Annuities - Caveat Emptor

Pension industry posts suggest that annuities are a new gold mine for people in the insurance industry. One writer suggests that annuities are a great opportunity to expand one's income. The writer is referring to the income of sellers of insurance products.

The arguments advanced for why consumers should buy annuities are:
- stability
- safety
- diversification

In principle, economists like annuities because they seem to match the need for people to have income until they die with a product that does it. Even President Obama is quoted as favoring annuities in a retirement strategy.

So yes, in some situations an annuity might make sense - let's say you don't know what to do with Lottery winnings, An annuity might be a good way to make sure the money lasts as long as you do.

But buyers of annuities need to be very careful or they will be throwing money away:
- Their risks go up because they are giving up control of their money. If there is a sudden need for capital, all they are getting is the regular return. This is a huge loss of access. This is inherently desirable only when the annuity is being sold to someone who cannot make financial decisions rationally and for whom the capital is tempting to spend.
- Insurance companies love annuities because they get to invest the money - so they pay their agents well to sell them. I have heard as much as 12 percent of the purchase price can go to the agent. Someone is going to pay for this, namely buyers in the returns they get.
- In the current interest-rate climate interest rates are bound to be on the conservative side. We have had a zero-bound environment for four years. Who says this environment is going to change soon? (I have said elsewhere that we are in a zero-bound purgatory that will last until we figure out why we are in it and why it is not heaven. No sign we are there yet.)

If what you have is a 401k or an IRA, it is crazy to roll them over into an annuity. Far better to maintain control of them and when you get to be 70.5 years old, take the Minimum Required Distribution. For no fee, just the cost of the transaction, with no 12% load, the mutual fund or broker will figure out the MRD and pay it out like an annuity. Yet you still have control of the underlying assets and in an emergency you have access to them. You also don't pay taxes on the income until you take it out.

In my view it should be against the law to roll a retirement fund over into an annuity. Just saying.

WOODIN | His Contribution to the Platinum Coin, HuffPost

My story on the history of the trillion-dollar Palladium (Platinum) coin was published today by Huffington Post. I wrote it before the Fed and Treasury decided to rule out issuance of the platinum coin.  (HuffPost sometimes takes a couple of days to post things, often because of rights issues relating to images.) 

I obtained permission to use the image of the "Woodin Nickel" for my blogs (see January 11 post below), but HuffPost must have decided the terms of the permission did not apply to them, and only to my personal posts on Google Blogger. So only the $25 platinum coin approved in 2010 is shown in their post, courtesy of the U.S. Mint.

In this post I am including two photos of Will Woodin that were generously loaned to me for copying, to accompany what I might write about Woodin, by his granddaughter Anne Harvey Gerli. 

This is Will Woodin with his beloved guitar, outside
the U.S. Embassy to Cuba. Photo by permission
of Anne Harvey Gerli, Woodin's granddaughter.

Here Will Woodin is proudly displaying his
catch of the day. East Hampton? Pennsylvania?
Photo by permission of Anne Harvey Gerli.

The Elephant in the Treasury - Why the Palladium Coin Was Rejected

The elephant in the room at the Treasury and Fed is the fear of being accused of "monetizing the debt". When the country is at the "zero bound" where interest rates on Federal debt are being constrained by Federal Open Market Committee policy to approach near-zero percent, then the difference between debt and money approaches near-zero.

So why the Treasury and Fed concern about a palladium coin valued at $1 trillion? It would solve the big problem of the debt ceiling. Paul Krugman has pointed out in his column in the print edition of the NY Times on Friday, January 11, that the Congress failing to authorize the debt ceiling forces the Executive Branch to withhold authorized payments, which blurs the roles of the Executive and Legislative branches.

Raising the debt ceiling wouldn't grant the president any new powers... [and] if the debt ceiling isn't raised, the president will be forced to break the law; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.

The palladium coin would also not appear to require Congressional approval - although the law does seem to require a "marketing plan" for the coin to be submitted to the Congress and a $25 palladium coin issue went through the Congressional legislative process in 2009-2010 as I have previously noted.

Here are some objections:
1. Separation of fiscal and monetary policy is an article of institutional and theoretical faith than no one wants to interfere with. For the Treasury to issue a trillion-dollar coin to deposit at the Treasury would open up all kinds of questions about this separation.
2. The zero-bound situation is temporary and everyone would like to escape from this difficult world as soon as possible. Former Fed Governor Larry Meyers said in December 2008 that at the zero bound the FOMC has nothing much to do and they should all take a very long vacation.  I am sure, however, he was not expecting the vacation to last until 2013.
3. A system with Federal Reserve independence is more resilient than one where the Fed and Treasury are combined. It's the 100th anniversary of the creation of the Fed, which was created to maintain orderly financial markets (the Fed was a remedy for the Bankers Panics of 1907-1908) and to preserve the value of the dollar. The fear that a head of state might tamper with the money supply to finance a war or excessive consumption is well founded. A monetary authority protecting the value of the people's money is a widely emulated institution.

So, however annoyed we may be about GOP misuse of the debt ceiling as a bargaining chip for something else, and thereby interfering with the conduct of government, the Treasury and Fed are right in opposing something that would blur the distinction between them.

However, some other plan better be ready to thwart a debt-ceiling blackmail.

FDR's GOP Treasury Secretary Exempted Pattern Coins

This post is merged with Chapter 12 of my biography of William Woodin. It is kept posted to avoid broken links. 
http://cityeconomist.blogspot.com/2012/10/the-crash-and-fdrs-bi-partisan-response.html

Legality of the Trillion-Dollar Coin

One suggested way to address the debt limit challenge is for the U.S. Treasury to issue a trillion-dollar coin and then deposit it with the Federal Reserve System as cash. I'm not a lawyer, so I will not opine on the legality of any proposed action. However, I can read. I can look up the law. I can post it herewith.

The authority for minting a trillion-dollar "platinum" coin appears to come from U.S. Code 31, #5112, subsection (v). The reference is to palladium, which is in the family of "white gold" platinum elements, but has different characteristics from platinum. Note that the law in clause (v) (3) sets a minimum price for any minted coin, i.e., the cost of acquiring the metal and the cost of minting the coin. It does not have a maximum price. Here is the entire subsection, from the Cornell Law School website (see link at the end).

(v) Palladium Bullion Investment Coins.—

(1) In general.— Subject to the submission to the Secretary and the Congress of a marketing study described in paragraph (8), beginning not more than 1 year after the submission of the study to the Secretary and the Congress, the Secretary shall mint and issue the palladium coins described in paragraph (12) of subsection (a) in such quantities as the Secretary may determine to be appropriate to meet demand.

(2) Source of bullion.—

(A) In general.— The Secretary shall acquire bullion for the palladium coins issued under this subsection by purchase of palladium mined from natural deposits in the United States, or in a territory or possession of the United States, within 1 year after the month in which the ore from which it is derived was mined. If no such palladium is available or if it is not economically feasible to obtain such palladium, the Secretary may obtain palladium for the palladium coins described in paragraph (12) of subsection (a) from other available sources.

(B) Price of bullion.— The Secretary shall pay not more than the average world price for the palladium under subparagraph (A).

(3) Sale of coins.— Each coin issued under this subsection shall be sold for an amount the Secretary determines to be appropriate, but not less than the sum of—

(A) the market value of the bullion at the time of sale; and

(B) the cost of designing and issuing the coins, including labor, materials, dies, use of machinery, overhead expenses, marketing, distribution, and shipping.

(4) Treatment.— For purposes of section 5134 and 5136, all coins minted under this subsection shall be considered to be numismatic items.

(5) Quality.— The Secretary may issue the coins described in paragraph (1) in both proof and uncirculated versions, except that, should the Secretary determine that it is appropriate to issue proof or uncirculated versions of such coin, the Secretary shall, to the greatest extent possible, ensure that the surface treatment of each year’s proof or uncirculated version differs in some material way from that of the preceding year.

(6) Design.— Coins minted and issued under this subsection shall bear designs on the obverse and reverse that are close likenesses of the work of famed American coin designer and medallic artist Adolph Alexander Weinman—

(A) the obverse shall bear a high-relief likeness of the “Winged Liberty” design used on the obverse of the so-called “Mercury dime”;

(B) the reverse shall bear a high-relief version of the reverse design of the 1907 American Institute of Architects medal; and

(C) the coin shall bear such other inscriptions, including “Liberty”, “In God We Trust”, “United States of America”, the denomination and weight of the coin and the fineness of the metal, as the Secretary determines to be appropriate and in keeping with the original design.

(7) Mint facility.— Any United States mint, other than the United States Mint at West Point, New York, may be used to strike coins minted under this subsection other than any proof version of any such coin. If the Secretary determines that it is appropriate to issue any proof version of such coin, coins of such version shall be struck only at the United States Mint at West Point, New York.

(8) Marketing study defined.— The market study described in paragraph (1) means an analysis of the market for palladium bullion investments conducted by a reputable, independent third party that demonstrates that there would be adequate demand for palladium bullion coins produced by the United States Mint to ensure that such coins could be minted and issued at no net cost to taxpayers.  http://www.law.cornell.edu/uscode/text/31/5112

TAXES | Lost NYS Cig Revenue–$2.4 Billion

New York State Packs of Cigarettes Sold, Taxed and Untaxed.
Number of packs in millions and tax in $millions.

The Tax Foundation just put out a report saying that New York State has the biggest cigarette smuggling problem of any state in the USA.

It blames the high $4.35/pack cigarette tax. However, a cigarette tax is a Pigovian tax, saving money on NY State health-care costs if smokers are discouraged from smoking by the higher cost.

On the other hand, if there are easy ways to bring in untaxed cigarettes (e.g., by car from a neighboring state), then New York State benefits neither from the Pigou Effect (lower consumption of goods with high negative externalities) nor from the higher revenue it should have earned on the untaxed cigarettes.

What's the impact of the counterfeit on the budget? I have been doing this kind of work long enough to know that these calculations are complex. I have also been around enough to know that reasonable first approximations - if not distorted by subsequent misuse - usually provide pretty good policy guidance.

With that in mind, the chart above suggests that based on the Tax Foundation numbers and the amount actually collected in cigarette taxes in the latest fiscal year, New York State is losing $2.4 billion in uncollected cigarette-tax revenue. Now there's a budget gap-closer. 

The nature of Pigovian taxes is that counterfeiting will always be with us. The snake in the Garden of Eden smuggled an illegal fruit into the diet of Adam and Eve. But the attempt to collect more revenue will either generate more income for NY State or it will reduce smoking. Either way, the State is ahead.