Articles | Chief Executive - The magazine for the Chief Executive Officer

President Bush is counting on CEOs to help him modernize Social Security. Some are involved officially, while others offer vocal-if informal-support. But most top business leaders remain neutral in the debate over the future of America's largest federal program.

AOL Time Warner co-COO Richard Parsons and former democratic U.S. senator Daniel Patrick Moynihan of New York co-chair the President's Commission to Strengthen Social Security. They fear today's system is gliding into an inescapable demographic wall.

"In 1960, there were five workers for every retiree," they explained in an interim report last July. "Now there are slightly more than three. Before long there will be just two. This downward trend in the ratio of workers to retirees, under the existing system, would require either painful tax increases, significant benefit cuts, or astronomical levels of borrowing."

To avoid this collision, the Commission soon will unveil a blueprint for individual accounts into which Americans may choose to invest 2 percent of their Social Security taxes.

The Commission's other top managers include Robert Johnson, chairman and CEO of BET Holdings (parent company of Black Entertainment Television), and Robert Pozen, vice-chairman of Fidelity Investments.

While these executives are active on this issue, most corporate chieftains are reticent about redesigning the government's $409.4-billion pension scheme.

Johnson describes the position of CEOs to date as "weak." Some, he believes, needlessly fear that diagnosing Social Security's ills will prompt Congress to prescribe business tax hikes. "Burying your head in the sand is not going to make the problem go away," Johnson says, "nor is it going to make you immune to political solutions that Congress may impose."

Wade Dokken, president and CEO of American Skandia, is one booming voice amid the quietude. He may be Social Security reform's most courageous corporate ally. The author of New Century, New Deal (Regnery Publishing, 2000) visibly broke with the Democratic Party, of which he is a life-long member and generous donor. During the 2000 election, Dokken publicly criticized Albert Gore for championing today's Social Security system.

Corporate chiefs "understand better than anybody the grave societal risks if we don't solve this problem," Dokken says. The status quo is "bad for America's savings rate and for its economic growth and political stability. Business executives need to speak out on this, just as we expect doctors to speak out on health care reform."

Non-profit privatization advocates wish their for-profit allies would follow Dokken's example and chime in more loudly on this matter.

"Most of the business sector has hung Social Security reformers out to dry," says Richard Thau, president of Third Millennium, a New York City-based advocacy group on whose board I serve. "We need resources, and they offer inertia."

Some honchos are waiting for the Commission's specific proposal before leaping into the fray. "We will be active as soon as there is something to be active about," PaineWebber CEO Donald Marron told the libertarian Cato Institute in Washington, D.C., earlier this year. "The only issue is whether we do it on our own or by contributing to not-for-profits who go out and do it."

Companies immediately can begin to educate employees and customers about private pension accounts.

"If corporations would take it upon themselves to speak with their workers in an intelligent way, pointing out the problems and the benefits of the solution, I think workers would respond," Johnson suggests.

Financial services companies, in particular, can inform clients by including brochures with their monthly statements and placing interactive Social Security calculators on their Web sites. These would help investors compare the puny returns they can expect under today's program vs. the robust gains possible within a revised system.

Firms and industries should communicate their views through the media as anit-reformers already do. To benefit the country and their balance sheets, corporate America should use advertising and public relations to explain the benefits of private retirement accounts.

Wade Dokken fears the consequences if Social Security modernization's foes prevail. "If this reform movement is killed, that would set us back a decade, and we cannot afford that," he says. "It's now or never."

New York commentator Deroy Murdock is a columnist with the Scripps Howard News Service and a Senior Fellow with the Atlas Economic Research Foundation in Fairfax, VA.

via chiefexecutive.net

Social Security strategies boost income - Investment News comments Wade Dokken

The press is growing about concerns about outliving our savings.  This is why lifetime income annuities are growing in popularity and the guarantee of principal protection of annuities--both fixed and fixed index annuities.    This is an excellent article that talks about the foundation of many Americans' retirement plan---Social Security.   We need to build private pensions to help us cope with the retirement crisis and we need to be smart in how we use the retirement income provided by Social Security.  Wade Dokken

Social Security strategies boost income

Knowing all of the options available is key to maximizing retirement benefits

By Lisa Shidler

September 19, 2010 6:01 am ET

Financial advisers are taking advantage of several Social Security strategies that can boost baby boomers' annual income dramatically.

One of the simplest strategies is to defer collecting Social Security benefits until 70. Since every year past 62 that is deferred adds about 7% to 8% to a client's eventual monthly benefit, waiting until 70 can add substantially to retirement income.

“As advisers, we must challenge our clients' assumptions that they should collect Social Security at age 62,” said Jim Weil, an adviser with Financial Strategy Network LLC, which manages $600 million in assets. “We need to be prepared to politely and professionally challenge clients about the assumptions they've built up over a long period of time.”

HEALTH A KEY FACTOR

Sharon Lacy: Uses the "collect now and collect more later" strategy.

Instrumental in deciding when to start collecting benefits is a client's health, said adviser Tim Conti, a financial adviser with Wealth Solutions of Central Florida, which manages about $50 million in assets.

One of Mr. Conti's clients, retired professor John Santosuosso, 71, remembers being torn over whether to collect at 62 or wait till 70. He split the difference and collected benefits at 651/2, which was full retirement age for him.

“My crystal ball is cracked and cloudy, and I have no idea how long I'll live,” he said. “I thought collecting at age 62 might be too early.”

Strategies other than delaying the start of benefits are complicated and may disappear as Congress makes changes to Social Security in the coming years. In fact, time could be running out for one strategy dubbed a Social Security “do-over,” said Kenn Beam Tacchino, director of the New York Life Center for Retirement Income at The American College.

A do-over occurs when an individual who began collecting Social Security benefits early decides to defer any further payments until a later age. Doing so can increase income by as much as $1,000 month when benefit payments resume.

Do-overs require that clients pay back all Social Security income they have received from the time they started receiving benefits. While that can be a sizable lump sum, the government charges no interest or penalties. As a bonus, those who repay benefits can claim a credit or a deduction — whichever results in a bigger tax break — for any income taxes paid on the benefits received.

But the rules could change. The White House Office of Management and Budget is reviewing proposed regulation that would limit do-overs to the first 12 months of collecting benefits.

Mr. Tacchino said advisers who have clients in their late 60s who began collecting benefits at 62 should consider a do-over now before the rules change.

“It's ridiculously cheap when you compare a do-over to any annuity,” Mr. Tacchino said. “If I have a 69-year-old client, I'd have them do over their Social Security rather than buy an annuity. It's a much better deal.”

Kevin Reardon, a certified financial planner with Shakespeare Wealth Management Inc., agrees. He completed a do-over for a risk-averse client a few weeks ago.

The man started collecting Social Security at 62 and was receiving monthly payments of $1,098, or $13,176 a year. He completed the do-over at 67 paying back about $50,000. His benefit is now $1,518 a month, or $18,216 a year.

A downside to this strategy is that if both spouses die shortly after paying back the benefits, the money paid into Social Security is gone.

Mr. Reardon said his clients were OK with that possible outcome.

“This decision is based more on their joint lives,” he said. “The overall objective is to increase their monthly income.”

Another strategy that can boost clients' monthly income and is successful for couples where one person was the majority breadwinner is called “file and suspend.”

For example, at full retirement age, a husband files for his benefits, and his wife files for spousal benefits. The husband then requests a suspension of his benefits, but the wife continues to get the spousal benefits. The husband's benefit continues to grow until he chooses to begin taking payments — usually at 70. If the husband dies, the wife would then collect the larger benefit.

“Most people don't realize the options available to them as planning tools,” said Sharon Lacy, an adviser with Bedrock Capital Management Inc., which manages $130 million in assets. “You really have to coordinate both spouses' benefits carefully.”

Ms. Lacy also uses the “collect now and collect more later” strategy, which she says is best-suited for dual-earning couples. Here is how it works: A wife stops working and collects Social Security benefits based on her work history. Her husband is still working and hasn't begun collecting Social Security. As long as he is at full retirement age, which is currently 66, he can start receiving spousal benefits based on his wife's Social Security amount.

This means that he would get half his wife's Social Security income each month while still allowing his own benefits to accrue.

At 70, he would stop receiving his spousal benefit and file for full Social Security benefits. When the husband dies, the wife will collect his higher benefit because he delayed his Social Security until 70.

Despite their complexity, these Social Security strategies should be part of an adviser's tool chest, said Ron Myers, an adviser with Associated Financial Consultants Inc., which manages nearly $500 million in assets.

“These issues come up every single week,” he said. “I do a lot of retirement planning, and this is an integral part of it.”

E-mail Lisa Shidler at lshidler@investmentnews.com.

via investmentnews.com

 

More on Allianz Annuity Survey--Wade Dokken

Joe Mont writes a more detailed follow-up on Allianz's annuity buyer study.   The real truth appears to be that Americans place a greater emphasis on safety of principal, guarantee of return and lifetime income guarantees than in the past.  They have lost 20-30% on their home values (which could equate to 100% of principal), and potentially 30% in real purchasing power in stocks over the past 12 years.   Who can blame them or question their evolving views of risk--particularly for aging baby boomers.   Wade Dokken.

 

BOSTON (TheStreet) -- What's in a name? When it comes to annuities, plenty.

"Even after describing an annuitylike solution as their ideal financial vehicle," more than half of Americans age 44-75 -- meaning 54% -- expressed distaste for the word "annuity," according to recent research promoted by Allianz Life Insurance Co. of North America.

Allianz -- as a provider of fixed index annuities -- has a vested interest in changing this perception, and its description of such products certainly puts them in the best possible light. Eighty percent of the more than 3,200 people surveyed agreed they would prefer "a product with 4% return and a guarantee against losing value over a product with 8% return and subject to market risk."

When asked to choose between putting money into an annuitylike solution (moderate growth opportunity, monthly income, but limited access to the lump sum) versus a similar instrument that provides total access but risks running out of money, 56% chose the former. Among the mass affluent (with investable assets of between $300,000 to $500,000), the share rose to 77%.

With respect to liquidity and access to funds -- a common criticism of annuities -- a majority of respondents said they would chose a product with 7% return and very limited access to funds over one that pays 5% but is totally accessible.

The findings demonstrate that "more education is needed about annuities" to change perceptions, Gary C. Bhojwani, president and CEO of Allianz Life, said in a statement.

"The 401(k) industry did a great job of teaching consumers about mutual funds to save for retirement," he says. "Now we need the same type of concerted education effort on annuities and how they can help Americans when they are in retirement."

Along with Allianz Life, top sellers of annuity products include Prudential Financial(PRU), Metlife(MET), TIAA-CREF, Jackson National Life, New York Life and AIG(AIG).

Allianz makes the case that the apparent distaste for annuities comes from opinions formed decades ago. Fifty-three percent of those surveyed said they first formed their assessment of annuities at least 10 to 20 years ago, and 64% of those respondents said they haven't researched them since that time.

The pool of Allianz respondents who own annuities ranked them second-highest (50%) in satisfaction among all financial instruments, beating out mutual funds at 38%, stocks at 36%, U.S. savings bonds at 35% and CDs at 25%. Gold and precious metals ranked first, with a satisfaction rating of 62%.

--Written by Joe Mont in Boston.

 

via thestreet.com

 

Retirement crisis: From bad to worse - MSN Money

By Jim Jubak

Baby boomers and the post-boomer generations are facing a retirement crisis. And it now goes way beyond the worries about a collapse of Social Security that so preoccupied us before housing prices headed south.

The crisis I'm talking about is a result of economic and monetary policies that have turned a pattern of boom-bust-boom-bust into business as usual in the U.S. economy. The 2007-and-counting collapse of the housing, mortgage and debt markets isn't an isolated disaster but part of a decade-long shift away from saving and investing toward speculation and gambling with our future.

We don't have a whole lot of time to fix this crisis. The boomers born in 1946 will turn 65 in 2011. For many of us in the baby-boom generation, financing a relatively comfortable retirement, which never looked easy, looks increasingly impossible.

For those of you in the post-boomer generations, I'm sure it seems even more likely that we boomers will try to pick your pockets to finance our retirements. And I'm not sure that you're wrong to believe that. This crisis wouldn't be so bad -- and might not even exist -- if we hadn't dug ourselves such a deep hole to begin with and then kept on shoveling.

Pig in a python

That initial hole was largely demographic. The number of Americans 65 and older is projected to increase to 69.4 million in 2030 from 35.5 million in 2000, the Census Bureau says. That's not entirely bad news -- much of the increase comes from Americans living longer -- but it is a problem if you're trying to figure out how to pay for all those people to retire.

Because the baby-boom generation is so much bigger than succeeding generations, the ratio of people in the retirement years, 65 and older, to those in the working years, 20 to 64, will rise from 20.6% in 2005 to 35.5% in 2030, according to the Census Bureau. That will put a strain on any retirement system that depends on contributions from current workers, as Social Security does, to pay the benefits of current retirees.

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Fortunately, Social Security is only one part of the stream of cash that we use to pay for retirement in the United States. Most of the other sources aren't based on funding current benefits from current contributions. They rely on current savings, invested over time, to produce a future sum sufficient to pay for retirement or part of it.

There are three big pieces to this saving and investing part of the retirement cash flow:

• Traditional pensions. With these, most of the saving and investing is done by employers, which also bear the risk that retirement assets will fall short of promised benefits. As of 2005, only 37% of workers were covered by a traditional pension, according to the Employee Benefit Research Institute. And a growing number of company pensions are winding up in the hands of the Pension Benefit Guaranty Corp., a government agency and payer of last resort that is underfunded to the tune of $14 billion, as I described in "The year's scariest investing news" on Feb. 26.

 

• Accounts funded by contributions from workers. These include 401(k)s and individual retirement accounts. The Employee Benefit Research Institute estimated workers had about $7.5 trillion in these retirement accounts as of October 2007.

 

• Home equity. For most people, the house they live in is their biggest retirement asset. In retirement, people cash in on the value of their homes by selling and then buying less expensive houses, renting or moving in with the kids. More people are also using reverse mortgages to extract equity from their homes in retirement. As of October, working from numbers published by the Federal Reserve and changes in home prices measured by the S&P/Case-Shiller index, I calculated a total value of about $20.7 trillion for the value of all U.S. residential real estate.

Additionally, Americans should embrace private pensions--personal tax deferred savings in index annuities, index cds, or variable annuities---investments that can give them either guarantee of principal, guaranteed income or both.

 

U.S. Retirement Deficit Reaches $6.6 Trillion: 'God Help the Poor Gen Xers'

The following article is essentially a lobbying perspective for Social Security and Medicare.   That's okay, of course, everyone has a point of view and their point of view is to preserve the status quo of the current Social Security system.   From my perspective, that's not what's important.   The real insight--is the $6.6 trillion gap that they are reporting. 

Today I launched WealthVest into Next Financial and my message was that the period from 1950 to 2000 may be a 50 year golden age of retirement in the United States.   However, we never moved Social Security to a funded platform and our nation has been spending the savings--one generation stealing from another.   

Now with the loss ($10 trillion at the worst) of trillions in household wealth due to the housing bubble popping and the lost decade of the U.S. equity markets, the problems are coming home to roost.   Americans need to develop a private pension approach to our 2010 retirement crisis.  

American's retirement crisis has reached epic proportions, according to a recent study by Boston College's Centerfor Retirement Research. The study estimate

s that the current retirement income deficit, or the gap between the retirement savings of U.S. households and what they need to have in order to maintain their living standards past retirement, is a whopping $6.6 trillion -- five times the projected federal deficit for 2010.

"The key sources of income retirees are relying on are either under attack, in the case of Social Security, or disappearing, in the case of traditional pensions," said Ross Eisenbrey, vice president of the Economic Policy Institute, at a press conference on Wednesday. "The early Boomers are better off than the late Boomers, and God help the poor Gen Xers. Seventy percent of them are on a track that leads to a fallen standard of living in retirement."

According to the latest retirement income data, half of 65-and-older households have an annual income of less than $29,744 -- about half the median income of younger households. Traditional pensions are disappearing in favor of 401(k) plans, which allow employers to shift much of the cost and all of the risk to their employees, and on top of this, Congress is considering cutting Social Security to balance the federal budget.

Maria Freese, director of government relations for the National Committee to Preserve Social Security and Medicare, said that the $6.6 trillion estimated retirement deficit is a "conservative number" and that the crisis could become far worse if Social Security is compromised.

"There's an old saying that goes, 'When you're trying to get out of a hole, the first thing you have to do is stop digging.' The last thing you want to do is to buy a bigger shovel, and that is unfortunately what we see happening with many policy makers here today in Washington," Freese said. "Instead of exploring ways to strengthen Social Security and improve our private pension system, the only discussion we hear these days are the various ways Congress could cut Social Security, and presumably they're hoping nobody notices."

President Obama has appointed a National Committee on Fiscal Responsibility and Reform to look into various ways to reduce the national deficit, including possible cuts to Social Security, despite the fact that Social Security has not contributed a dime to the federal deficit. Eisenbrey warned that future generations planning on collecting Social Security will be in trouble even without the proposed cuts to the program.

"Social Security, our one nearly universal pension plan, is scheduled to replace a much smaller share of pre-retirement income in the future than it has in the past," he said. "That's without the fiscal commission or Congress doing anything more. An average earner who retired at 65 in 2002 gets benefits that replace 39 percent of his pre-retirement income. By 2030, this will fall to 28 percent due to a higher normal retirement age, higher medicare deductions, and income taxes levied on Social Security benefits."

Political action group Retirement USA announced the retirement income deficit Wednesday morning as part of "Wake Up, Washington!" month, a speak-out on retirement security that will run from September 15 to October 15, 2010. Organizers of the event hope to call the attention of voters and policy makers to the magnitude of America's retirement crisis before elections in November.

"The number should be a wake-up call," Freese said.

 

Stock Slump No Impediment to Reform, Says Skandia's Dokken

Stock Slump No Impediment to Reform, Says Skandia's Dokken

May 4, 2001

In an op-ed in Investor's Business Daily, Wade Dokken, president and chief executive of American Skandia and author of New Century, New Deal: How To Turn Your Wages Into Wealth Through Social Security Choice, argues that recent stock downturns shouldn't put the public or the politicians off the idea of Social Security privatization. Following are excerpts from Dokken's commentary. You can also click here to view Dokken's appearance at a Cato Institute book forum.

"Those who profess to be shocked to discover for the first time that the stock market can't go up 20% a year forever are only kidding themselves. But equally delusional are those who try to use these short-term fluctuations in the equity markets as justification for opposing President Bush's proposal to allow Americans to invest part of their Social Security taxes through personal accounts. And I say this as a lifelong Democrat."

"To begin with, people live longer than bear markets. Much longer. There have been 20 bear markets since 1900. The average break-even time (measured by how long it took someone who invested at the top to regain the value of a stock index portfolio) was three years. Under a personal accounts-based Social Security program, a person would begin investing in his or her early 20s, and on average would live another 50 years. At some point he or she would retire, but would not completely 'un-invest' by liquidating the account. Therefore, I submit that 50 years is the relevant holding period to use when analyzing Social Security accounts and assessing their risk.

"At my request, Wharton professor Jeremy Siegel calculated the best, worst and average annual equity returns for every 50-year period since 1802. His results are stunning: 13.1% is the best 50-year return on record, 5.0% is the worst and 8.1% is the average annual return on stocks over 50 years. Real after-inflation annual returns were 9.3% (best), 4.4% (worst) and 6.8% (average). To my mind, these figures are a powerful rejection of the critics' argument that a near-term decline in equity values means we shouldn't let Americans take greater ownership and control of their retirement destiny. Even Siegel's lowest 50-year annualized real return, 4.4%, is 300% to 400% greater than the atrocious rate of return today's young workers can expect to receive from Social Security if we fail to enact accounts-based reform.

"'What if you didn't have 50 years?', some will ask. Or what if you were retiring right in the middle of a market correction? Even under these circumstances, it is proper to take the longer view. Government statistics predict that a person retiring today could easily live another 15 to 30 years (which, of course, is part of the reason we need to reform Social Security in the first place). Siegel's research indicates this is plenty of time to weather a market setback. In the last 200 years, the average annual after-inflation return on stocks has been 6.7% for a 25-year holding period, 6.9% for a 15-year holding period and 7% for a 10-year holding period.

"In any event, there is no need for your portfolio to be comprised entirely of stocks. Bank certificates of deposit, bond funds, real estate investment trusts - some or all of these investment options, whose performance is not highly correlated to that of stocks, will be available to workers through their accounts. Diversification lowers risk and insures that losses in one investment may be partially offset by gains in another.

"Additionally, when you are investing for the long haul, a fall in stock prices represents a buying opportunity. If shares today are cheaper than they were a month ago, you can buy more shares for the same amount of money. Then when equity values rise, your profit is even greater. This technique, known as dollar-cost averaging, is actively pursued by many investors already, and is inherently undertaken by anyone with a 401(k) or similar retirement plan that automatically invests a certain amount each month.

"The bottom line, as Bush himself recently noted, is that 'the plan is not going to be (to) invest in the lottery mutual fund or (to) take it to the track and hope to hit it right. It's going to be in relatively safe investments.' History amply demonstrates that stocks are relatively safe, especially when held along with other investments. As someone who has helped people save and invest for the long haul for more than two decades, I can attest that it is an axiom of finance that the right investment method or vehicle is one that is in sync with an investor's time horizon. Building, and then enjoying, a retirement nest egg is an extended, half-century-long process. Therefore, no matter how the stock market performs during a given month - or year, or even decade - personal accounts are the best long-term solution for preserving and strengthening Social Security."

2002 Index | 2001 Index | 2000 Index | 1999 Index | 1998 Index

via socialsecurity.org

I thought this old post would be interesting in today's Social Security debate.

New century, new deal: how to turn ... - Google Books

via books.google.com

Ideas still have not been addressed

The Next 100 Million

Our current recession, which may end at the end of this quarter, has been severe.  The impacts upon housing, unemployment, business formation, and the toll on existing companies and our citizens exceeds any recessions since the “Great Depression.” However, in the middle of these trying times, Joel Kotkin has authored “The Next Hundred Million.”  Mr. Kotkin’s book is an irrepressible optimistic view of our country, our culture, our people, and most importantly, a contagiously cheery future predicted for our youth.

As a man with three children and fourteen nieces and nephews, “The Next 100 Million” is a riveting book.  If this is to be our destiny, then let us grow quickly from 300 to 400 million Americans.

Embracing a forty-year optimistic scenario near the trough of a severe recession challenges our sense of reality.  But consider that forty years after the 1929 crash, America was at near its post WWII zenith.   This is our 5th recession in the past forty years.   They have all ended.

America is evolving, but along the same cultural identities that have shaped our nation up today. Our fertility rates remain higher than any other western democracy and indicate faith in the future. By 2050, our population will be younger than any of our major economic competitors.   China’s aged will represent a 20% greater portion of their population, than will ours.  Western Europe, Japan and Russia are predicted to have population declines.

Our expected future nation will continue to be fed by the aspirations of people around the world.  Over 165 million express a desire to move here today-an immediate 50% potential growth in our society.    I’m certain American media influences the dreams of Chinese, Indians, Mexicans or others whom see us as a future home-but in all businesses, referrals matter, and my hunch is that just as my great grandfather convinced my great great grandmother to follow him from Norway, so it is true for today’s immigrants.   The American experience matters.

On the critical issue of the most highly skilled immigrants, American currently attracts 50% of the entire global pool of the highly skilled who do move from their homeland. Between 1990 and 2005, 25% of all venture-backed public companies were founded by immigrants. These immigrants are driving our economy.  The yearning of the world’s gifted to be American is not wavering.

Our essential national character of optimism, a beacon for immigrants, faith in free markets, and a DNA wired for 

Heath Care Costs: The New Economic Challenge

We founded WealthVest Marketing to focus upon products which are guaranteed.  We predicated this bias for three reasons.  The first is painfully straightforward—after over a decade of flat equity market performance, Americans will likely reduce their exposure to equities for their discretionary savings.    The experience has been painful for some and not what they anticipated.  It is obvious to us that fixed annuities and fixed index annuities are perfect for this change in investment behavior.

The second reason is also straightforward.   We believe that the baby boom generation is rapidly transitioning from accumulation products to products better suited for income.   Again, fixed index annuities, fixed annuities, and single premium income annuities are very well suited for this need change.

Thirdly, we believe the long bull market in bonds is near its end.  The current phase is actually scary, because it has elements of deflation (excess manufacturing capacity, excess labor capacity and falling consumer prices), however we must all believe that the Fed and Congress will fight to not let this tragedy occur.
Implicit in the final point is two thoughts.  First, our economy will recover and interest rates will naturally rise to higher levels.   The second point is a broad question about the social safety net, our changing demographics, and America’s ability to reconcile these pressures.  Europe, as evidenced in Greece, France, Spain and Portugal has serious conflicts between their expressed guarantees to their citizens, and their changing demographics.  They have simply made promises that exceed their ability to pay in light of their aging society and the global competitive pressures.   If India, China, Brazil, Eastern Europe and other economic competitors do not need to price pensions, or broad-based health insurance into their products, then they have a competitive advantage.  In fact this is the case.

Finally, the overall need to contain health care costs—whether paid by companies or governments, is a driving financial concern for the developed world.    As their societies age, the health care costs rise disproportionally and this is the great fear.  This was the heart of the health care debate—America’s essential need to reduce our investment in health care.   Ourgovernment costs are high because of Medicare, CHIPS, and Medicaid.   Our it is our overall societal costs that are the concern.
This blog focuses on health care costs.   We will feature a series on our public policy issues.

One of the largest segments of the health care debate was centered on the overwhelming costs in terms of implementation and individual spending. Paul Krugman elaborates on the problem at hand in the New York Review of Books “ The Health Care Crisis and What to Do About It.” “The US health care system is more privatized than that of any other advanced country, but nearly half of total health care spending nonetheless comes from the government. Most of this government spending is accounted for by two great social insurance programs, Medicare and Medicaid.” To remedy the expensive problem that Krugman touched on, the United States created both an incredibly comprehensive and costly reform.

The projected government spending on health care reform is a staggering $ 829 billion. Well what does that mean in total expenditures? To quantify these numbers there are some startling statistics. In 1960 health care spending accounted for 5% of the United State’s GDP, today it represents roughly 16% of our total GDP.

The Congressional budget office states that health care reform will lower our budget deficit by $81 billion dollars by 2019.   Despite this estimate from the very institution that controls and regulates bill spending, 81% of the American public believes that health care reform will increase the deficit. The major problem facing Washington is trying to explain to the American public that the reforms being made will increase frugality. The creation of the Independent Medicare Advisory Board (IMAB), the “bundling” of Medicare programs and the presence of a truly transparent and competitive insurance has helped to reduce overall health care costs.

Social Security and Medicare respectively are the two largest annual expenditures of the United States Federal Budget. Some say the real business of the U.S. Government has become a money redistribution machine moving funds from young to the old. Social Security costs $730 billion annually and Medicare costs roughly $491 billion annually.

Furthermore, the prices are estimated to rise exponentially as our society ages. The Graph below comes from the 2009 report from the Social Security and Medicare Boards of Trustees.

If these projections are accurate, then there is an obvious impending crisis. The best way to fix the issue at hand is to radically change the institutions responsible for Medicare spending. The creation of the Independent Medicare Advisory Board is a good first step in curbing Medicare costs. Prior to the Independent Medicare Advisory Board, there was the Medicare Payment and Advisory Commission, an organization with little institutional power and no track record of success.

The IMAB on the other hand is an independent fifteen-person board that is chosen by the president and approved by the senate. Their task is to write proposals that will improve the current state of Medicare. Congress cannot modify or filibuster these proposals. It can make a counter play but it has to of equal cost of the IMAB’s proposal. This is essential to reducing costs.

As Newsweek stated in its article How Health Care Reduces The Deficit in 5 Not So Easy Steps, “Making the process of passing tough reforms easier is the single most important thing you can do to make sure tough reforms actually happen.” However, the IMAB is only going to have this much oversight for a temporary period of time. But beginning in 2020 their political clout would be significantly limited. Jacob Goldstein of the Wall Street Journal elaborates, “ Leonhardt notes, the commission would only intervene to reduce spending if costs for each Medicare beneficiary rose faster than non-Medicare health spending — which may not be enough to keep Medicare solvent in the absence of significant tax increases.”

Another component of health care reform that has lowered overall costs is the bundling of Medicare programs. John Reichard the CQ HealthBeat Editor reports that, “Medicare ran a similar program from 1991 through 1996 to test bundled payment for cardiac bypass surgery at seven hospitals. Medicare estimated savings of about 10 percent on bypass patients treated in participating hospitals. Savings for the program totaled $42.3 million while Medicare patients and their insurers saved another $7.9 million.”

Essentially the objective of Medicare bundling is that the individual will pay for health care in terms of total care provided instead of individual related treatments. The best example of someone who would benefit immensely from “bundling” is a diabetic. Diabetes is obviously an illness many different side affects. Instead of paying for individual treatment for each one of those individual, the diabetic would be paying for treatment as an overall package.

One of the largest benefits of the current health care reform is that it makes the market more competitive. Right now the connotation of Health Insurance competition is negative. Insurers fight over getting the healthiest clientele and those who really need coverage are often given the short stick. Several of the changes made by health care reform make the industry more competitive and transparent. Newsweek magazine furthers in “ How Health Care Reform Reduce the Deficit in Five Easy Steps”,

“The insurance “exchanges” imitate the market in which federal employees (including congressmen) purchase their health care insurance. Participating insurers can’t discriminate based on pre-existing conditions, they have to answer to regulators if they attempt to jack up premiums, and consumers will be able to rate their insurers, a rating that everyone else will see when shopping for their insurance. If all goes well, consumers will be able to log onto the exchange’s Website, compare insurance plans, and choose their favorite. That means insurers will have to compete for customers.”

I believe more market incentives should be added in future reform.   The greater individual consumers feel the cost of health care decisions (including life style choices), then cost-consciousness will rise.   Perhaps health premiums and their tax benefits should be more transparent.   Clearly, health savings accounts and their success at bringing pricing decisions to the individual should be our stated public policy.    Anything that can drive further competition by insurers on a national basis should be attempted.

These reforms would lower prices and increase quality. If consumers are able to rate and compare plans there is a much greater degree of transparency and consumer knowledge. Consumers will try to find a plan that offers a good balance of costs and quality. Insurance companies will transition to this balance saving the consumer money.

A Little Slice of Market History

On December 31, 1964 the Dow closed at 874.2.  Seventeen Years later on December 31, 1981 the Dow closed at 875.  Over that time period the GDP of the US grew by 370%, the sales of the Fortune 500 more than sextupled, and the Dow inched up a mere fraction of a point.

How is it possible that the economy could expand by such a large degree when the Dow grew by only one tenth of a percent?  This is the question that Warren Buffett posed in a 1999 interview in Fortune magazine on the nature of the current market.  The simple answer is that the value of the economy grew but the price investors were willing to pay for a share of the future of that economy did not.  So the actual question is what caused investors to have such a low valuation of the economy despite its huge growth.  It is important to remember the simple, often forgotten, idea behind investment which Buffett defines as, “laying out money today to receive more money tomorrow.”  In effect the value of an investment is the expected return and a decline in investor valuation signals a decline in expected returns.  Thus, the answer to the question put forth by Buffet can be found by looking at the value of expected returns.

The career of Wade Dokken began at a historic low valuation in the market, and everyone whose career had an early 1980’s beginning has experienced an unprecedented market run.   We formed WealthVest Marketing to market guaranteed annuities, index annuities, and income annuities—because we believe that we may be in another period—not unlike the 1964-1982 period—and a period unknown to almost all current financial service professionals.   So, this is a story of stock market valuation—and over-valuation.

Every asset has some level of uncertainty attached to its future value.  This uncertainty is quantified by risk which effectively lowers the future value of an asset.  Investors need to compare this risk between multiple assets and, as a result, for any meaningful comparisons to be made there has to be some kind of standard of risk to be compared to.  This comes in the form of what is called the risk free rate which is derived from the interest rates on long term government bonds, an asset with effectively no risk.  This is the baseline value to which all investments are ultimately compared to.  Even minor changes in these interest rates can have huge effects on market valuation.  Buffett underlines the far reaching nature of these rates by saying, “In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates, changes the value of every financial asset.”  Overall, the risk free rate is the first thing an investor looks at when trying to determine how much he should pay for even one dollar in the future.

This graph is a perfect example of how changing interest rates can have a huge impact on the markets.  As the risk free rate rises it lowers the value of other assets because of the inherent risk associated with them.  It comes down to the idea that if two assets have identical rates of return but differing levels of risk, then the asset with lower risk will always be more valuable.  In the case of an asset with effectively zero risk, a small increase in the interest rate can significantly depreciate even the value of assets with much higher rates of return.  Conversely, a drop in the risk free rate can significantly inflate the value of an asset (in my opinion this is the dominant risk today—and why we are structuring innovative index annuities, which fundamentally reduce inherent investment risk).    This is the first part of the explanation as to why the stock market preformed so poorly in the period from the mid 60’s to the early 80’s.  Interest rates steadily increased threefold from 1964 to 1981 where they finally peaked at 15.32%, a level which is almost unfathomable today.  This served to suppress the relative value of assets during this period despite significant gains in the economy.