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  #191  
Old 09-02-2016, 12:39 AM
DiscreteAndDiscreet DiscreteAndDiscreet is offline
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Originally Posted by exactuary View Post
I am amazed. The great papers in financial economics work from premises to conclusions:

Markowitz (1952)
Modiigliani-Miller (1958)
Samuelson (1962)
Borch (1962) - in an insurance context actually derives CAPM before ...
Sharpe (1964)
Black-Scholes (1973)
Merton (1974)
Harrison & Kreps (1979)

Several Nobels in there and the idea that Hayek didn't like it doesn't count.
From Sharpe:

"In order to derive conditions for equilibriumin the capital market we invoke two assumptions.First, we assume a commonpure rate of interest, with all investors able to borrow or lend funds on equal terms. Second, we assume homogeneity of investor expectations: investors are assumed to agree on the prospects of various investments-the expected values, standard deviations and correlation coefficients described in Part II. Needless to say, these are highly restrictive and undoubtedly unrealistic assumptions.However,since the propertest of a theory is not the realism of its assumptions but the acceptability of its implications,and since these assumptions imply equilibrium conditions which form a major part of classical financial doctrine, it is far from clear that this formulation should be rejected-especially in view of the dearth of alternative models leading to similar results."

This paragraph clearly describes abductive reasoning. Abductive reasoning is inferential reasoning based on determining a simple model which fits an accepted conclusion. The paper may present its results as a deductive process, but the selection of premises by the author was based on abductive reasoning.

Abductive reasoning can be made more robust by use of experiments, cross-validation with other models of the same phenomena, or identification of concrete mechanisms that implement the model's assumptions. Without these things, you are left with something that is better off as being interpreted narrowly rather than broadly.

The fact that economics celebrates this kind of work as a victory of deductive reasoning is a failing in economics. This is why no one but economists take economics seriously.
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  #192  
Old 09-02-2016, 10:03 AM
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Update (Aug. 22, 2016). From Tom Wildsmith

The Academy remains committed to publishing objective, unbiased public policy analyses on topics of public importance...... We will shortly be publishing a paper on public pension plans that will include concepts from financial economics.
Really? The paper might already be written and AAA-reviewed, but I wonder if putative authors have been rounded up. Who would want to be likened to the 1987 NFL replacements?
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  #193  
Old 09-02-2016, 10:49 AM
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Really? The paper might already be written and AAA-reviewed, but I wonder if putative authors have been rounded up. Who would want to be likened to the 1987 NFL replacements?
Keanu Reeves?
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  #194  
Old 09-02-2016, 10:10 PM
exactuary exactuary is offline
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Really? The paper might already be written and AAA-reviewed, but I wonder if putative authors have been rounded up. Who would want to be likened to the 1987 NFL replacements?
You know whereof you speak. When the papers can be laid side by side and subjected to the claims in the Wildsmith letter, the replacements are going to be crushed and embarrassed. Keanu Reeves does not show up in this emerging reality show.
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  #195  
Old 09-05-2016, 01:00 PM
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http://www.pionline.com/article/2016...issue=20160905

{Cartoon here}

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Originally Posted by P&I editorial
Heads must have exploded at the leadership of the American Academy of Actuaries and the Society of Actuaries once they realized some members of their joint Pension Finance Task Force were moving ahead with a paper challenging the standard actuarial practice of valuing public pension plan liabilities.

The paper seeks to contribute to bringing economic reality to valuation of liabilities, shedding light on the true cost.

But the initial reaction of the academy and SOA on Aug. 1 was to refuse to let the paper see the light of day. They suppressed publication, prohibiting the task force from posting or distributing the paper. To complete its suppression, the academy and SOA disbanded their joint Pension Finance Task Force, which was created in 2002 and, because of its longevity, appeared to have become more of a permanent fixture in the organizations.

Faced with mounting pressure caused by revelations of the action, the SOA on Aug. 26 relented and now plans to release a draft of the paper Sept. 5, followed by publication in the society's Pension Forum in October that includes different perspectives.

The paper calls for measuring public plan liabilities using risk-free interest rates instead of the standard practice of using long-term rates of return on investments.

The SOA deserves credit for backtracking on the original ban to limit expression it imposed with the academy. But its earlier action might still serve to intimidate members from expressing ideas and leave actuarial members and the pension plan community, including fiduciaries, distrustful of the SOA's embrace of objective research and discussion on actuarial issues.

Craig W. Reynolds, SOA president and consulting actuary at Milliman, in an open letter posted on the society's website, makes no mention of any support of the change by the academy.

For its part, the academy offered no comment on the SOA plans for publication other than acknowledgement that it will be released. The academy remains critical of the paper for not completing what it calls its rigorous review process and adherence to its editorial standards.

Thomas F. Wildsmith IV, president of the Washington-based academy and president and senior manager of public policy at Aetna Inc., in an open letter to members, said the academy “will shortly” be publishing its own paper “that will include concepts from financial economics.” Actuaries and the pension community have to wonder whether the academy will adhere to its rigorous review standards for its own paper, developed in the wake of the prohibition on the PFTF paper, which underwent the academy's review process for months.

The society and academy need to do more to undo the damage and restore trust by reaching out to members and the pension plan community, which relies on actuarial consultants to help determine valuation of liabilities and contribution requirements.

One way they could do so is to reject any ongoing effort like the one by the National Conference on Public Employee Retirement Systems. NCPERS is seeking to suppress any divergence from defined benefit plan orthodoxy, wanting to impose a form of control over service providers, including actuarial firms, and pension plan fiduciaries.

NCPERS last year adopted what it calls a code of conduct that's more like a pledge of loyalty. It puts obstructions in the way of doing business with firms not approved by NCPERS.

To enforce its code, NCPERS created two lists. One is a list of the good guys that adopted the loyalty pledge. Segal Consulting, whose services include actuarial work, and Gabriel Roeder Smith & Co., an actuarial consulting firm, were among the first signatories of the NCPERS code, both signing in February.

The other list is composed of bad guys, as defined by NCPERS, to give pension plan fiduciaries “a way to screen service providers for practices that harm participants and beneficiaries.”

For actuaries and money managers and other service providers, signing the NCPERS code of conduct raises the question of how such observance squares with their own professional codes.

For pension fund trustees, can they still meet fiduciary standards of duty when they observe the code of conduct, which obligates them to limit their opportunity set of money managers?

Pension plan funding is about finance and realistic valuation of liabilities. Efforts such as those by the Academy of Actuaries, the SOA and NCPERS that resist new approaches undermine the ultimate goal of pension income security, weakening public confidence in defined benefit systems. n

This article originally appeared in the September 5, 2016 print issue as, "Actuarial overbearing".
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  #196  
Old 09-05-2016, 05:52 PM
DiscreteAndDiscreet DiscreteAndDiscreet is offline
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The NCPERS code of conduct does not mandate the use of particular methods. The particular sticking point is that it excludes advisors who simultaneously engage in public policy advocacy with a tone that defined benefit obligations are inherently unsustainable. By my count, at least 9 of the 25 organizations that NCPERS identifies as advocating this kind of position are funded by the Koch family. The perception here is that these are organizations more interested in dismantling government employment infrastructure than they are in studying what can make it effective.

Now it's true that in the US, the private sector has largely come to the conclusion that defined benefit plans are unsustainable. There are reasons why the choices that our society has made have had that conclusion. This is not a fact of economics, but a consequence of the frameworks that we chose to deal with a problem.

In contrast, in the Netherlands, they chose to use an asset matching framework for retirement funding, but they supplemented that choice with heavy use of mandates and risk sharing. In the Netherlands, pension plans can be forced to merge together to form an industry-wide plan following a single risk management strategy and the benefits have variable annuity features. That's one possible solution to the society-wide problem of retirement income adequacy.

Choice of frameworks and choice of solutions have to complement each other. Insisting on a particular framework while forbidding solutions that work well with it just amounts to being difficult.

Public sector actuaries in the US are using a framework based on concepts that are used in engineering. The framework is not taught that way, but the concepts are the same as those used in stability of dynamical systems. Financial economics has more kinship with statics. It's not a matter of one being right and the other being wrong, but rather that they give different constraints on solutions with different advantages and disadvantages.
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  #197  
Old 09-07-2016, 04:55 PM
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Originally Posted by DiscreteAndDiscreet View Post
The NCPERS code of conduct does not mandate the use of particular methods. The particular sticking point is that it excludes advisors who simultaneously engage in public policy advocacy with a tone that defined benefit obligations are inherently unsustainable. By my count, at least 9 of the 25 organizations that NCPERS identifies as advocating this kind of position are funded by the Koch family. The perception here is that these are organizations more interested in dismantling government employment infrastructure than they are in studying what can make it effective.
False dichotomy. Sometimes dismantling government infrastructure is the best way to make it more effective. Assuming otherwise introduces a systemic bias.
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  #198  
Old 09-07-2016, 05:36 PM
DiscreteAndDiscreet DiscreteAndDiscreet is offline
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False dichotomy. Sometimes dismantling government infrastructure is the best way to make it more effective. Assuming otherwise introduces a systemic bias.
That depends on your definition of effective. Surely you have to see that some groups try to insist on a narrower definition of effective than others. I don't agree with NCPERS' tack on this but I understand why they feel threatened by efforts to force the discussion into particular frameworks.

If the world were all mine, I would frame effectiveness in terms of using personal income, employer income, national income, and investment income appropriately as sources of funding for retirement, disability and in some cases as bridge income for career changes at later ages. Funding strategy implies different trade offs on how these elements are tapped. I personally think some employers have retirement benefits that are too high and that individual saving may be underutilized. I also think that relying too much on individual saving can be ineffective due to needing larger balances in order to self insure.

For the most part, I feel that public sector retirement gets a lot right in the breadth of issues that it tackles and most of the efforts to force it along a particular path entail shutting your eyes to a lot of that.

I thought the sustainability vs solvency article in Contingencies was a much less divisive take on pension funding.
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  #199  
Old 09-08-2016, 12:46 AM
nonlnear nonlnear is offline
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That depends on your definition of effective.
Not really. Sometimes government services are more effective when they are abolished. This is true for all but the most ridiculous definitions of effective.

Whether or not one agrees with the Koch brothers' proxies, it is simply undeniable that the premise that it even makes sense to organize society in such a way that employers are directly linked to retirement funding is of questionable value, and introduces some structural risks which simply wouldn't exist if this stubborn bit of the tax code weren't so entrenched in our society.

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Surely you have to see that some groups try to insist on a narrower definition of effective than others.
I certainly didn't mean my post to imply an endorsement of the Koch brother's vision for the world. I was simply pointing out that being openly hostile to the very notion that a government service might be best abolished in the name of being non-partisan or somehow impartial is ignorant and/or disingenuous. And I wouldn't guess it's the former. After all, this is ALL political, especially when some group is insisting they are being apolitical.

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I don't agree with NCPERS' tack on this but I understand why they feel threatened by efforts to force the discussion into particular frameworks.
Again, to be fair, the presumption that employers have a major role to play in retirement I plucitly forces the discussion into a preset slate of framework options, excluding some other perfectly viable ones. That's okay, but it needs to be pointed out when a group states that they don't want to force the discussion into particular frameworks.

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If the world were all mine, I would frame effectiveness in terms of using personal income, employer income, national income, and investment income appropriately as sources of funding for retirement, disability and in some cases as bridge income for career changes at later ages. Funding strategy implies different trade offs on how these elements are tapped. I personally think some employers have retirement benefits that are too high and that individual saving may be underutilized. I also think that relying too much on individual saving can be ineffective due to needing larger balances in order to self insure.
This is true in a sense, but it's important to parse out exactly what is going on under the hood there. It's not just the typixal insurance diversification angle making self-insurance of a DB retirement more expensive. There is also - to put it kindly - generational diversification. When benefit levels are guaranteed, "funding" assumes a risky rate of return, and things go sour, the next generation pays more, and typically gets their benefits slashed as thanks. This is the deal the boomers have given their kids. Doubtless many of them quite smugly agree with you that public pensions got a lot of things right as the ones in plans that haven't crashed cash in the last round of non-slashed benefits.

Going back to a point in the middle of this paragraph, it is true that a good retirement plan often does more than just serve as a saving s vehicle. There are some other insurance-like functions embedded in it. But there is no good reason to presume that these other functions couldn't be handled well by other vehicles.

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For the most part, I feel that public sector retirement gets a lot right in the breadth of issues that it tackles and most of the efforts to force it along a particular path entail shutting your eyes to a lot of that.

I thought the sustainability vs solvency article in Contingencies was a much less divisive take on pension funding.
It was a cute but narrow meditation on "sustainability". Not a bad piece for what it is, but it is important not to make too much of the specific points in it which are true. Best to bear in mind the glaringly obvious thing which it deliberately avoided: human behavior in the face of incentives. Governments all have a powerful institutional incentive to defer as many expenses as possible. They often go one better and deny as long as possible the very existence of deferred costs. (See, for example, how the CBO's cost estimates are routinely gamed.) It happens. So it's well and good to point out that solvency isn't always necessary for sustainability if you have a pit at the end of your rainbow, but all that really means is that every official whose budget is affected by the need to pay into such a fund wants to imagine a really big pot. Now, before you accuse me of being all Koch-ey, corporations have quite notoriously mismanaged this risk as well. The difference is the power to tax. A private company mismanages its pension it explodes. Benefits get cut/bankruptcy/PBGC steps in, whatever. It's bad, but it ends. A government follows the same path of incentives and who loses? Not just the retirees, but a bunch of other people who never really had a say in what went down. It is fundamentally worse. And sometimes the taxpayers don't even have the ability to take some common sense measures to ameliorate the situation. Some state constitutions are real fusterclucks. By design.

So sure, solvency is not necessary for sustainability. But it is sufficient to guarantee it. And it immunizes the whole system from a lot of perverse incentives. Yes it costs more up front. Maybe that's a good thing - or at least not unequivocally bad.

On the other hand, [alleged] sustainability is not even sufficient to guarantee sustainability. All it really means is someone is willing to say they are pretty sure that the money isn't going g to run out because they projected lots of regional growth over the next t few decades. But if things don't pan out, you can ask their successor's successor about it.
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  #200  
Old 09-08-2016, 08:31 AM
DiscreteAndDiscreet DiscreteAndDiscreet is offline
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You're still trying to draw a line in the sand to avoid engaging with the idea that some things may be worth doing even if they aren't ideal.

Employers have skin in the game because compensation policies generally result in higher pay at later ages and longer service, while employers actually generally need a stationary distribution of worker experience levels.

The most striking example of this is military, police, and firefighter pensions. The very generous early retirement eligibilities are a consequence of the career pattern. For an average soldier, policeman, or fireman, they have to invest a significant amount in training in the early career and in order to get a career length that makes use of that investment, the entity needs to try to control average career lengths. Very short career lengths are generally bad and, while some longer careers are needed, there are not enough senior positions available to deal with the fact that you generally want to reduce turnover as just mentioned.

As far as things spilling over and affecting people who aren't involved: that happens anyway. Regardless of how we arrange the retirement system, someone has to insure retirement income. When an employer is on the hook for a portion of it, we measure the impact, we study how it can be addressed and so on. We have much less information about how things are going for the other parties insuring retirement income.

Bringing insurance companies more heavily in the mix for this is not necessarily a solution either. Profitability testing for annuities is greatly simplified in a matched assets framework, which is why insurance companies favor fixed income investment and variable annuity products with soft guarantees. Now given this, the question I have, is whether the economy produces enough sustainable high quality fixed income securities to immunize adequate retirement income for the entire population? Currently the supply of high quality fixed income securities is not adequate to meet demand and various entities are self-insuring lower quality instruments as a proxy for it. We've also seen before the outcome of a situation where underwriters attempted to synthesize high quality investments by diversifying junk quality guarantors, and we saw where that lead. Both of these, to me, imply flaws in views that seeking immunization is a panacea.
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