thanks to deregulation. But it didn’t take long for things to turn sour.
In 1986 Drexel faced scandal when a managing director was charged with insider trading. Two years later, bond trader Michael Milken was accused of self-dealing and bribery. The bank settled criminal and civil charges, but by 1990 it had gone bust.
Within a decade of its own conversion, Salomon stood accused of market rigging when, in 1990, trader Paul Mozer submitted false bids in an attempt to purchase more Treasury bonds than permitted. Weakened by the criminal proceedings, the firm was acquired by insurance group Travelers. As for Bear Stearns, Lehman and Merrill, the extent to which their behaviour during the subprime mortgage bubble contributed to the end of their independence is well known.
Historically, partnerships led to more prudent decisions because partners were jointly and severally liable. To make it less risky to establish businesses, the concept of limited liability partnerships was introduced, providing separation between outside investors and liable executives running the business. The PE groups use the LLP model.
Even so, managers in a partnership are rewarded in illiquid shares that yield wealth only if the business creates value over time. Senior officers must consider the firm’s reputation and survival as paramount. By contrast, executives in a public corporation receive annual bonuses and share options that are exercisable and tradable within a few years.
Since the financial crisis, bankers’ pay has been under tighter supervision. Many deal junkies have migrated to private capital, receiving instant gratification through management fees that mount up, irrespective of performance.
As PE founders who set up shop decades ago prepare to exit by converting to corporations, prospective investors should stay vigilant. A corporate status can amplify unprincipled behaviour.
The writer is a lecturer in private equity at Imperial College
THOUGHTS FOR A PIVOTAL WEEKEND / SEEKING ALPHA
Thoughts For A Pivotal Weekend
by: The Heisenberg
- Three things have to happen (or not happen) for multi-asset investors to enjoy another outstanding six months.
- As for the trade talks, the Huawei issue is the key.
- Herein also find some uncomfortable math for a prospective next round of China tariffs and a margin reality check for protectionist proponents.
The addition of these five firms to the Entity List, coming right after Huawei… suggests that even intellectual property rights and spying concerns related to 5G deployment could be secondary issues. In fact, the prospect of China building a competitive semiconductor industry may well be the key worry.
Goods in which China supplies a large share of total US imports are less likely to provide scope for import diversion if sufficiently developed production chains are not yet in place in other countries. To test this, for each category we construct a measure of import diversion as the change in nominal ex-China import growth relative to the nominal value of imports of the category from China, which roughly captures the share of US imports from China replaced by increases in imports from other countries. We find a sizable and statistically significant negative relationship between our measure of diversion and the share of US imports from China (Exhibit 3, top). Many of the imports from China not yet hit by tariffs have large China import shares, and our analysis therefore suggests significantly less scope for substitution of imports going forward (Exhibit 3, bottom).

Base case (truce – no comprehensive deal, but no new tariffs). Buy high quality Industrials. Industrials are pricing in an earnings recession already. We continue to see higher volatility under a truce and prefer high quality stocks. Defense stocks could benefit from potential for heightened geopolitical tensions. Software over Semis. 74% of Semis’ revenue growth since 2010 has come from Asia Pacific. Within Tech we would prefer Software, which has less China exposure.
HOW TO CONTAIN IRAN: AS AMERICA AND IRAN INCH CLOSER TO WAR, NEW TALKS ARE NEEDED / THE ECONOMIST
How to contain Iran
As America and Iran inch closer to war, new talks are needed
Negotiation, not confrontation, is the way to stop the mullahs from getting the bomb
FOR NEARLY four years Iran’s path to a nuclear weapon was blocked. The deal it signed with America and other powers in 2015 limited its nuclear programme to civilian uses, such as power-generation, and subjected them to the toughest inspection regime in history. The experts agreed that Iran was complying and that its nuclear activities were contained.
But then President Donald Trump ditched the nuclear deal and Iran resumed stockpiling low-enriched uranium. It is now poised to breach the 300kg cap set by the agreement. Iran may hesitate before crossing that line, but it is also threatening to increase the enrichment level of its uranium, bringing it closer to the stuff that goes into a bomb.
Fortunately, Iran is not about to become a nuclear-weapons power. Its breakout time is over a year. But it is once again using its nuclear programme to heap pressure on America. That adds an explosive new element to an already-volatile mix. America accuses Iran of attacking six ships in the Strait of Hormuz since May.
On June 20th Iran shot down an American spy drone. America insisted the aircraft was above international waters, not Iran’s, and sent warplanes to strike back. Ten minutes before they were due to hit targets inside Iran Mr Trump called them off and contented himself with a cyber-attack instead.
Neither Mr Trump, nor America’s allies, nor Iran wants a big new war in the Middle East. Yet Mr Trump’s strategy of applying “maximum pressure” on Iran is making the prospect more likely—because each side, issuing ever-wilder threats, could end up misreading the other’s red lines. The president’s room for manoeuvre is shrinking.
As Iran turns more belligerent, calls for action will grow, not least from his own party. Before things escalate out of control, both sides need to begin talking. That is not as unlikely as it sounds.
Mr Trump’s Iran strategy is based on the premise that Barack Obama gave too much away too easily when he negotiated the deal in 2015. Last year the president set out to get better terms by reneging on the agreement and reimposing the sanctions that have crippled Iran’s economy.
This, his advisers argue, will force a weakened Iran to accept a new deal that lasts longer than the old one, most of which expires by 2030. They also want curbs on Iran’s missile programme and an end to its violent meddling in the region. Mike Pompeo, the secretary of state, sees recent Iranian aggression as a sign that the strategy is working.
Hard-hitting sanctions brought Iran to the negotiating table in 2015, but they are unlikely to lead to the transformation Mr Trump wants. One reason is that he has discredited Hassan Rouhani, Iran’s president and a champion of the nuclear deal. Hardliners are now calling the shots. Another is that America is acting alone. In 2015, in a rare moment of international unity, it had the support of its European allies as well as Russia and China.
Maximum pressure comes with extra risks, to boot. The mullahs and their Islamic Revolutionary Guard Corps want to prove their mettle by showing that Mr Trump’s actions have costs—for everyone. On top of the attacks on ships and drones, Iranian proxies have hit pipelines in Saudi Arabia and are suspected of having struck Iraqi bases hosting American troops. If sanctions are not lifted, Iranian officials may resort to closing the Strait of Hormuz, through which one-fifth of the world’s oil passes.
Hawks like John Bolton, Mr Trump’s national security adviser, retort that if Iran wants war, that is what it will get—especially if it shows signs of dashing for a nuclear bomb, which could trigger disastrous proliferation in the Middle East. But this is the riskiest calculation of all. Having pulled out of a working deal, America may not win the backing of European allies for strikes. China and Russia would vehemently oppose any action at all.
Perhaps sanctions or war will cause the regime to crumble. But that is hardly a strategy: Cuba has resisted sanctions for decades. More probably, a defeated Iran would heed the lesson of nuclear-armed North Korea and redouble its efforts to get a bomb. Attacking Iran’s nuclear facilities would not destroy its know-how, as even Mr Bolton admits. If, as is likely, Iran barred international inspectors, its programme would move underground, literally and figuratively, making it very hard to stop.
The alternative to today’s course is talks between America and Iran. Just now that looks far-fetched. Iran’s foreign ministry says American sanctions imposed on Ayatollah Ali Khamenei, the supreme leader, and other top officials this week mark “the permanent closure of the path of diplomacy”. Mr Rouhani has suggested that the White House is “mentally handicapped”—after which Mr Trump threatened “obliteration”.
But optimists will remember similar clashes between America’s president and Kim Jong Un, North Korea’s despot, before they met in Singapore and “fell in love”, as Mr Trump put it.
When he is not threatening to annihilate the mullahs, Mr Trump is offering to talk without preconditions and to “make Iran great again”. He does not want the prospect of war in the Middle East looming over his re-election campaign. Likewise, in Iran the economy is shrinking, prices are rising and people are becoming fed up. Pressure is growing on Mr Khamenei to justify his intransigence. Love could yet bloom.
America might coax Iran back to the table with a gesture of good faith, such as reinstating waivers that let some countries buy Iranian oil. Iran, in turn, could promise to comply with the nuclear deal again. Behind the scenes, its leaders have expressed a willingness to sign something like the old agreement with additions—such as extending parts of the deal beyond 2030.
Negotiations would never be easy; the Iranians are infuriating to deal with. But that would let the president claim victory, as he did with the United States-Mexico-Canada Agreement, which his administration signed last year and which looks a lot like its predecessor, the North American Free Trade Agreement.
What of a deal that also curbs Iran’s missile programme and restrains it in the region? As Mr Trump seems to realise, biting everything off in one go is unrealistic. A new deal cannot solve all the problems posed by Iran or normalise ties with America after decades of enmity. It may not even lift all America’s sanctions. Neither did the first agreement. But, if done right, a deal would put Iran’s nuclear programme back in a box, making it easier to tackle all those other problems without causing a war.
WHY GOLD STILL SHINES FOR SOME DESPITE A DIFFICULT DECADE / THE FINANCIAL TIMES
Why gold still shines for some despite a difficult decade
What remains a popular investment for many clients is seen as too unpredictable for others
Tom Stabile
Gold fingers: The precious metal’s price hit a five-year high recently, but is still down since 2011 © Bloomberg
Gold’s unique place in portfolios faces a series of tests. Its tepid performance since its 2011 peak, an uncertain global economic outlook, the rise of cryptocurrencies and a drive towards sustainable investing have all put off US investment advisers from turning to the metal — even as their clients have ever more ways to invest.
While gold tends to be a small holding for a limited number of clients, advisers say, it stands apart from other commodities because of complicated supply and demand trends that emerge from its many portfolio roles: as a safe haven asset, a consumable product, a de facto currency and a deposit of value.
Gold is a unique commodity, says Brent Armstrong, partner at Weatherly Asset Management, an $833m independent advisory firm in California that caters to clients with $2m to $25m in assets.
“We can look at its use in jewellery and electronic products, but it’s also been a human emotional store of value for thousands of years. That often clouds the lines, and creates movements and exuberance around the asset class.”
Gold today trades around $1,300 per ounce, some way down from the 2011 peak of $1,900, which followed the financial crisis.
Juan Carlos Artigas, director of investment research at the World Gold Council, says that although gold makes up less than 1 per cent of all global assets — estimated at $317tn by Credit Suisse last year — it remains an active market.
Gold demand was up 7 per cent year-on-year to 1,053 tonnes in the first quarter this year, according to World Gold Council data, thanks in part to a spike in purchases by central banks and exchange traded funds tracking the asset class.
Investors own gold for a variety of reasons, such as diversification, liquidity and hedging. They gain exposure to it largely through bars, coins, ETFs, futures and mining company stocks.
Many choose physical gold for a longer-term asset, while ETFs that own gold reserves or futures contracts — a $100bn market — offer a more liquid exposure, meaning investors can sell quickly if necessary.
Many factors help set gold’s value, from consumer demand to movements in interest rates, the US dollar, and global GDP. For example, the price of gold suffers from higher interest rates, as investors sell it to buy interest-generating assets.
This year, Mr Artigas says investors should look out for the impact on gold of capital markets volatility, the path of US Federal Reserve policy and the pace of global structural economic reforms.
But some clients seek gold investments no matter the trends, says Laurie Kamhi. She is managing director at New York-based LCK Wealth Management, part of the $48bn HighTower Advisors platform, which serves entrepreneurs and executives. “You’d be surprised at how many of them invest in bars as a way to store money,” Ms Kamhi says.
Gold’s role in portfolios can be limited, as is the case for Chicago-based RMB Capital, a $9.4bn independent adviser and asset manager. “We see it as a more tactical opportunistic investment for when the right macro factors are in play,” says RMB vice-president Ryan Kennedy. “It’s not a permanent part of client portfolios.”
One current opportunity for gold and other commodities to come into favour is if the dollar weakens, Mr Armstrong says. “While the dollar is strong, there’s a chance for it to reverse in the near and medium term,” he says.
RMB Capital tends to invest in gold through ETFs. In the past this was done using a dedicated strategy, but more recently RMB has used a diversified commodity allocation that invests in futures contracts, Mr Kennedy says.
LCK Wealth also has moved from gold ETFs in recent years to seeking gold exposure in blended commodities funds.
A concern for advisers in the longer term is the underwhelming performance of the asset class so far this decade. “There have been number of different market events that could have allowed gold to advance, but didn’t,” says Mr Armstrong.
Another challenge is a trend among some investors to use cryptocurrencies such as bitcoin as a rival savings medium, according to Ms Kamhi. “There is a lot of interest in whether the crypto market over the very long term will replace the need for gold,” she says.
Indeed, many investors who in the past considered gold a safe haven when the dollar falls may instead look to the yen or government bonds, Mr Armstrong says.
“It remains to be seen if gold could get pushed to the back burner, or if the emotional connection holds true,” he adds.
The rise of sustainable investing could pose yet another set of obstacles for ownership of the metal, Ms Kamhi predicts.
Gold mining in particular raises the potential for environmental exploitation and fair labour and compensation problems, she says.
“That’s a long-term trend, not for tomorrow morning,” she says. “But there may be a different view of its desirability. It’s not going to be a big holding in the sustainable funds.”
CHUBBY CATS: GOLDMAN WANTS TO MANAGE THE ASSETS OF THE MIDDLING RICH / THE ECONOMIST
Chubby cats
Goldman wants to manage the assets of the middling rich
The bank bought United Capital, a boutique wealth-manager, for $750m
IF THE BEST way to get rich is by managing other people’s money, it helps if your clients control a lot of it. For private-equity firms and hedge funds, that means courting pension-fund managers, investment bankers and the like. For the top wealth managers, the money in question belongs to the super-rich, whom they advise on asset allocation, tax planning and even which artists should adorn their walls.
Now some are starting to tout for the custom of the merely well-heeled. On May 16th Goldman Sachs paid $750m in cash for United Capital Financial Advisors, a wealth-management firm based in California that manages $25bn-worth of assets for 22,000 clients. It was Goldman’s biggest acquisition in two decades.
It accelerates the firm’s shift of emphasis under David Solomon, who became its boss last year, away from volatile businesses such as trading towards more stable fee-based ones. It also broadens Goldman’s target market for wealth-management services. Until now, the bank’s individual customers were drawn almost entirely from the ranks of those with at least $25m in investable assets. United Capital serves those who have $1m-5m.
The non-filthy rich used to find it surprisingly hard to get customised help with managing their money. The fees they generated were not fat enough to satisfy full-service wealth advisers at the biggest investment banks. But the mass-market offerings of brokers and retail banks were not sufficient. Into this gap came firms like United Capital, founded in 2005 by Joe Duran, its chief executive (who will join Goldman as a partner). The firm’s platform enables its advisers to manage relationships more efficiently. The client’s age, career status and so on are used to build up a financial profile, and advisers can send video updates about major market moves to those whose portfolios are affected.
The acquisition fits well with Goldman’s evolving thinking about wealth management. In 2003 it acquired Ayco, which specialised in managing the assets of top-ranking company executives. Ayco has since expanded into offering financial-planning services to everyone at the companies it serves, says Larry Restieri, the Goldman partner who runs Ayco. Moreover, uninvested deposits with United Capital can conveniently be funnelled to Goldman’s consumer bank, Marcus.
Competition to serve the mass affluent is heating up. In February Morgan Stanley, which is around the same size as Goldman but makes twice as large a share (40%) of its revenues from wealth management, announced that it would buy Solium for $850m. The software company, since rebranded Shareworks by Morgan Stanley, provides a platform for companies to administer shares and stock options paid as part of compensation. The acquisition is appealing in two ways, says Jonathan Pruzan, Morgan Stanley’s chief financial officer. It brings an opportunity to acquire younger customers who may one day be very rich, and it allows the bank to use Shareworks to offer those employees access to Morgan Stanley’s own products.
The mass-affluent market is becoming better served in other ways, too. Online financial advisers such as Betterment, which manages $16.4bn in assets, are developing clever new ways to counsel customers on what to do with their savings. Investment banks, it seems, are not alone in deciding that the best way to get rich is not to manage rich people’s money, but to manage everyone’s.
THE NEW MATH OF SAVING FOR RETIREMENT MAY BOIL DOWN TO 1 ABSURDLY SIMPLE RULE / BARRON´S MAGAZINE
The New Math of Saving for Retirement May Boil Down to 1 Absurdly Simple Rule
By Joshua Gotbaum, MarketWatch
abacus Photograph by Crissy Jarvis
“Eventually, I’ll stop working.” Most of us think that and know it will happen, but millions of us worry whether we’re saving enough to live on once we do. We want to know: How much of my earnings should I set aside? What’s the magic number? 3%? 5%? 10%? More?
What your financial adviser won’t tell you:
Unfortunately, the retirement industry has spent decades largely avoiding the magic-number question. “There’s no magic number for everyone,” some say. “It’s complicated,” say others. And then they offer, sometimes for a fee and sometimes for “free,” to take our money and invest it for us — often without telling us whether it’ll be enough when the time comes.
Why will no one give us a magic number? They don’t want to be legally responsible when the number turns out to be too low, which, for some of us — especially those whose pay is low or whose investments are poor or who live long and need a nursing home for years — it will. The legal jitters are understandable, but they leave us in the dark about how much to save.
Don’t give up hope. There’s research that can help — from institutions that don’t have a conflict of interest because they don’t invest or give advice. My favorite is the Employee Benefits Research Institute in Washington, D.C. EBRI, as it’s called, gathered anonymous information on tens of millions of people and how they actually save. It won’t tell people what to do, but from its research there’s a pretty useful rule of thumb: Count on your fingers and...
Save 10% — now
Between you and your employer, set aside at least 10% of your paycheck. If your employer contributes 3%, then your share is at least 7%. If the company kicks in 5%, then you save at least 5%. If your employer does nothing, set aside at least 10% of each paycheck on your own.
Of course, there will be times when you’re between jobs or you need your money for a pre-retirement-age emergency. In those cases, you can put your money in a Roth individual retirement account (IRA) account. That way, you can take your contributions out without penalty. (There are also Roth 401(k) accounts, though they have more complicated withdrawal rules.) Don’t let the fact that you might need money someday keep you from saving for retirement now.
It’s perfectly OK to consult a financial adviser and get more personalized recommendations, but if you can’t or don’t want to — or while you’re waiting to “get around to it” — set aside enough so that, together with your employer match, you’re putting aside at least 10%.
America’s No. 1 fear: golden years minus the gold
People are living longer. That’s both good news and bad: We hear about baby boomers moving into posh “active adult” communities, but we also hear about disabled and bedridden elderly requiring years’ worth of health aides and the constant help of their children. Either way, longer lives seem expensive.
And our capacity to lay the groundwork for retirement can feel pinched from all directions. Life can be expensive even in our earning years, with college tuition, housing and medical costs in the stratosphere. Student loans and credit-card debt intrude. Social Security, we’re told, is at risk. Lifetime pensions are, for most, a thing of the mythical past. All that most of us feel we can count on is a retirement account that’s at the mercy of the markets and, we suspect, doesn’t have enough in it. Many, of course, don’t even have that.
Experts often tell us how complicated this is to figure out — and why we should hire them to do it for us. And it is easy to make it complicated: We can try to decide — now, decades before we’re ready to even think about retiring — what our future earnings will be and how long we’ll work, what lifestyle we’d prefer in retirement, how much health care will cost decades down the road, how long we’ll live after retirement (with a margin for error, of course), how our money should be invested and what our investment returns will be (with, again, a margin for error). Not complicated enough? Add whether or not we’ll need funds at hand to support children or parents or other family members.
The result is confusion. Some people get financial advice. Others turn to online retirement calculators. Many, sadly, do nothing at all, falling back on a vow of resignation: “I’ll just keep working.” (Spoiler: Almost no one who says they’ll work until they die ends up doing so.) For still others, it means saving too little.
Modeling for millennials
How can EBRI’s model help? It estimates the risk of running out of money after retirement by taking into account many more factors than the usual online calculator: contributions, market changes, Social Security benefits and salary growth, as well as a range of health outcomes and longevity prospects. It can then estimate the risk that — for particular savings rates and income levels — a person’s expenses in retirement will overwhelm their savings plus Social Security benefits.
For this article, EBRI provided projections for today’s 25-year-olds at multiple income levels; we’ll interpolate the results to reflect the median income of today’s 25-year-olds, which is $30,000.[1] (The projections assume that people will earn more as they get older.)
We then applied EBRI’s projections to three millennials. Their names have been changed, but they are all in their mid-20s. We’ll assume they’re average earners:
•Phillip, working in a startup, contributes 3% of pay to a retirement account. His employer contributes nothing.
•Ida, an office worker, contributes 3%, which her employer matches, for a total of 6%.
•John, working for a financial firm, contributes 8%. His employer contributes 4%, for a total of 12%.
Are they contributing enough, too much or too little? Here’s how, based on EBRI’s model, our millennials and their different savings practices would end up at retirement:
• If Phillip, from a current salary of $30,000, continues to contribute just 3%, he has a 56% chance of running through both his retirement savings and Social Security in his lifetime. (If he were earning $40,000 now, the odds improve, but his chance of running out of money still exceeds 40%.) Clearly, then, 3% isn’t enough.
•Ida, being a woman, will likely live longer, so her 6% total contribution will have to last longer, and the probability that neither it nor Social Security will be enough is 47%. Sounds like 6% is too low, as well.
•John, contributing 12% of pay, has less than one chance in four (23%) of running out of money.
Overall, the EBRI simulation model suggests that, in the income ranges of most millennials, a contribution rate of 10% starting in a worker’s mid-20s cuts the risk of running out of money in retirement to about 30%, less than one chance in three. Contributing more than 10% when you can will give you a better cushion.
Of course, everyone’s situation is and will be different, so 10% is a guideline, not a guarantee. (Furthermore, if you start later in life, 10% won’t be nearly enough.)
Digital piggy Banks
By now you’re probably thinking, “This is easier said than done.” And you’re right. Saving for retirement is like dieting in that we’re better at making resolutions and excuses than making progress.
But technology makes the savings part easier, too. More and more employer plans will sign you up automatically. If your employer doesn’t have a plan, you can set up a Roth IRA with a bank or an investment company and have a portion of each paycheck deposited automatically. Some states, including Oregon, Illinois, California and Maryland (whose program I chair), are setting up IRA programs for small businesses that don’t offer retirement plans.
The good news is that, in one respect, retirement saving is easier than dieting: If you fall off the wagon, you can start again and feel better immediately.
Yes, life is complicated. Retirement plans don’t always turn out as planned. But if, while worrying about everything else, we each adhered to the 10% rule as much as we are able, there would be a lot less retirement insecurity and a lot more gold in the golden years.
Joshua Gotbaum is a guest scholar at The Brookings Institution focusing on retirement issues. He has worked in finance and government for over 40 years. These are his personal views. This article originally appeared on MarketWatch.
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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