How to Insulate Your Portfolio from Inflation

Annual limits on the purchase of Series I is more than $10,000 if you have a tax refund or some other entity like a Trust or business. Additional inflation protection can be obtained through the purchase of Treasury Inflation Protection Securities (TIPS).

Question: I am worried that my retirement plan will not keep up with inflation and would like to increase my holdings of Series I savings bonds.  However, there is a $10,000 annual limit on purchase of these assets. What can I do?

Answer:   The purchase of Series I savings bonds is the single best way to protect yourself and your household against inflation. Series I Bonds are literally the only thing working in most portfolios today, a situation that will unfortunately persist unless inflation drastically recedes.

The Treasury limits direct purchases of Series I Bonds from Treasury Direct to $10,000.  However, taxpayers with a tax refund can purchase an additional $5,000 in Series I Bonds. Go here for a discussion of how to do this.   You can also purchase Series I bonds through a Trust or a business.   The first step is to go to Treasury Direct and set up an entity account.

The annual limits prevent most households from quickly increasing their holdings of Series I bonds in response to a sudden shift in inflationary expectations.

Additional protection against inflation can be obtained by purchasing Treasury Inflation Protection Securities (TIPs). There is $10 million dollar limit on each TIPS security for each auction.  I am not worried about every being constrained by this limit.

The price of TIPS varies with interest rates and inflationary expectations, and you can lose money on TIPS. But price risk can be managed by staggering the purchase dates and maturity dates of the TIPS bonds and holding the bonds until maturity.

Series I Bonds are sold at par and never fall in value.    The semi-annual rate can go up and down with inflation, however, the bonds will not fall in value with inflation.  Go here for Series I FAQs from Treasury Direct.  Go here for a comparison of Series Bonds and TIPS.Authors Note:  The paper Financial Decisions for a Secure and Happy Life  is a collection of eight essays.  One of the essays provides a lot of information on Series I bonds and Tips.  The author has also written extensively on health care with his most recent paper outlining potential 2024 care reform proposals

The Decision to Downsize and Delay Claiming Retirement Benefits

A person entering retirement without a mortgage or with a negligible level of mortgage debt can often delay claiming Social Security benefits and disbursing funds from retirement plans. This strategy leads to a more prosperous and secure retirement.

Situation:  A 62-year-old person is debating whether to immediately claim Social Security and start 401(k) disbursements or downsize, live off her capital gain for five years, and start spending retirement benefits at age 67.

She lives in a $1,500,000 house with no mortgage.  She has $1,000,000 in a 401(k) plan.  She cannot afford to delay spending retirement savings unless she downsizes to a smaller home.

  • What are the potential consequences of these decision on the person’s financial well-being in retirement?

Analysis:  The cost of downsizing (sale commissions, purchase commissions and moving costs) from a $1,500,000 home to a $1,000,000 home might be $80,000.  The person would net $420,000 after selling the $1,500,000 home and purchasing a $1,000,000 home.  This $420,000 should be more than enough to live on for five years without tapping retirement savings and without claiming Social Security benefits.

A person born after 1960 claiming at age 62 receives 70 percent of the Social Security benefit of the person who claims at age 67 as noted here.

  • Projected annual Social Security benefits are $15,960 at age 62 compared to $22,800 at age 67.

The delay in disbursing retirement plan benefits delays depletions from spending and allows for increased accumulation from compounding of investments inside the retirement account.  Projected retirement plan balances assume a 5.0 percent annual return on invested assets and disbursements based on the four percent rule with an annual inflation rate of 3.0 percent. 

  • The projected retirement balance at age 67 are $1,024,527 for the person initiating retirement plan disbursements at age 62 and $1,276,282 for the person delaying disbursements until age 67.

The person who delays retirement plan disbursements could implement the four percent rule at age 67 and receive an annual inflation adjusted benefit of $51,000.  The person who downsizes and delays retirement savings has more to spend early in retirement prior to spending retirement resources and more to spend after age 67.

Concluding Remarks:   The decision to downsize and delay spending retirement assets will often lead to a more prosperous and secure retirement.

Authors Note:  David Bernstein is the author of both Financial Decisions for a Secure and Happy Life and A 2024 Health Care Reform Proposal.

The House Downsizing Decision: Options for the 401(K) Rich Person with a Mortgage

A 401(k)-rich person entering retirement with a mortgage should probably downsize to a less expensive home.


Situation One:  A person with $1,000,000 in a traditional retirement plan has a house valued at $700,000 and an outstanding mortgage with a balance of $152,576.  The monthly mortgage payment is $2,387.   This mortgage payment and outstanding mortgage balance is consistent with the person taking out a $500,000 mortgage 24 years earlier.

The only other source of income for this person is her Social Security benefit of $20,000 per year.  Should this person downsize to a smaller house?

Analysis of Situation One:  This person is in a difficult situation.  This retiree is in danger of quickly depleting her retirement account or having insufficient funds for basic consumption, under standard guidelines governing the disbursement of retirement assets.  

Financial advisors often recommend retirees follow the 4.0 percent rule.  This rule sets the initial disbursement from the retirement plan at 4.0 percent of the plan’s assets and adjusts future assets for inflation.

Under the four percent rule, this retiree’s annual mortgage payment during the first year of her retirement is 71.6 percent of her total 401(k) disbursement.  Higher disbursements could lead to rapid depletion of the retirement account and higher taxes because disbursements from traditional retirement assets are fully taxed.

The most obvious solution to this person’s situation is to sell the home to pay off the mortgage.  The person might be able to pay off the mortgage and buy a home for $596,000.  (Assuming selling, buying, and moving costs are around 7.0 percent of the value of the home.). 

Other options involve a new traditional mortgage, or a reverse mortgage. Both options are unattractive and of limited practicality.

A refinancing of the $157,425 mortgage to a 30-year term would lead to a $728 monthly payment or annual mortgage payments of $8,741.  The mortgage is probably not available for someone without wage income.  Also, current interest rates are now higher than 4.0 percent.  

A reverse mortgage allows a person to tap equity and stay in their home. The largest amount a person could borrow on a reverse mortgage is 80 percent of equity. However, a 60 percent borrowing limit is more practical since the borrower is responsible for taxes and maintenance on the home.  Obtaining additional resources from a reverse mortgage might make sense for an older borrower nearing the end of her life.  A younger borrow using a reverse mortgage is highly likely to outlive both her 401(k) wealth and the additional wealth obtained from the reverse mortgage.

Concluding Remark:  The person in situation one prioritized savings inside a traditional retirement plan over the elimination of a mortgage during her working years. This person also chose to contribute to traditional retirement plans instead of Roth plans.   Go to my collection of essays Financial Decisions for a Secure and Happy Life for discussion on prioritizing debt reduction and the use of Roth retirement accounts.  

The only real option during retirement for the 401(K)-rich person with non-trivial debt is downsizing to a less expensive home.  More posts on the downsizing decision will follow.

The Likelihood of Higher Future Interest Rates

Despite recent tightening by the Federal Reserve Board, interest rates remain relatively low both compared to past decades and the current inflation rate. Persistent Inflation will lead to a long period of higher interest rates.


Introduction:

Some pundits believe inflation has peaked, and it is now time to buy bonds. These pundits offer an inaccurate macroeconomic assessment and bad financial advice.

Comment One:  The nominal 10-year Treasury interest rate is roughly where it was in February 2014, but inflation is substantially higher. 

Both in February 2014 and September 2022, the 10-year constant maturity interest rate was 3.4 percent.

  • In February of 2014, the one-year inflation rate was 1.6 percent. It had hovered close to that level for the entire year.
  • The reported inflation rate in August of 2022 was 8.2 percent up from 5.2 percent, 12 months early. 

People purchasing 10-year bonds are now earning far less than inflation.   We should expect this gap to narrow and bond yields to rise unless inflation suddenly plummets.

Comment Two:   Interest rate comparisons based over data from the last 10 or 15 years are deceptive because rates have been abnormally low.

Comparisons to average and high interest rates over a longer period are more relevant.

  • This graph shows the 10-year rate reached 5.0 percent in June 1967 and stayed above 5.0 percent until July 1998, literally 31 years.  The current 10-year rate is 3.5 percent.
  • This graph reveals that while the current two-year constant maturity rate is at its highest level since 2007, it is also lower than any rate that existed between 1976 and August of 2001.

Comment ThreeThe reduction in interest rates requires a decrease in inflation, an unlikely outcome in the near term

In a previous era, the Federal Reserve used two tools, higher interest rates and lower money supply, to reduce inflation.  Today the main tool is higher interest rates, which remain below historic levels.   

The money supply has grown robustly during the pandemic and is at a high level compared to the size of the economy.  The impact of past increases in the money supply on the price level has not been fully realized.  Whether the Federal Reserve Board can reduce the inflation rate without reducing the money supply is questionable.

Comment Four:  Wages are likely to continue to increase, even if there is a recession, leading to 

significant wage-push inflation over the next few years.  

There are many reasons why worker compensation is likely to continue to increase over the next few years.

  • One way to reduce the gap between job openings and people, noted here, is to increase immigration, an outcome that appears unlikely in the current political environment.
  • Many workers are burnt out from COVID and resistance to returning to the office can increase wages in some areas, especially for firms and industries dependent on in-person work.  
  • There is a shortage of teachers, nurses, airline pilots, long-haul drivers, and highly skilled computer analysts. These shortages won’t be instantly reversed with the advent of a recession.  The shortage of nurses guarantees that health care costs, a key component of both the CPI and workers compensation will not fall in the near or intermediate term.   
  • Some unions have recent won large increases in compensation, with a recent example being the rail unions.  Increases in rail transport prices will increase the price of transported goods.

The wage-push inflation will make it very difficult to reduce inflation and return to the abnormally low interest-rate environment.

Comment Five:  The housing component of the CPI will not fall with an increase in interest rates.

The housing price component of the CPI described here is based on imputed rents.  An increase in mortgage interest rates generally leads to higher observed and imputed rents.

The increase in interest rates will reduce the affordability of new mortgages and decrease house prices. However, relatively few households buy or sell a house in a particular year.   Increases in interest rates, which delay home purchases, can increase both actual rents and imputed rents used for the CPI housing cost calculation.

Increases in the housing cost component of the CPI, stemming from higher interest rates, will contribute to inflation despite a decrease in aggregate demand from higher interest rates.

Comment Six:  More supply shocks leading to more inflation are likely.

The most likely supply shock from the Ukraine war involves higher food prices from disruptions in grain and fertilizer exports.

Concluding Remarks:   How should investors respond to this economic outlook?

Avoid long-term bonds, anything with a maturity more than two years.

Avoid bond ETFs.  Even shorter maturity ETFs and ETFS that own TIPS bonds have been problematic over the last year.

Purchase at least $10,000 in Series I Bonds every year from Treasury Direct.  Additional purchases beyond the $10,000 limit are possible through tax refunds, trusts and S-corporations.  For details go to essay five here.

Allocate a small share of your wealth to two-year Treasury bonds.  The purchase and maturity dates of the bonds should be staggered to create constant liquidity when the bonds mature.  Ownership of bonds is preferrable to investments in bond ETFs because bonds return the initial investment at par value on the maturity date.

Authors Note:  David Bernstein is the author of eight essays published in Financial Decisions for a Secure and Happy Life

The Case for Rapid Repayment of Student Debt

New entrants to the workforce need to prioritize student debt reduction over contributions to 401(k) plans.

The first of eight essays in my new paper Financial Decisions for a Secure and Happy Life makes the case that new entrants to the workforce must often delay savings for retirement to quickly eliminate most if not all their student debt.  There are several reasons for this finding.

Reason One:  Failure to reduce student debt to a manageable debt level often leads to poor credit and higher borrowing costs on auto loans, credit cards, private student loans, and mortgages.

Reason Two:  A person using a short maturity loan will pay substantially less in interest than a person using a long maturity loan.

Reason Three:  The decision to enroll in an Income Driven Repayment loan and only pay the minimum balance will often result in increased loan balances and substantially higher lifetime interest payments. 

Reason Four:  The quick reduction of student debt frees up cash for other financial priorities including increased savings for retirement.

Reason Five:  Most young student borrowers choosing to immediately save for retirement on their first job will raid their 401(k) plan and pay tax and penalty.

Reason Six:  The rapid elimination of student debt facilitates the purchase of a first home, lower mortgage costs, and higher house equity, an important source of wealth. 

The succinctly written eight essays in  Financial Decisions for a Secure and Happy Life can be obtained for $7.00.  I suspect you will find the financial strategies and tips outlined there worth much more.

The Opening Salvo of the 2024 Health Care Reform Debate

The paper “A 2024 Health Care Reform Proposal” is available free for a limited number of potential reviewers.  Just go to this link https://app.sellwire.net/p/2Uv

and apply promotion coder REVIEWER1.

Ideas in this paper could reduce number of people without health insurance and improve the quality of coverage.

Proposals Include:

  • Having employers subsidize state exchange health insurance instead of paying for firm-specific health insurance to reduce loss of insurance during periods of unemployment and job transitions.
  • Further modifications to the premium tax credit to reduce worker share of premiums for middle-income young adults without employer-based coverage.
  • Creation of new low-cost comprehensive health insurance plans combined with the elimination of current short-term health insurance plans.
  • Improvements in Health Savings Account for low-income and mid-income households. 
  • Creation of incentives leading to Increased access to top hospitals and specialists.

Again, purchase at a low price of $2.50 or download a free sample copy here.

https://app.sellwire.net/p/2Uv

I hope if you take the free sample, you will provide me with feedback either in the form of an email to Bernstein.book1958@gmail.com or through an on-line review.

Analysis of the Abraham and Strain Student Debt Argument

A recent article authored by Abraham and Strain arguing against a debt relief proposal under consideration by the Biden Administration was inaccurate. The proposal under consideration mostly benefits middle-income borrowers and the program could be means tested. Existing IDR programs have proven to be ineffective. Bankruptcy reform won’t pass Congress. Student debt discharge is the only realistic way to stop the increase in student debt burdens and reduce the number of people foregoing higher education.

Introduction:

Abraham and Strain claim a debt relief proposal for student borrowers considered by President Biden is regressive.  They cite research indicating that a blanket forgiveness of $10,000 in student debt relief would offer $3.60 in debt relief to households with the highest 10 percent of income compared to $1.00 for the bottom 10 percent.  The research they cite also found that ¾ of the benefit from the proposal under consideration would flow to households with income over the median.  They argue that expansion of Income Driven Replacement (IDR) loan programs and alteration in the treatment of student debt in bankruptcy would be a more effective way to assist students with excessive student loans.

Comments on arguments advanced by Abraham and Strain:

I am not surprised that student debt does not provide much benefit to households with income in the bottom ten percent because education is the best way to avoid poverty. Most of the advantages of the current student loan discharge proposal appear to go to middle income people with income between the 25th and 75thpercentile.  The percent of people receiving benefits in the middle of the income distribution is a much more interesting portrayal of the equity of the proposal than the percent of benefits going to people with income over the median. 

IDR programs have proven to be ineffective at providing debt relief to student borrowers, especially middle-income borrowers.  The Public Service Loan Forgiveness loans, which are tied to IDR loans were not discharged in a timely fashion and it is likely that borrowers in long-term IDR programs will experience a similar fate.  People in IDR loan programs often can’t qualify for a home mortgage because of uncertainty about their income and loan payment. The relative merits of an IDR versus a conventional loan are unknowable immediately after the student borrower finishes school and starts repayment.  IDR loans can be negatively amortized, and many IDR borrowers pay substantially more on their loan than if they took out a conventional loan.

Abraham and Strain argue for allowing the discharge of student loans in bankruptcy, an action that would not pass Congress.  Alternatively, it would be useful to modify chapter 13 bankruptcy payment rules to allow for increased student debt payments and decreased payments on other consumer loans during the chapter 13 bankruptcy period.  This proposal also probably lacks the 60 votes needed to get through the Senate. 

Abraham and Strain argue that it is inappropriate to treat student borrowers from people who borrowed for other purposes.  However, this is exactly what current bankruptcy law does and Congress is not going to change this situation.  A second-best answer is to provide debt relief.

The $10,000 immediate student loan debt discharge strikes me as excessively generous.  I agree that it could encourage increased future borrowing.  I would structure debt relief at the greater of 20 percent of outstanding loans per year or $3,000 per borrower per year for five years.  I would exclude borrowers with household income greater than the 90th percentile.

Concluding Remark

These has been a constant increase in the trend growth of the number of entrants to the workforce with student debt, the average student debt burden for new workers, and the number of older workers leaving the workforce and entering retirement with unpaid student loans. 

I understand that most people with student debt are better off than people who never went to college but increases in the burden of going to college will almost certainly increase the number of people foregoing higher education.  Congress is not going to act on this problem.  Many of the proposed solutions won’t work.  Some unilateral debt relief is the only way to avoid worsening debt burdens and increases in the number of people foregoing higher education.

David Bernstein, an economist living in Denver Colorado is the author of A 2024 Health Care Reform Proposal.  Use promotion code REFORM101 for a discount on the paper.

True-False Questions from the 2024 Health Care Reform Proposal

Test your knowledge on the continuing health insurance reform debate.


The true-false questions presented here are fully explained in the memo A 2024 Health Care Reform Proposal.

Questions:

  1. High-deductible health plans coupled with health savings accounts are more likely to prevent a $25,000 to $50,000 out-of-pocket health expense than short-term health insurance.
  2. The sum of deductibles and worker share of premiums has decreased since the passage of the ACA.
  3. Tax preferences associated with health savings accounts are smaller for low-income people than for high-income people.
  4. The Senate could make major changes to the tax-treatment of employer-based insurance and the premium tax credit based on a majority vote.
  5. Short-Term health plans provide great protection if total health expenditures remain below the annual cap.
  6. The ACA guarantees that people purchasing state-exchange health insurance have access to top cancer hospital if they get cancer.

Answers and Discussion:

  1. True. High-Deductible health plans cap out-of-pocket health expenditures. The current out-of-pocket limits are $7,050 for an individual policy and $14,100 for a family policy. The arbitrary benefit exclusions on short-term health plans can lead to large out-of-pocket expenses for relatively minor health problems.
  2. False. The sum of deductibles and worker shares of premiums has risen since passage of the ACA.
  3. True. HSA contributions are deductible. The value of the deduction is determined by marginal tax rates. This disparity could be eliminated by replacing the HSA tax deduction with a tax credit.
  4. True. if done through the tax reconciliation process. Several tax changes are proposed in the book including the tax credit discussed above and the replacement of the tax subsidy for employer-based health insurance with an employer subsidy of state-exchange insurance.
  5. False: A three-day stay in the hospital could result in thousands of dollars of health expenses for people covered by a short-term health plan. The book points the reader to some papers that found problems associated with short-term health plans could be rectified through reinsurance subsidies or by allowing automatic access to Medicaid for people covered by a policy with an annual cap.
  6. False. In fact, state-exchange health insurance policies tend to have narrower provider networks than employer-based health insurance policies. The book discusses how issues related to narrow network policy might be addressed through network adequacy regulation, expansion of the No-Surprises Act and new subsidies.

I am not looking forward to a 2024 debate between advocates of Medicare for all and people who want to tinker around the edges of the ACA.  The memo A 2024 Health Care Reform Proposal makes the case for a centrist-flavored overhaul of health insurance in the United States.

Will Congress Change Retirement Savings Rules?

Retirement plan proposals currently under consideration by Congress will increase profits for Wall Street firms by increasing the use of high-cost 401(k) plans. These proposals do not assist the people having the hardest time saving for retirement. This memo evaluates the pension changes under consideration by Congress and presents alternative proposals.


Introduction:

recent CNN article describes several bills before Congress designed to change rules governing retirement plans including the Secure Act 2.0, a bill that has been passed by the House, and several proposals drawn up in the Senate. This memo outlines these legislative proposals and evaluates their potential financial impacts.

Features of the House Secure Act 2.0 bill:

  • Requires automatic enrollment in 401(k) plans, sets an initial contribution rate at 3.0 percent of salary, and increases contribution rate by 1.0 percent per year of service,
  • Increases catch-up contributions for people aged 62-64 and invest catch-up contributions in Roth accounts.
  • Allows employer matching 401(k) contributions on student loan payments,
  • Increases initiation age for required minimum distributions (RMDs) from retirement plans,
  • Require employers cover part-time workers working at least 500 hours per year for two years,

Discussion of bills in the United States Senate: 

The CNN article discusses several Senate bills addressing pension issues, which could be coupled with the bill that has already passed the House.

  • A bill offered by Senator Cardin and Senator Portman differs from the Secure Act 2.0 bill by excluding the automatic enrollment provision and its tax treatment of catch-up contributions.
  • A bill under construction by Senator Murray and Senator Burr may include provisions for new emergency savings options and annuity purchases by workers.
  • The starter K-bill offered by Senator Carper and Senator Barrasso facilitates creation of low-cost retirement plans, for small businesses and startups.  Proposed plans would have a $6,000 annual contribution limit and would allow automatic enrollment.

Analysis:

Comment One:  The automatic enrollment provisions in Secure Act 2.0 could lead to suboptimal savings outcomes for some workers.  It could lead to workers placing funds in a high-cost 401 (k) rather than a low-cost IRA.   (High 401(k) fees can decimate retirement savings as discussed here.)  Workers with substantial debt may be better off foregoing retirement contributions and rapidly repaying loans as discussed here. Many workers need to prioritize contributions to health savings accounts over additional contributions to 401(k) plans as discussed here.   This article makes the case for investments in Series I bonds outside of a retirement account instead of conventional bonds inside a retirement account.

Automatic enrollment into suboptimal financial options is bad policy.  The Cardin-Portman bill without an automatic enrollment provision would be preferable to the House bill.   A compromise bill would limit automatic enrollment to the amount needed to maximize receipt of the employer match and automatically enroll workers at firms without an employer match into IRAs.

Comment Two: An empirical analysis of the finances of people choosing to currently make catch-up contributions could determine if an expansion of catch-up contributions helps people who need to catch up or people already ahead.  It is likely expanded catch-up contributions for people in the 62-64 age group will primarily assist people who have little or no debt and are already well prepared for retirement.  People with debt should retire debt rather than increase contributions to their 401(k) because one of the worse financial outcomes is to enter retirement with outstanding debt and all financial asset inside a 401(k) plan.  

Comment Three:  It seems unusual to require catch-up contributions near retirement be made in Roth rather than conventional accounts.  I generally favor the use of Roth accounts instead of conventional account, but Roth contributions are most effective for young workers in low marginal tax brackets, not older workers nearing retirement.

Comment Four:  The proposal to increase the age of mandatory RMDs will benefit wealthier households capable of living by consuming from assets outside their retirement plans.  Less wealthy households will disburse their retirement assets earlier in life out of necessity. Households that delay distributions from their retirement plan because of the change in RMD rules will have to increase distributions and could pay higher tax later in life.

Comment Five:  The Secure Act 2.0 provision allowing employer matching contributions for workers making student debt payments will have a limited impact on savings incentives for most student borrowers and is not the most effective way to assist student borrowers.  Many young adults with student debt work at firms that either do not offer 401(k) firms or offer a plan without an employer match.  Young student borrowers that switch jobs prior to the employer contribution vesting will lose the contribution.  A rule allowing employer matching contributions into an IRA and allowing matching contributions for student debt payments would assist more student borrowers than the student-debt provision in Secure Act 2.0.

Comment Six:  The goal of increasing retirement savings for part-time workers would be better achieved by automatic IRA contributions instead of expanded 401(K) eligibility and automatic 401(k) contributions.   It would also be useful to change IRA rules to allow employer contributions into an IRA.   The participation of part-time workers into 401(k) plans will increase 401(k) fees.   Workers that use IRAs are free to select a low-cost highly diversified fund.

Comment Seven:  The goal of increasing retirement saving for workers at small firms that do not have a 401(K) plan would be better achieved through automatic enrollment in IRAS than by the creation of streamlined 401(k) plans.  Workers could seek out a low-cost IRA and are less likely to close the IRA than the 401(k) when they move to a new position. Also, the streamlined 401(K) option created by the Carper/Barrasso bill could displace more comprehensive 401(k) plans both among new and existing firms.  

Comment Eight: Many people currently withdraw a substantial portion of their retirement funds prior to retirement.  Around 60 percent of young adults have borrowed from their 401(k) plan.  It is unclear how the Murray/Burr bill will facilitate savings for emergencies while increasing saving for retirement.  One way to address this tradeoff is to encourage a shift in retirement savings from conventional accounts to Roth accounts.  Roth accounts allow disbursements of contributions without penalty and tax prior to age 59 ½ while conventional accounts apply penalty and taxes to all early disbursements.

Current retirement plan rules allow the worker to disburse all funds at any age if she is willing to pay an additional tax and penalty.  My view is any expansion of the use of retirement funds for emergencies without penalty or tax should be combined with a rule change that requires a portion of funds contributed to the retirement plan remain allocated for use after age 59 ½. 

Comment Nine:  An alternative to the Murray/Burr proposal for the purchase of annuities in a retirement plan is a program, like Oregon Saves, that allows workers to contribute to the state pension fund.  The Oregon Saves program also obviates the need for creation of retirement plans by small businesses.

Concluding Remark:  Proposals altering the retirement savings system currently in Congress favor the use of high-fee 401(k) plans over low-fee IRAs. The primary beneficiary of these changes is Wall Street, not households experiencing the most difficult saving for retirement.

The comments presented here support the view that rules allowing employer contributions into IRAs and automatic enrollment into IRAs instead of 401(k) plans are superior to the enlarged role of 401(K) plan offered by current Congressional proposals.   

Authors Note:  David Bernstein recently published a 2024 Health Care Reform Proposal, which differs substantially from the ACA modifications favored by the Biden Administration and the Medicare for All proposal favored by the progressives.  The program outlined in this paper available on Kindle would bring the United States close to universal coverage and would substantially improve health and financial outcomes for people with low-cost health insurance policies.

Appeasing Russia Will Fail

Many pundits and analysts, including Jeffrey Sachs in a recent CNN article, are arguing against sanctions and weapons for Ukraine. Sachs favors a peace deal that ends NATO growth and creates a neutral Ukraine. This unenforceable approach would lead to further aggression against Ukraine and neighboring states.


Introduction:

In a recent CNN opinion peace, Jeffrey Sachs argues against sanctions and military support for Ukraine and for a quick peace deal.

The two-pronged US strategy, to help Ukraine overcome the Russian invasion by imposing tough sanctions and by supplying Ukraine’s military with sophisticated armaments, is likely to fall short. What is needed is a peace deal, which may be within reach. Yet to reach a deal, the United States will have to compromise on NATO, something Washington has so far rejected.

The specious arguments used by Sachs to advance this policy will lead to a future of war and genocide.  This approach will not alleviate the economic issues from the invasion.

Analysis:

Russia is committing war crimes in Ukraine and Putin is supportive of these actions. Putin does not believe Ukraine is a real state. How can Ukraine make a deal with Russia given Putin’s stated aim and current actions?

Russia could sign a peace deal, regroup, and reinvade.  The starting part for the new invasion would the parts of Ukraine that Ukraine cedes to Russia, a lot closer to Kyiv.  The best way to deter Russia from a future invasion is admitting Ukraine into NATO, the very action Sachs opposes.

Sachs correctly points out there are holes in sanctions. Sanctions on imports are not the only tool needed to combat Russian aggression.  The west can end all scientific cooperation including space, all travel and tourism to Russia, remove Russia from the WTO, ban Russians from international sporting and cultural events, and stop exporting technology to Russia.

Sachs pointed out that countries representing most of the world’s population did not vote for resolutions against Russia.   The countries that are not unequivocally opposed to Russian aggression have a relatively small percent of the world’s GDP and the GDP share may be a better measure of likely effectiveness of sanctions.  Countries that have not supported resolutions condemning Russia do not parrot the Russian line on the invasion and may come around with more evidence of atrocities.

Sanctions and disruptions from the war are impacting the world economy.  The war is preventing planting of grain, and Russian ships are preventing the delivery of Ukrainian grain to the world.  Russia could control around 30 percent of the world grain supply if it takes control of part of Ukraine.  Any peace deal should be constructed so Russia does not have more power over the world’s food supply.

Western nations need to plant more grain. The United States should end the ethanol mandate and covert corn farms to wheat farms.  See the U.S. subsidy that powers Putin.

Sachs points out that higher oil and grain prices could increase export revenue to Russia in the short term despite sanctions.  The Ukrainians may have to disrupt Russian exports at some point.  The west could ration and substantially reduce consumption of gas perhaps through a COVID type shut down.

Sachs seems to accept Putin’s concerns about NATO expansion.  NATO nations have not invaded either the Soviet Union or Russia.  There are numerous examples of the Soviet Union and Russia invading its neighbors.  

Sach’s deal with Russia is outlined in the second to last paragraph of his essay.

“The key step is for the US, NATO allies and Ukraine to make clear that NATO will not enlarge into Ukraine as long as Russia stops the war and leaves Ukraine. The countries aligned with Putin, and those choosing neither side, would then say to Putin that since he has stopped NATO’s enlargement, it’s now time for Russia to leave the battlefield and return home. Of course, negotiations might fail if Russia’s demands remain unacceptable. But we should at least try, and indeed try very hard, to see whether peace can be achieved through Ukraine’s neutrality backed by international guarantees.”

It seems a bit late for this deal.  Russia has already killed a lot of civilians and seized a lot of land.  What type if international guarantees would support Ukraine’s existence?  The Budapest memo?  That worked out so well.

The end of the war does not end the problem.  The peace must be enforced somehow.  Ukraine must be rebuilt.  Western funds should not contribute to rebuilding areas seized by Russia.  Any peace that does not end in a defeat by Russia will result in even more aggression.

David Bernstein is an economist living in Denver Colorado.  He is the author of A 2024 Health Care Reform Proposal.  This plan available on Kindle will move the United States close to universal health coverage, would enable continuous coverage during periods of unemployment and would improve health and financial outcomes for people with low-cost insurance coverage.