Philadelphia Reflections

The musings of a physician who has served the community for over six decades

4 Volumes

American banking was invented in Philadelphia. The banking center of America has moved away and changed in extraordinary ways but the foundations remain.

New volume 2012-07-04 13:46:41 description

Second Edition, Greater Savings.
The book, Health Savings Account: Planning for Prosperity is here revised, making N-HSA a completed intermediate step. Whether to go faster to Retired Life is left undecided until it becomes clearer what reception earlier steps receive. There is a difficult transition ahead of any of these proposals. On the other hand, transition must be accomplished, so Congress may prefer more speculation about destination.

A New Era in Politics: Clinton, Obama, and Trump
New forms of communication made the party system largely obsolete.

Financial Planning for a Long Retirement

How should individual investors ensure they have enough money for retirement?

Such a person is often a professional or entrepreneur who has worked to accumulate the wealth. Legions of "advisors"line up to take this money and manage it or else to sell "products" that promise to solve some problem or other. Without this background, extra savings will be needed, to buy advice. And advice is not invariably reliable.

A person who has created his/her career and its wealth from scratch, can likely manage investments themselves, or at least supervise the process from a position of strength from observation. Reliable advice is not always cheap.

This collection of articles explains to the individual investor how to take control of their wealth. They may eventually decide to look for help from an advisor but they will retain control of their assets and they will know what to do.

Financial Planning videos on YouTube

Retirement Planning

Retirement Planning Video


Special Education, Special Problems

School Bus

President John Kennedy's sister was mentally retarded; he is given credit for immense transformation of American attitudes about the topic. Until his presidency, mental retardation was viewed as a shame to be hidden, kept in the closet. Institutions to house them were underfunded and located in far remote corners of a state. Out of mind. And while it goes too far to say there is no shame and no underfunding today, we have gone a long way, with new laws forcing states to treat these citizens with more official respect, and new social attitudes to treat them with more actual respect. We may not have reached perfection, but we have gone as fast as any nation could be reasonably expected to go.

However, any social revolution has unintended consequences; this one has big ones, surfacing unexpectedly in the public school system. For example, the king-hating founding fathers were very resistant to top-down government, so federal powers were strongly limited. So, although John Kennedy can be admired for leadership, the federal government which he controlled only contributes about 6% of the cost of what it has ordered the schools to do, and the rest of the cost is divided roughly equally between state and municipal governments. As the cost steadily grows, special education has become a poster child for "unfunded mandates", increasingly annoying to the governments who did not participate in the original decision. We seem to be waking up to this dilemma just at a time when the federal government is encountering strong resistance to further spending of any sort. The states and municipal governments have always been forced to live within their annual budgets, unable to print money, hence unable to borrow without limit. As Robert Rubin said to Bill Clinton when he proposed some massive spending, "The bond market won't let you."

The cost of bringing mentally handicapped individuals back into the community is steadily growing, in the face of a dawning recognition that we are talking about 8% of the population. Take a random twelve school children, and one of them will be mentally handicapped to the point where future employability is in question; that's what 8% means. Since they are handicapped, they consume 13% of the average school budget and growing. The degree of impairment varies, with the worst cases really representing medical problems rather than educational ones. Small wonder there is friction between the Departments of Education and the Medicaid Programs, multiplying by two the frictions between federal, state and municipal governments into six little civil wars, times fifty. An occasional case is so severe that its extreme costs are able to upset a small school budget entirely by itself, tending to convert the poor subject into a political hot potato, regularly described by everybody as someone else's responsibility. There are 9 million of these individuals in public schools, 90,000 in private schools. They consume as much as 20% of some public school district budgets.

All taxes, especially new ones, are bitterly resisted in a recession. Unfortunately, the school budgets are put under pressure everywhere by a growing recognition that our economic survival in a globalized economy depends on getting nearly everybody into college. Nearly everybody wants more education money to be devoted to the college-bound children at a time when there is less of it; devoting 13% of that strained budget to children with limited prospects of even supporting themselves, comes as a shock. Recognizing these facts, the parents of such handicapped children redouble their frenzy to do for them what they can, while the parents are still alive to do it. It's a tough situation because a simultaneous focus on specialized treatment for both the gifted and the handicapped is irreconcilably in conflict with the goal of integrating the two into a diverse and harmonious school community, with equal justice to all.

As school budgets thus get increasingly close scrutiny by anxious taxpayers, handicapped children come under pressure from a different direction. It seems to be a national fact that slightly more than half of the employees of almost any school system are non-teaching staff. Without any further detail, most parents anxious about college preparation are tempted to conclude that teaching is the only thing schools are meant to do. And a few parents who are trained in management will voice the adage that "when you cut, the first place to cut is ADMIN." Since educating mentally handicapped children requires more staff who are not exactly academic teachers, this is one place the two competing parent aspirations come to the surface.

Unfortunately, the larger problem is worse than that. When the valedictorian graduates, the hometown municipal government is rid of his costs. But when a handicapped person gets as far in the school system as abilities will permit, there is still a potential of state dependence for the rest of a very long life. The child inevitably outlives the parents, the full costs finally emerge. We have dismantled the state homes for the handicapped, integrating the handicapped into the community. But when the parents are gone, we see how little help the community is really prepared or able, to give.

Disappearing Stock Power

The Right Angle Club of Philadelphia recently heard two presentations on newer investment strategies, one by our member on hedge funds and private equity, and a week later by his guest from Black Rock, on ETF funds. For the purpose of this review, both presentations ultimately got around to the same issue.

In the case of private equity, the investor purchases a share of aggregated profits from a company in the business of buying a substantial or controlling interest in corporations, usually underpriced or underperforming ones. And then, the private equity fund attempts either to fix up the company and sell it or fix it up and hold it indefinitely. Whether or not he achieves a profit, the individual investor in the fund loses the opportunity to vote the shares, or has it offered in such an awkward way the opportunity is meaningless.

Hedge Fund

A hedge fund similarly buys and sells stock on its own account, employing the money of investors, and generally adding huge amounts of borrowed debt. In this case, the stock is often held for such short times that voting rights are lost in the registration requirements. Taken as a whole, however, the issue is substantial, since it is reported that 70% of recent transactions have been conducted by unattended computers operating by pre-arranged contingency instructions, often responding in fractions of a second. While the resulting immobilization of voting rights is substantial, the main problem with hedge funds has been the way very small profits have been magnified by staggering amounts of borrowing, potentially causing very large losses if the transaction system is slowed for whatever reason. While hedge funds did perform well during the 2007-2009 crash, it will be 2012 before the incredible volume of transactions can be analyzed to see how close we were to disaster. There is definitely a risk in doing nothing, but probably less than the risk of ill-informed legislation making matters worse in some way.

In the case of ETF, the operator or "manufacturer" of the fund attempts to buy blocks of stock in all or representative samples of the companies listed on some index, weighted in proportion to their weight in the index. The intent is never to sell that stock, merely evaluating the fund price and its dividends as a mathematical exercise, and repurchasing or reselling the calculated bundle to other investors, but never disturbing the contents of the bundle unless the index changes its composition.

In all third-party investing cases except hedge funds, the advantage is that reduced tax and transaction activity saves costs, and avoiding internal selling of stock means essentially no taxes are payable until the investor ultimately sells the fund. The managers of funds maintain that these tax and overhead savings completely compensate for losing whatever opportunities for profit would come along and be exploited by expensive "active" managing of the funds. (Some investment funds employ more Ph.D.'s than any American University does.) Even if the performance turns out to be somewhat lower, there is a safety factor of exactly matching the averages, and thus agreeing to surrender the opportunity to join half of the universe of investors in beating the average, in order to avoid joining the other half of investors in doing worse. Furthermore, distributing the investment over a large group of corporations confers diversification, and thus surrendering the chance of a windfall profit in return for avoiding the occasional disastrous loss. In a sense, the fund investor no longer hopes for a company to do well, he hopes for the whole nation to do well. Summarizing the details, these funds provide safety of diversification and reduction of turnover costs, in return for assured but marginal above-average performance. Since this outcome is so greatly superior to the actual experience of non-professional investors overall, it is highly attractive to many investors and should be attractive to more of them.

In addition to these common features, the hedge funds and private equity expose the investor to the risks and rewards of choosing a skillful manager, who may or may not choose the portfolio wisely, and who may or may not use leverage wisely. The choice of portfolio companies, on average, justify a greater degree of borrowing as their quality improves, and all investment borrowing involves a risk that interest rates may go up for reasons unrelated to the investment. In the recent debacle, hedge funds did comparatively well, but nevertheless, there are times when it is unwise to borrow against even the safest securities. And finally, because of the risk of stock market raids by outsiders, hedge funds are quite secretive about their portfolio contents and force the investor to "lock in" his illiquid investment for several years at a time.

There remains one characteristic of both funds, and for that matter mutual funds, annuities, life insurance and all other forms of aggregated investing through a third party. The third party retains the right to vote the shares, admittedly with some little-used and generally unworkable opportunities for investors to request their own proxies. Such third parties almost always vote the shares in their custody in favor of management. There are occasional exceptions, as when union-managed funds will vote their shares in a political manner, or as when some mutual funds attempt to obtain pension fund business in return for cooperation on selected proxies, or in one legendary story the custodian was instructed: "Always vote AGAINST any management proposal." But these are presently exceptional situations. In the vast majority of cases, the proxy votes effectively disappear, and control of the companies in the portfolio gradually gravitates into the hands of those few stockholders who retain direct ownership and take the trouble to vote it. In fact, it is increasingly the case that the most effective way to frustrate a management proposal is not to vote against it, but to abstain entirely, in the hope that a quorum cannot be assembled.

Another popular movement augments this unfortunate situation. Increasingly, it is urged that top management be paid substantial parts of its reimbursement by stock in the company or options on it. The argument is that it is important to align the motives of top management with the rest of the stockholders. Reflecting concern about some recent events, such stock is or should be forced to bear the covenant that it may not be voted in a stock take-over by an outside raider, to frustrate the commonly used inducement to the manager to sell out his stockholders in a merger. Even when this particular contingency has been foreseen and prevented, the effect of increasing the shares in the hand of management and decreasing the voting shares in the hand of the outside public by freezing them in third-party funds -- soon puts the idea in the heads of managers that they own the company. The recent public indignation about inordinately high salaries for top management, can in large part be traced to the plain fact that voting control of the companies is visibly shifting into the hands of the people who receive those salaries.

Force Justifying the Use of Force

Once a group of people reaches an agreement about governance (or, become convinced that certain specified varieties of force will put an end to unspecified force), the stage is set to impose conformity upon those who prefer persuasion. The justification is almost always the same: force is offered to justify making the use of force unnecessary. Except for the indoctrination of children, the prior use of force is just about the only justification for forcible responses. There's a Quaker sound to that because it introduces an unproven suggestion that all force might begin with the training of children.

Even an approximation of that suggestion seems to fit the facts of fierce tribes like the Vikings and the Romans permanently switching to notoriously pacifist ones and goes on to include others like the Tibetans and the Japanese, and Germans. Unfortunately, it must also mention the early Quakers themselves, who have a history of cavalry troops in the English Civil War, Confederate sympathies in the American Civil War, and conflicted allegiances in the "Good War", World War II. The history may not be an undiluted one, but contains numerous threads of many switches in nature from a revulsion against violence, or reversion to it, nevertheless too rapid to seem plausible as either mutation (on one hand) or pure switches of reasoning, on the other. Conversion by childhood observation and rebellion, at least, seem more plausible mass-change agents.

Basic Lifetime Health Care?

Lifetimes are divided into sequential episodes for various practical reasons, and in the past fifty years, a brand-new episode known as retirement has even been added to the end of the sequence. We started with two thirty-year periods, childhood, and adulthood. For its own purposes, the medical payment system stretched to three segments within a 90-year lifetime, and then for practical purposes, a five-segment one: childbirth, childhood, education, employment, and retirement. The employer community pioneered this American hybrid, but almost all other national systems are government-dominated, so the American system segmented slightly to accommodate the reality that two employers (the parents and the child) must be recognized. The new retirement era tends to unite retirement with the government as becoming the organization which pays the bills tending to dominate the choice of payment. It probably does not overstate matters to say that recent immigrants favor a unified lifetime government system, while employers are reluctant to give up control for fear government control will spread out through the opening. The fact that medical revenue at any age originates in the employment interval lends plausibility to this attitude. Comparison of the quality of the two existing approaches does not seem to disqualify either employer-based or single-payer (lifetime national governmental), although the Constitution seems to favor individual 50-state hybrids.

What is gradually shifting during the past century is the inclusiveness of the sponsor groups, retirees enlarging at the expense of the employed. These groups see themselves becoming potential beneficiaries but changing at different rates and with different costs. Shifting costs are befuddlement, but it seems safe to predict that costs will ultimately fall to slightly more than the first year of life and the last year of life. Before that point is reached, we will probably experience a rising period of development costs in the middle. Actuaries calculate an average present lifetime cost of $300,000, net of inflation, around which actual costs will fluctuate. Taking a wild guess that first and last year will eventually settle down to $100,000 per average lifetime, or perhaps $150,000 including terminal care, the elements of the first-and-last year of life insurance should be calculable, and the premium approximated and re-adjusted annually on a current-cost basis. In the meantime, healthcare costs can be monitored by big-data methods. No one would expect such data to be precise at first, but a ten-year probationary period should suffice to arrive at commercially workable net costs for all citizens for the two universal costs for everyone -- birth and death. There will be universal outcries that other costs will be neglected, underestimated or misjudged, but a workable and basic universal system can nevertheless be established, and the intervening other medical costs managed in the conventional political way.


Innate Longevity

Someone must have made a study of longevity because the externals give every sign of genetic control. Pets and domestic animals vary widely in their typical lifespans from a few hours to more than a century, but each species seems to have characteristic longevity, roughly in proportion to its typical overall size. Within a certain limit, each species of a pet seems to live about the same length of time, suggesting some variety of genetic control. The human species is of most concern to longevity in the life insurance industry, and it is commonly noticed that very few people live beyond the age of 110, except in Biblical accounts of doubtful accuracy. Until recently, the average human longevity was what it was, but if we are to base insurance on this topic, it will soon enough be important to know how difficult it would be to lengthen it artificially. Right now, it appears to be next to impossible, but the same question got a different answer a century ago, and the answer has approximately doubled.

Bear in mind that the purpose of tinkering with longevity is to affect the cost of the insurance, and there are two natural forces at work == inflation and compound interest. They work in opposite directions; inflation reduces the available funds over time while compounding increases it. Since inflation is under human control whereas compounding is purely mathematics, only inflation is likely to be changed, while compounding is likely to increase the size of the principal. There are limits, but at a duration of 90 or 100 years, the net of inflation and compounding is apt to improve the size of the reserves. In any event, only inflation needs to be monitored in order to make adjustments, and after fifty or so years, it would have required pretty drastic changes to put similar life insurance started by President Hoover at mathematical risk today.

Since there is thus no need to worry about the finances of this system back to some Roman Emperor, approximately half of the permanent healthcare cost can be predicted (one-off forever) and some clever actuary could thus calculate what it would amount to, per year.


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8 Blogs

Retirement Planning
A process to determine the amount of investment portfolio to accumulate for retirement.

Retirement Planning Video
The retirement situation and how much to save for yourself.

Insurance comes in many types, many mis-understood. There's Risk Management, which is very important; and there's Investment, which is often better done with products other than insurance.

Special Education, Special Problems
Until recently, mentally retarded children weren't even considered in school budgets. But in recent decades, they have become one of the biggest challenges.

Disappearing Stock Power
The proxy voting power of corporate common stock is disappearing every day, by thousands of shares.

Force Justifying the Use of Force

Basic Lifetime Health Care?
One of the main reasons healthcare payments are so fragmented, is that it is so difficult to imagine how to unify them.

Innate Longevity