Is your Daddy eating your pie? --Youth Unemployment and Old-Age Resolution

Several days ago I happened to read an interesting article discussing old people retirement and youth unemployment: 

http://www.fivecentnickel.com/2012/10/16/an-age-old-employment-myth-takes-its-lumps/ 

Struggling to find an ideal job myself, I start to think about this issue and it seems that I've found an excuse to forgive my father of not intending to retire at 60.

It is not uncommon to hear people say “I know it is going to be difficult to find a job, so I will stay on at university and take a Master’s degree.” Facing the gloomy global economy and the increasingly fierce competition in job market, quite a number of university graduates are opting for continuing education both to recharge themselves and to wait for a booming economic climate. While for the old, many are holding new resolutions to postpone retirement due to various reasons. 

Such stark contrast drives me into deep contemplation: should the old be responsible for the youths’ unemployment? My answer is definitely “no” and I would expect little change in job market within a decade: the young would face a rosy while unforeseeable future confronted with probably recovering yet unstable economy, while the old would find nowhere to sweat their guts out under current retirement mechanism, no matter how fascinating their resolutions may appear. 

The old is not all that to blame for youth unemployment 

Admittedly, in some industries, the elderly constitute a large proportion of youngsters’ competitors. In landing jobs requiring extensive experience such as doctors, teachers and lawyers, newly graduated youths are no doubt at disadvantage; in seeking promotions in these specialized fields, age can also become an obstacle for young people. For example, many young doctors have to stay at assistant-level until one elder doctor moves away, only in which case can the younger climb up to an upper-level position. 

However, the older and the younger generations can hardly be perfect substitutes for each other in most industries, and age/experience is no longer the most important criterion in selecting talents. On one hand, certain management-level jobs are largely occupied by older generation, which actually poses no potential threat to the young. These demanding positions should and must go for the most qualified not only physically but also mentally, in which aspect the younger green hands fall far behind the older and the more experienced. On the other hand, there are still numerous jobs requiring no experience and offering formal or on-the-job training, and these positions are perfect choices for the young but not the old. Therefore, in the real job market, the old can hardly be regarded as job-seizers of the young. 

What’s more, even if the young were indeed squeezed out of employment by the old, the old generation is not all that we should blame. Other factors such as macro-economic environment, individual competency and mentality all play vital role in deciding the job seeking of youngsters. Under current economic downturn worldwide (except in some emerging countries), high unemployment rate is quite common. For instance, the unemployment rate of US last month rose to a historical high in three years to 8.5%, forcing great number of people including the young out of work. So we cannot just pour the dirty water all to the old generation while neglecting the macro climate. 

Finally, even if we could blame the old for grabbing our “iron bowls” and force them to retire at a relatively early age, say 50 or so, the side-effects brought about by limiting their working capacity could not be neglected. Just imagine how our life would become then: the traditional 4-2-1 family mode in China would force the young to bear heavier burden for supporting the non-working old; the government has to appropriate more portion of budget to pension funds; the retired themselves may very likely feel isolated and uncomfortable because of sudden leisure at their 50, a still prime age both physically and intellectually. 

In a word, blaming the old generation for youth unemployment and thus forcing them to retire early is neither meaningful nor justified. 

Look Back and Move Forward: Outlook for 2020 

The challenges of aging population are daunting for any country, especially for developing countries such as China, which possess a population of more than 1.3 billion. The percentage of elderly in China is projected to triple from 8% to 24% between 2006 and 2050, to a total number of 322 million.[1] 

Percentage of Older Adults (Age 65+) in China, 1950-2050

The old: life begins at 60 

The rapid growth of aging population makes this group of people an increasingly non-negligible force. In China, the official retirement age for men, according to 1978 regulations, is 60; ordinary woman workers retire at 50 and woman cadres at 55 [2]. The mental and physical conditions of China’s elderly people, however, have changed drastically in the past three decades, so must the regulations: a more flexible retirement mechanism would be treated on a priority basis when it comes to caring for senior citizens while benefiting the whole society, the younger generation included. 

Flexible retirement mechanism, proposed and practiced by Western countries, attaches great importance to individual distinction. For example, for management-level jobs, people may choose to retire at a relatively older age than for manual works such as construction workers. This strategy, in the near future, would be better received in China given its rapid growing aging population. 

First, there is many a good tune played on an old fiddle. More and more would-be retirees begin to feel like spitting out their entire life’s story to anyone who will listen, and they would like to postpone retirement age to further flex their management muscles. To quote a survey conducted by Daqing Petrol Administration Bureau among its 15,000 would-be retirees, about 76% of the healthy elderly would like to remain at work. If promoting the result nationwide, we will find the figure rather enormous. In addition, in an online survey participated by more than 360,000 netizens in China, nearly 230,000 voted in favor of implementing flexible retirement mechanism, accounting for more than 62% of all participants. [3] 

Next, flexible retirement mechanism would act as a stimulus for national economy. The experience and knowledge imparted by the working old would play an important role in boosting the national economy, making bigger national economic pies. The elderly yet the competent should be encouraged to work and benefit the country with their deep knowledge and rich experiences. In this way, the lacking of academic and management personnel in many fields can be quickened. 

Last but not least, the society as a whole benefits from a more flexible retirement mechanism. Increasing elder workforce can help ease the burden of both the young and the society. As one researcher of the Chinese Academy of Social Sciences calculates, China now needs another 1.3 trillion yuan ($196 billion) to ensure that its aged people get enough pensions to lead a decent life. However, China's pension and welfare systems are not yet strong enough to deal with an aging population. When developed countries encountered an aging population, their per capita GDP was between $5,000 and $10,000, but China's was only $806 in 1999 when 10% of its people passed the age of 60. China's per capita GDP rises above $4,000 now, but it is still below what it was in Western countries' when they first encountered an aging population. [4] Therefore, by implementing a flexible retirement mechanism, less elder people would have to draw from national treasury and more budget could be spared for other utility. 

The factors above are more than enough to warrant a change in retirement regulations. Thus, a more flexible retirement mechanism serving the interest of different working groups may be well under way. 

The young: rosy yet unpredictable future ahead 

As stated above, the youths are not necessarily forced out of employment by longer working periods of the elder generation. Thus, the prospect of the young hangs more on the macro-economic climate and individual capability than on the changes in older generation’s work patterns. 

To begin with, the future demand for labor may increase as the world economy is recovering from the crisis months earlier, when we will hopefully embrace a brighter and more prosperous economy. However, the new hit of debt crisis of US and European countries and the shadow of financial crisis are still hanging over the heads of many fresh faces who are just stepping into the job market. Volatile as it is, the world economy is rather difficult to foretell. After all, who knows whether another brewing crisis is around the corner in the near future? To hope for the best while prepare for the worst may be the best strategy for the young then. 

Next, let's take a look at the supply side. Take China, one of the world's largest economies now and in the foreseeable future, for illustration. It is estimated that during the next five decades, the demographic condition of the nation would have undergone tremendous changes, with the elderly surprisingly occupying larger proportion of national population while the youth population sharply shrinking. Under such circumstance, there would very possibly emerge a huge shortage of workforce, posing a turning point for today's 20s in job market. 

Population Pyramids, China: 2000 and 2050 

                                     

                                                    2000                                       2050     

Thus, confronting a possibly upward-shifting yet volatile demand side and a surely downward-shifting supply side, according to the Demand-Supply theory, we could safely draw two key words of the overall prospect of youth labor market in 2020: PROMISING, yet somehow UNPREDICTABLE.

In sum, the coming decade would possibly witness more flexible retirement age of older generation while unpredictable future for the young in the job market. Hopefully, for the elderly, a more meaningful old-age life will be ahead; for the young, striving to be the most competitive would always be the golden rule.

----by Xiao Zhong 

Reference: 

[1] China's Concern Over Population Aging and Health, by Toshiko Kaneda, Population Reference Bureau (Feb. 27, 2008) 

[2] Same Retirement Age for All, by Gao Zhuyuan, China Daily (March 24, 2011) 

[3]Flexible Retirement Mechanism http://baike.baidu.com/view/4429840.htm 

[4]Debate: Aging Population, by Mu Guangzong, China Daily (Jan. 10, 2011)

Quick review of capital gain taxes in United States and around the world

As Mitt Romney stated in his economic plan, he proposed to cutting on capital gain tax. Many economists agree on that cutting capital gain will encourage investment in capital and continue to fund future growth. However, cutting capital gain also raises the concern that it may widen income gap between the rich and the poor.

Before rush into a quick conclusion, let's take a look at how capital gains are taxed in the US and other main countries and regions.

United States: In the United States, with certain exceptions, individuals and corporations pay income tax on the net total of all their capital gains. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. The tax rate for individuals on "long-term capital gains", which are gains on assets that have been held for over one year before being sold, is lower than the ordinary income tax rate, and in some tax brackets there is no tax due on such gains. The tax rate on long-term gains was reduced in 1997 via the Taxpayer Relief Act of 1997 from 28% to 20% and again in 2003, via the Jobs and Growth Tax Relief Reconciliation Act of 2003, from 20% to 15% (for individuals, whose highest tax bracket is 15% or more), or from 10% to 5% for individuals in the lowest two income tax brackets (whose highest tax bracket is less than 15%).

United Kingdom: Individuals who are residents or ordinarily residents in the United Kingdom (and trustees of various trusts) are subject to an 18% capital gains tax. For people paying more than the basic rate of income tax, this increased to 28% from midnight on June 23, 2010. There are exceptions such as for principal private residences, holdings in ISAs or gilts. Certain other gains are allowed to be rolled over upon re-investment. Investments in some start up enterprises are also exempt from CGT. Entrepreneurs' Relief allows a lower rate of CGT (10%) to be paid by people who have been involved for a year with a company and have a 5% or more shareholding. Every individual has an annual capital gains tax allowance: gains below the allowance are exempt from tax, and capital losses can be set against capital gains in other holdings before taxation. All individuals are exempt from tax up to a specified amount of capital gains per year. For the 2011/12 tax year this "annual exemption" is £10,600.

Russia: There is no separate tax on capital gains; rather, gains or gross receipt from sale of assets are absorbed into income tax base. Capital gains of individual taxpayers are tax free if the taxpayer owned the asset for at least three years. If not, gains on sales of real estate and securities are absorbed into their personal income tax base and taxed at 13% (residents) and 30% (non-residents). A tax resident is any individual residing in the Russian Federation for more than 183 days in the past year.

South Korea: For individuals holding less than 3% of listed company, there is only 0.3% trade tax for sales of shares. Exchange traded funds are exempt from any trade tax. For larger than 3% shareholders of listed companies or for sales of shares in any unlisted company, capital gains tax in South Korea is 11% for tax residents for sales of shares in small- and medium-sized companies. Rates of 22% and 33% apply in certain other situations. Those who have been resident in Korea for less than five years are exempt from capital gains tax on foreign assets.

Mexico: Capital gains are taxed at 30% in Mexico during 2012 (29% in 2013 and 28% in 2014 and on).

Japan: In Japan, there were two options for paying tax on capital gains from the sale of listed stocks. The first, Withholding Tax, taxed all proceeds (regardless of profit or loss) at 1.05%. The second method, declaring proceeds as "taxable income", required individuals to declare 26% of proceeds on their income tax statement. Many traders in Japan used both systems, declaring profits on the Withholding Tax system and losses as taxable income, minimizing the amount of income tax paid.

In 2003, Japan scrapped the system above in favor of a flat 20% tax on gains, though the rate was temporarily halved at 10% and after being postponed a few times the return to the normal rate of 20% is now set for 2014. Losses can be carried forward for 3 years. Starting in 2009, losses can alternatively be deducted from dividend income declared as "Separate Income" since the tax rate on both categories is equal (i.e., 20% temporarily halved to 10%). Aggregating profits and dividends to reach a single figure taxed at the same rate is fairly innovative.

Germany: In January 2009, Germany introduced a very strict capital gains tax (called Abgeltungsteuer in German) for shares, funds, certificates etc. Capital gains tax only applies to financial instruments (shares, bonds etc.) that have been bought after 31 December 2008. Real estate continues to be exempt from capital gains tax if it has been held for more than ten years. The German capital gains tax is 25% plus Solidaritätszuschlag (add-on tax initially introduced to finance the 5 eastern states of Germany - Mecklenburg-Western Pomerania, Saxony, Saxony-Anhalt, Thuringia and Brandenburg - and the cost of the reunification, but later kept in order to finance all kind of public funded projects in whole Germany), plus Kirchensteuer (church tax), resulting in an effective tax rate of about 28%. Deductions of expenses such as custodian fees, travel to annual shareholder meetings, legal and tax advice, interest paid on loans to buy shares, etc., are no longer permitted starting in 2009.

China: The applicable tax rate for capital gains in China depends upon the nature of the taxpayer (i.e. whether the taxpayer is a person or company) and whether the taxpayer is resident or non-resident for tax purposes. It should however be noted that, unlike common law tax systems, Chinese income tax legislation does not provide a distinction between income and capital. What commonly referred by taxpayers and practitioners as capital gain tax is actually within the income tax framework, rather than a separate regime.

Hong Kong: In general Hong Kong has no capital gains tax. However, employees who receive shares or options as part of their remuneration are taxed at the normal Hong Kong income tax rate on the value of the shares or options at the end of any vesting period less any amount that the individual paid for the grant.

Singapore: There is no capital gains tax in Singapore.

(information from Wikipedia)

From above information we can see most countries have capital gain taxes in various forms. Usually the rate is between 10% and 30%. The few countries or region that do not tax capital gain are usually financial center like Singapore, Hong Kong and Swiss. However, they suffer from the problem that many rich company executives split their income with large portion of company shares and option and small portion of salary, in which way they can get away from income tax.

When we look at other countries policies. We can find following similarities.

1. Most countries try to make rich people pay more capital gain tax and normal people pay less. Some countries use different tax rate like the US, South Korea. Some countries use annual exemption such as United Kingdom, which means capital gain are tax free within the limit - ₤10600 for fiscal 2011/2012.

2. They try to make long-term capital holders pay more and short-term holders pay less. Countries like United States, United Kingdom, Germany and Canada all have such policy to encourage long-term investment, either in equity or property.

So it seems that the capital gain tax is well designed in United States. First, it tries to tax more on rich people, which helps prevent widening income gap. Second, it encourages long-term investment with lower rate, which creates jobs and helps the economy grow, even providing more revenue than a higher rate.

In the Fiscal Year 2012, the lower tax rate of long term capital gains meant $38 billion less in taxes was paid to the federal government. The 2007 capital gains tax revenue of $123 billion was equal to 75% of the Fiscal Year 2007 budget deficit. So it seems that cutting too much capital gain tax will make government budget in trouble.

From my point of view, the new government should further tailor the tax policy to fit the country's economy. For example, they can provide annual exemption for low income people, further lower long-term capital gain tax rates and increase tax rates on speculative investment and securities. And increasing top tax rates for specific people and circumstances will not affect economic growth, which have been proved by study conducted by Burman, Leonard, Tax Reform and the Tax Treatment of Capital Gains

- Tian Tan

Discussion Topic 10/22/2012

http://www.bloomberg.com/news/2012-10-19/marco-rubio-exposes-mitt-romney-s-plans.html

What do you think about Romney's economic plans. Are you in favor of his plans? and why?

Market Forecast Week 10/22/12

The U.S market plunged on Friday erasing all of October's gains. The drop was mainly due to the multiple earnings miss by U.S Corporations: AMD, GOOG, MCD and GE. All the major indices broke their short-term support levels, and are now testing September's supports levels.

In the chart below I drew Fibonacci retracements to test the S&P 500 short-term movements. It seems like the S&P 500 failed to break key resistance levels of 1468.5. In addition to that, the S&P has been trading in a channel since September (between 1431.7 and 1481.1), which means that if the index breaks the 1431.7 support levels we could see the markets reversing to the downside.

While the short term markets movement  seems to be bearish, the long term movement is still bullish. To validate this argument, we can see in the chart bellow that the S&P is still trading way above its 68.1% Fibonacci retracement which is considered to be a positive long-term signal. That said, if the index break below Fibonacci support levels of 1401.1 and 1376.4 we will probably experience a strong downtrend move in the markets.

While the markets were in "correction mode" this week, the dollar index seems to have regained some strength. Both the MACD and RSI are showing bullish signals which means that the trend could reverse to the upside in the short-term. In the meantime we can see that using the same indicators the S&P is losing its bullish momentum.

To conclude, I think that the S&P 500 took a big hit on Friday, but it still did not break numerous support levels. Also, as you can see in the chart bellow there is a clear inverse relationship between the dollar index and the S&P, which means that if the dollar break the 80.2 key resistance level we will probably see a bearish reversal in the markets.

Following the forecasts that I stated above, this upcoming week I have two ETFs on my watch list: $UVXY and $XIV. If the S&P 500 indeed breaks key support levels, the volatility in the market will increase and thus $UVXY is going to benefit from that. On the other hand if the market fails to break the support levels the volatility will decrease and the $XIV will be the way to go.

Amine Bensaid

momentumrevesal.com

Discussion Topic 10/19/2012

http://www.businessweek.com/articles/2012-10-15/explaining-softbanks-bold-bid-for-sprint#r=com-s

Softbank just decided to buy Sprint. Is it a good move for both parties? Will this transaction change the industry dramatically?

Discussion board 10/17/2012

http://www.businessweek.com/articles/2012-10-11/the-gap-between-rich-and-poor-widens#r=nav-fs

Do you think income gap in US has been widened recently? Why is that?

Put your thoughts as comments.

Discussion Topic 10/15/12 (Mon)

Topic:  Will QE3 Cause Serious Inflation? Other impact on US economy?

Link: http://www.slate.com/articles/business/project_syndicate/2012/10/economic_outlook_we_need_fiscal_stimulus_not_austerity_.html

Our view on the topic:

Kalyan: Look forward to hearing thoughts on the following:

(1) Effect of underutilized production capacity and dismal immediate economic prospects on inflation.
(2) Relative impact of fiscal stimulus vs. monetary policy (where does bank liquidity fall into this?).
(3) Current state and future of real estate market; impact on lending.
(4) Lower interest rates, exchange-rate weakening, and domestic economic benefits (more import/export?) and possible risks.
(5) Risk of commodity boom and firm investment in fixed capital as opposed to human capital.

Tian: My three cents on QE3:

1) Inflation rate is low, a good timing for QE3,
2) Credibility of US dollar won't be in the near future due to even weaker Euro and Japanese yen,
3) May recover real estate market, then stimulate other industries.

Concern:
1) May not help lower employment and export deficit.
2) How to regulate to avoid putting too much money into virtue economy, and I think US. needs bringing back manufacturing to its territory.