Communicating Quantitative Information

1. Communicating Quantitative Information Excel Homework Social Security, Pensions Stocks and Bonds Life expectancy Homework: Postings. Homework due after Thanksgiving. Find on-line retirement planner. Compute prediction for yourself (or for a parent) or John/Jane doe or someone made up. Make posting on experience (do not show results)

2. Retirement problem What will I have in the future starting with pv and with the system of payments described by the rest of the parameters. • FV is future value =fv(rate, nper, pmt, pv, type) • Rate is 4%, • pv is -4000, • pmt = -2000 • nper = 20 • For type, try both 0 and 1. This indicates paying at the end of the period versus paying at the beginning

3. Retirement • Take it one year at a time:

4. Retirement Compare after 4 years: 13,172.36 vs 12000

5. Retirement answers: • Adding the 2000 to savings • at the end of the year: =fv(.04,20,-2000,-4000,0)  $68,320.65 • at the start of the year:=fv(.04,20,-2000,-4000,1)  $70,702.90 • Putting the money away, no interest: 4000 + 2000*20 $44,000

6. Purchase TV problem What is the better thing to do, comparing what you are paying in terms of the value of money today. This assumes a cost of money • You are comparing • the cost paying $2500 now with • the cost of making annual payments over the next 4 years • Assumption: you have or will have the money. You can invest money today to have in the future (put away less now to produce/grow to something later). • Use pv for present value • =pv(rate,nper,pmt,fv,type) • For rate, use 10% for what you need for capital • nper is 4. pmt is -750. • Set fv as 0. Try both values of type. The answer is different!

7. TV problem: answers • You don't pay anything for a whole year:=pv(.10,4,-750,0,0) $2,377.40 • Note: the first 0 indicates no extra last paymentIf you can get this deal AND you can invest money to ear 10% interest, take it! • You pay $750 at the start of each of the 4 years=pv(.10,4,-750,0,1) $2,615.14You are better off paying the whole thing up front! Go to Excel Help and read [more] examples.

8. PV and FV (and PMT) • Need to be careful on time unit, e.g., month vs. year. I avoided this in the 2 problems. • Why is present value of something in the future less now? • Think about what you need to put away to reach that value, assuming earnings and compounding • Need to be careful with signs • Solution: use HELP in Excel!!! • Need to be careful with default values

9. Alternate tools • Get google mail (gmail) account and use Google Documents • Word processing and Spreadsheet • Has advantage that you can access your projects anywhere • Has advantage that you can share access to work • Disadvantage: requires fast web connection.

10. Social Security • Not intended as investment/retirement plan • Transfer plan: • Tax current workers to pay entitled workers (retirees, disabled, families) a guaranteed percentage of prior wages • Full amount at 65 going to 67. You can start at 62 for reduced benefits (reduction stays in place). You can wait up to 70 for increased benefits (8%/year). • If you don't fully retire, some reduction in benefits up until 70. • Benefits can be taxed as income if total income large enough. • Original goals: • Encouraged retirements, helping new workers get jobs • Put money into circulation: help economy • Keep elderly out of poverty • Minimal administration costs • Success

11. Social Security taxes • Part of what is called 'payroll taxes' • along with Medicare (1.45), withholding taxes US and State (taxes taken away for income tax: exact amount owed determined when your file returns) • 6.2% from employee, matched by 6.2% from employer • Responsibility of employer to collect • Up to a cap, which has moved up over the years: currently set at $102,000 • Self-employed pay: 12.4%, also up to cap.

12. Social Security Situation • System currently takes in more than it pays out. • No 'lock box', but treasury bonds • Estimates are that system will start paying out more than it takes in in 2017 • Based on population ("baby boomers" retiring) and economy • Estimates are that in 2041, the funds will be depleted and the money coming in will only cover 70% Estimates are considered conservative: situation could be better, for example, if economy is good with more people earning money and paying taxes. These estimates are from 2 years ago. Extra Credit to find current estimate.

13. Is this a crisis? • Government generally runs a deficit • Surplus in latter part of Clinton administration • Deficits in Bush administration due to • fall in taxes because of economy • wars in Afghanistan and Iraq • substantial tax cuts (mostly benefiting people in upper upper-range of income) • Changes now (earlier rather than later) will make a significant difference.

14. Alternative view: see next • Real crisis is growth in Medicare entitlements • Entitlement: class of people entitled by law to benefits • Recent addition of drug benefits • Criticized from the right for being yet another entitlement • Criticized from the left for forbidding negotiations with drug companies to lower costs AND for not covering more expenses (the doughnut) • This is independent of issues of the uninsured, underinsured, benefits tied to employment, etc. • This is related to general issue of costs of medical care going up.

15. New Health Care legislation • Provide more efficient (cheaper) care • Require [almost] everyone to buy insurance • Encourage/require all but smallest businesses to provide health insurance • Support preventative/wellness care to Medicare clients • Provide plans in exchanges • Cut down on Medicare Advantage • Monitor (reward or punish) hospitals for better care • Close drug donut hole (negotiation with drug companies. • Other programs that may over time move towards pay for care versus pay for procedures. Congressional Budget office says this will reduce growth of costs

16. Personal Retirement Accounts • Divert portion of individual Social Security taxes to personal account. Details not complete, but may be: • 2% to 4%: (2% of salary to PRA, 4.2% to Social Security) • Go into managed account of index funds and bonds (see later) • Claim (hope) that this will grow faster than government securities • Upon retirement, use money to buy annuity • Anything left over available to individual and family • This is what is called: privatization of Social Security • With financial crisis, fall in stocks, election of Obama, this will not be pushed. • But some candidates did suggest it again.

17. Suggested fixes for Social Security • Pop the cap: raise from $102,000 ($106,000 in 2009) • Raise retirement age (for full benefits) • Raise tax rate on everyone. Raise tax rate on some. • Lower benefits (other than by age) • make raises based on wages not prices • decrease standard to cover less than 40% of prior income • Personal Retirement accounts would take money out of the system. • Significant transition problem: money taken out of system when it is needed • Advocates claim (hope) that investments make up for decreases in benefits. Give people sense of ownership. • Many (most?) economists are skeptical. Note also that the system would require fees to investment companies as well as increased administrative costs.

18. Panel: http://www.nytimes.com/2010/11/11/us/politics/11fiscal.html?hp • Findings leaked out. May still change. • Do raise (pop?) the cap on Social Security payroll taxes • Change benefits (means-testing): lower for some, higher for others. • Change tax code including • Remove mortgage interest deduction • Subject health care benefit, other benefits to taxes • Lower rates

19. My comments • People really don't want to simplify taxes. • They want to keep all their benefits AND lower tax rates. • Tax rates actually at historic low, especially for richest 2% richest .1% • Extra credit opportunity for research? • Deficits are big problem, but is now the time to cut programs? • Programs stimulate jobs • Stimulus did prevent deeper decline.

20. Pensions, etc. • Employers may offer • defined benefit plans: employee received a set amount (based on salary and years of service) upon retirement. This is the traditional way, being replaced in many places by: • defined contribution plans: Employee contributes and employer matches/over-matches. Amount is invested. • Example: SUNY: 3 % with 8% match • May be choices. Enron and other examples led to rules to widen investments choices, but… • Too many choices tends to decrease participation • Recent legal change made enrollment the default. New employee needs to ‘opt out’. • Why would anyone opt out?

21. Independent of employer • Tax encouraged plans. Person saves into special account • IRA: tax deferred • Roth IRA: tax sheltered • NOTE: under-utilized • Limits to how much • Limits to who can do it

22. Investment options • Individual company stocks • Mutual funds: buy shares. Manager buys & sells various things according to a strategy. Management fees. • Index funds: stocks of each of some set of companies, say S&P 500 industrials. Fees are less. NOTE: all of the above often called equities. • Municipal Bonds: individual bonds of government agencies. Get stated interest usually twice a year plus principle back when 'bond matures' NOTE: many of these did fall in value in financial crisis, due to supply of hedge funds selling. Face value still good. • Company bonds: same from companies • Money market, CDs, savings: offered by banks: defined interest, maturity date. • Treasury bonds: most secure, lower interest

23. Investment options • Global (outside of USA or mixture) funds, bonds, stock • Gold, other commodities • Real Estate Investment Trusts • Futures: puts and calls • Other???

24. Treasury Bills • … are bonds sold by U.S. government. • Purchased by U.S. residents AND others • Many are purchased by people, organizations, banks in China • The comment that 'we are borrowing money from China to pay for the war' comes from this. • Note: China (Chinese companies, people, government) also sell U.S. residents goods.

25. Federal reserve • Acts to prevent (control) inflation and • Help economy • Interest rates already very low. • Recent effort: buying treasuries is intended to encourage borrowing.

26. Zero-coupon bond • Buy at specific discount from 'face' value. • Do not get periodic interest. • At end of agreed upon time, get full value. • Graduation gift???

27. Jargon • Market: place to buy and sale • Liquidity: how easy it is to sell something, that is, convert item to cash • Credit market: places to get money (that is, take out loans) or sell loans (like selling an IOU) • Credit market is said to be frozen now. • Recession: officially is two months of declines in Gross Domestic Product (total of goods and services) • Extra credit: get different definitions of GDP and compare

28. Check current market • www.nytimes.com • www2.standardandpoors.com • www.djindexes.com • wwws.publicdebt.treas.gov/AI/OFBills • www.bloomberg.com/markets/rates/ • Dow Jones Industrial Average: combination of 30 specific company stocks • Standard and Poor 500: 500 largest US companies • NASDAQ: companies traded on this exchange • T-bills and bonds: individual rates, lengths, terms

29. Trends • Overall, in long [long] term, stocks (mutual funds, even with fees) have done better than T-Bills though • Periods when that has not been true • Some evidence that stocks are over-valued now. • The phrase ‘Stock market up’ or "Stock market is down' generally refers to the DOW: 30 specific large companies • Extra credit opportunity: first person who posts the list of companies • There also is S&P 500, NASDAQ, others???

30. Life Expectancy www.cdc.gov/nchs/fastats/lifexpec.htm • Life expectancy at birth is different than at a late[r] age • If you make it to an advanced age, the expectation is that you will live even longer • If you live until your 60s, how many [more] years of life? 65 in Wh. male Wh. female B. male B. female 2002 16.6 19.5 14.6 18

31. Life expectancy • World http://www.worldpolicy.org/globalrights/econrights/maps-life.html NOTE: this data represented is life expectancy at birth: infant mortality is significant factor.

32. Life expectancy • http://www.ac.wwu.edu/~stephan/Animation/expectancy.html\ (unofficial source, but appealing presentation) What is the significance of what parts change and what parts don't?

33. gapminder • UN statistics • www.gapminder.org • Gapminder World 2006 (first application) Go To Graph • Dimensions shown: • Country / Region / Size • Income (log scale, 'International Dollars' vs • Life Expectancy • Time (dynamic)

34. Extra credit / Project II • Use Gapminder to pick 2 or 3 countries with different trajectories • Consult 2 or 3 other sources • Offer explanations (theories) for differences

35. Project II: Tentative • If you didn't present before, you should to present now (see me). • You may work in teams (from more, more is expected) • Propose topic. I will suggest some. • Including maps, charts, diagrams • Analysis of feature(s) of election okay • Local relevance always a plus • Focus on definitions, denominator, difference (contexts), dimension, distribution, … critical features of quantitative topic in the news

36. Do you have enough for retirement • How much do you need • often stated as percentage of current income • how many years do you expect to live • Sources (some/all of which may grow) • Social Security • Defined benefit plan(s) • Defined contribution plan(s) • IRA, Roth IRA, 401K, other • Savings not in retirement accounts • What is expected growth of investments (in retirement plans and other)? • What is expected inflation? • Some plans ask about spouse • Some retirement estimators ask if you want to leave an estate

37. Homework: over Thanksgiving • Find a retirement calculator and do the calculation for yourself and/or a parent. • http://www.asec.org/ballpark/ • http://www.raymondjames.com/retire_calc.htm • http://cgi.money.cnn.com/tools/retirementplanner/retirementplanner.jsp • http://sites.stockpoint.com/aarp_rc/wm/Retirement/Retirement.asp?act=LOGIN • other (maybe ones associated with parent's work or investments) • Find sources and make comments, backed by data, on Social Security, pensions, savings, etc. NO PERSONAL DATA

38. John/Jane Doe If you do this option, write about your choices. • Decide on age and do research to find life expectancy • Decide on age for retirement • Has estimated Social Security $1100/month if retiring at 67 • Current salary $45,000. You decide on estimated raises (bet. 1 to 3 %) • Company retirement: do both or only 1 (3 ways) • Has guaranteed defined benefit retirement of 25% of average of highest 5 years • Has 401k of $30,000. Contributing 3%, matched by company. • Can add something from previous job • Savings: $27,000 ?? (median in http://www.forbes.com/2005/05/04/cx_da_0504topnews.html OR see http://www.bls.gov/opub/cwc/cm20050114ar01p1.htm • Has house with outstanding mortgage?? • Has credit card debt???