Transcript Communicating Quantitative Information

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
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
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!
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
payment
If 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) $2,615.14
You 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
• 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.
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
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
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.
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.
• Graduation gift???
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 TBills 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/econr
ights/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/Animatio
n/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 plans ask about spouse
• 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/retir
ementplanner.jsp
– http://sites.stockpoint.com/aarp_rc/wm/Retirement/Re
tirement.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
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???