The Financial Frolicker Social Pension Portfolio - Costs, and Value Perspectives.

In this episode, we are going to dig right into the individual costs of my exemplar portfolio of social pensions.  We are then going to round that off with some general perspectives before, in the next episode, we look at constructing a portfolio explicitly to take advantage of financial payoff concepts such as asymmetry and convexity, how to integrate special product features across the social pension product set, and portfolio diversification, correlation and path dependency as general portfolio optimisation tools.

Firstly, to costs...  

Well, the australian social pension is free.  It never costs a dollar directly, and if you do not live in australia it is not costing you any money indirectly in the form of your personal tax contributions to the national budget.  It does not get much cheaper than that.  The USA social pension is almost free to me because i will receive one without any significant record of contributions from my own labor.  Please note, that where qualifying periods are relevant, double social security agreements between countries can be availed upon.  For example, my 10 years of adult residence in australia can be cross-credited to 40 qualifying quarters under USA rules, were that ever to become necessary.  It is not presently.  Financial frolickers read their social security agreements amongst host countries.

A financial frolicker knows his social security agreements and how to operate them, as well as he knows his income tax brackets and how to lodge a tax return.  It is a defining skill that makes a Financial Frolicker different to the man in the street.  The man in the street has lodged tax returns - but has never heard of, much less read, a social security agreement for salient features.  Be wiser frolickers.  Taxes are, on average 30% of your income.  Social charges are, on average 20-25% in anglo countries, and 30-35% in european social democracies.  They warrant equal general administrative expertise.

Wow guys - that is 2 average-outcome major social pensions for nothing, truly for the 'beach bum gold standard in lifelong labor peony and effort'.  A brute benefit of 28 000AUD and 21 500USD every year until the day you die, indexed for inflation, for being born and making it to age 67.  Be wiser frolickers, and take the social dividend provided to you by society's intermediation on your behalf.  When baby boomers run ponzi schemes in secondary assets, look to intermmediate across several national groups of them.  The financial solution to concentrated deliberate socially predatory asset ponzi nastiness is truly a diversified approach to intermediated social dividends.

Of course, the usa social pension is a spousal benefit and a spouse went to work for 35 years.  The money is the same, and it is a lovely example of what financial asymmmetry in payouts can bring you in value.  Marriage is bliss to the Financial Frolicker.  You will be hearing that again in many future episodes long after we have forgotten social pensions because everybody is clued up and has 3 of them.

Helas, my british pension was not free, either in direct labor contributions or in direct financial costs after that phase.  I worked very hard for it as a freelancer and due to some unemployment after the GFC there were gaps in my record.  It does cost a significant typical chunk of your labor returns - the typical 20-25% social charges to get it.  Fortunately, you do not actually have to provide labor in the uk for 35 years to get it.  You need at least 10 years of record to get a pro rata part-franked pension.  You can port years of record with double social security agreements to meet this qualification again, but you only get pro rata franking on years you actually contributed to the uk system.  

The huge beneficial caveat is that you can continue making voluntary payments after you have left the uk long behind.  This is another great example of asymmetry as a source of value, this time on the contributions basis rather than the benefits basis.  Once you have a national insurance number and 2 years of record you can leave the country and continue to contribute.  That is the intermediation threshold - 2 years of local record.  

If you want to continue to purchase years of record from offshore it is an absolute budget proposition, truly cheap and cheerful.  It costs about 850 pounds per year presently and you can backfill for 6 years as a general rule, although at the moment there is a closing special window to backfill for years prior to 2017.  The local worker with a decent professional income might be paying 6-7000gbp per year for the same franked year of record.   That is a serious asymmetry working for you.

If you are a would-be frolicker who has ever lived and worked in the uk but does not now and has gaps in their social card record pre-dating 2017 you need to go and get yourself form CF38 and send it in today, and chase like crazy to meet the end-july deadline.  Hurry and scurry people.  ... and learn to keep your eyes open for special contribution windows.

In my case, i paid 12 years of 20% of labor value in the uk, and i will have to purchase 23 years at 850gbp a year, about 20 000gbp as a whole of labor life contribution, but spare a moment of empathy for the local professional worker who is paying 6-7000gbp a year in social charges, for the same franked year of record and a health system that would kill you happily...  

It will pay for itself in about 4-6 years on its own account i guess.  However, permit me to introduce you to our first portfolio concept. As as incremental asset added to the two basically free social pensions outlined above it will pay for itself in 1-2 years.  We must consider the total income in retirement of the portfolio against the total contribiution cost to acquire it, adding assets incrementally from the cheapest to reach the income benefits we need..  Please feel the joys of taking a portfolio view on incremental asset costs, right?  The cost of the british social pension fell into nonsense when considered as an incremental asset as opposed to in its own right.

I am presently prepared to bet i will live to 70, but i know i would like the extra income potential however long i live, so i pay the contribution cost for the additional social pension, and thank the gods of social intermediation for their kind favor.  As you may imagine i am now starting to whistle quite merrily at that pension broker chap who wants to offer me a tax-advantaged investment vehicle, which might not be so tax-advantaged when you really need it in anger, 20-40 years hence.

As you can see, it is very possible to achieve 3 major western anglo state social pensions as a personal or spousal beneficiary, without much cost at all.  That is a pension portfolio paying, before interactions, 28 000 AUD. 21 500USD, and 10 600GBP every year.  That is super-smart value investing at the long end of the game readers, using the power of intermediation and a global frolick.  That is the financial alchemy of bronze to gold.  Learn it.  

In a future episode we will do a comparative analysis of what you would need in a private pension pot, and what it would have cost you in various decades, to replicate this outcome.  It is going to amaze you - and make you cry too.  It will be a very sad lesson in the power of interest rate policy to ruin large crowds of people who believed they were being 'financially savvy and responsible', because they were told they were by their financial advisor and the government of the day.  

At the end of your working lives when ruin is really ruin, it is most disappointing to find that governments acted re-distributively for 40 years for another cohort thematically in financial markets with deliberate policy extremes - and for every sociopathic risk seeker out there to boot, and simply used your naivete to help those groups out.  How could that possibly go wrong badly later right?  Please conjure up your mental caricature of your pension broker, which should be easy by now.  He is potentially more dangerous to your financial health than your stock broker or online brokerage account.  But he is let off a leash by government policy - never forget that.  Seriously...  You need to be fully vested in a hazmat suit when you take expert advice from these types, and dabble in their chicanery on their preferred terms.

The german pension is very expensive to build later in life, and never makes sense as a standalone asset.  You get 36EUR a month for every point you buy, and to buy the maximum 2.17 points for a year will cost you about 2400 euros per month, to my best belief, a fact i am currently verifying.  It is a terrible price/value trade off.  You pay 2400 a month to get back 1200 a month over, on average longevity roughly the same periods of time.  However, an FF must consider the overall pension portfolio scenario.  If an employer is paying half and providing unemployment insurance contributions on your behalf too it is somewhat fairly priced.  As a freelancer paying both sides or an ex-country voluntary contributor it is a disaster on price vs future value.  You need to be enmeshed in long-term stable employment in germany, and earning decent money.

So, when considered as part of a so-far very cheap social pension portfolio this is one tradeoff where i actually have to place some analytic capability rather than a back-of-the-envelope easy decision, and it is likely a non-elective contingent decision based on mode of employment in the end.  If you work as an employee you are on the hook and the pricing is overall ok, and if you do not it is not worth it.  I need some more income in retirement but this is a costly way to purchase it privately rather than through regular employment.  I may make some minimum pension contribution to capture some gift points i am offered for rearing children for example, and move to a private pension pot locally in germany.  

This due dilligence is a work in progress so stay tuned frolickers.  A later episode will present my suitability analysis and due diligence efforts as a template for you all.  However, the first 3 social pensions were free and super cheap, so i will take a balanced view of paying a little more than i want to for the final element of the portfolio - but probably not privately without holding my nose.  One caveat is that if inflation stays high, the inflation hedge, the annual indexing, makes those nominal price/value notions very skewed over a couple of decades.  You are not going to save and invest and beat 6-8% inflation over 15 years.  Not at this late exhausted stage of financial ponzi run for the benefit of generation Baby Boomer.  (Aside - when the economy grows at 2% the domestic asset base does not grow at 8% in the long run.  Sorry.  It is a ponzi scheme, inducted on policy measures on the yield curve.  Again, more in a later episode.)  Sometimes, you must pay the piper to not end up eating rat rattatouille at 70.  Sometimes, financial frolickers get winged deliberately.  We just don't get winged by ponzi operators late in a scheme, and we never get winged by financial chicanery in the hands of folk who earn their livelihood through it.  Be wiser about your desired living standard at 70.  Be prepared to compromise on individual assets and take a portfolio view on outcomes.

What we have achieved here is a significant middle class adult income, in retirement until the day we die, fully inflation hedged, for a token contribution really.  That will certainly make us feel better about paying for more expensive or riskier portfolio elements we may need to top it off with.  Oh - and folks.  No stock market crashes relevant here.  No sequence of returns close to retirement to worry about.  No annuities getting destroyed by interest rate policy pants-dropping.  You know what you are getting in the end.  Think that over a little...

Your financial frolicker remembers defined benefit company pensions, the golden gift of early cohort baby boomers to themselves both in government and large companies, and actually has a small one.  Let me tell you, would-be frolickers, defined benefits kick the living shit out of anything you are betting for, as does anything with an inflation hedge element, and anything with spousal and/or survivor asymmetry, especially for the next 20 years since we went a bit extreme on policy and ponzi the last 30, doubly true when inflation ticks up, or your spouse has had below average labor outcomes, or one of you has shortened life expectations or disability, in that very unfortunate case.  Believe it.  That is how life is.  

You do not need the heavy financial education i have across accounting, economics, finance, actuarial concepts, asset and risk manager practice, and derivatives markets stochastic asset pricing in rocket scientist mathematics that i make my labor bones out of to hear good advice.  You just need good intuition to know common sense when you hear it.  

In fact, the clear power of social global intermediation here is enough for me to almost manage to be polite to baby boomers when they tell me about smart investing and how life is not fair and we all do the best we can - and then housing comes up.  Seriously generation Baby Boomer, get a grip on yourselves on your policy extremes and inter-generational equity capture before we do it for you, in a somewhat determined way which might be just as injurious to your financial health as your ponzi schemes were to ours - but rather faster.  

Political control premiums end quickly at the mortality curve.  Agency conflicts dissolve and reverse, the policy rulebook gets torn up for other objectives than your collective ponzi scheme in secondary assets, and suddenly the tyrants are naked in the streets.  Economic and political regime change happen.  You have been gently and wisely warned generation Baby Boomer.  

For the first time in their adult lives, generation Baby Boomer is approaching a watershed in political, social and economic power, and they may need to exhibit greater wisdom - and simply be less exploitative and a lot less sociopathic.  Be wiser Baby Boomer readers, much wiser....  Economic tyranny ends in economic revolt.  Plus ca change.  

For my non-baby boomer readers, please do hand generation Baby Boomer your multiple social benefits cards at retirement, whistling as you would at a pension broker.  Tell them you understood the power of diversification and intermediation - and diversified their liability to you for a change, rather than the other way around.  Same caricature?  No, we need a much worse caricature for generation Baby Boomer i am afraid.  They have been fairly motivated at the financial chicanery to their own cohort interests for a very long time now.

However, it is time to let Baby Boomer go the way of the dinosaurs gently and move onto out next episode, integrating our social pension portfolio and exploring special features.