blog24aug2008

Hot Off the Web- August 24, 2008

In “Barclays Global Investors selects MetLife as income annuity provider for SponsorMatch”  you get a view of emerging asset allocation approaches in DC pension plans. BGI’s SponsorMatch product for company DC pension plans is composed of a combination of a target date fund and a deferred annuity. The annuity allocation rises from 5% to 53% between age 25 and retirement. The addition of a deferred annuity allocation option is a sign of things to come with DC plans. (I predict-famous last words- that within the next decade this type of plans will be common, with the slight modification that the target date portion will be adjusted so that the risk/asset-mix will remain constant after retirement and annuities will be replaced with “longevity insurance”)

IndexUniverse.com’s Murray Coleman reports in “Second emerging Asia focused ETF launches” that BGI launched iShares MSCI All Country Asia ex-Japan Index ETF on NASDAQ, symbol AAXJ (MER=0.74%). The difference from the similar existing ETF S&P Emerging Asia Pacific SPDR, symbol GMF (MER=0.6%) is that AAXJ includes Singapore and South Korea to China, Taiwan, Hong Kong, India, Thailand, Indonesia and Malaysia. (I’ve been using for about five years EPP to get Asia ex-Japan exposure. EPP is about 2/3 Australia with the remaining 1/3 predominantly Singapore and Hong Kong, clearly a less emerging mix the other two funds mentioned here.)

WSJ’s Brian Blackstone in “Report urges raising social security age” quotes a recent NBER paper where the authors “are urging benefits to be indexed to mortality improvements”. When Social Security was introduced in 1935, 65 year olds had a 12 year life expectancy compared to 19 years in 2004. SS retirement age was raised for those borne after 1960 to 67 in 1983. However based on 2004 mortality data the retirement age should now be in the 71-74 range. The authors question the political will, though they suggest that without change “the burden will become crippling on government finances.

And in a related topic the Globe and Mail’s Eric DeCloet writes that “U.S. ‘fiscal gap’ paving the road to meltdown”  . He quotes Boston University Professor Laurence Kotlikoff that the day of reckoning is coming and the next U.S. president, whoever is elected, will have to deal with the problem, the $70-trillion ‘fiscal gap’; a lot of this related to the $30,000 a year Social Security and healthcare benefits that the average U.S. senior receives.

Gene Epstein asks in Barron’s “When a tax cut is really a tax hike? (Usually)”  . Milton Friedman’s surprising answer is “When the so-called tax cut is accompanied a larger rise in government spending than in prices….The real cost of government is measured by what the government spends, not by the receipts labelled taxes.” This is because ultimately the taxpayer ends up paying the shortfall between spending and taxes, by reallocating tax-load from federal to state to county to city to etc, by increasing borrowing and by printing money. Government taxes in the U.S. have increased from 25% of GDP in 1960 to 35% today. So don’t get too excited when you hear ‘tax cuts’ before you check if corresponding spending cuts have also been implemented (this is not a favourite activity of politicians).

Jeff Opdyke in WSJ’s “Who will pay for college” comes down squarely on the side of saving for retirement as the priority over saving for your child’s college. He writes that “instead of a free ride through college, a better gift to my kids is a mom and dad financially self-sufficient in their dotage.”

Another sign of the times is the ROI blog in the WSJ entitled “Is your insurance safe with AIG?” . With all the bad news percolating around AIG, the insurer with about $1- trillion of assets, some insurance and annuity holders of the company may be asking if their policies are safe. AIG’s stock dropped 2/3 after losing $18-bilion in the last three quarters. But according to A.M. Best and the NY State Department of Insurance there should be no concerns at this time. (You have noted the qualifier “at this time’. However the very fact that the issue is discussed indicates that great care needs to be taken in factoring in an insurance company’s credit rating in the purchasing decision of an annuity, especially when you consider that you may be expecting an income stream from that company over 30-50 years. If you took the Commuted Value of your DB pension because you were worried that the underfunded pension plan won’t meet its commitments that does not guarantee that you’ll get paid by the insurance company from which you then bought an annuity from.)

And finally, the Sun-Sentinel reports that “Pain in south Florida housing market spreads as home sales show little relief”  . Foreclosures have almost doubled since last year and the peak is not expected before mid 2009. “Weak housing sales, falling home prices, tighter lending standards and a slowing U.S. economy have hurt many strapped homeowners. They owe more than their properties are worth and can’t find buyers or refinance into more affordable loans.”

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