SeLFIES Can Improve the Nation’s Retirement Security

Robert C. Merton, Ph.D., and Arun S. Muralidhar, Ph.D., discuss how Standard of Living indexed, Forward-starting, Income-only Securities can address the call for in-plan retirement income solutions.

Last month, the Government Accountability Office (GAO) issued a stunning report, “The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security” (GAO-18-11SP), on the U.S.’ retirement preparedness. In the report, it notes, “The U.S. retirement system, and the workers and retirees it was designed to help, face major challenges. … individuals are increasingly responsible for planning and managing their own retirement savings accounts … [M]any households are ill-equipped for this task and have little or no retirement savings.” The report ends with a very strong recommendation, or plea, that, “Congress should consider establishing an independent commission to comprehensively examine the U.S. retirement system and … improve how the nation promotes retirement security.”

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Coincidentally, the U.S. Treasury also issued a report, “A Financial System That Creates Economic Opportunities,” that makes the case for in-pension plan retirement income options and the importance of funding infrastructure. The U.S. government can have an immediate impact on the retirement challenge, create a liquid in-plan retirement income option, and raise funding for infrastructure by issuing a new type of long-term bond, one we call SeLFIES—Standard of Living indexed, Forward-starting, Income-only Securities. SeLFIES address many of the challenges raised in the GAO and U.S. Treasury reports and are also advantageous to the U.S. Treasury.

Individuals seek a guaranteed, real income, ideally from retirement through death, and to lead a lifestyle comparable to pre-retirement. At the same time, the Treasury seeks to ensure that individuals can make independent, informed financial decisions and accumulate a retirement nest egg. The GAO notes three main challenges to achieving this goal: access to retirement plans; insufficient savings; and the complexity of investing and decumulating. Typically, low-income or part-time employees work for firms that neglect to offer retirement plans—and even if they do, many of these employees cannot participate for a host of reasons. A number of states, Oregon being the first, are stepping into the breach to create plans that offer access to uncovered private-sector workers.

Inadequate savings disproportionately affects women and some minorities and is caused by insufficient real wage growth, high debt levels and increased longevity. Further, the complexity of retirement planning leaves many confused about what constitutes adequate savings. They are overwhelmed by the information provided and the absence of a robust and uniform method to calculate income replacement rates. The attempts by Richard Thaler, Ph.D., winner of this year’s Nobel Memorial Prize in Economic Sciences, to nudge individuals into pension plans and increase savings over time, via automatic enrollment and automatic escalation, help; however, they fail to address the “how much is adequate” question.

Finally, there is uncertainty over what to invest in and how best to decumulate. Most adults can barely answer questions about compound interest, the effects of inflation or the benefit of diversification. The Department of Labor (DOL) provided safe harbor guidance about appropriate investments, but investing in existing assets is risky relative to the retirement objective, because these assets fail to provide a simple or low-cost cash-flow hedge against desired retirement income. Even a portfolio of traditional, “safe” government securities, unless heavily financially engineered—at some cost—would be risky because of the cash flow, and potential maturity, mismatch between traditional bonds and the desired retirement income stream.

The Treasury report notes, “Because annuities are the only financial services product that can provide a guaranteed lifetime income stream … [they] are an important contributor to the Core Principle of empowering Americans to save for retirement.” However, many hesitate to buy annuities because they can be complex, opaque and illiquid; investors fear not being able to bequeath the annuities to heirs.

SeLFIES address many of these issues. Governments could issue a new, low-cost, liquid and safe ultra-long bond instrument. SeLFIES start paying investors upon retirement and pay real coupons only—say, $5—indexed to aggregate per capita consumption—for a period equal to the average life expectancy at retirement, e.g., another 20 years. Instead of current bonds that index solely to inflation, SeLFIES cover both the risk of inflation and standard-of-living improvements.

SeLFIES are designed to pay people when they need it and how they need it, and greatly simplify retirement investing. A 55-year-old today would buy the 2027 bond, which would start paying coupons when he turns 65, in 2027, and keep paying for 20 years, through 2047.

In this way, even the most financially illiterate individual can be self-reliant with respect to retirement planning. For example, if investors want to guarantee $50,000 annually, risk-free for 20 years in retirement to maintain their current standard of living, they would need to buy 10,000 SeLFIES—i.e., $50,000 divided by $5—over their working life. The complex decisions of how much to save, how to invest, and how to draw down are simply folded into an easy calculation of how many bonds to buy.

Besides being simple, liquid, easily traded at very low cost and with low credit risk, SeLFIES can be bequeathed to heirs. SeLFIES do not address all issues, including longevity, but go a long way toward improving retirement security.

These securities are a good deal for governments, too. In fact, governments are the biggest beneficiaries. SeLFIES not only improve retirement outcomes for all defined contribution (DC) plans, but also have spill-over benefits for the current administration and future ones. First, cash flows from SeLFIES reflect synergistic cash flows for infrastructure spending: namely, large cash flows upfront for capital expenditure, followed by delayed, inflation-indexed revenues, once projects are online. Financing infrastructure has been a challenge and a priority for the current administration. Second, SeLFIES give governments a natural hedge of revenues against the bonds, through value-added taxes (VATs).

The looming retirement crisis needs to be addressed by timely innovation, because the longer that governments wait, the higher the cost to the taxpayer. SeLFIES improve retirement security, fund infrastructure and can be created immediately, at low cost, without waiting for an independent commission or changing regulations!

 

Robert C. Merton, Ph.D., recipient of the 1997 Alfred Nobel Memorial Prize in Economic Sciences, is the School of Management Distinguished Professor of Finance at the MIT Sloan School of Management. He is also Resident Scientist at Dimensional Fund Advisors, a global asset management firm headquartered in Texas, and University Professor Emeritus at Harvard University.

 

Arun Muralidhar, Ph.D., is adjunct professor of finance at George Washington University, Academic Scholar Advisor at the Center for Retirement Initiatives at Georgetown University, as well as founder of Mcube Investment Technologies and AlphaEngine Global Investment Solutions. He has served as a consultant to Overture Financial (consultant to California’s Secure Choice Board) and has authored a new manuscript, “Fifty States of Grey: An Innovative Solution to the DC Retirement Crisis.” These are the personal views of the authors and do not reflect the views of any of the organizations or universities with which they are associated.

 

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.

SURVEY SAYS: Time Off for Thanksgiving 2017

For the first time in my career, I work for a company that provides both Thanksgiving Day and the day after as paid holidays.

Last week, I asked NewsDash readers, “What days off does your employer provide for Thanksgiving and are you asking for more?”

 

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More than half of responding readers (52.2%) said they get Thanksgiving Day and the day after off, while 21.1% get Thanksgiving Day only. Twenty percent reported they leave early the day before and get both Thanksgiving and the day after off, and 4.4% get Thanksgiving, the day before and the day after off. The same percentage 1.1% chose “Leave early the day before and Thanksgiving Day,” and “The whole week.”

 

Most (55.6%) of respondents have not asked for any more days off for the Thanksgiving holiday. Slightly more than 12% have asked for the day before, 6.7% each chose “the day after” and “the day before and after,” and 11.1% have asked for the whole week off. Among the “other” responses, one reader said he/she gets Tuesday through Friday from the company, so he/she asks for Monday. Others said they ask for Tuesday and the day before Thanksgiving or they ask for the following Monday.

 

In verbatim comments some said working the day after Thanksgiving is productive for them, while one said the opposite. One reader said everyone should get Thanksgiving and the day after. A few readers noted that even though they get the day off, they still work. Some readers explained that their reasons for taking an extra day were not just to have a day of rest or fun, like the reader who said children are out of school the day before. Editor’s Choice goes to the reader who said: “I can turn 3 days of PTO into 9 straight days of vacation with Thanksgiving and that Friday off. That’s a value play!”

 

Thank you to everyone who participated in the survey!

 

Verbatim

Our company has offered both Thanksgiving and the day after as paid holidays since the 1970s. I take additional vacation days that week based on how much cooking I have to do!

A flawed management: puts pressure on workers to come in even on holidays.

It’s very nice having both Thanksgiving Day and the day after off. Who doesn’t like a four day weekend.

I’ll be “on vacation” the day before and after. However, I’ll be working from home at least part of each day. But, the key there is I’ll be working “from home”. Happy Thanksgiving!

It’s amazing to have 4 days off without needing to use time off. It’s like a mini vacation whether we travel or not.

Not a whole lot of work gets done on the Friday after Thanksgiving despite people’s best efforts to “catch up” that day.

I can turn 3 days of PTO into 9 straight days of vacation with Thanksgiving and that Friday off. That’s a value play!

I have previously only had Thanksgiving off (financial world), but now working at a school I have Tuesday-Friday off. It’s like an early Christmas… and I’m very thankful!

Thanksgiving is an awesome holiday. I love having the day after the holiday off as well. It allows for travel time, time to recover from cooking, guests, and cleaning.

Best holiday. No decorating or gift buying, just good eats and get to sleep it off next day!

I think that the Friday after should also be part of the holiday in a law firm.

Everyone should get thanksgiving and the day after- But now we have retail which has EXPLODED Saturday could turn into black Friday and everyone could give Thanks that the early Americans were survivors!

It’s great to have a 3 day work week!

It there is to be a day off after a holiday, it makes more sense to me to have the day after Christmas rather than Thanksgiving.

We had the day after as a paid day off because the building wouldn’t provide air for just our company. Then we were bought by a bank and the day off went away.

My husband is a teacher and gets the whole week off, so I usually take Wednesday as a vacation day to supplement our company holidays of Thanksgiving and the day after.

Black Friday should be a national holiday.

Since I work for a Federal agency, I get Thanksgiving Day as a Federal holiday, but I must use 8 hours of annual leave (vacation time) to take off the day following.

Daycare mirrors the public school holidays, so I also need off the day before.

I really appreciate having a five day break at Thanksgiving. It is really a gift.

Our families are scattered throughout the U.S., so my husband and I typically spend the Thanksgiving Holiday with each other or friends. Very low key!

Day after Thanksgiving was traded for Columbus Day in collective bargaining agreement

The office is open on the day after Thanksgiving, and I hate using a vacation day for it. It’s so quiet and we usually get let go early. It’s not guaranteed though, as is leaving early the day before. Depends on which manager is here!

We usually leave in early afternoon Wednesday and have Thursday and Friday off. Our company also provides two work days off for both Christmas and New Year’s. Most years we end up with two four-day weekends. It’s a nice perk and minimizes the vacation days needed to end up with a long break.

I’m thankful for my days off!

Since the stock market is open, our business must be open as well on the day after Thanksgiving. We do get to close early though!

Even if you are “off”, you are expected to be “on”

I like to travel to be with family on Thanksgiving, so I routinely request vacation for the day before and day after as well as the Monday after.

I think the extra day off really is a great way for employers to get the most out of their employees. Family time is important and so is safe travel – the employers are putting their employees first!

Appreciated.

Our holidays follow the NYSE!

In the past, at a different employer, I’ve had to work the day after Thanksgiving (in a rotation) to cover potential client calls. Not all departments with client contact had the same rule. I was one of only about four people on our floor of close to 100 people who worked that day, and I never received a client call. Most of the clients are probably taking the day off.

Having Thanksgiving and the day after off is a nice mini-break.

If the stock market closed the day after Thanksgiving we would also close.

Thursday plus Friday has been typical at most of my employers. Some were Thursday only, but almost everyone used a vacation day on Friday. Current employer usually allows early dismissal on Wednesday, although I can’t recall if it happens every year.

get a lot of negative employee response to not providing day after thanksgiving off.

I love having the day after Thanksgiving off. I get a lot of shopping done.

I am a contract employee and the employer I am working for has the leave early the day before (Noon or 3pm, not decided yet), Thanksgiving Day and the day after. Since I am contract, the company that I am contract through only does Thanksgiving Day. So I will not be paid for the leave early the day before and the day after, but I still get to have a nice amount of time off. I am also going to be representing the company I am working for in the Thanksgiving Day parade. What an honor!

Sometimes, they do let us go an hour or two early the day before, but that’s not a given. One year, we were all given Apple pies that day!

It’s a generous benefit to have the day-after Thanksgiving off, for which I am thankful. It probably has a benefit to the company also, that the employees return rested rather than tired and late from trying to squeeze in some shopping.

There are so few people who report to work that without the customary distractions, I accomplish a week’s worth of work in a single day! I always work the following Friday –

Although it’s not a written policy, we generally let employees leave early the day before Thanksgiving.

This should be a day off as many families get together.

The day after Thanksgiving is a holiday for us, but since the stock is open that day, we have minimal staff work that day.

Employer is generous with time off. We get Thanksgiving and the day after. For the first time in my career, I work for a company that provides both President’s Day and Martin Luther King Jr. Day as well. Working in Finance, it is nice to have those two days off in the first quarter of the year.

In Wisconsin a lot of employees have the entire week off. It is gun deer season and many save vacation for that week. 3 days of vacation get you the whole week off.

 

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Strategic Insight or its affiliates.

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