The chart below is courtesy of Dan Primack, Pro Rata newsletter from Axios. At first glance, it appears that a significant majority of taxpayers across the income spectrum will receive tax relief and a positive after-tax income boost from the latest tax proposals out of D.C.  However, fast forward 10 years to 2027, and the tax relief proves illusionary for most Americans.

According to Primack, a majority of Americans in income percentiles from 0% (not high) to 90% will not only NOT see tax relief, they will actually see a tax increase relative to current tax law. In fact, it is estimated that only 11.8% of those in the lowest 20% of income will continue to receive a tax break, while 32.4% will see their taxes raised and after-tax income fall by -0.1%.  I find this quite distasteful. How about you?

If you find yourself in the 40% to 60% bracket, 65.6% of you will see a higher tax bill come 2027, while 58.9% of those in the 60% to 80% income bracket will be impacted by higher taxes. Regrettably, 98.1% of the top 0.1% will continue to receive a tax cut, while their after-tax income grows by 2.0%. I say regrettably because we are negatively impacted by a serious income inequality in this country, and proposed tax changes should be addressing this issue – not compounding it!

I am always interested in articles that address Social Security’s looming insolvency. Today, I had the opportunity to read an article on WealthManagement.com titled, “Solving the Social Security Shortfall” by Mark Miller.  The article’s subtitle read, “Solvency is the 800-pound Gorilla in the Room”. It may be the focus of a lot of hand-wringing and discussion, but it is a concern that isn’t valid.

Mr. Miller began his article with the following: “With fewer retirees receiving income from defined benefit pensions, the lifetime annuity income from Social Security will be even more important in the years ahead in protecting seniors from longevity risk.” We couldn’t agree more! The loss of a true retirement plan and significant income inequality have combined to create a potentially disastrous social and economic crisis for most of our workforce.

The issue that we should be focused on is how do we increase the monthly payouts (average is $1,360 or $16,320 annually) currently being received by beneficiaries and those to come for our future retirees. It is not through higher payroll taxes on either the employee or employer, as one will significantly reduce demand for goods and services, while the other will impact job creation.

What we need is the U.S. Treasury to provide additional funds to meet future obligations. Cutting benefits because of the misguided fear of insolvency, especially in an environment where life expectancy is rising, will force millions of Americans into years of poverty and greater dependence on the government’s social safety net.

The U.S. enjoys the benefits of having a fiat currency (unlike those in the Eurozone).  As a result, the government never lacks for its own money. According to Warren Mosler from his book, “The 7 Deadly INNOCENT Frauds of Economic Policy”, “there is no operational constraint on the government’s ability to meet all Social Security payments”.

The additional Social Security payouts would stimulate economic growth, create additional jobs, and perhaps increase federal receipts, which would potentially reduce government support in the future.  Congress seems preoccupied with tax and healthcare policies, but millions of Americans need substantive action on Social Security (read benefit enhancements) before the fear of insolvency leads to inapprpriate decisions by our legislators trying to “fix” a problem that doesn’t exist.

Here’s another example proving once more that defined contribution plans are nothing more than glorified savings accounts. Non-profit Transamerica Institute published a study in September estimating that nearly 1 in 5 Americans has raided their retirement accounts to pay for family caregiving. As laudable as it is for one to take on this responsibility, using precious retirement assets is the wrong gameplan.

The transition from defined benefit to defined contribution plans has placed much more responsibility on the individual to fund, manage, and disperse a retirement account. Unfortunately, we’ve also made it too easy for participants to stop contributing, take loans, grab the assets prematurely, etc.  We reported earlier this month in our latest KCS Fireside Chat that the U.S. Government was permitting hardship withdrawals without penalty for those impacted by the several severe weather incidents in 2017.

It is terrific that many companies in the private sector offer at least some form of a retirement vehicle but we currently have nearly 40% of our employees lacking access to an employer-sponsored plan. For those that do have access, we need to dissuade them from touching those assets prematurely.  Median account balances are anemic, even for those nearing retirement. Let’s eliminate the easy access to these “retirement” assets by putting into practice policies to restrict access.

The title would suggest that I find and post an interesting/meaningful chart each and every day. That is a very misleading – sorry. I stumbled across the following chart in today’s WSJ (thanks, FactSet), and I just had to post it.  History does repeat itself, especially on Wall Street, and over my 36 years in this industry, I have seen a lot of cycles.

Could we be headed for another Technology-lead equity market crash, or will “this time” be different? Sure, the magnitude of the performance gap isn’t quite as stark, and the technology stocks in question certainly appear to have more sustainable businesses. But, fundamentals eventually matter, and I would suggest that more people pay attention to this chart as extremes continue to evolve and market performance diverge.

I wrote a blog post last week titled, “Change Is Good – Really”, which was penned to address the reluctance on the part of asset consultant research teams to appreciate the need for evolutionary change within an asset manager’s investment process. Here I go again, but in this case, I am referring to an experience that I had just yesterday when presenting to the “Investment” committee for a couple of local unions.

KCS was invited to meet with this group after presenting to a broader group of Trustees for the same two plans in October. The purpose of both meetings was to share with them how critically important it is for plan sponsors to become more aware of their plan’s liabilities (the promise) on a basis much more frequently than once per year. As those that follow KCS know, we believe that a plan’s funded status should drive asset allocation and investment structure decisions, not the return on asset assumption (ROA), which is not reflective of anything going on within the plan.

Before having the opportunity to begin our presentation, I was asked by the plan’s asset consultant to put in layman’s terms what the end game was behind our recommendation. I began by stating again that managing a pension plan should have a cost objective and not one based on return. That by focusing on return, the retirement community has injected too much risk into a process without achieving the desired results, those being a fully-funded plan at modest contribution expense.

At that point, one of the more experienced trustees stated, “50 years ago you (I’m assuming the industry, since I was in the second grade at that time) said that we should build a diversified portfolio of stocks and other investments. Are you saying that was wrong?” Yes, and the trustees (and our industry) should have come to that conclusion a long time ago, too. The DB plans in question have funded ratios (at a true mark to market discount rate) of 62% and 49%. If now is not the time to explore alternative approaches, then when is it appropriate?

Regrettably, DB plans are going away, but they don’t have to. There are strategies that can be utilized that will protect and preserve the promise that has been made to the participants. As a nation, we cannot afford the profoundly negative social and economic consequences of our failure to preserve these important retirement programs. The failure of DC plans to build adequate retirement balances for the “average” participant certainly highlights this fact!

We are happy to report that the Butch Lewis Act was filed with the 115th Congress today.

At the most recent IMI Consultants’ Congress in NYC, several panelists discussed their evaluation process of investment managers and their products for both the defined benefit and defined contribution markets. One of the prevailing areas of focus was the consistency of both the investment process and the “insights” that they are trying to capture and exploit.

There has always been this great concern emanating from the consulting community about changes to a manger’s investment process and stock selection elements. In my former life as head of Invesco’s Quantitative business, we were always being challenged by consulting firms when discussing an evolutionary change in model weights or stock selection factors.  But, why?

One of the real special aspects of the investment management industry is the abundance of very bright and intellectually curious people. Great ideas can and will be arbitraged away over time.  Either because a firm is not cognizant of their idea’s natural capacity or they refuse to adhere to it, or because other firms “stumble” on their secret sauce.

No process will remain robust if it doesn’t evolve. What consultants should be doing in their evaluation process is to challenge investment advisors to reveal their research agendas related to the ongoing evaluation of stock selection criteria.  Experience should account for something, so what do you know today relative to what you knew or didn’t years ago? Also, ask if these firms monitor the effectiveness of their insights on a regular basis. We would suggest that firms adhere to certain disciplines without truly knowing whether or not they still have predictive ability.

Passive management has been eating the lunch of active managers in recent years. There are many reasons for this, and we would suggest that active managers will once again have their day in the sun, but they don’t do themselves any favor by not challenging every aspect of their investment process on a regular basis. Finally, asset consultants who can’t embrace change will be picking yesterday’s winners!

Anyone who follows KCS knows that we prefer defined benefit (DB) plans relative to defined contribution (DC) plans for a significant percentage of our workforce.   Sure, there are some workers who can handle the funding, management, and distribution of a DC plan, but it is a small minority of participants.  However, since DC plans are quickly becoming the only retirement option, we, of course, want these programs to be the very best that they can be.

Congress, as part of tax reform, considered significant changes to 401(K)s.  Although legislative changes do not seem likely at this point, there are significant debates raging as to how to make the tax reform package revenue neutral, which may force both branches of Congress to reconsider their options.

Forcing individuals to adopt a Roth option for some, if not all, of their future 401(k) contributions is not going to help alleviate the growing U.S. retirement crisis.  A wonderful report has recently been released by the Center for Retirement Research at Boston College.  The report, titled, “Dodged a Bullet? ‘Rothification’ Likely to Reduce Retirement Saving” by Alicia H. Munnell and Gal Wettstein does a terrific job of comparing and contrasting the pre- and post-tax benefits of traditional and Roth 401(k)s. In the report they speculate that “many, especially those who have lower incomes or are cash-strapped, may overreact and save much less.”

It appears that 401(k) participants favor the immediate tax savings as opposed to waiting years for the tax benefit to kick in.  According to Vanguard, nearly 70% of all of their 401(k) participants are provided with an opportunity to invest in a Roth option, yet only 9% actually use one. Furthermore, when polled, 80-90% of plan sponsors believe that eliminating or reducing pre-tax contributions would have an adverse effect on retirement savings.

As mentioned above, we are already facing a retirement crisis in this country. Let’s not exacerbate the situation by imposing more hurdles.  Let’s spend the necessary time fixing traditional 401(k)s to make them more like retirement vehicles than glorified savings accounts.

For months we’ve teased our readers with references to possible legislation to preserve and protect multi-employer defined benefit plans. Finally, the Bill named the Butch Lewis Act, is being put forth by Senator Sherrod Brown, Ohio, that will protect those promised retirement benefits. Senator Brown’s office put out a press release outlining the goals of the Bill.

As we’ve mentioned, Ryan ALM and KCS have been involved in creating an implementation that will be used to invest the proceeds from the loans provided by the U.S. Treasury through a new office called the Pension Rehabilitation Administration (PRA). The money for the loans and the cost of running the PRA would come from the sale of Treasury-issued bonds.

Unlike Pension Obligation Bonds, whose proceeds have been invested in a traditional asset allocation and subject to normal market volatility, the proceeds from the PRA must be used to secure all of the retired lives benefits earned to date.  By securing the currently retired lives, the fund has bought time to meet the remaining plan liabilities.

This process has been tested on some of the poorest funded plans, and it works! We believe that this model can be used to secure the promised benefits for state and municipal plans, too.  Please don’t hesitate to reach out to us if you’d like to learn more about the legislation or implementation.

MarketWatch recently published an article by Angela Moore, titled “Why Retiring In America Has Become Less Attractive”. I would suggest that most Americans find the idea of one day retiring to be very attractive.  I would propose an alternative title which would read, “Why Is Retiring In America Less Attainable?”

The  MarketWatch article highlights the fact that the U.S has fallen 3 places in the Natixis Global Asset Management Global Retirement Index. The index ranks 43 mainly developed countries on their ability to offer its citizens a secure retirement.  We now rank a very unimpressive 17th.

We’ve been highlighting the fact that the move away from defined benefit plans to defined contribution plans will produce profoundly negative social and economic ramifications, and they are clearly beginning to materialize.  According to the article, the U.S. took hits in income equality, health care spending and life expectancy. Despite America’s high income per capita, we have the sixth lowest score for income equality, suggesting that retirement saving is difficult for average workers.

Why should that be a surprise? We’ve been highlighting the fact since KCS’s inception (2011) that asking untrained individuals to fund, manage, and disperse a retirement benefit was an incredibly challenging task made more difficult by the fact that wage growth has been stagnant for two decades! According to the National Institute on Retirement Security,  the median retirement account balance is $2,500 for all working-age households and $14,500 for near-retirement households. That won’t get most people through half a year let-alone an average retirement of 20+ years.

Winning the lottery is not a sound retirement strategy, yet that may be what our future retirees will need to one day retire!