Don’t Worry: The Economy Will Boom Up Ahead, Says Dimon

Despite widespread unease, the JPM chief has faith in strong household finances and the Fed.

Jamie Dimon

Turn that frown upside down. That’s the message from JPMorgan Chase CEO Jamie Dimon, who believes the nation is entering the best economic growth phase it has seen since the 1940s.

Despite all kinds of economic malaise, he is pushing an optimistic forecast where even rising interest rates will be no problem. “We’re going to have the best growth we’ve ever had, this year, I think since maybe sometime after the Great Depression,” Dimon said on CNBC, speaking from a health care conference the bank sponsored. “Next year will be pretty good, too.”

In December, consumer confidence dove, down 12.5% from the year before, according to the University of Michigan sentiment index. Rising inflation—the new Consumer Price Index (CPI), released Wednesday, hit 7%, the highest level since 1982—has disheartened many. So has the rampant spread of the Omicron variant, with new cases running well over an average 500,000 daily in the US, the largest tally thus far in the pandemic.

But to Dimon, the solid condition of US households’ finances will prevail and restore people’s sense of comfort, with the economy rising as a result. “The consumer balance sheet has never been in better shape: They’re spending 25% more today than pre-COVID,” he said. “Their debt-service ratio is better than it’s been since we’ve been keeping records for 50 years.”

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That said, the stock market might not tag along with this core economic strength, Dimon warned. More ups and downs lie ahead, he cautioned. “The market is different,” he said. “We’re kind of expecting that the market will have a lot of volatility this year as rates go up and people kind of redo projections.”

Dimon also expressed optimism that the Federal Reserve actions will pull back today’s robust inflation, without damaging economic growth. “If we’re lucky, the Fed can slow things down and we’ll have what they call a ‘soft landing,’” he said. The Fed’s policymaking body’s members last month predicted three quarter-point increases in the benchmark fed funds rate. But Goldman Sachs and Deutsche Bank economists have forecasted that it will be four.

“It’s possible that inflation is worse than they think, and they raise rates more than people think,” Dimon said. “I personally would be surprised if it’s just four increases.”

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DB Plans Far More Cost-Efficient Than DC Plans, Research Finds

Switching from pensions to 401(k) plans only saves money if benefits are cut substantially, a new report says.

Defined benefit (DB) pension plans are “substantially more economically efficient” than defined contribution (DC) plans, according to a new report from the nonprofit National Institute on Retirement Security (NIRS).

The report calculated the cost of achieving a target benefit in a typical public sector DB plan expressed as a level percent of payroll over a career, and compared that with the cost of providing the same target benefit in a typical DC plan. The research found that a traditional DB pension has a 49% cost advantage over a typical DC account, thanks to benefits from longevity risk pooling, higher investment returns, and optimally balanced investment portfolios.

“DB pensions continue to have substantial economic efficiencies that cannot be replicated by individual DC accounts,” said the report. “Switching from a DB to a DC system saves money only if it involves substantial cuts to employee benefits.”

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According to the report, the pooling of longevity risk in DB pensions enables them to fund benefits based on average life expectancy, while still paying each worker monthly income regardless of how long they live. In contrast, DC plans must receive excess contributions for each worker to self-insure against living longer than expected.

DB pensions also tend to have higher net investment returns due to professional management and lower fees from economies of scale, according to the report. The report also called DB pensions “ageless” in that they can perpetually maintain an optimally balanced investment portfolio rather than downshifting over time to a lower risk/return asset allocation as one does with a typical individual strategy.

“Due to the advantages of longevity risk pooling and the maintenance of portfolio diversification, the DB plan costs less than a DC plan, even compared to the ideal DC plan with no disadvantage in terms of fees and investor skill,” said the report, which added that “the cost of the DC plan doubles compared to the DB plan because the DB plan realizes a hefty additional cost advantage due to its low expenses and professional management of assets.”

The report also said using private annuities to convert DC account balances into a lifetime income stream does not close the gap between DB and DC plans because such annuities are expensive, particularly when they include the same inflation protection offered by public DB plans.

“Shifting from a DB plan to a DC plan and maintaining the same contribution rate will generate significant cuts in retirement income,” according to the report. “Considering the magnitude of the DB cost advantage, the consequences of a decision to switch to a DC plan could be dramatic for employees, employers, and taxpayers.”

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