Search Results for : Muralidhar

Arun Muralidhar on The Public Option for 401K Plans

I received an email from Arun Muralidhar in response to my sending him a link to my previous post Elizabeth Warren: We should be talking about expanding Social Security benefits.

Hi Steve:

Thanks for the email and for the link to Sen Warren’s comments on Social Security. I totally agree with her that benefits need to be preserved, but sadly preserving benefits without making any changes to the current system will place an unfair burden on our kids. The only way to do so would be to implement our plan immediately as every delay adds to the cost of bolstering the program.

On your idea about allowing the Social Security investment option to be an offering for 401(K) plans, Franco and I had anticipated this kind of need. In fact, the World Bank pension fund was reformed in 1999 to allow such an option so that even retirees in 401Ks could be protected from market volatility, and it became the default option for staff who did not want to select equity/bond funds.

Thanks again for your thoughts.

Arun Muralidhar
Mcube Investment Technologies

Arun is co-author with Franco Modigliani of the book  Rethinking Pension Reform. I was glad to hear Arun confirm that the idea of a 401K public option is not farfetched at all.  The fact that the World Bank offers this type of investment in its pension plan, is as close as I know to an existence proof that such a plan is possible  on a national scale.

I note in Arun’s comments the use of an insight I first read about in the works of behavioral economists.  That is, that when you offer a bunch of complicated options to people, the best outcome happens if you make a good option be the default option.

Are Economists in Denial About What’s Driving the Inequality Trainwreck?

Naked Capitalism has the article Are Economists in Denial About What’s Driving the Inequality Trainwreck?

A new paper by economist Lance Taylor for the Institute For New Economic Thinking’s Working Group on the Political Economy of Distribution takes on the way economists have looked at wealth and income inequality.

The existing social order does not necessarily guarantee that the rich will get richer (remember Keynes on the essential uncertainty of the future). But even if they do, a stiff tax on capital gains could be used to build up a socially-oriented wealth fund that would help offset that.

Look at Norway’s “oil fund,” which takes a cut of petroleum revenues and invests the money while giving a small annual pay-out from its investment returns. An example closer to home is California’s CalPERS retirement fund. The key point is that such funds can save at a higher rate than wealthy households, amassing market power and potentially using capital income for social purposes.

In the labor market, real wages of employees have lagged productivity growth, which is why the profit share for the boss has gone up. Outsourcing has played some role, but policies and legal interpretations (think of so-called “right to work” legislation and attacks on public sector unions) that reduce labor’s bargaining power have been more important. Recreating that power could reverse the trends and slow the accumulation of wealth. Our studies and others suggest that simply raising taxes on the rich and transferring the proceeds downward in the income distribution will not have a large immediate effect on distribution, but the impacts could cumulate over time.

It’s possible to reduce U.S. wealth and income disparity, but reversing the trends of the past 30 or 40 years that got us there will not be easy or quick.

Of course I would like this article. It substantiates a lot of what I have been writing on this blog. Just because I suffer from confirmation bias, doesn’t mean that the article is wrong, though. It is just possible that my ideas really are close to correct.

The talk about Norway’s “oil fund” demonstrates what I think are the benefits of having large parts of the Social Security Trust Fund invested in the stock market. California’s CalPERS retirement fund is just another example. Admittedly CalPERS management has gone off the rails a bit in recent years as documented by the Naked Capitalism web site. That just means we need to develop better control mechanisms for the Social Security Trust Fund when it gets into stock market investing.

Search this website for the many articles I have posted on investing Social Security in the stock market.

Saving Capitalism For The Many, Not The Few

I have just finished reading Robert Reich’s new book Saving Capitalism For The Many, Not The Few.

I have come to a set of expectations for books of this type. The really good ones do a great job of identifying a problem, providing new ways to analyze the problem, and new ways to explain the problem clearly for the rest of us to understand. This book does all that, so I rate it really good.

These books always have a small part at the end that tell us what to do about the problem. These are universally the weakest part of the books. Most of the books do tell you what needs to be changed, which of course is pretty obvious from the excellent description of the problem. No book that I have read so far tells you any practical way to bring about the change.

Robert Reich’s book goes farther than many books because he doesn’t just tell us that people have to act differently from the way they have ever acted before. He does go through some specific rules of the market that need to change, and he does describe some ways of reorganizing the meaning of basic economic entities such as corporations. What he cannot do, and therefore does not do, is to explain how we wrest power from those who now wield it in such a way that we can never seriously contemplate how to make the changes that he says we need.

The robots of the future, along with other breakthrough technologies, will not exactly take away “common property” for which citizens deserve to be indemnified. But they will take away good good jobs that are already dwindling in number and replace opportunities already growing scarce. They will, in short, supplant the middle class that has been the centerpiece of our economy and society that is already shrinking. New market rules that cause wealth eventually to revert to the public domain rather than compound for future generations that had nothing to do with creating it, and be used instead to finance a minimum guaranteed income for all citizens, is one way to go.

This and some other ideas he discusses are starting to be tried in some places around the world, so it is not as if they are completely outside of the realm of possibility. I should give Reich more credit for bringing these ideas to the fore in a book that may be more widely read than other sources that discuss these ideas.

What strikes me is that there is a transition step that I think is more easily made, and I do not see even mentioned. The idea has been described and thoroughly researched by Franco Modigliani and Arun Muralidhar as described in several posts on this blog, but even they shied away from the deeper implications of their proposals. Possibly they downplayed these implications for fear that it would be too upsetting to the 0.01% if they were to understand what the implicatons were.

I am talking about changing the Social Security Trust Fund investment rules so that the trust fund could actually buy shares of corporations. The premise is that the trust found would have far better returns than the Treasury bonds they must buy now. With better returns, the trust fund could both do with less money being taken in from taxes, and it could safely pay higher benefits. This is the surface meaning of this idea.

The deeper implication is that an arm of our government, The Social Security Trust Fund, would own a very large part of the private corporations, given the size of the trust fund. Rather than be passive investors, the trust fund could be active in demanding that corporations pay more attention to the needs of the whole society. The trust fund as a major shareholder would do that because the trust fund has that basic responsibility to society as a whole. This is unlike private investors who have only their own best interests at heart.

Moreover, the fact that the Social Security Trust Fund was growing because of the growth of corporations would in itself be a sharing of the benefits of increasing productivity which sharing is not going on now.

This idea of starting to invest the trust fund in corporate shares is something that could start small, and grow over time. The transition could be so gradual, that people would hardly notice the impact until it had grown substantially. It would also have the benefit of changing its course if unforeseen side-effects started to appear.

As the size of the investment grew, the incentives for corporations would change. The income inequality between top executives and average workers would start to get controlled in a way that no group of small investors can cause. The funding by corporations of buying elections and elected officials to rig the system for their benefit could be brought under control. This change in wealth and income distribution, and diminishing of political power and influence would make it easier to make Reich’s more far reaching changes possible.

If the public understood these changes this way, they might be far more apt to strongly support them. Of course the people with the power now would also understand, and they would fight these ideas more fiercely. It is then a question of whether or not the power of an idea could overcome the power of the money. I think history shows that sometimes this can happen.

Will Hillary Clinton Adopt Hedgie Billionaire John Arnold’s Schemes for Retirement Insecurity?

Naked Capitalism has the story Will Hillary Clinton Adopt Hedgie Billionaire John Arnold’s Schemes for Retirement Insecurity?

The front-running scheme for “retirement security” — backed by billionaire John Arnold — looks an awful lot like it’s “on the table” because it guarantees that middlemen collect fees for “managing” what we used to call your “nest egg.” Will Hillary Clinton’s campaign platform support it?

Hillary Clinton Has Ruled Out Expanding Social Security.

This is a warning to watch your wallets. The article is too filled with just pejoratives, and a little light on specifics, but it does warn us of things to watch out for. In fact, this plan might sound a little like the Modigliani/Muralidhar plan or the one I proposed in my previous post in November 2013 Elizabeth Warren: We should be talking about expanding Social Security benefits. However, the devil is in the details. The details in this case is all about the size of the fees. Large fees can turn a retirement plan from a saving grace (pun intended) to a disaster for the retiree.

Here is a very simple test for any retirement plan. If any manager gets to be a billionaire by managing such a program, then the beneficiaries are being robbed. Those billions of dollars represent money that the beneficiaries should have had.

Nobel Prize Winner Robert Merton Slams Fed for “Negative Wealth Effect” Policies 4

Naked Capitalism has the story Nobel Prize Winner Robert Merton Slams Fed for “Negative Wealth Effect” Policies.  This post is a discussion of the Pensions & Investments article Monetary policy: It’s all relative by Robert C. Merton and Arun Muralidhar.

The Naked Capitalism article starts with the explanation:

Nobel Prize winner* Robert Merton and Arun Muralidhar have charged ZIRP and QE happy central banks with economic malpractice. One of the main justifications for low interest rates is that they create a “wealth effect” by elevating asset prices. People allegedly feel richer and spend more, stimulating growth.

As we’ve pointed out, the first central bank to try the bright idea of lowering interest rates to spur consumption was Japan in the late 1980s. We know how that movie ended. Japanese banks and companies engaged in what was then called zaitech, or speculation, funded by being able to borrow 100% against urban land.** The result was to massively inflate already-large commercial and residential real estate bubbles, and to funnel Japanese cash into largely misguided and/or overpriced foreign investments.
Super low interest rates lower incomes to asset owners, producing what they describe as a “negative wealth effect”. The Fed seems to think that retirees and others who live mainly off their assets will happily eat their seed corn, um, liquidate some of their capital gains to make up for the loss of income. Instead, people in that position who come up short most often curb spending.

As a retiree who is managing my own investments just as Merton and Muralidhar describe, I can attest to the fact that I am behaving just as they say I should.  Though I have had a good  boost in my net worth, my income has not gone up by much  since the crash of 2007-2009.  Perhaps Merton and Muralidhar are not devotees of the newsletter Investment Quality Trends.  IQT’s methods do extract a little rising income out of the  current situation. without eating into your principle.  As I mentioned above, both my principle and income have increased since the crash, although the income is way down from the pre-crash level and my net worth is above the pre-crash level.  I have adjusted my spending in response to my new level of income.

I have since realized that no matter what my dividend income is, I should limit my expenditures to no more than 5% (maybe it is 4%) of my invested assets.  According to historical performance, that level of spending should be sustainable pretty much forever.  I have modified my investing goal from what used to be just maximizing my investment income stream, to a mix of capital appreciation and investment income, where the income doesn’t have to be more than about 5%.  The rest can be capital gains.  If I manage income higher than 5%, I just reinvest the excess instead of happily spending it.

Adapting Society To The Age Of Robots

In my previous post The Robots are Coming for White Collar Jobs, I proposed a version of my favorite thought experiment.

When the day comes that robots can be used to produce everything that the human population needs so that nobody has to work, what will the society look like? Will everybody lead a fairly comfortable life with some sort of somewhat even distribution of wealth. Or will the robots produce just enough for the wealthy to have a good lifestyle while the rest of us are turned into beggars? What control do we have as to which way the society will turn?

The solution finally came to me.  Remember in the debate about health care reform where many people, including me, wanted at least a single payer option?  Some called for Medicare for all.  Well, how about Social Security for all?

Don’t we already have Social Security for all?  No, only people over a certain age (or some minors or people with disabilities) get Social Security benefits.

Right now the typical paradigm is that you work for enough years to build up a nest egg (including Social Security) that can support you in your retirement.  Your ability to sock some money away while you are working presupposes that you are making more money than you need to live on, and you can afford to put some of the money aside for retirement use.  I hope you can see that as robots get employed to do more and more stuff at cheaper and cheaper prices, there should be more excess earnings that can be saved for retirement. (There is no doubt the increasing excess will accrue to the economy as a whole. The question comes down to who will benefit from the excess?)

As  time and automation progress, people should be able to save enough for retirement at earlier and earlier ages.  Think of this as your inheritance from past generations.  After all, children of very wealthy parents are born with enough money to retire at the moment of birth.  What would happen if this capability were spread to more and more people?

How can this be spread without massive government interference in every aspect of the economy?  We have had too many experiments with complete centralized control for us to feel very comfortable with such a prospect.

Interestingly enough, the way forward ties in with a Social Security investment strategy that I have been proposing for over a dozen years.  (See my previous post The End of the Assault on Social Security and Medicare and its reference to the article Saving Social Security: A Better Approach.) The idea – most meticulously worked out by Modigliani, Muralidhar, et. al. – is for the Social Security Trust Fund investments start to be diversified away from sole dependence on special Treasury bonds to include stocks in public companies.  Well run pensions systems of corporations, unions, professional organizations, universities, insurance companies, countries, states, and individuals  have been doing this for hundreds of years.

For instance, Alaska has what amounts to a Sovereign Wealth fund that pays a substantial yearly dividend to every resident of Alaska.  The dividend is not restricted to people who are retired.

So starting with the Social Security Trust Fund, we can see how a cooperative of the people can start to buy ownership of “private” enterprise in order to pay more generous Social Security benefits while collecting less in contributions from the eventual beneficiaries.

As the excess profits of future automation become larger and larger compared to investment needed from the population, we  can see how the benefits of a “Social Security” system can be spread farther and farther to younger and younger people.  Ultimately, the benefit can accrue to people starting at birth.

Of course I have left out all of the details that will need to be worked out. First, I want to get people to imagine the possibility. Then we can work on figuring out how to do it, and how to overcome any problems that will arise.

The End of the Assault on Social Security and Medicare 1

Truthout has the article The End of the Assault on Social Security and Medicare by Dean Baker.

Third Way is one of a long list of organizations that have received Wall Street funding to go after Social Security and Medicare under the guise of protecting the young from their greedy parents and grandparents. This list includes Lead or Leave, the Concord Coalition, The Committee for a Responsible Federal Budget, America Speaks, Fix the Debt and the Can Kicks Back.

At a time when we are seeing the largest upward redistribution in the history of the world these organizations have attempted to divert attention from the class war on the nation’s middle class and poor. Instead they are trying to convince young people that their financial difficulties stem from the size of their parents’ Social Security checks.

I’ll have to go back and reread the article to see how the headline fits the content.  I don’t see where the end of the assault comes in.

I left the comment to Dean Baker and the other readers:

Are you aware of the work by Arun Muralidhar? His latest paper is:

Saving Social Security: A Better Approach by Thomas K. Philips and Arun Muralidhar.

I have managed to connect him up with people in the Elizabeth Warren office in Washington. I expect great things from this collaboration.

I am hoping for another article by Arun Muralidhar soon.  The country can stand the benefit of all that he knows about various attempts around the world to try different ideas for funding Social Security programs and pension programs.  He has a good knowledge of what fails and what succeeds.

Elizabeth Warren: We should be talking about expanding Social Security benefits

Rachel Maddow’s web site has the article We should be talking about expanding Social Security benefits featuring the Elizabeth Warren floor speech below.

Over the past generation, working families have been hacked at, chipped, and hammered.  If we want a real middle class – a middle class that continues to serve as the backbone of our country – then we must take the retirement crisis seriously.  Seniors have worked their entire lives and have paid into the system, but right now, more people than ever are on the edge of financial disaster once they retire – and the numbers continue to get worse.

That is why we should be talking about expanding Social Security benefits – not cutting them…. Social Security is incredibly effective, it is incredibly popular, and the calls for strengthening it are growing louder every day.

Search this blog for all I have written about Social Security. After all that, Elizabeth Warren’s speech inspired a new idea for me.

What we need is a 401K option to invest into a Government run pension system that invests wisely.  Such a plan has almost been proposed at MIT by Modigliani, et, al,  Such a plan has almost been put into legislation by Rep. Peter DeFazio (in 2001).  What is new in my idea is that this plan is not (only) to be part of Social Security, but it expands Social Security to cover the 401K also.  Think of this as the “public option” for retirement that is the equivalent of the “public option” we so much wanted for health care in the Affordable Care Act

I just realized that this “public option” idea is very nearly contained in the article that is the subject of my previous post Saving Social Security: A Better Approach. Not excerpted in my previous post, is the following excerpt from the article Saving Social Security: A Better Approach by Thomas K. Philips and Arun Muralidhar.

In addition, centralized administration and record keeping make pension portability exceptionally easy to implement. Therefore, workers would be free to gravitate toward the most productive sectors of the economy without fear of losing their accrued pension benefits. When an employee left a company for a job elsewhere, his vested pension benefits could be sent to the Social Security system for credit to his account. Adding a table to each account to track all the additional contributions made to it over the course of time would be a relatively simple matter. Employees’ payments in retirement would be based on the sum of their Social Security contributions and any additional contributions made to those account.

My innovation takes this idea for portability of vested part of an employer provided pension, and applies it to the 401K plans naming it the “public option”.  If the private pension assets were put into this new “public option” right from the start of the accrual of benefits, this would do away with the possibility of vulture capitalists taking over a company to raid its pension system.  This would be a tremendous benefit to society all by itself.

The extent of the howl of complaints about this from the private sector would be a good measure of the wisdom of this plan.

Saving Social Security: A Better Approach

Financial Analysts Journal November/December 2008, Vol. 64, No. 6 has the article, Saving Social Security: A Better Approach by Thomas K. Philips and Arun Muralidhar.  Arun Muralidhar is the coauthor with Franco Modigliani of many of the items I have talked about before with regard to saving Social Security.  This article is a wonderful introduction to their ideas with some updating since the 2004 book that I have mentioned.

Here is one notable excerpt from the article.

Arnott and Casscells (2003) and Munnell and Sass (2008) pointed out that the real problem of designing a retirement plan for the population does not relate to inadequate savings, but rather to demographics and productivity (i.e., the generation of sufficient real consumption goods by the future young to support the consumption of the then elderly).

I particularly like this quote because it answers the article’s initial statements about the need for increased saving.

I like the thought experiment of considering the day when automation allows all the necessary goods and services to be produced without the need for anybody to work.  Would we have a society where the benefits of this paradise were shared among all the people?  Or would we have a society in which one or two people owned everything and the rest of us had to live as beggars?  This thought experiment focuses us on the real issue of the economy being able to produce enough goods and services.  If the economy is able to produce enough goods and services, then it is only a political/moral issue of whether or not everybody in society benefits. The issues of savings and investment are just bookkeeping.

Another notable quote is:

The assets of the Social Security system should be invested solely for the benefit of beneficiaries. And their management should be subject to the regulation of ERISA to ensure that neither the U.S. Congress nor any presidential administration can divert the assets to purposes that are not in the best interest of the entire system. In particular, all proxies should be voted to benefit shareholders (i.e., the citizenry of the United States) in accordance with ERISA, and not to protect inept or politically wellconnected special-interest groups.

I like the quote because it addresses just what stance the Social Security Administration should take with respect to the companies whose stocks it has in the Social Security Trust fund.  It also shows that the authors of the article address the many thorny, practical, political considerations in moving to the plan they propose.

Read the full article at the link I have provided above to get many more valuable ideas.

If you have a subscription to Financial Analysis Journal, you can read the Letter To The Editor “Saving Social Security: A Better Approach”: An Update March/April 2009, Vol. 65, No. 2: 10

A Solution To The Social Security Crisis From An MIT Team

Here is an email that I sent to Elizabeth Warren.

It is time to take up this proposal from Franco Modigliani, Maria Luisa Ceprini and Arun Muralidhar that I have been touting since about 1999. This plan will have as profound an effect on our society as FDR’s original plan had in his day and since. I would love to discuss this with you.

It has been so long that some of my references to the plan have almost disappeared, but this 1999 working paper is still available.

Senator Kennedy was going to arrange for Professor Modigliani to present this to the Senate. That presentation never happened as far as I know. Now both of them are gone. However, I know that Arun Muralidhar is still available and a well respected advisor on pension plans.

If this email gives me room, I will quote just a couple of paragraphs from the MIT working paper.

“The centerpiece of our plan is the creation of a new public fund (NF), which like Social Security (SS) is financed by mandated contributions, and will offer defined benefits, but which will be fully funded, and establish individual accounts. The defined benefit will be ensured by a guaranteed return on contributions.

“Each participant’s contributions will be credited to an individual account, together with the accrued returns. However, for investment purposes, all the funds will be pooled and invested in a single, highly diversified “indexed” portfolio consisting of an appropriate share of the market portfolio of publicly traded financial assets. Despite its diversification, the return of this portfolio would be somewhat risky and variable. But a defined benefit system requires a rate fixed in advanced. To achieve this result, we stipulate that the Government should stand ready to “swap” the return of the NF portfolio against a guaranteed real rate of return.”

There is also a book: Rethinking Pension Reform, Franco Modigliani, Arun Muralidhar.

This is the idea that President Obama should be pushing when he talks to the Republicans.  Yes, it will blow their minds, but it is a serious proposal that I think could be the foundation of some profound changes to the way our society works.