If I were any good at cartooning, I would draw the following scene, stick-figure style: an agent stands guard. Out of nowhere he’s attacked by a mysterious enemy. He fights back. The struggle intensifies. It takes the two up flights of stairs and near harrowing ledges. Finally they are on the rooftop. With a split-second of freedom, the man pulls out his gun, but it’s instantly knocked away, skidding down a slope. They each fight desperately until finally one man emerges, standing, while the other awaits his certain death. The man with the gun looks down from above and speaks these potent words:
“Alpha sums to zero over all investors.”
And pulls the trigger.
(Wouldn’t it be great?)
Alpha is one of those annoying things that’s too hotly debated to really be understood. The idea is that alpha is an investment gain that exceeds the market return in general. Sites like “Seeking Alpha” are basically pandering to this idea that in general, investors want to gain higher returns than average. Some argue that alpha always sums to zero since it’s effectively “the average” of all returns, others argue that it’s more complicated than this.
I’m honestly not much of a finance guy (specifically), so it’s not like I have deep knowledge of this subject, but I can admire when people educate themselves and try their darnedest to get the best deal they can. We see this in how tax-sheltered retirement accounts can be used to decrease your tax burden, or how Traditional accounts and Roth accounts are better sheltering strategies based on future expectations or under certain circumstances.
Lately I’ve been thinking of what this means on an international level. I’m familiar with the United States tax structure and some of the gritty rules surrounding 401(k)s, its siblings the 403(b) and 457 (did you know there’s a 401(a)?!) , IRAs, and generally how Social Security works. But what about other locations in the world?
The Financial Independence community has quite a few Canadians, so I’ve heard of RRSPs and TFSAs, and a few other dealios, but I’ve not actually researched them. There are plenty of people from England and Australia as well, no surprise given that many of the early blogging personalities were all native English speakers. Some people speculate on the best countries in Europe to retire to. In general, it’s a slightly fascinating subject. What systems have worked? What systems have failed? What is the bigger picture on strategy? Clearly some things work really well here because of our history of innovation and freedom of speech, but what does that imply for countries with different value systems? What does “retirement” look like in those places?
For the hell of it, I found myself researching how Nepali people would do this. In the early 60s, a sort of “Provident Fund”, common in many Asian countries, was adopted. It acts similar to how our Social Security does. About 18% of an employed person’s salary was paid by the employer while 10% was paid in by the employee out of their own earnings. Here in the US, we have the FICA tax for Social Security and Medicare. We pay a 7.65% tax out of our paycheck on this, and the only times we don’t pay this tax are for health care elections and employer-sponsored Health Savings Account contributions. (I’m also willing to suspect there are some deep corners of the tax code that provision other exceptions I’m simply not aware of, and I think certain ordained individuals can be exempted). What I didn’t know until this past year is that employers actually pay an additional 7.65% of an employee’s pay as well, and self-employed individuals pay both. So we actually pay less to our government than the Nepalis do to theirs. But I don’t actually know what the benefits of their system are. In general, there’s just an awful lot to compare between even just two countries.
Lately, Nepal has begun to put in place a Social Security Fund, which is scheduled to replace the Provident Fund. It looks like a red-tape nightmare, though it seems to be an improvement for many. Since you have to pay into it for 15 years (assuming consistent employment), what about those who are already near “retirement age”? And as far as I’m aware, there is no equivalent of a 401(k) or IRA in Nepal. So if you were a citizen there, your Financial Independence strategy might look very different from how it does here. I just find that super interesting. But my interest in politics and policy do not extend far.
Environment determines strategy. No matter what country you are in, buying an expensive home in a tiny town that only exists because of one employer, for example, is probably not the smartest decision. Investing in stocks in a country where financial assets are often or even just occasionally frozen is extremely risky business. The value of a stock means nothing if you can’t liquidate it!
And we must understand, state-level societies will have similarities with each other. So a true understanding of risk requires going beyond simply “other countries”. This is where we dive into culture. In some cultures, the only viable retirement strategy involves having lots of children who can take care of you in your old age. For some it may be alliances with neighbors; others, attaining statehood. It’s a huge subject. I’d love to study it, but I hardly know where to begin, and more importantly, I don’t know how far into it I really want to go.
Resilient systems. There is no such thing as eradicating risk. Ah, but resilient systems! Those frequently lead to success. Linear systems frequently lead to failure. To employ a resilient strategy means understanding your broader goals and pairing that with knowledge of specific tactics, such as investing money in your company’s 401(k), or avoiding capital gains taxes on bond returns by avoiding dividend-happy mutual funds. Resiliency can exist in any country, in any culture. The tactics may be different, but they will still be very important.
I’ve wondered this past year if this would be something I’m interested in researching in depth. I don’t know yet. I tend to enjoy learning many different things and don’t enjoy being bogged down by one subject or another for too long. But there is, I think, a great deal to be learned from international tax laws.