I blogged here for 8 months because of operational difficulties with my WordPress site. These have now been resolved so returning to WordPress. Again blogging at:
http://www.harryrclarke.com
http://www.harryrclarke.com
Friday, September 4, 2015
Thursday, July 2, 2015
Car insurance
I insure two cars. They are old - one 10 years, the other 14 years. I am a cheapskate when it comes to cars. My guess is in aggregate their market value is $5000-$6000. The insurance premium I have been paying each year for both is around $750 per car and there is an excess on claims of $650 on each. I pay $750 annually to insure a car whose replacement value net of excess I would have to pay of about $2100 plus, to be fair, I get comprehensive cover if I damage another car. The value of the comprehensive cover is about $250 per car (I priced this as a stand-alone policy) so that for the actual cover on each vehicle costs me $500 for a value of a written-off vehicle of excess of $2100. This charge seemed outrageous to me and I even felt foolish for allowing this situation to develop.
I have been insured with the firm for 25 years and have never made a claim - all the costs above are discounted to reflect this. After a long discussion with one of the insurer's representatives I found that about $150 of this charge was connected to the fact that one of the cars had initially been purchased with "finance". This adds a $300 premium to the total bill. I had failed to notify the insurer that the financing had ended 9 years ago and a finger was wagged at me for my failure! I had no idea I was being levied a surcharge for this.
Eventually I did the obvious thing and took out a policy giving me comprehensive insurance cover only. If either car is damaged beyond repair or stolen I will write it off. My premium total dropped from $1500 to $550 a saving of $950 annually. For this I gave up cover on the two vehicles insured of $4200. Happy with that exchange.
My lifetime experience of insurance companies has been unfavourable. On this occasion I have to say my own stupidity in not demanding a detailed accounting of costs in years past irritates almost as much as the over-charging.
I have been insured with the firm for 25 years and have never made a claim - all the costs above are discounted to reflect this. After a long discussion with one of the insurer's representatives I found that about $150 of this charge was connected to the fact that one of the cars had initially been purchased with "finance". This adds a $300 premium to the total bill. I had failed to notify the insurer that the financing had ended 9 years ago and a finger was wagged at me for my failure! I had no idea I was being levied a surcharge for this.
Eventually I did the obvious thing and took out a policy giving me comprehensive insurance cover only. If either car is damaged beyond repair or stolen I will write it off. My premium total dropped from $1500 to $550 a saving of $950 annually. For this I gave up cover on the two vehicles insured of $4200. Happy with that exchange.
My lifetime experience of insurance companies has been unfavourable. On this occasion I have to say my own stupidity in not demanding a detailed accounting of costs in years past irritates almost as much as the over-charging.
Wednesday, June 17, 2015
Pension reform
The reforms on eligibility for the pension that Labor opposes seem sensible to me, The current eligibility for a part pension (for a couple) is $1.15m in assets whereas under the proposed Coalition-cum-Green reform this is reduced to $823,000.
Suppose couples want to leave no bequests and that they own a house worth $650,000. Suppose also they retiree at age 65 and know they will live for 25 years to age 90.
The big factor determining their sustainable income is the rate of return on their assets and whether they can engineer a reverse mortgage on their house that yields this rate of return.
Suppose their assets earn a paltry 2% annually real return. Someone just on the old current eligibility limit (without a home) can spend $58,903 annually over the 25 years (or $92,102 if you include the reverse mortgage). With the lower eligibility requirement they can spend $42,154 annually (or $75,448 with the reverse mortgage).
More realistically suppose returns of 5% annually on the investments. Under the old limit they can (without a home) get income of $81,538 annually (or $127,715 with the reverse mortgage). Under the lower eligibility requirement they can get $58,393 annually (or $104,000 with the reverse mortgage).
I have used simple annuity formulae* to do these calculations. The basic idea is that you can draw down the value of assets and draw interest on residual asset values until they hit value zero at age 90. The Labor Party it seems to me in opposing the Coalition reforms is supporting people who don't really need it. Of course they want it but it isn't an imperative.
With a bit more effort I could allow for bequests and longevity risk but these will change these calculations in a straightforward way. Bequests anyway are irrelevant in a situation where you are trying to compute eligibility for basic pension entitlements. Notice too how critically the value of the family home enters these calculations. Excluding the family home from these asset tests does not seem defensible if the opportunity to purchase reverse mortgages is available.
(*) It is a while since I have done these financial mathematics but the equation I used is that the sustainable income X * annuity formula given interest rates r and time horizon n, namely a(r,n), must equal the initially value of the capital asset V so X =V/a(r,n). I think that's right.
Suppose couples want to leave no bequests and that they own a house worth $650,000. Suppose also they retiree at age 65 and know they will live for 25 years to age 90.
The big factor determining their sustainable income is the rate of return on their assets and whether they can engineer a reverse mortgage on their house that yields this rate of return.
Suppose their assets earn a paltry 2% annually real return. Someone just on the old current eligibility limit (without a home) can spend $58,903 annually over the 25 years (or $92,102 if you include the reverse mortgage). With the lower eligibility requirement they can spend $42,154 annually (or $75,448 with the reverse mortgage).
More realistically suppose returns of 5% annually on the investments. Under the old limit they can (without a home) get income of $81,538 annually (or $127,715 with the reverse mortgage). Under the lower eligibility requirement they can get $58,393 annually (or $104,000 with the reverse mortgage).
I have used simple annuity formulae* to do these calculations. The basic idea is that you can draw down the value of assets and draw interest on residual asset values until they hit value zero at age 90. The Labor Party it seems to me in opposing the Coalition reforms is supporting people who don't really need it. Of course they want it but it isn't an imperative.
With a bit more effort I could allow for bequests and longevity risk but these will change these calculations in a straightforward way. Bequests anyway are irrelevant in a situation where you are trying to compute eligibility for basic pension entitlements. Notice too how critically the value of the family home enters these calculations. Excluding the family home from these asset tests does not seem defensible if the opportunity to purchase reverse mortgages is available.
(*) It is a while since I have done these financial mathematics but the equation I used is that the sustainable income X * annuity formula given interest rates r and time horizon n, namely a(r,n), must equal the initially value of the capital asset V so X =V/a(r,n). I think that's right.
Friday, May 22, 2015
Congestion pricing & Infrastructure Australia
I have been glancing through the 3-part report by Infrastructure Australia (a summary here) on Australia's infrastructure needs over coming decades. I was mainly interested in the transport sector and proposals that looked - on casual reading of the press this morning - like yet another case for user charges (congestion charging and heavy vehicle charging for road damage costs). As I started working on these issues more than 20 years ago I do get a little peeved by the almost annual attempt to revive such discussions somewhere which always get promptly forgotten.
On this occasion I can only say I am underwhelmed by the stupidity of the Infrastructure Australia analysis. They still don't understand the basics of user-charging. Nor for that matter did Ian Harper in his recent reported proposals for competition reform.
Infrastructure Australia take as given Australia's dismal future population trend forecasts (fair enough not their concern, but in my view the forecast rates of population growth via our migration program are unacceptably high) and then look for ways of dealing with the surge in congestion and heavy vehicle demands that will result. Their answer? Build more roads everywhere and find ways of funding such investments. Their answer? Road use charges that fund the roads.
That fundamentally misrepresents the intent of user charges. Unless these prices target congestion and road damage costs this won't ensure efficiency. Indeed the issue is not primarily one of funding at all. All roads - new and old alike - that are subject to external costs should be priced to eliminate the external costs imposed on them (congestion and road damagers) so that all roads are utilised efficiently. Then if the roads make a profit expand their scale thereby making expansion decisions that reflect demands at the socially correct price.
Its the same old dumb-assed "engineer think" that has dominated Australian road infrastructure planning for decades. It is a shame that they cannot get the basic logic right.
http://www.infrastructureaustralia.gov.au/news-media/media-releases/2015/2015_05_22.aspx
On this occasion I can only say I am underwhelmed by the stupidity of the Infrastructure Australia analysis. They still don't understand the basics of user-charging. Nor for that matter did Ian Harper in his recent reported proposals for competition reform.
Infrastructure Australia take as given Australia's dismal future population trend forecasts (fair enough not their concern, but in my view the forecast rates of population growth via our migration program are unacceptably high) and then look for ways of dealing with the surge in congestion and heavy vehicle demands that will result. Their answer? Build more roads everywhere and find ways of funding such investments. Their answer? Road use charges that fund the roads.
That fundamentally misrepresents the intent of user charges. Unless these prices target congestion and road damage costs this won't ensure efficiency. Indeed the issue is not primarily one of funding at all. All roads - new and old alike - that are subject to external costs should be priced to eliminate the external costs imposed on them (congestion and road damagers) so that all roads are utilised efficiently. Then if the roads make a profit expand their scale thereby making expansion decisions that reflect demands at the socially correct price.
Its the same old dumb-assed "engineer think" that has dominated Australian road infrastructure planning for decades. It is a shame that they cannot get the basic logic right.
http://www.infrastructureaustralia.gov.au/news-media/media-releases/2015/2015_05_22.aspx
Monday, May 11, 2015
How to eliminate government budget deficits with some simple efficiency-based tax reforms
I recently became awarec that each year the Commonwealth Government publishes a tax expenditures report that details the tax exemptions, deductions or offset concessional rates as well as deferrals of tax liability. A colleague told me that state governments publish similar documents for tax expenditures associated with land tax, payroll tax and the non-taxation of non-profits. I have not yet checked these out.
A tax expenditure is a bit of tax the government could grab but it does not - it foregoes the tax. It is just like government spending in terms of its impact on the budget deficit. They increase the deficit. Actually more than a "bit" . Huge amounts of foregonee possible tax revenues arise:
These alone would boost the total tax take by 12% and obliterate the deficit. These tax expenditures have grown dramatically over the paast few years because of the property booms in our capital cities. Getting rid of housing exemptions would reduce property prices and leave our children better-off. Over-investment in housing would give way to more productive investments in other areas.
Generally even without adding to tax income the fewer these types of exemptions therec are the smaller are the excess burdens (deadweight losses) of the taxesc that remain. Big taxes impose disproportionatetely large inefficiency costs - roughly they are proportional to the square of the tax size.
Apart from income tax deductions there are also exemptions from the GST - Australia compared to NZ which does have a broadly based GST has 40% less coverage. Some big items here:
There are plenty of opportunities to resolve our fiscal difficulties if politicians had the guts and stamina to approve such changes. They won't in the foreseeable future. We are timid of even modest cuts in childcare benefits! A basic principle of Australian policy (a version of the Pareto Principle) - no policy should be undertaken unless it disadvantages no-one. There are no such policies so we will do nothing!
A tax expenditure is a bit of tax the government could grab but it does not - it foregoes the tax. It is just like government spending in terms of its impact on the budget deficit. They increase the deficit. Actually more than a "bit" . Huge amounts of foregonee possible tax revenues arise:
- Exemptions of capital gains-tax on family home $25b
- Exemptions on residences previously lived in $20.5b
- Concessional tax on superannuation $16.3b
These alone would boost the total tax take by 12% and obliterate the deficit. These tax expenditures have grown dramatically over the paast few years because of the property booms in our capital cities. Getting rid of housing exemptions would reduce property prices and leave our children better-off. Over-investment in housing would give way to more productive investments in other areas.
Generally even without adding to tax income the fewer these types of exemptions therec are the smaller are the excess burdens (deadweight losses) of the taxesc that remain. Big taxes impose disproportionatetely large inefficiency costs - roughly they are proportional to the square of the tax size.
Apart from income tax deductions there are also exemptions from the GST - Australia compared to NZ which does have a broadly based GST has 40% less coverage. Some big items here:
- Exemptions of food from GST $6.4b.
- Exemption of education $3.9b
- Exemption of health services $3.6b etc etc.
There are plenty of opportunities to resolve our fiscal difficulties if politicians had the guts and stamina to approve such changes. They won't in the foreseeable future. We are timid of even modest cuts in childcare benefits! A basic principle of Australian policy (a version of the Pareto Principle) - no policy should be undertaken unless it disadvantages no-one. There are no such policies so we will do nothing!
Thursday, April 23, 2015
Emissions Reduction Fund insufficient to hit Kyoto targets
I wrote a paper with Rob Waschik and Iain Fraser arguing that the ERF would be unlikely to achieve Australia's Kyoto target by 2020 - in fact we computed that the $2.55b in the fund would only hit 50% of the target. (The link is to a preprint - the paper itself is now published but paywalled).
The figures today on the outcome of the first ERF auction do not lead me to reconsider my conclusion despite the assurances of The Australian that the ERF is "within reach" of the 5% reduction target by 2020.
The arithmetic in The Australian is wrong since, to this time, about 1/4 of the $2.55b has been spent but emissions cuts of 236MT are only 1/5th of the 236MT reduction that is targeted. Not a big deal this error however and the "within reach" conclusion might even be approximately justified.
The difficulty is that the emissions cuts achieved so far are likely to be the cheapest cuts available - the "low hanging fruit". As cuts continue to be made the cost per tonne of making the cuts is likely to rise well above the average rate paid this round of about $14 per tonne. The "marginal abatement curve" is always supposed be to be a strongly increasing function of the level of cutbacks.
This is not to say that Australia won't hit its emissions targets. It might. The economy may go into recession and continuing developments in energy conservation and the use of renewables (solar and wind) may help achieve this objective as might developments in coal burning technology and substitutions toward use of natural gas. But the ERF itself won't be enough to achieve desired targets with its current budget.
The figures today on the outcome of the first ERF auction do not lead me to reconsider my conclusion despite the assurances of The Australian that the ERF is "within reach" of the 5% reduction target by 2020.
The arithmetic in The Australian is wrong since, to this time, about 1/4 of the $2.55b has been spent but emissions cuts of 236MT are only 1/5th of the 236MT reduction that is targeted. Not a big deal this error however and the "within reach" conclusion might even be approximately justified.
The difficulty is that the emissions cuts achieved so far are likely to be the cheapest cuts available - the "low hanging fruit". As cuts continue to be made the cost per tonne of making the cuts is likely to rise well above the average rate paid this round of about $14 per tonne. The "marginal abatement curve" is always supposed be to be a strongly increasing function of the level of cutbacks.
This is not to say that Australia won't hit its emissions targets. It might. The economy may go into recession and continuing developments in energy conservation and the use of renewables (solar and wind) may help achieve this objective as might developments in coal burning technology and substitutions toward use of natural gas. But the ERF itself won't be enough to achieve desired targets with its current budget.
Saturday, March 14, 2015
Insuring quack medical treatments and non-quack useless treatments
A few years ago I had an arthroscopy in my right knee. It followed acute knee pain that resulted from clumsy attempts to climb a locked gate at the Western Treatment Plant. The pain was intense and "burning" - it lasted several weeks while my GP suggested I rub Voltaren on it which had no effect at all. Finally I went to a "sports doctor" who recommended arthroscopic knee surgery. I was on crutches for a couple of weeks after which the knee went back to normal, the pain gone I think permanently.
I was intrigued therefore to read in this morning's AFR ("Rolfing and Rebates", unfortunately pay-walled) that some insurers (NIB) regard arthroscopies as being ineffective so that, like Rolfing, homeopathy, naturopathy, massage and herbalist treatments (and other evidence-free medical practices) insurance companies should not provide cover for them.
I am not expert on medical issues but I wondered if the claim with respect to arthroscopy is correct true. This article posted online claims they are. It claims the recovery I experienced would probably be achieved by a placebo procedure.
Two issues occur to me:
(1) Should insurance companies provide cover for treatments that consumers demand - if- like homeopathy - there is no clinical evidence they work. One insurer in the AFR answered "yes" to this question since insurance companies should reflect consumer preferences and, presumably, not science. I have problems with this view since providing insurance cover to procedures signals to customers that the procedures are valid. By reducing the effective cost they also increase incentives to use them.
(2) How many more mainstream "respected" treatments (like arthroscopy) are being insured even though there is little clinical evidence they work? I wonder, for example, about the widespread advocacy of Statin drugs for dealing with claimed cholesterol problems: See here - Statins of concern to me as I have taken these drugs for a decade. Or the now discredited, but still practised, advocacy of a carbohydrate-based "food pyramid" that has driven millions into obesity, Type 2 diabetes and heart disease. Ditto the rejection of carbohydrate intake as a treatment for diabetes and obesity.
I was intrigued therefore to read in this morning's AFR ("Rolfing and Rebates", unfortunately pay-walled) that some insurers (NIB) regard arthroscopies as being ineffective so that, like Rolfing, homeopathy, naturopathy, massage and herbalist treatments (and other evidence-free medical practices) insurance companies should not provide cover for them.
I am not expert on medical issues but I wondered if the claim with respect to arthroscopy is correct true. This article posted online claims they are. It claims the recovery I experienced would probably be achieved by a placebo procedure.
Two issues occur to me:
(1) Should insurance companies provide cover for treatments that consumers demand - if- like homeopathy - there is no clinical evidence they work. One insurer in the AFR answered "yes" to this question since insurance companies should reflect consumer preferences and, presumably, not science. I have problems with this view since providing insurance cover to procedures signals to customers that the procedures are valid. By reducing the effective cost they also increase incentives to use them.
(2) How many more mainstream "respected" treatments (like arthroscopy) are being insured even though there is little clinical evidence they work? I wonder, for example, about the widespread advocacy of Statin drugs for dealing with claimed cholesterol problems: See here - Statins of concern to me as I have taken these drugs for a decade. Or the now discredited, but still practised, advocacy of a carbohydrate-based "food pyramid" that has driven millions into obesity, Type 2 diabetes and heart disease. Ditto the rejection of carbohydrate intake as a treatment for diabetes and obesity.
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