Friday, March 31, 2006

But I'm not bitter.

I just read this article, found here.

Inside Trading: Congress for sale


Here's a little history to consider.

Congress enacted the Securities Act of 1933, which required registration of publicly traded companies -- making more information open and available to the public. A year later, Congress added more protections for investors. One of those provisions made it illegal to trade stock by corporate insiders who were privy to special information that could help or hurt a stock.

After this generation's corporate scandals, Congress passed Sarbanes-Oxley in 2002 to improve corporate governance and audit independence. But one of the measures added reporting requirements and tougher standards for insider trading.

Unfortunately, Congress forgot itself. It remains perfectly legal for a member of Congress to buy and sell stocks based on information that's not available to the public. Last year it was reported that a "political intelligence" firm tipped off its clients to an undelivered speech by Senate Majority Leader Bill Frist on asbestos liability. The information was profitable to those in the know.

"This is simply wrong that members of Congress can exchange information ... and get rich on it," says Rep. Brian Baird, D-Wash., who is co-sponsor of a bill to prohibit insider trading by members of Congress and their staffs.

Baird will report to a congressional committee today on the proposal -- and is optimistic. "When people hear about it, on both sides of the aisle, they think this is something that ought to be fixed."

We think Baird's right. Even if a congressional insider trading ban comes seven decades too late.
I have mostly stopped reading political news because I get so frustrated by all of it. This is a perfect example of how politics in this country now works. It is no wonder that nobody has any faith in anything with such a corrupt government doing its best to line it's own nest at the expense of the taxpayers.

There is one thing I would like to know though. I have often heard that when Senators and Congressmen retire, they retire with 100% pay, not a portion of the pay they receieved, like the rest of the country. I'd really like to know if that is true. Does anyone know for sure and can you show me where the proof of that would be located? I would prefer to think that this is just another "urban legend," but I have a bad feeling that its true.


Sassan Sanei said...

According to this site, it's not that they retire with full pay, but they can arrange their finances in such a way that their pension plan plus their retirement savings provides an annual income equal to (or greater) than their working income. It requires more saving during the working years to achieve this.

Through the magic and wonder of compound interest, I'll be doing the same thing (retiring with more income than my present salary). This is not some secret tactic unique to politicians. Anybody can achieve the same thing, provided that they avoid spending a good portion of their pay, saving it in a retirement plan instead.

I created a quick spreadsheet just now and found that based on 30 working years (from 25 to 55), 3% pay increase per year (equal to inflation), and 8% interest per year (typical of long-term returns on a well-balanced portfolio), you would need to set aside 18% of your income each year to end up with interest income equal to your final year's salary - more than that if you place your savings in an annuity when you retire. The question is, can you save 18% of every paycheque? It's not easy, but it is possible.

Unfortunately, credit is so easily accessible that most people live well beyond their means. When was the last time you heard of anybody "saving up" for a car? Most people "finance" their cars instead, and make payments on them for years. Then as soon as they actually own the car, trade it in for a new one. It's nice to drive a new car, but you'll be paying for it in retirement!

The common recommendation from financial advisers is to plan for retirement income equal to 70% of your salary from your working years; the assumption is that you will have fewer expenses when you are retired than when you were working. But that's a bad assumption. With all that free time on my hands, I plan to do a lot of traveling and to spend more time on the hobbies that I don't have time for now. That requires MORE money in retirement than when working.

So I think there is every reason to be cynical about the financial motivations of politician, but retirement planning probably isn't one of them!

And I agree 100% with your original point that insider trading regulations should apply to everybody, including politicians. If they can put Martha Stewart in jail, they ought to do the same with those who wrote the laws she broke in the first place.

markoos said...

geez you're a thorough person aren't you sassan?!!! put the rest fo us to shame!

in Ozland, we have compusary superanuation contributions of 9% but we can opt to sacrifice more. most people give about 11% to super to fund retirement.

i plan to live the life as an oldie but i know that that menas saving and sacrifice until then, but i've volunteered at nursing homes and delivered free meals to pensioners before and seen how that generation lives. it's not pretty and it scared me into realising what lies ahed if you don't plan.

Sassan Sanei said...

You got it. Plan now, no regrets later!

You don't necessarily have to sacrifice a lot now. Just think of it this way: every dollar you spend now would, if you saved it instead, grow to at least five dollars when you're old and gray.

The idea is, before spending $20 on something small and frivolous now, think twice and ask yourself if an extra $100 wouldn't come in handy in retirement.

By the way, 9% is pretty high for compulsory retirement savings. In Canada, it's 4.95%, to a maximum of $3500/year; the current payout at age 65 is a maximum of $844/month. That's not a lot, and many people also contribute to a tax-deferred Retirement Savings Plan (RSP), where the current maximum contribution is another 18% up to $18,000/year, and you can withdraw the money at any time. Having the discipline to make the maximum RSP contribution each year makes an enormous difference in later life!