Thursday, September 29, 2011

The Social Science literature and 50 cent: "Get rich or die tryin"

My alternate title was a stupid phrase we used to say in euchre when the Queen of diamonds was played....
Call: "Can't buy me love.
Response: "Love don't come for free"
this lasted until 2004-ish when Dr. Nirav Patel forever ruined the game by insisting on using the response "Get in my belly" a la Austin Powers. No class! But onto economics.......

Dunn, Gilbert and Wilson (2010) produced an interesting literature review of the money-happiness link that seems to be en vogue throughout the social sciences, including economics. Authors premise is that if you're rich and not happy then you're not using your wealth correctly. Based on numerous happiness studies the authors offer 8 principles to using your money to make you happier. Some are obvious others not so much......the intuition and research cited within are the most interesting parts. Great read and easily accessible.
The principles are:
1. Buy experiences instead of things
2. Help others instead of yourself
3. Buy many small pleasures instead of a few big ones (not sure I agree...I loved my truck and derived pleasure from driving it everyday)
4. Buy less insurance (actually should definitely have health and life insurance)
5. Pay now and consume later (anticipation is one of the sources of joy...its eliminated when we charge it or go into debt to buy since we're still paying for it after the initial joy wears off)
6. Think about what you're not thinking about (before you purchase what you believe will make you happy...think and consider the downsides and opportunity costs)
7. Beware of comparison shopping (details can be overwhelming...perfect can be the enemy of the good)
8. Follow the herd instead of your head (find out what other people liked and enjoyed as a departing point)

Caveat: Beware of the studies which claim that rich people are not any happier than less rich people. Maybe, but one has to be careful of the question and how it is worded. If you asked anyone on a random day "How ya feeling? Are you happy?" Odds are that money couldn't completely wipe away all the daily pains like traffic, unruly kids, long hours, and all the million other little drags on present moment happiness that is also known as life. However if you ask the question with a longer term in mind or more broadly such as "How happy are you with your life over the last 10 years?" or "How satisfied are you with your life and accomplishments?" you'll get different answers.

Reading the poverty literature and the work produced by Duflo (MIT) and Karlan (Yale) its clear that poverty is stressful and takes a toll. The more wealth and savings a person, city or nation has, the more they are shielded from uncertainty and economic shocks. Peace of mind goes a long way towards being happy.

Monday, September 5, 2011

Military Retirement Plan changes (proposed)...

Lot of talk, lot of fear about changing the military retirement system. Here are a few useful links, my thoughts below.

The proposed Defense Business Board plan is here. It is packaged into 24 very readable slides with assumptions laid out.

A few articles and comments on the proposed plan: predictably the military community is adamantly against reform of the status quo.
Pensions and Investment's website: "Pentagon panel backs change to DC plan for military retirement fund"
NTYs "A Veteran Questions a Proposed Overhaul of Military Pensions"
Loren Thompson of the Lexington Institute's take here and a previous article for the Armed Forces Journal talking about rising personnel costs here.

Quick remarks:
Cheers to the SecDef and leadership for calming fears. They've vocalized that changes would not affect current military members or retirees. Good to know that the rug won't be pulled out from people who have made important and irreversible financial decisions based on the assumption of our current retirement system.

Next, I know that we, military members, consider ourselves the most important people who ever walked the planet, and we are. However one could justify and rationalize just about any compensation and retirement plan when starting from that assumption. Why not pay double what we do now? Don't we deserve it? What about vesting retirement at 100% of base-pay? We make sacrifices for the country, don't we deserve more? At some point, regardless of merit, our defense force could become unaffordable. That would be awful for lots of reasons.

But I start from another point. Our taxpayers are chipping in for a public good that is non-excludable and they have every right to expect our political leaders to negotiate the most effective-least costly defense force possible. Particularly when our military is an all-volunteer force subject to labor market constraints it doesn't make sense to talk of benefits as entitlements. If our soldier and airmen were draftees, forced to do this because of necessity then I'd be more sympathetic to making sure they were more than generously taken care of. But when we left behind the draft we opened ourselves to the free-market. Pay and benefits had to rise greatly in order to recruit new members and military members are much better off today than in 1970. As the DBB points out, both our officer and enlisted corps are very well compensated in comparison to their similarly educated peers, we get free health care, an enhanced GI Bill that nearly completely pays for three years of college, as well as active duty educational benefits, plus a retirement package of at least 50% of base pay and health care for member and family starting at the day of retirement. In short it is expensive to employ one of us and that cost becomes astronomical when one completes 20 years of service. Its not immoral for taxpayers to evaluate what and how we are paid or dial our compensation and benefits down in the future while keeping in mind the sacrifices the military will make in the future.

Some smaller but interesting concerns that the DBB plan addresses.

Why pay out at 20 years when a guy/girl will likely live another 40 years? Why not begin paying the pension at 55 or 60? A man's highest paying years are in the 35-55 range. We are paying retirees on top of what will be their peak earning years. Our system doesn't make sense in any context. And it leads to another problem.

Paying out after 20 years of service creates a powerful incentive to leave at 20. The old saying of "you're only working for half-pay" is true. There are a lot of forces pulling a guy away from military service once he hits 20 years and he takes his human capital with him at his peak earning years. Yes the pension becomes sweeter as a service member accumulates more time in service but it is unclear which is the stronger incentive.

Current retirement system is unfair to those who serve then are forced out. We are going through a reduction in forces phase in the Air Force. Those who get the boot will receive no pension, nothing towards their retirement. Say what you want about those who do one tour and leave with nothing accumulated towards retirement but when we go through troop-reduction phases and people are forced out with no pension and nothing contributed by the military towards retirement our system strikes me as unfair.

Our system is unbalanced against those who take on more dangerous/risky work. The guy who hands out towels in the gym gets paid on the same retirement scale as the Delta Force operator who has fast-roped out of countless helicopters in the middle of the night to assault terrorist compounds. How is that justifiable? Besides the Delta guy is probably leaving the service with multiple injuries. Obviously we could tinker with the current system and change the pension scales to favor those closer to combat/danger. Maybe Congress could vest retirement at 15 years for combat troops or when they hit 20 years they could get 65% base pay.

To be fair, a large change in retirement benefits and/or compensation could hurt recruitment of quality people. There is some merit to that argument but it is really an empirical question. We won't know until the die is cast. However in a no tooth-fairy financially doomed US economy, this might be a trade-off our citizens are willing to accept.