Almost everyone would agree that large banks like JPMorgan and Citigroup should be classified as Sifis — the melodious acronym for systemically important financial institutions, whose failure would produce widespread shocks to the financial system.
To reduce the chances of failure, regulators have imposed a broad array of extra requirements for capital, liquidity and risk controls on these Sifis.
The need for these requirements is less clear for two other categories of financial institutions currently labelled as Sifis: midsize regional banks and large insurance companies. Both types of institutions have been unsuccessful in getting their Sifi label dropped by regulators or legislators.
However, activist hedge funds have taken a more fruitful tack, pushing for structural changes to avoid the label at some midsize banks and large insurers.
In the Dodd-Frank Act of 2010 that sought to prevent systemic risks building in markets, Congress effectively applied the label to any banking institution with more than $50bn in assets.
But size is not a good indicator of potential adverse effects on the financial system. For instance, the dozen or so US bank holding companies with between $50bn and $100bn in assets are primarily regional institutions with low profiles in the global financial system.
Read the rest at brookings.edu…
As voters in Idaho, Michigan, Mississippi and Hawaii head to the polls on Tuesday for the GOP primary, they should take a closer look at the frontrunner’s tax plan and what that could mean for their wallets.
Donald Trump’s plan would sharply reduce the top tax rate on individual income from 39.6% to 25% and broadly reduce rates for individuals with lower incomes. His plan would also lower the tax rate on corporate income from 35% to 15%, and apply this 15% to other “business income.”
While his plan limits certain tax preferences and deductions, it does not include any reductions in federal spending. As a result, the Trump plan increases the federal deficit over the next decade by $10 trillion or $12 trillion, according to several estimates that do not include macroeconomic changes in GDP, investment and employment. Of course, these so-called “static” estimates do not reflect the potential tax revenue from the economic growth resulting from lower tax rates. However, even under “dynamic” scoring, which takes into account a broad range of macroeconomic effects of tax proposals, his tax cuts would still expand the federal deficit over the next decade by $10 trillion — on top of the $10 trillion increase in the federal deficit already projected under current law.
Let’s consider two prominent analyses of the Trump tax plan — one by the Tax Foundation and the other by the Tax Policy Center. Despite their different methodologies, they both estimate that the Trump plan would cut tax revenues by over $10 trillion in the next decade.
Read the rest at fortune.com…
The U.S. is facing a retirement crisis. About one third of Americans have no retirement savings, and most don’t have enough savings to retire comfortably. One main cause of this financial shortfall: more than 60 million American workers have no retirement plan offered to them by their employer.
The U.S. Department of Labor (DOL) recently issued a rule proposal intended to encourage more employers to offer a retirement plan to their workers. Specifically, the DOL proposed to exempt from ERISA, the federal pension law, state-sponsored plans for individual retirement accounts (IRAs). These state plans would require employers that do not already offer any retirement program to forward to the plan a state-specified percentage of their workers’ salaries. These monies would be invested as retirement savings, unless workers opted out of this state-sponsored plan.
The DOL proposal is an understandable response to the failure of Congress to pass federal legislation for a similar program called the Automatic IRA — with regular contributions from workers without retirement plans unless they opted out. However, the DOL proposal gives too much leeway to the states in offering their own versions of the Automatic IRA.
Here is the background to the DOL proposal. Most employers without retirement plans run small businesses with fewer than 100 workers. These employers do not want the financial burdens of operating and contributing to a retirement plan.
Read the rest at realclearmarkets.com…
Christmas came early for Congress this year as politicians from both sides of the aisle came together to pass – by wide margins – a US$1.8 trillion package of tax cuts and new spending.
At year end, Washington seemed awash in a spirit of holiday cooperationwith the president praising new Speaker Paul Ryan. But does the bipartisan approval of the budget deal really mean that Democrats and Republicans have learned to play together nicely in the Congressional sandbox?
This legislative package was adopted with little rancor because both parties agreed to lift existing caps on discretionary spending and to cut taxes without trying to raise offsetting revenues. So both sides got most of their desired list of Christmas presents – increases in defense and domestic spending plus expanded tax incentives for businesses and individuals.
The big losers were future taxpayers who will have to shoulder the burden of higher interest payments. As the size of the national debt balloons and the rate of interest gets back to normal levels, these payments will consume more of the annual budget and leave less room for spending on defense as well as domestic programs (except for entitlements such as Social Security and Medicare).
Even before this year-end legislation, the national debt was already huge relative to the size of the US economy. While declining annual budget deficits in the last few years have created the impression of fiscal responsibility, the U.S. national debt has more than doubled over the last decade.
Read the rest at the conversation.com…
Few people in the financial services industry have been more productive and influential than Bob C. Pozen. The 69-year-old Harvard-and-Yale-educated lawyer has served as president of Fidelity Investments, as chairman of MFS Investments, as a presidential adviser and SEC official, as a lecturer at MIT and as a research fellow at the Brookings Institution. He has written books on topics both macro (the mutual fund business, the Global Financial Crisis) and micro (personal time management).
Back in October, Pozen moderated a panel on Innovative Retirement Products at the 2015 Fall Journal of Investment Management conference on retirement at the MIT Sloan School of Management. The panelists included Peggy MacDonald of Prudential Financial’s pension risk transfer business and Tom Reid of Sun Life Financial of Canada.
During the panel discussion, Pozen spoke favorably about the usefulness of annuities in mitigating longevity risk. In a recent phone conversation with RIJ, he expanded on some of his views regarding retirement.
Read the rest at retirementincomejournal.com…
Like most American cities, Boston has promised to pay most of the health care premiums for its employees after they retire — which can be as early as age 45 or 50. Boston also subsidizes the Medicare premiums of its retired employees after age 65.
As a result, Boston reported an unfunded liability for retiree health care in 2013 of over $2 billion (that is a B!). This equated to a liability of over $3,000 per city resident — the fifth highest per capita of large American cities. And these figures did NOT include Boston’s share of another almost $2 billion in unfunded health care liabilities
for retired employees from the MBTA.
The good news. In fiscal 2014, Boston contributed $154 million toward retiree health care — more than 10 percent of its total payroll (including schools) for that year. This sum covered its current benefit premiums plus $40 million to help pre-fund its future liabilities for retiree health care. Moreover, Boston committed to keep contributing current benefit premiums plus $40 million to pre-fund such future liabilities.
The bad news. Boston is using two overly optimistic assumptions in estimating what it would take to address its future costs for retiree health care.
Boston is assuming that it can meet its commitment by making large payments out of each year’s budget despite more retirees and rising premiums. This works out to be an average increase of 4.5 percent per year according to Stanford professor Josh Rauh. Can Boston really devote $400 million out of its 2035 budget to retiree health care given competing priorities like police and schools?
Read the rest at bostonherald.com…
On October 29, China adopted a policy of two children per family, instead of one. This change is, in large part, intended to mitigate the adverse demographic trend plaguing China’s social security system: the rapidly declining ratio of active to retired workers. The ratio is falling from over 6:1 in 2000 to under 2:1 in 2050.
However, the new two-child policy is not likely to have a big impact on the worker-retiree ratio, so China’s retirement system will remain under stress. To sustain social security, China needs to implement other reforms — moving from a local to a national system and expanding the permissible investments for Chinese pensions.
The one-child policy always had exceptions, such as for rural and ethnic communities. These exceptions were broadened in 2013 to cover couples where both were only children. Yet the birth rate did not take off.
Why? A combination of rising levels of urbanisation and housing costs, more education and jobs for women, and rapidly increasing expenses for child rearing. These factors have driven fertility rates down in other south-east Asian countries, such as Singapore and South Korea, without any government restrictions on family size.
Read the rest at ft.com…
Starting in 2016, push comes to shove for small businesses under the Affordable Care Act, better known as Obamacare. As of January 1, small businesses, broadly defined as firms with 50 to 100 full-time employees, must comply with the ACA’s employer mandate and provide qualified health insurance to their workers or face stiff penalties. But this requirement poses a big threat to the financial stability of small employers—and not for the reasons you might think.
Obamacare includes a myriad of regulatory incentives and exemptions that define the parameters of the employer mandate. However, these have inadvertent consequences. Most important, exemptions in the ACA encourage small firms to self-finance their health care plans—that is, pay their workers’ health care bills directly, rather than covering them through a traditional insurance policy. Most large companies in America (above 3,000 employees) engage in self-funding, but that is done now by only about 16% of small companies of between 50 and 100 employees. According to my research, that number is set to rise.
It’s understandable that small companies see self-funding as the superior option. By financing their own health care plans, they stay exempt from the community rating requirements that restrict how much insurers may vary premiums based on factors like age and smoking status; they also stay exempt from the federal and state taxes on most health care premiums that are paid to traditional insurers.
But these benefits pose significant risks for small businesses. While a big company usually has a diversified employee base and financial resources that can help absorb substantial overruns in health care expenses, a small company has neither. One big claim can wipe out a small company.
Read the rest at forbes.com…