Friday, December 15, 2017

Misunderstanding Social Security

Every few months it pops up on social media:  “I paid into Social Security and the government is using my money without my permission!”  It’s listed as “Fun Facts” and says that it’s your money, politicians are using it without your permission, and they are lying about insolvency because it is running a huge surplus.  Let’s take a look at the validity of that outrage.

The first person to claim Social Security was Ida May Fuller.  She paid in a total of $25.75 over the three years of working in the 1930s and had collected $22,888.92 by the time she died at age 100.  How could that all be her money merely held in a lock box and paid back to her?  NO.  Social Security is a tax, set up like an insurance policy or annuity.  Everyone is required to pay the “premiums” to get in return an agreed amount upon retirement.  All the money goes into a pool and is paid out to retirees as promised.  It is workers’ money going in, retirees’ money coming out.

Initially with more workers than retirees, that pool grew.  The Treasury doesn’t keep it hidden in a mattress or invest in gold.  They don’t put it in the local credit union or bank; nor do they buy stocks or corporate bonds.  They are required to invest it in government bonds, considered one of the safest possible investments.  But those bonds are the vehicle for the government to borrow money when it spends more than it has – which is most of the time. 

So yes, the government spends that money, but it has an obligation to pay it back to the Social Security Trust with interest, the same obligation it has to anyone else that buys government bonds.  This isn’t raiding the trust fund; it’s spending money that was borrowed.

Why are we worried as long as there is this huge surplus ($2.85 trillion) in the fund?  With more people retiring and a smaller workforce contributing – more going out than coming in – soon that huge surplus will be gone.  Here is what the government writes in the press release announcing the 2017 annual report:  The year when the combined trust fund reserves are projected to become depleted [i.e., all gone]…is 2034…[after that] there will be sufficient income coming in to pay [only] 77 percent of scheduled benefits.”  What could extend that date is a continuing strong economy with high employment with good paying jobs.

Once we pay the tax, it is no longer our money.  Politicians are not robbing the Social Security bank, but are treating the money as they would any other borrowed funds.  The surplus is large now but could easily disappear in less than two decades – in other words, if you are 45 years old today, expecting to collect full benefits at 65 is iffy.  When nothing is done and the fund runs out, it is highly likely that Washington will avoid the unpopular action of cutting benefits, thereby adding costs.  That will impact the debt.

So most of what is posted is neither fun nor is it facts.  It’s mean and nasty, a scheme in support of a political agenda to get people all upset – and it works!  Critical thinking is impossible when people fail to do even a little research.


Those are the basics.  For a more in depth explanation of Social Security issues, see here, here and here.

Monday, December 11, 2017

Paying Attention

We start with a CNBC story about a new miracle product advertised to help people achieve optimal human performance – whatever that is.  A reader sent me an email with the subject line “If only people read your blog” along with the link to that story.

The headline reads:  “This start-up raised millions to sell 'brain hacking' pills, but its own study found coffee works better.”  So what do conscientious business people do when their own study shows that pills they are selling for $40 a bottle are “less effective in many ways than a cup of coffee”?  They try to “delay publication of the study and asked researchers to change the name of the product [studied] to distance it from the analysis.”

The company claims their “supplements such as chewable caffeine pills help the human system become ‘quantified, optimized, and upgraded’…and that they may unlock the ‘next-level thinking’ that will be key to humanity's evolution.”  Pay no attention to that pesky research comparing it unfavorably to coffee or to the general lack of scientific evidence backing their claims.  The news report concludes with information that one month after receiving the results of the study, they changed the company name and hired a scientist, as neither co-founder “has a scientific background.”

Of course these products are marketed as dietary supplements to sidestep FDA regulations.  They are therefore only subject to investigation after problems are reported.  Problems may include illness, injury or major physical side effects; the financial side effects of tossing away $40 for a bottle of chewable caffeine pills are left to the individual.  (For a more in-depth discussion of the problems with nutritional supplements in general, see my comments here, here and here.)

What is frightening is that they are selling millions of dollars of these products to people who should know better.  (But that’s a drop in the bucket compared to the revenue generated by the supplement industry as a whole.)  P. T. Barnum was right!

And speaking of people knowing better – after much legal foot-dragging, stalling and negotiating by the defendants, a Federal Judge has ordered tobacco companies who lied to the American public about the dangers of cigarette smoking to take corrective action.  They are forbidden to use any health descriptors including "the words ‘low tar,’ ‘light,’ ‘ultra light,’ ‘mild,’ ‘natural,’ and any other words which reasonably could be expected to result in a consumer believing that smoking the cigarette brand using that descriptor may result in a lower risk.”  In addition, they’ve been ordered to undertake a broad campaign, advertising the dangers of smoking including: website postings, labels on cigarette packages, and newspaper and television ads.

That’s all fine, but a few weeks ago I was out with my granddaughter on the day after my birthday.  She asked how old I was now.  When I told her, she said, “It’s a good thing you didn’t smoke or you would be dead already.”  So if a five-year-old can figure it out and express it that clearly, I think it’s more a matter of motivation than information for teens and adults.


A little critical thinking and paying attention goes a long way to making us healthier and wealthier.  Isn’t it worth a try?

Friday, December 8, 2017

MYOB

Minding your own business was, not too long ago, a favorable behavior.  No one wanted you judging or advising or trying to do their job for them.  Now the opposite is true, at least the part about doing someone else’s job.  Now we are encouraged, sometimes even required to do many jobs we haven’t been trained for and don’t get paid for.

The other day when I was grocery shopping I found myself in line for one of four self-service checkout lanes, patiently waiting for the person ahead of me to scan her groceries, bag her groceries and pay the computer.  Soon it was my turn to do the same.  Those four lanes plus four self-service express lanes were overseen by two store clerks in case the computer got grumpy, a customer was puzzled or someone forgot to scan an item.  The experience at big box hardware stores is often the same.  They hire one person instead of four and let the customer do the work.

This is a far cry from the grocery stores at the turn of the last century when customers stood behind a counter and passed their orders through to a clerk, who would pick items off the shelves in back.  And Amazon Go plans to take it a step further, where the “checkout-free shopping experience is made possible by the same types of technologies used in self-driving cars: computer vision, sensor fusion, and deep learning.”  Just fill your cart and leave.  The computer knows who you are, what you bought and where to charge it.

The same is true when calling customer service or trying to work out a problem on line.  The typical phone call begins with a question about choosing a language.  Then you must “listen carefully as our menu has recently changed.”  After you have categorized your problem according to their definitions and pressed the appropriate buttons, you find out your position in the waiting line and must to listen to music and/or advertising about how important your business is to them.  As the wait goes on the computerized voice may remind you that you can always research your problem at their website.  At the end of the call you may be lucky enough to take a survey on how well you were treated either by pressing more buttons or speaking your answers so the computerized voice can tally and report your opinion and thank you for your time.

Suppose you lose patience and decide to try the on-line route.  I recently went to the Microsoft website with a question and was exposed to a robotic chat partner.  It presented me with categories and subcategories only to find that the problem was not one they anticipated, so I was given the option to sign on to a waiting line by filling out a form and requesting a return phone call.  While waiting for the call, I figured out the problem.  When the phone rang, I pressed the number to cancel the call.  Two minutes later the phone rang again.  I once again pressed the number to cancel the call.  When the phone rang a third time, I pressed the number to speak to a human.  I spent a full eight minutes on the phone with talking to a person trying to get their computer to stop calling – a problem they created (presumably because they care so much about my business).

It’s the same in banking.  This article from last spring tells of banks replacing tellers with ATMs and other automation delegating the work to customers.  In the Washington, D.C. region teller jobs have “dropped by nearly half in the past 10 years,” faster than the 17 percent drop nationally, with the expectation of losing another 30 percent by 2025.   It has become common for banks to charge a fee for not going paperless, requiring them to mail a monthly statement instead of customers going on line to retrieve their own statements from the website.

Many other industries are adopting this philosophy of virtual customer interactions or have been phasing it in for a long time.  When is the last time you have used a travel agent to book an airline or motel?  A new restaurant in San Francisco, called Eatsa, requires zero human interaction.  A Business Insider piece describes how cashiers’ work has been completely outsourced to customers.

As more and more laborsaving devices arrive on the scene, we have less and less time.  Everyone is rushed, and computers that were supposed to make our lives easier, following in the footsteps of indoor plumbing, vacuum cleaners and microwaves before them, just seem to be adding to the frenetic pace of life.


Monday, December 4, 2017

Consequences of Not Thinking Things Through

Sometimes we believe that we are backing a worthy cause or making a good decision, but it turns out (sometimes too late) not to be the case.  Two recent examples in the news are trophy hunting and tax deductibility.  Though they may seem totally unrelated, they share the common characteristic that we tend not to think them through.

They both tend to be political, which makes it all the more important that we fully understand what is going on so as not to be manipulated by the opposing forces.  In these cases I am taking a critical thinking approach rather than taking sides.

In the first case, many oppose trophy hunting as treating animals badly.  There was talk earlier this year of banning imports of trophy-hunted elephants and possibly other species for that reason.  A deeper look reveals a different story.

This article from CNN explains that the major threat facing elephants and other exotic wildlife is not the trophy hunters, but other factors such as loss of habitat, retaliatory killing by local farmers and poaching.  Poachers come at night to kill the elephants for their ivory.  Controlling poaching, reimbursing farmers for crop damage and preserving the savannah requires funding.  A major source of that funding is the license fees paid by the rich trophy hunters.  As long as the hunting is well regulated, the overall impact on wildlife can be positive.

It seems counterintuitive at first glance that shooting a few elephants or lions in a well-regulated way could benefit the larger group, but it’s true.  The writer of the CNN piece admits to being a conservationist and vegetarian who wishes for a different solution, but the revenue ensures positive outcomes for animals as a whole and jobs for local game wardens.  Other sources agree, including The University of Washington’s Conservation Magazine and the National Geographic.  Yet some want to brand these fat-cat hunters as evil men who hate animals and are destroying the planet.

The second example has to do with tax deductibility, which is the subject of a fuss in Washington over a new tax law.  Various proposals intend to double the standard deduction while eliminating different itemized deductions.  But are these deductions as valuable as their backers claim?  Here is a simplified explanation.

A deduction is the amount we subtract from our income before calculating taxes.  If we earn $50,000 and have $15,000 in deductions, we pay tax on only $35,000.  Using a 15% tax bracket, the actual savings is not $15,000, but 15% of that, or $2,250 – still nothing to sneeze at.

But don’t forget the standard deduction!  You must spend that $15,000 to get the benefit, but we can subtract $12,000 without doing anything, which would reduce our taxes by $1,800 (15% of 12,000).  In this example, the difference between having the deduction and not is only $450, or 3% of the total deduction.

Now I don’t know many people who would go rushing to the store for a 3%-Off sale, but that’s not the way it’s presented.  When the state or local government wants to raise your taxes they explain how it won’t hurt you because “it’s all tax-deductible.”  When a charity wants your money they emphasize the tax-deductibility.  When a tax preparer charges $50 for software or over $100 for the personal touch, they don’t tell you that this money saved you only an incremental $450.  No, they stress the much larger number at the bottom of your return, remind you that their fee is also tax-deductible and then urge you to get your money today at their high interest rate.  (Note:  The CPA Practice Advisor says that you should expect to pay an average of $273 in the 2017 filing season if you want to itemize your deductions.)


Elected officials at all levels, charities, environmentalists, tax preparers, animal rights advocates, realtors and many others depend on the majority of us not to think too deeply.  Perhaps some of them aren’t thinking clearly themselves.  But when we just nod in blind agreement, allowing ourselves to be misled, we get poor outcomes and may never realize it.

Friday, December 1, 2017

My Credit Card Pays Better Interest than My Bank!

Here is an odd realization.  My credit card actually gives me a better interest rate than my bank.

“How can that be?” the crowd will scream.  Everyone is always complaining about high interest rates on credit cards.  They currently average around 16.1% and some are much higher!  Not only that, but if you make a minimum payment or even a partial payment, the interest applies not only to what is left after the payment, but to the entire amount you owed them before the payment.  It takes many years to pay off a credit card if you pay just the minimum, even if you never use it again.  Typical advice from financial advisors and planners is to pay off your highest interest debt first, and that is invariably credit card debt.

This high interest seems like a scheme for banks to make more money, but it is partially due to the need to cover the risk they face when lending money, which a credit card is.  Some of those people will default on their debt and never pay them back.  The default rate on credit cards is up this year, but usually hovers around 3%.  That’s 3% of people who walk away from their debt leaving the banks holding the bag.  They charge the high-risk people more because they are more likely to default, but they charge everyone else more (except for those low, teaser introductory offers to get you hooked) to make sure they have collected enough to cover their losses.  As I’ve written elsewhere, businesses and governments really have only one source of money:  our wallets.  We all end up paying the price for bailing out the deadbeats.

Given all that information, what I’m saying about getting interest from the credit card company doesn’t seem to make sense.

But I’m not talking about the interest consumers have to pay.  I’m talking about the interest the credit cards pay us in the form of those cash back bonuses.  Discover pays 1% on all purchases (with some 5% quarterly specials) and a Capital One card advertises 1%,  2% on groceries and 3% on dining.  So here is the catch; when I pay off my credit card in full every month I get a cash bonus for every dollar I have spent and I pay them no interest.

When I look at a typical bank savings account I find an interest rate of 0.1% at Chase, for example, (or 0.4% for a Premier Account with monthly fees and/or monthly limits unless the balance is over $15,000).  So for practical purposes, the Discover credit card pays me 10 times as much for the money I spend each month as the bank would pay me if I let them keep my money for a year (assuming I did not have to pay any extra fees).


I know it’s not a pure comparison, money spent is clearly not the same as money saved, but the contrast is still interesting.  The credit cards don't pay me interest for lending them my money.  They pay me to borrow their money hoping I will end up paying them more in interest in return - but I don't!  It’s a curious result from some creative critical thinking.