“They will have to double their savings to retire at a reasonable age.”
These quotes represent the conventional wisdom about our nation’s millennials, the more than 80 million Americans between the ages of 20 and 36. However, the savings picture for millennials has become more complex, according to recent data. This cohort of young people is saving more, though for short-term goals instead of retirement.
Millennials, especially the younger ones, are now building up their savings to cover emergencies for the first time since the financial crisis. More than 30 percent of Americans ages 18 to 26 have saved enough to cover three to five months of living expenses, according to a survey conducted earlier this year by Princeton Survey Research Associates International.
A spokesman for Bankrate.com, the survey’s sponsor, explained, “Millennials have a savings discipline that the preceding generations lacked.” Despite much lower levels of earnings, millennials save on average 19 percent of their annual income, compared to 14 percent for both generation X (those in their late 30s to early 50s) and baby boomers (those in their late 50s to late 60s).
Ever since I was a graduate student in economics, I’ve been struggling with the uncomfortable observation that economic theories often don’t seem to work in practice. That goes for that most influential economic theory, the Efficient Markets Hypothesis, which holds that investors are rational decision makers and market prices fully reflect all available information, that is, the “wisdom of crowds.”
Certainly, the principles of Efficient Markets are an excellent approximation to reality during normal business environments. It is one of the most useful, powerful, and beautiful pieces of economic reasoning that economists have ever proposed. It has saved generations of portfolio managers from bad investment decisions, democratizing finance along the way through passive investment vehicles like index funds.
Then came the Financial Crisis of 2008; the “wisdom of crowds” was replaced by the “madness of mobs.” Investors reacted emotionally and instinctively in response to extreme business environments — good or bad — leading either to irrational exuberance or panic selling.
Pennsylvania, like many other states, is facing a huge unfunded pension deficit in its defined benefit plans: a $70 billion shortfall in two large plans for teachers and other state employees. Unlike most states, Pennsylvania in early June passed — with widespread bipartisan support — major legislation “to get real meaningful pension reform,” as Gov. Tom Wolf was quoted saying.
Indeed, the recent Pennsylvania law is a significant step in the right direction. However, the financial projections for the legislation show how long it takes, given the legal and political constraints, for this approach to pension reform to meaningfully reduce the burden on state budgets.
Here is the background. In 2001, Pennsylvania reported a $20 billion surplus in its two big defined benefit plans – the Public School Employees’ Retirement System and the State Employees’ Retirement System. But then state legislators boosted benefits for current state workers without increasing contributions to these plans, and even extended this giveaway to already retired public employees. In 2003, legislators compounded the state’s funding challenge by taking a “pension holiday” — decreasing pension contributions to allocate revenue to other state priorities.
These actions contributed to a giant shortfall during the global financial crisis, when the value of the state’s pension portfolios plummeted. In response, state legislators in 2010 reduced pension benefits — only for newly hired state workers — to pre-2001 levels. Nevertheless, because of growing obligations to current and retired workers, the state’s contributions to its pension plans ballooned to $6 billion in the 2018 fiscal year from $1 billion in the 2011 fiscal year.
As of Saturday, January 13, all EU member states were to fully implement the revised Payment Services Directive, known as PSD2.1) Among other things, PSD2 allows third-party payment service providers to gain access to customers’ bank accounts (with the customers’ consent, of course), and customers’ banks are required to provide API connection for identity verification. Its potential impact should not be underestimated. For example, under PSD2, customers and merchants can, in principle, cut credit cards and debit cards out of their transactions, saving significant costs along the way. In addition, banks can no longer “own” their customers’ account data or prevent competitors from accessing them.
The EU’s PSD2 is a major development in payments and financial market infrastructure, a once-sleepy “back-office” function that is now alive and kicking. The essence of PSD2 is to encourage competition and reduce the information advantages of incumbent banks. Likewise, the Bank of England announced in July 2017 that non-bank payment service providers can become direct settlement participants in the UK’s payment system, as long as certain requirements are met.
Access to financial market infrastructure such as payment systems has important implications for market competition. The study of industrial organization shows that competition is reduced by vertical integration. A vertically integrated incumbent that produces both “upstream” and “downstream” goods can effectively reduce competition in the downstream market if its stand-alone competitors rely on the incumbent for providing the upstream good.2) Financial market infrastructure is the ultimate upstream good for almost all economic activities. Privileged access to market infrastructure makes banks “special” and, in some situations, may encourage anticompetitive behavior. Good examples to keep in mind include two antitrust class lawsuits in over-the-counter derivatives markets in which investors accused dealer banks of, among other things, using their unique positions as clearing members in OTC derivatives to shut off new entrants that aim to compete with dealer banks in the transaction of these derivatives.3) One of these lawsuits has been settled, with dealer banks paying $1.86 billion.Read More »
Are you concerned about climate change, or about social issues such as corporate board diversity? Can you as a shareholder have your preferences communicated to company management and perhaps impact corporate policy on these issues? For the majority of individual investors, the short answer is “no.”
That’s because most individual investors own mutual funds. But the structure of the mutual fund makes it difficult to reflect shareholder objectives and values related to environmental, social, and governance (ESG) issues.
The growth in individual shareholder ownership ironically has created a huge gap in corporate governance and accountability. The ownership of Corporate America lies largely with employees through 401(k) plans and other retirement vehicles, except these same employee-owners cannot and do not have proxy voting rights — these are exercised by the fund providers.
Given the size of retail assets that fund managers control — collectively close to $10 trillion — there is a valid concern about their voting practices not reflecting the preferences of the millions of investors in their funds. A typical fund has to vote on hundreds of proxies each year, most of them routine. The voting process is centralized and fairly automated, with default guidelines regarding how the shares are voted. The fund manager conducts analysis only on issues that materially impact a company’s financial or operating performance, and then casts a vote.
Having managed mutual funds for a long time and voted hundreds of proxies globally, I believe there is a simple and direct way to reflect shareholder ESG preferences in the voting of proxies: Through the fund prospectus. Read More »