State-run mandatory retirement plan?

CaliforniaStaMonicaBeachCalifornia is poised to institute the first state-run mandatory retirement plan for all workers in that state. According to a New York Times article reproduced at MSN Money, the California State Assembly approved the measure on Thursday, August 25 but it must be reconciled with the version passed by the California State Senate in May.

According to this article, the program called “Secure Choice” will likely affect all California businesses with 5 or more employees and be phased in a three year period beginning with the state’s largest employers.

Under the program, workers will have an “opt out” procedure to eliminate an automatic plan to deduct 3% of their paycheck. Lawmakers hope that the “opt out” provision will cause more workers to accept Secure Choice and save more. After the program begins, workers will have the option to increase the rate of payroll deduction if they wish. What has not been worked out is where these funds will be directed. Some are advocating that the investment accounts be managed by CALPERS; the California state employee pension fund. This pension fund is one of the largest collective retirement plans in the world. “On Thursday, the United States Department of Labor issued a final safe-harbor rule, making it possible for California to run its program without conforming with the federal employee benefits law, known as Erisa…”, says the article.

Secure Choice has been developed by a 9 member board that has been working on it since 2012. The bill will also hold employers harmless in the event the plan fails or if the investments in the plan lose money. Originally, some board members wanted a guaranteed return provision (!) but, it seems that after much discussion, the closest they could come to this was a plan investing only in US Treasury bonds, possibly using the new Federal individual saving program called “MyRA”. “Connecticut, Oregon, Maryland and Illinois are moving forward with their own state-run retirement programs and are looking to California as an example are also poised to create their own plans”, says the article.

What seems to be driving this initiative is the belief that there is a need for creating a simple mechanism for working people to save and invest more for their retirement. According to this article, the AARP and many unions (a leader of one of the largest Service Employees International Union locals is a member of the 9 member board) support this endeavor.

What the article does not mention is that a retirement fund with guaranteed benefits and mandatory participation by all employers and employees already exists. Created on the heels of the Great Depression, it sought to address the lack of a financial safety net for disabled or elderly workers. It’s called “Social Security”. It seems it would be a lot easier to do this on the Federal level simply by expanding Social Security. Social Security is a defined benefit program as is the CALPERS.

Social Security does not provide quite sufficient retirement income for American workers. According to this Motley Fool article, as of Feb. 2016, the average retired American worker received $1,340 in retirement benefits from Social Security in the last reported month. Social Security has a sophisticated benefit formula that considers each individual’s 35 year work history. However, roughly speaking, if the median income for American workers age 25 and older is $32,140, or $2,678 per month, then the $1,340 benefit is equal to almost exactly 50% of that. It would take considerable preparation for a person to live on half of their average pre-retirement income.

Social Security (unless it is truly soon to be insolvent) is a very good start for ensuring a more financially secure retirement for many workers in all the states of the union. The lawmakers in these states do not seem to have much faith that it will be there for the public or they would not be busy creating their own.

Fed Vice Chairman sees “hailing range”

Dean Baker correctly alerts us to the ominous statements made by the Federal Reserve Board Vice-Chairman, Stanley

Stanley Fisher VP FRB
FRB Vice Chairman Stanley Fischer

Fischer. Baker points out that 2% is a inflation target average; not a ceiling. It would be economically counterproductive to raise the Fed Funds Rate when the US economy is in the 8th year of recovery from the worst recession in US history since the Great Depression. Wall St. banks have resisted easing credit since they were unable to establish values for themselves and their cohorts in October of 2008. Yes, students of the economy remember the meeting Treasury Secretary Paulson had with 9 of the biggest banks in the USA. At that meeting the values of each of the banks was assigned to them via a dollar amount he had written on a slip of paper. Each received a portion of $125B of Treasury funds in the form of purchase of preferred stock.


The Federal Reserve’s control of the money big banks can access is used to encourage economic expansion or cool off an economy that is expanding too rapidly. If it hikes the rates, banks can charge higher loan interest rates such as mortgages and they can pay depositors higher rates.

The Fed’s monetary actions have not had much effect on the lending of big banks. Several years of 0% to .25% failed to produce the loans necessary to cause business expansion. Failing this, the Fed resorted to “quantitative easing”…twice also with little effect. The QE, (link for sight impaired) as it is called forces banks to sell government bonds to the Federal Reserve thereby reducing the securities on their books and increasing their cash. The theory of QE is that without interest producing securities, banks are forced to find a market for this cash; hopefully retail borrowers.

A big part of the problem of bank lending is the domination of Wall St. banks in the banking industry. Wall St. banks have centralized credit policies that limit the lending of local bank managers. Businesses without hard collateral cannot meet the risk avoidance criteria of their local Wall St. bank branches. With slack lending through their thousands of retail branches, the Wall St. banks must look to businesses with a national presence. Here, they may be finding slack demand for credit. This slack demand is due to the fact that these businesses have excess productive capacity. That is, they are capable of producing more product but have no market for it. Currently, producers in the aggregate have almost 25% excess capacity; a full 5% below the average capacity utilization between 1972 and 2015. If you can produce more with what you already have, you have no need to expand, nor to borrow to finance that expansion.

This dilemma; having too much capital concentrated within centralized lending institutions while too little capital is in the hands of consumers is driving bizarre proposals such as Vice Chairman Fischer’s. The Federal Reserve cannot force the banks to lend and the banks can’t force these national corporations to borrow. If he has his way, this tepid economic recovery will slip into another recession a concern expressed by Baker and his colleagues at the Center for Economic and Policy Research.

Wells Fargo bank spanked by the CFPB for maximizing student loan fees

The most interesting fact in this article originally from Reuters news service is that:

“Last year, the CFPB found that more than 8 million U.S. borrowers are in default on more than $110 billion in student loans. Breakdowns in student loan servicing may be driving the problem, the bureau said.

Simage-20160331-28459-fk6s7ntudent loans make up the second largest U.S. consumer debt market with roughly $1.3 trillion owed by borrowers who took out federal and private loans, the bureau said.”

Taken in the aggregate, it seems that student borrowers are terrible risks for banks. On the face of it, millions of mostly young people have no respect for their debts or the institution(s) that helped them get that very advantageous college education. A scenario is easy to imagine in which comfortable college graduates simply throw away the bill from their bank benefactor while they dutifully make their $4,000 condominium payment.

However, perhaps it is more a matter of their ability to pay. Can it be that promising young people marketing their shiny new degree find there are few job opportunities that pay enough to live on, let alone pay their debts? Anecdotally, I am the father of two young men; one a member of the college class of 2010; another of the class of 2013. Both are self-employed in businesses they created while in college or soon after graduation. They did not seek work from others’ businesses but created their own businesses to work in. The vast majority of their peers have not been so lucky. I have seen many who have accepted low-level administrative positions or even make ends meet delivering pizzas. Some can find no work at all and are “boomerang” kids who had to return to their parent’s home. Many conservatives may argue that: they should have chosen a more employable major course of study; there is work for any who want it;  or regardless of their financial situation, a debt is a debt and it should be paid, on time.

Those who cast aspersions on the liberal arts or fine arts graduate may not know much about what is required to earn a college degree. Much of the first two years of college involve the same courses for pre-med; engineering; hard sciences; teaching; business and public administration as majors in psychology, fine arts, languages, and philosophy. This portion of a college education alone imbues the student with a host of skills and knowledge that sets them apart from the vast majority of people who never attended college. They have the potential for much greater productivity in any business. To condemn them for chosing a poor career path is blaming the victim. They want to be more productive; were led to believe they would be if they continued in school; they even borrowed money to gain the advantage they were told they would have.

Did our children fail the system, or did the system fail them?

I would like to further explore the way in which state universities have lost their mission and have become quasi-private centers for business profitability. That will be for a future post.


Will a financial transaction tax cause US exchanges to flee?

In this blog post from the Center for Economic and Policy Research, Dean Baker criticizes Bart Chilton, Commissioner at the US Commodity Futures Trading Commission from 2007 – 2014, who in a letter to the editor of the Washington Post,Image Stock Market Trading floor claims “A tax on financial trading activity has been tried in other nations, where it failed miserably”. He states that it would be folly to impose such a tax to fund such programs as free college tuition. Baker deftly dissects this falsehood by noting that many countries of developed economies have such a tax, find it a very lucrative way to fund social programs and do not find it in any way a hindrance on their stock exchanges. Baker goes on to observe that the speed of light arbitrage trades that are so prolific on US exchanges are analogous to using 5 million trucks to transport goods across the country when only a million trucks are required. The tax rate on the transactions are so tiny that the vast majority of Americans who invest in the markets would see no effect upon the net value of their trades. It would serve as a brake on the tiny margins exploited in high speed trading; thereby reducing this rentseeking practice that adds no economic value.