In The Headlines
Nations Retreat from Privatizing Retirement
When Poland introduced private retirement accounts in 1999, the government gave its blessing to a $100 million ad campaign explaining why workers were required to contribute. Privately managed savings accounts would assure a comfortable retirement, the pitch went, while giving a boost to Polish capital markets and taking pressure off the underfunded state social security system.
Last year, the Polish government seized more than half the assets held in the individual accounts, telling workers that the state social security system would pay their benefits when they retired. “It was highway robbery, the strong taking from the weak,” fumes Marcin Jaworski, a 34-year-old tax consultant in Warsaw. “I expect the public pension system to go bust,” he says. Poland is among 11 countries that have recently rolled back or abandoned efforts to privatize their retirement systems. The latest to backtrack was Bolivia, where President Evo Morales in mid-January nationalized $10.2 billion held in individual retirement accounts.
Starting in the 1980s, more than 30 nations in Latin America and the former Soviet bloc overhauled their retirement systems to create individual savings accounts. Unlike the U.S., where private retirement accounts such as a 401(k) are optional, most of these countries required workers to contribute a minimum percentage of their pay. The privatization, strongly encouraged by the World Bank and the International Monetary Fund, reflected what was seen as an urgent need to backstop traditional government retirement systems in which benefits are paid by contributions from people still working. These so-called pay-as-you-go schemes face funding shortfalls in many countries, including the U.S. But the problem is especially acute in countries such as Poland where birthrates have declined or many young people work abroad.
Privatization was supposed to “provide greater financial stability and make pensions less prone to political interference,” says Stephen Kay, an economist at the Federal Reserve Bank of Atlanta. So far, it appears to have achieved neither goal. What went wrong? In some places, such as Bolivia and Peru, private pensions never took hold because a majority of the labor force works off the books. “If you put in a system that doesn’t touch 90% of the population, what good is that?” asks Tapen Sinha, a professor at Mexico City’s ITAM who studies pension policies. Even Chile—which in 1981 became the first country in the world to replace its state-run retirement system with privately managed personal retirement accounts—reintroduced some public benefits in 2008.
Another problem: In some countries, returns on individual retirement accounts fell far below expectations. In Poland, the government took private fund managers to task for charging high managing fees and barred them from advertising to attract new business. But authorities were partly to blame, because they required that private retirement savings be invested only in Polish stocks and bonds, says Maciej Bitner, chief economist at the Warsaw Institute for Economic Studies. And building a nest egg takes time. Bitner says the average benefit collected by a Polish worker who began putting money into a private plan 15 years ago is 80 zlotys ($22) per month, compared with an average 2,000 zlotys a month under the traditional system, which remains in place alongside private accounts.
Some governments could not resist the temptation to dip into the growing pool of private savings when national budgets were under strain. Hungary and Argentina canceled their private schemes and poured the money into state coffers. Poland said it seized $42 billion held by private fund managers to pay debts the government accumulated to shore up the public social security system.
ITAM’s Sinha expects other countries to join the retreat. Mexico introduced private retirement accounts in 1997. Only about one-third of workers participate, and benefits from private accounts are likely to be far lower than forecast, he says. That will create “tremendous political pressure” to increase benefits under the public-financed retirement system, which may cause it to go bust within 15 years.
Eric Affeldt: Reinventing the Country Club with a Private Equity Playbook
If golf courses and country clubs do not strike you as well-oiled corporate machines, that is because, before Eric Affeldt, they were not. Affeldt is the CEO of ClubCorp, the largest owner of golf courses and private clubs in the country by a wide margin. Over the past few years the company has been on an acquisition tear, buying 64 new properties in 2014 alone, bringing its total to 207, more than three times the size of its next largest competitor. In its fall issue, Golf Inc. named Affeldt the sport’s “most powerful person.” It helps that in a struggling industry, his business is growing fast. But golf lovers still are not sure if he is saving the sport—or ruining it.
ClubCorp is based in Dallas, TX and was founded in 1957. Today, its clubs have more than 430,000 members supported by approximately 20,000 peak-season employees. In addition to golf and country clubs, the firm owns business clubs, sports clubs and alumni clubs in 26 states, the District of Columbia and two foreign countries.
Since ClubCorp went public in September 2013, the company’s stock has climbed 27%. That is despite the declining popularity of golf itself. A study by consulting firms Pellucid and Edgehill Consulting found that people in the U.S. played 2% fewer rounds last year than the year before. Longer-term statistics look even worse. Players knocked around a sixth fewer rounds in 2014 than at the game’s height in 2000. We are now playing the same amount of golf as we did in 1990.
Country clubs are not doing much better. After a boom in the ’90s, 185 clubs closed last year. Pellucid says 140 clubs will need to shutter every year for the next five years before the industry approaches equilibrium.
Where others saw decline, though, Affeldt smelled opportunity. A former finance executive, he now uses a familiar private equity playbook. First, he buys properties, often distressed. Then he pools his clubs’ purchasing power to get better pricing, and uses the savings to procure things like new pools and fitness facilities.
That ruthless pursuit of efficiency has led some in the industry to call Affeldt the “golf assassin,” saying he is corporatizing the sport. But it is hard to ignore the results. ClubCorp’s last four quarters constitute its second year of record membership revenue, and sales increased about 5% on a club-for-club basis amid industry decline.
Affeldt’s unemotional approach may have some hidden benefits for the sport. He has embraced change where others are resistant, like offering shorter games and cheap wine to attract millennials. While the rounds of golf played have not risen, they have not declined either—which is more than many rival club owners can say. “Many of the clubs have been owned and run by a board of well-intentioned people, but without technical expertise,” says Affeldt. “Given that’s all we do, we have a bit of an advantage.”
Citations
1. http://bloom.bg/1G3u0OD – BusinessWeek
2. http://for.tn/1wMRZlM- Fortune
The Good News Is . . .
• The U.S. economy added 295,000 jobs in February, which exceeded economists’ expectations. February’s job growth is the 12th straight month that the economy has gained over 200,000 jobs. The unemployment rate fell to 5.5% its lowest reading since May 2008. Job gains rose across the board, including retail, health care, and business services. Retail businesses added 32,000 jobs last month, continuing their role as leaders in the jobs recovery.
• Costco, Inc., an international warehouse discount retailer, reported earnings of $1.05 per share, an increase of 19.0% over year-ago earnings of $1.25. The firm’s earnings topped the consensus estimate of analysts by $0.07. The company reported revenues of $27.5 billion, an increase of 4.4%. Management attributed the company’s results to a special tax benefit of $0.13 per share, plus improvements in its gasoline business and operating efficiencies driven by the firm’s IT modernization efforts.
• Hewlett-Packard (HP) agreed to buy Aruba Networks, a maker of Wi-Fi access equipment for businesses, for $3 billion. Under the terms of the agreement, HP will pay $24.67 a share in cash. Buying Aruba will bolster HP’s networking business as smartphones, tablets and other connected devices continue to proliferate. Aruba, a 13-year-old networking equipment maker, specializes in wireless networking access point hardware and software, which are used by hotels, universities, and shopping malls.
Citations
1. http://cnnmon.ie/1MbZjsF – CNN Money
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/1Mg84C2 – SeekingAlpha.com
4. http://nyti.ms/191aw3k – NY Times Dealbook
Planning Tips
Tips for Avoiding Scams Targeting Retirees
Financial scams targeting older Americans and retirees have become so prevalent that they are now considered “the crime of the 21st century.” Why? Because older Americans are thought to have a significant amount of money sitting in their accounts. Also, financial scams also often go unreported or can be difficult to prosecute, so they are considered a “low-risk” crime. Below are some of the most common financial scams aimed at retirees and older Americans.
Medicare / health insurance fraud – Every U.S. citizen or permanent resident over age 65 qualifies for Medicare, so there is rarely any need for a scam artist to research what private health insurance company older people have in order to scam them out of some money. In these types of scams, perpetrators may pose as a Medicare representative to get older individuals to give them their personal information, or they will provide bogus services at makeshift mobile clinics, then use the personal information they provide to bill Medicare and pocket the money.
Funeral / cemetery scams – There are generally two types of funeral and cemetery fraud perpetrated on seniors. In one approach, scammers read obituaries and call or attend the funeral service of a complete stranger to take advantage of the grieving widow or widower. Claiming the deceased had an outstanding debt with them, scammers will try to extort money from relatives to settle the fake debts. Another tactic of disreputable funeral homes is to capitalize on family members’ unfamiliarity with the considerable cost of funeral services to add unnecessary charges to the bill.
Counterfeit prescription drugs – Most commonly, counterfeit drug scams operate on the Internet, where many individuals increasingly go to find better prices on specialized medications. This scam is growing in popularity—since 2000, the FDA has investigated an average of 20 such cases per year, up from five a year in the 1990s. The danger is that besides paying money for something that will not help a person’s medical condition, victims may purchase unsafe substances that can inflict even more harm. This scam can be as hard on the body as it is on the wallet.
Reverse mortgage scams – Scammers like to take advantage of the fact that many people above a certain age own their homes, a valuable asset that increases the potential dollar value of a certain scam. The reverse mortgage scam has mushroomed in recent years. With legitimate reverse mortgages increasing in frequency more than 1,300% between 1999 and 2008, scammers are taking advantage of this new popularity. As opposed to official refinancing schemes, however, unsecured reverse mortgages can lead property owners to lose their homes when the perpetrators offer money or a free house somewhere else in exchange for the title to the property.
Sweepstakes and lottery scams – This simple scam is one that many are familiar with, and it capitalizes on the notion that there is no such thing as a free lunch. Here, scammers inform their mark that they have won a lottery or sweepstakes of some kind and need to make some sort of payment to unlock the supposed prize. Often, the victim will be sent a check that they can deposit in their bank account, knowing that while it shows up in their account immediately, it will take a few days before the (fake) check is rejected. During that time, the criminals will quickly collect money for supposed fees or taxes on the prize, which they pocket while the victim has the “prize money” removed from his or her account as soon as the fraudster’s check bounces.
Citations
1. http://bit.ly/1wPXRus – Consumer Reports
2. http://1.usa.gov/1lDuCRw – Federal Bureau of Investigation
3. http://bit.ly/1e78n2l – National Council on Aging
4. http://bit.ly/1DXdrBH – North American Securities Administrators Association
5. http://1.usa.gov/1KvnIZt – StopFraud.gov
