September 16, 2020 - Bankers Anonymous

With the great economic freight train of spring 2020 brought to a screeching halt by COVID-19, our usual supply chains buckled, broke, and then fell off the tracks.

Our normal ways of satisfying our needs disappeared. In the midst of a scramble over the past month, in some ways we went back in time. In other ways, we went forward in time.

I reacted to shortages at the grocery store by getting in the habit of ordering a dozen eggs weekly through my gym, which has a connection to a local farm. The eggs are very delicious, and very expensive, compared to grocery store-bought eggs. I feel very close to the land!

I admire on social media my friends and relatives home-sewing their custom face masks from old scarves and bandannas. Stylish! Unique! Hand-crafted! It’s all very Etsy.com.

I bought a 5-gallon bucket of hand sanitizer from a friend who converted his whiskey distillery to the task.¹

So the question becomes, will the legacy of COVID-19 be a return to a slower pace of economic life, recognizable from a century ago? A life full of locally-sourced eggs, hand-sewn clothing, customized distillery products and of course quality time with a small family unit? Seen from a certain angle, it’s all very Little House on the Prairie. Is that our post-COVID future?

No, that fantasy is silly. That train left the station long ago.

What’s happening instead, and what will remain after, is a jump-start to new ways of doing things.

In The Structure of Scientific Revolutions philosopher Thomas Kuhn argues that big change comes not as a slow evolutionary process, but rather in sudden paradigm shifts. What we’ve all experienced and observed in the last month of social distancing is a massive jump forward – maybe by many years – into the future of certain economic processes. Below are just a few trends that COVID-19 will rapidly accelerate. COVID-19 causes this paradigm shift, rather than evolutionary change.

The revolution in education

Online learning this month has offered an insight into the future of school and learning. For the first three week of school shutdown, the public elementary school where my fourth grader attends has worked on providing technology to all of her classmates. That technology procurement was necessary because it’s impossible to start online work if kids in the class can’t get connected. So administrators have rushed to acquire and distribute iPads, hotspots, and internet access for families for whom that was previously out of reach financially.

Before COVID-19, they could never do much with online learning, because too many families would be left outside the digital divide.

Having solved that tech problem over the past three weeks, however, new online learning methods, assignments become both possible and necessary.

With the education world forced to adapt so quickly and so universally, will education ever be the same again? Will universities, for that matter, ever be the same? It feels like COVID-19 has forced a paradigm shift in what’s expected of teachers, schools, and kids.

The revolution in payments

I already used the touchless Apple Pay service before now. But I’ve noticed, to my frustration, that a huge number of retail establishments – like my local grocery store chain – never have the right kiosks to accept payment this way. If we understand that bills and coins are a germ-filled disease vector, and even that exchanging credit cards with a cashier is too much contact, then the contactless Apple Pay represents the future. COVID-19 may mark a sudden paradigm shift away from cash.

Apple, as always, sees the future before the rest of us do.

The revolution in retail.

Did we think Amazon’s deliver-to-the-door business model already threatened brick-and-mortar retail before 2020?

Of course. But the only reasonable observation to make now is that Amazon has accelerated its take-over of retail businesses in America. Much more brick-and-mortar retail will now die, much more quickly, in a step-change paradigm-shift way, not in an evolutionary way.

From the distance of time, let’s say two decades from now, my freight train economy analogy that I began this column with will seem even more quaint, and even more apt. We will look back at spring 2020 – before the COVID-19 transformation – and see the way we did things in 2020 as impossibly inefficient. Impossibly brutal, dumb, loud, linear, and tracked. Like a freight train that can only go from one point to another. So limited.
Our sleek, smart, creative, rocket ship economy of 2040 will have blasted off from 2020, no longer held back, no longer limited, by the rails of a freight-train economy.

Note: This post ran in the San Antonio Express News in April 2020…I’ve just been remiss in posting my stuff on Bankers Anonymous! Forgive me.

Please see related posts

The coming death of brick and mortar (2016 edition)

The War On Cash

A small whiskey distillery near The Alamo that is also a family legacy

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Next request to the distillery: Please hook me up with a 5-gallon bucket of moonshine to tide me over during this period of isolation, as I spend large amounts of indoor quality time with my family. ↩

Adding to a vast ocean of unrelenting bad news, let’s explore some troubling research into the fine print on Social Security benefits.

Andrew Biggs, a resident scholar of the American Enterprise Institute, has two papers out this Spring with interesting implications on our most important safety net for retirees.

One paper has bad news for a particular cohort of soon-to-be-retirees. The other explores an idea for helping with current financial distress. I personally think his proposal is wrong, but worth discussing.

Biggs wrote in a recent paper that for a group of soon-to-retire folks – specifically those born in the year 1960 – the COVID recession could be very hurtful to their benefits claimed in 2027, at full retirement age.

In his paper, Biggs assumes the 2020 US gross domestic product (GDP) shrinks by 15 percent in 2022, and that average wages also drop by a similar amount. The net effect of this drop in average wages – as a mathematical input into the Social Security benefits calculations for people born in 1960 in particular – will drop benefits by 13 percent overall. If that happens, for a medium-wage worker born in 1960 in particular, Biggs calculates an annual and ongoing hit of $3,900. For that same medium-wage worker, lifetime social security benefits drop by a present value of $70,193 due to the 2020 COVID effect.

The math justification behind Biggs’ claim isn’t obvious unless you enjoy building your own Social Security benefits spreadsheet.¹

The math trick to know is that before calculating your first benefit check, Social Security indexes your annual earnings to a national wage index – rather than an inflation index, as you might expect.

If the wage index declines by 15 percent in 2020 (Biggs’ assumption), then this national wage indexing of 2020 earnings has a substantial negative impact on your benefit checks starting at age 67. Subsequent retiree benefit checks do increase according to inflation, known as the Cost of Living Adjustment. But if benefits start at a low base, for example, they will remain permanently lowered, even as they move upward with inflation over the years.

An economic recovery may mean later cohorts do not suffer this same temporary drop. Biggs recommends Congress consider interventions to protect this specific born-in-1960 cohort.

The COVID recession – depending on its duration and lasting effects on national wages – may also affect near-retirees born in 1961. So that’s your not-so-great news of the day on COVID.

Biggs also has written another paper in April 2020 which should be filed to the “interesting, but bad idea” pile. In the midst of our national discussions around stimulus payments, Biggs and his co-author Stanford Economist Joshua Rauh propose allowing pre-retirement individuals to take loans from their future Social Security benefits, which could be paid back at retirement age.

For context, private lenders do not make loans specifically collateralized by future social security payments. But Biggs and Rauh propose the federal government become that type of lender.

If a not-yet-retired individual decided to take a $5,000 check now, the authors suggest, the borrower could pay that loan back at retirement age by simply delaying owed benefits until the loan is repaid.

Part of the benefit to borrowers, Biggs and Rauh argue, is that the federal government could offer extremely low interest rates, knowing that it can recoup the money at the individual’s retirement date. This low interest rate helps the individual who could not otherwise borrow cheaply. In addition, warming the cockles of an economist’s heart, this cash infusion can be made budget neutral. Money paid out today during the crisis will be repaid, with low interest, by the worker at retirement.

In their scenario analysis, they show that most workers 45 or older who borrowed this way would likely only delay taking their social security benefits by three months, based on a $5,000 loan made today.

In simplest terms, Biggs proposes a mechanism for financially-strapped workers during the COVID recession to access their social security benefits early, with the obvious implication that they will have less later on, in retirement.

If enacted, (Narrator: this won’t be enacted) this form of pre-retirement loan would clearly impact the most vulnerable folks – people who have no other source of savings.

In general, I like considering any so-crazy-it’s-possibly-good wonky financial idea. But this is more like a so-crazy-its-possibly-terrible financial idea. I can’t endorse robbing future Peter to pay present Peter as a humane way to solve a short-term financial crisis.

When I am declared the National Personal Financial Benevolent Dictator (NPFBD) sometime in the future, I have a few different plans for Social Security. Different from both the current plan and Biggs’ suggestions.

My plan eliminates the need for complicated math and indexing as mentioned by the first Biggs paper. In my plan, basically, everyone gets the same amount of money. It doesn’t matter what your average 35 best earning years are, indexed for wages, then further adjusted for cost-of-living, then made progressive by counting different percentages of a specific workers’ earned wages. That’s a description of the current complicated math, simplified.

Instead, in my simple plan you get, say, $32,000 a year. Or whatever flat amount we choose. Everyone gets the same amount. No math. Congratulations, you’re 67. End of story.

If your lifestyle is above that cost, so be it. You should save some money now so you can maintain your lifestyle. If your lifestyle is below that cost, so be it. You’ll feel rich in retirement.

The complicated math we currently do for social security benefits is a very convoluted way to express a couple of wrong ideas. By wrong ideas, I specifically mean the ideas that:

1. We ‘earned’ our social benefits by a lifetime of working, and

2. If we worked more or harder or got paid more, then we should get a bigger chunk of cash in retirement.

I understand the implications of not doing any tailoring of benefits to individual workers and retirees. I understand why the current system feels “fair” to many. But I think the benefits of simplicity outweigh those implications, leading to a fairer outcome overall.

A spokesperson for the Dallas office of Social Security Katrina Bledsoe said they do not comment on projections or proposed policies, so declined to respond to my query about Biggs’ ideas.

Biggs responded to my query that he is very confident about the math behind his warning about the cohort of near-retirees born in 1960. His biggest doubt is whether the national wage index will actually fall by the estimated 15 percent – a sharp decline – or whether that’s too steep an assumption. At this point – not yet halfway through 2020 – we just don’t know yet.

A version of this post ran in the San Antonio Express News.

Please see related post:

Running for Personal Financial Benevolent Dictator

Building Your Own Social Security Spreadsheet

Building Your Own Social Security Spreadsheet, Part 2

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