Answers to The Financial Riddler, 11-30-22
Financial knowledge is financial empowerment
Economics Matters — The Money Quiz is a daily test of your financial knowledge. The quiz is hard. Expect to be wrong most of the time. But losing is winning. Your payoff is not bragging rights. It’s learning what you don’t know, learning what you can’t know, and learning how you can know what you can’t know.
Answers to the Financial Riddler, December 7, 2022. Previous Quizzes and Answers are posted below.
Russia currently accounts for 3 percent of global GDP. What’s its projected share in 2100?
a) 6 percent
b) 5 percent
c) 4 percent
d) 3 percent
e) 2 percent
f) 1 percent
The answers is f). As described in The Future of Global Power, Russia’s global GDP share will fall for two reasons. First, it’s global population share will, according to the UN, fall from 2 percent today to 1 percent by century’s. Second, its productivity (output per worker) is projected to keep up with the U.S. (It’s a quarter percent of the U.S. level) let alone grow as rapidly as China, whose productivity will match that of the U.S. well before the century’s end.
Sub-Saharan Africa’s current population of 750 million people will, according to the UN, grow by 1.7 current-day Chinas, i.e., by 2.4 billion, by 2100. At that point, it will account for 30 percent of the world’s population, up from 10 percent today. Africa’s global share of GDP is now 2 percent. What share will it represent in 2100?
g) 5 percent
h) 4 percent
i) 3 percent
j) 2 percent
k) 1 percent
The answer is h). Yes, Sub-Saharan Africa’s population will grow like crazy. But its productivity is projected to fall from 5 to 3 percent of the U.S. level. When it comes to global hegemony, worker productivity is the name of the game.
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3. Between October 1, 2021 and October 1, 2022, prices rose by 7.7 percent. Federal debt held by the public on October 1, 2021 totaled $22.6 trillion – roughly a year’s GDP. How much, in dollars, did inflation water down, i.e., reduced the purchasing power of, government debt during this period?
a) $231 billion
b) $528 billion
c) $711 billion
d) $1.74 trillion
e) $2.27 trillion
The answer is d), the product of .077 and $22.6 trillion. The point here is that inflation represents a real tax – it’s lowering the value of all our nominal (non-inflation indexed) assets and income streams.
4. Since 1900, has the U.S. ever experienced inflation above 12 percent?
a) No
b) Yes
The answer is b). Uncle Sam lifted price controls right after WWII. In March of 1947, prices rose at an annual rate of 19 percent. Between 1946 and 1949, inflation wiped out over a third of the real value of government debt!
Answers to the December 1, 2022 Financial Riddler.
By how much will the S. Korean population change between now and 2100?
a) Rise by 50 percent
b) Stay roughly fixed
c) Fall by 53 percent
d) Rise by 18 percent
The answer is c). S. Korea has the lowest fertility rate of any country in the world. Its population is on track to fall from 51 million people now to 24 million by century’s end. At that point, roughly two in five S. Koreans will be 65 or older.
Social Security is scheduled to provide an 8.7 percent COLA (Cost of Living Adjustment). Does Social Security’s COLA protect retirees against a decline in the purchasing power of their benefits due to inflation? Assume that the price increases facing Social Security recipients are the same as that experienced in general.
a) Yes
b) No
The answer is b). The thresholds beyond which first half and then 85 percent of Social Security benefits are taxable under the federal income tax are not indexed against inflation. As prices rise, more retirees find they are paying taxes on their benefits and those already facing benefit taxation find more of their benefits are taxable. Plus, the COLA is annual, not monthly, indeed it arrives as much as 15 months in arrears. The failure to index benefits on a timely basis, e.g., every month, reduces retirees’ real benefits by more than half of each year’s inflation rate. Thus, over the past year, retirees have seen a greater than 4 percent real benefit cut.
If you have money in a brokerage account and the investment company uses your funds to cover withdrawals by other investors, is your money insured by the Federal Deposit Insurance Corporation?
a) Yes
b) No
The answer is b). No, the FDIC does not insure brokerage accounts. Here’s part of the story (taken from the web). “While bank balances are insured by the FDIC, investments in a brokerage account are covered by the Securities Investor Protection Corporation (SIPC). It protects investors in the unlikely event that their brokerage firm fails. However, certain rules and conditions apply—and investment earnings are not insured.” But SIPC insures against fraud, but only when it chooses to recognize fraud. As discussed here, SIPC declared the Madoff fraud a “bankruptcy” and failed to compensate its victims. Indeed, it used bankruptcy law to declare many of its victims co-conspirators.
Suppose you own a $1 million house and can earn 3 percent real on your investments. Inflation is zero. But your house’s price will rise by 5 percent. You have no mortgage, no property taxes, no homeowners insurance (It’s made out of cement.), and no maintenance costs. How much is the cost you face this year of living in your home?
a) Zero
b) $30,000
c) negative $20,000
The answer is c). If you were to sell your house this year and invest the proceeds, you’d earn $30,000. But if you don’t sell the house this year and sell it next year, it will be worth $50,000 more. So, on balance, you’ll make $50,000 less $30,000, which equals negative $20,000. Hence, your imputed rent/implicit rent/housing holding cost/opportunity cost of holding your home and related expressions for your annual cost of living in your home is negative $20,000 this year.
Answers to the November 30, 2022 Money Quiz. Other Answers to Prior Quizzes are posted below.
As this new study shows, over 90 percent of those 45-62 should wait till 70 to collect their Social Security retirement benefits. How much could these households typically raise their lifetime benefits by optimizing benefit collection? The study assumes a 0.5 percent real (inflation-adjusted discount rate and a maximum age of life of 100.
a) $182,370
b) $93,233
c) $25,791
d) $59,028
The answer is a). That’s more than three years of the typical US worker’s earnings after tax.
Homer and Marge are 63 and 62. They have not yet started collecting Social Security. Their maximum ages of life are 100. Homer has had high earnings. Marge devoted her career to raising four children. So her earnings history is low and sporadic. How many monthly Social Security collection options do Homer and Marge need to consider to determine the strategy that will maximize their combined lifetime benefits?
a) Between 0 and 5,000
b) Between 5,000 and 10,000
c) Between 10,000 and 15,000
d) Between 15,000 and 20,000
e) Between 20,000 and 30,000
The answer is e). According to maximizemysocialsecurity.com, the couple has to consider 21,436 alternative collection strategies. Note, each spouse can start their retirement benefit collection in any month through age 70. In addition, what each spouse can collect with respect to spousal benefits depends on whether the other spouse is collecting their retirement benefit. This explains the massive number of combinations that need to be considered. It takes our software 1 minute to consider all these cases. Is this something you could do in your head were you Marge and Homer? Could their financial planner figure this out in their head? This is an example of learning how to know something you can’t know.
If you belong to gen X, Y, or Z, what’s your best investment move?
a) Invest in Bitcoin now that the price is rock bottom?
b) Invest in the stock market for the long term?
c) Help your parents decide when to take their Social Security?
d) Buy Canadian dollars. Their energy-based economy should do well and their fiscal system is stable.
The answer is c). There’s no downside risk. If your parents do what most parents are doing and royally screw up this decision, you will likely inherit less money if they die early because they’ve had to use up more of their assets due to collecting less than would otherwise be the case from Social Security. If they die late, you’ll likely need to provide them with more financial assistance when they realize at, say, 90, that they can’t cover their costs with their meager monthly Social Security check.
Which country produces the most wheat in the world?
a) Russia
b) Ukraine
c) Chiina
d) The U.S.
The answer is c). Interestingly, Ukraine is the 8th largest producer of wheat. This helps explain why the price of wheat has dropped after rising dramatically after Putin began his horrific war. Other suppliers are coming on board by planting more wheat.
Answers to The Money Quiz — November 24, 2022
By approximately how much have prices risen over the past 20 years?
a) 20 percent
b) 30 percent
c) 40 percent
d) 50 percent
e) 60 percent
The answer is e. You can confirm this here. And this site provides inflation’s year-by-year values back to 2014.
Approximately what fraction of workers age 45 to 62 should wait till 70 to take their Social Security retirement benefit if they seek to maximize their lifetime benefits?
a) 30 percent
b) 50 percent
c) 60 percent
d) 90 percent
The answer is d. But, as shown in this study, only about 10 percent do. This tool will show you what’s best in your case.
In 1960, a gallon of gas cost 31 cents. Today, a gallon cost $3.90. The are the costs in dollars. If you adjust the 31 cents for inflation and express the 1960 cost in today’s dollars, the cost is
a) $5.82
b) $2.58
c) $3.10
d) $4.57
The answer is d. Prices throughout all sectors of the economy have risen by a factor of ten since 1960. Hence, gas is more expensive now, but not that much more.
Does Washington State have a state income tax?
a) yes
b) no
The answer is no. A total of 42 states, including Washington D.C., tax income. Washington State does not.
Answers to The Money Quiz — November 23, 2022
Compared with Albany, New York, the median hourly wage of occupational therapists in Tallahassee, Florida is
a) 21 percent higher
b) 30 percent lower
c) 16 percent higher
d) 7 percent lower
The answer is c. To check, consult the Bureau of Labor Statistics Occupational Data Base.
The bond market currently predicts inflation over the next 10 years to run at
a) 7.2 percent
c) 5.8 percent
d) 2.5 percent
e) 11.3 percent
The answer is d. This is the difference between 10-year nominal and real (Inflation-Protected) Treasury bond yields.
By the end of the Century, the United Nations project that the world’s population will
a) fall by 0.3 Chinas
b) rise by 4.1 Chinas
c) rise by 1.7 Chinas
d) fall by 1.3 Chinas
The answer is c. Here’s the link.
A 67 year-old married divorced widow, who was married to her ex for 20 years can’t collect divorcee widows benefit unless she
a) is unmarried
b) remarried after age 60
c) is disabled
d) dumb question. Divorced widows can never collect widows benefits off their ex’s records.
The answer is b. As described here, Social Security is incredibly sexist in practice, although its provisions are nominally gender-neutral.
Answers to The Money Quiz — November 22, 2022
Compared to taking your Social Security retirement benefit at 62, waiting till 70 will raise its starting value, adjusted for inflation, by
a) 33 percent
b) 47 percent
c) 76 percent
d) 100 percent
The Answer is c.
In starting retirement benefits at 70, not 62, a worker experiences no reduction in benefits due to taking them early. The worker also raises their benefits via the accrual of Delayed Retirement Credits. Here, by the way, is a NY Times Best Seller that covers all of Social Security’s often bizarre, outdated, and sexist provisions.
If interest rates fall, Uncle Sam will let you refinance your student loan at a lower rate.
a) True
b) True, but only if the interest rate falls by more than half of its initial value
c) True, but only if you switch to a 10-year standard loan
d) False
The Answer is d.
Uncle Sam will let you change how you will repay your loan. But he won’t let you repay at a lower interest rate. Read Don’t Borrow for College in Money Magic for the rules on restructuring student loans.
Sue is 30 and lives in Kansas. She has no assets apart from $10,000 is her checking account. But Sue is now contributing $2,500 a year to an IRA. Sue expects to earn 1.0 percent above inflation on her savings. She also expects her $60,000 salary to keep even with inflation. Sue has decided to retire at 62 and immediately take her Social Security retirement benefit. Finally, Sue’s maximum age of life is 100.
How much can Sue spend in today’s dollars each year through age 100 if she lives that long? I.e., what is Sue’s sustainable annual real spending?
a) $20,000-$30000
b) $30,000-$40,000
c) $40,000-$50,000
d) $50,000-$60,000
e) $60,000-$70,000
f) $70,000-$80,000
The Answer is b.
Sue can spend $35,849 on a sustainable basis.
Sue has 70 years to finance spending through age 100. She also has to pay federal income taxes, payroll taxes, Kansas state income taxes, and Medicare Part B premium. Plus, she’ll be paying taxes on 85 percent of her Social Security benefits.
This is an incredibly complex calculation — far beyond human capacity. But MaxiFi Planner can calculate the answer in less than a second. This is how you can know what you can’t know.
For the first question, of the 1 Dec quiz, actually, the answer is c.
The answer is a). S. Korea has the lowest fertility rate of any country in the world. It’s on track to lose 53 million people by the century’s end
Very interesting. Thanks for the advice...