Communicating Quantitative Information

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Communicating Quantitative Information. Excel Homework Social Security, Pensions Stocks and Bonds Life expectancy

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## Communicating Quantitative Information

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### 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)

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
Retirement
• Take it one year at a time:
Retirement

Compare after 4 years: 13,172.36 vs 12000

• 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
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!
• 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.

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
Alternate tools
• Disadvantage: requires fast web connection.
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
• Success
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.
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.

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.
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.
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

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.
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.
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
• 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.
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?
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
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
Investment options
• Global (outside of USA or mixture) funds, bonds, stock
• Gold, other commodities
• Real Estate Investment Trusts
• Futures: puts and calls
• Other???
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.
Federal reserve
• Acts to prevent (control) inflation and
• Help economy
• Interest rates already very low.
• Recent effort: buying treasuries is intended to encourage borrowing.
Zero-coupon bond
• Buy at specific discount from 'face' value.
• Do not get periodic interest.
• At end of agreed upon time, get full value.
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
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
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???
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

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.

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?

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)
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
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
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 retirement estimators ask if you want to leave an estate
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
• 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

John/Jane Doe