Introduction:

Traditional valuation statistics, especially the ubiquitous PE ratio, are undefined when earnings are negative. The PE ratio cannot be used to evaluate firms in the early stages of their growth or any firms with negative earnings. This paper applies a valuation transformation proposed by Bernstein (2025) that remains mathematically defined whether earnings are positive, zero, or negative, to examine the path of valuation of two historic tech companies, Amazon and Tesla, from their inception to maturity. The paper then applies this valuation methodology to projected earnings and valuation statistics for three companies, SpaceX, OpenAI, and Anthropic, which are currently preparing for an IPO.

Methodology:

My SSRN paper, Measuring Portfolio Valuation, describes the measurement of firm and portfolio PE statistics when some firms have negative earnings. This note on valuation measures is my most frequently downloaded article.

PE ratios behave counterintuitively when earnings are negative because an increase in price causes P/E to become more negative rather than larger.

By contrast, the statistic S=(V-E)/V will increase whenever V rises or E falls, regardless of whether E is positive or negative. At E=0 this number is 1, at E<0 this number is greater than one (indicative of a higher valuation), and for E>0 this number is less than 1.0.

For instance, a company trading at a conventional P/E ratio of 20 translates to S=0.95 while a company with a PE ratio of 15 has S=0.933.

The PE ratio does not exist when E is negative, but the S remains well defined.

The S can be used to evaluate valuation in the early growth years when a company has no earnings or when a company experiences large losses later in its product cycle.

Tesla and Amazon:

The early phase of tech companies is often characterized by a combination of astronomic valuations and substantial losses. The S statistic in the early phase of a firm’s growth is a measure of the relationship between expanding market enthusiasm and escalating market losses.

For Amazon, S at its 1997 public inception was 1.071, and it reached its lifetime maximum S at 1.256 in 2000.

For Tesla, the first-year value of S at its 2010 public inception was 1.091, and it reached its maximum value of S in 2012 with a highest value of 1.104.

SpaceX, OpenAI and Anthropic:

SpaceX, OpenAI and Anthropic are preparing their IPOs, and the released projections of V and E can be used to create the initial valuation statistic S.

· SpaceX: A projected V of 1.77 trillion and E of -4.9 billion yields an S value of 1.00276.

· OpenAI: A projected V of $852 billion and E of $14 billion yields an S value of 1.01643.

· Anthropic: A projected V of $965 billion and E of -14 billion yields an S value of 1.01450.

Conclusion

Unlike the traditional P/E ratio, which suffers from mathematical discontinuity, the S statistics is defined over all values of E.

The projected S values for these pending IPOs are lower than the initial S values observed for Amazon and Tesla, indicating that their projected valuations are not unusually aggressive relative to those historical benchmarks.

Of course, actual outcomes are TBD.

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The United States is facing an accelerating private retirement savings crisis that requires immediate structural tax reform. The upcoming 2029 sunset of temporary federal tax provisions presents policymakers with a stark choice: extend narrow, consumption-focused tax carve-outs or deploy those same fiscal resources to build a resilient, broad-based foundation of private savings.

Because federal tax expenditures are resource-constrained and federal capital is entirely fungible, the budget cannot sustain untargeted income exemptions while simultaneously expanding the domestic savings safety net. We must choose.

Prioritizing a permanent extension of the “No Tax on Tips” policy represents a significant misallocation of public funds due to several problems:

Exempting tips from federal income tax does absolutely nothing to address the structural retirement deficit. Tipped and service-sector workers are among the least prepared for retirement in the American workforce. The Bureau of Labor Statistics data shows that only about 25% of service workers -- and 23% of workers in the lowest earnings quartile -- participate in an employer-sponsored retirement plan.

Worse, a blanket income tax exemption completely fails the lowest earners. More than one-third of all tipped workers have baseline earnings low enough that they owe zero federal income tax before applying refundable credits. A “No Tax on Tips” policy provides a $0 benefit to these low-income families while scaling its upside entirely to high-income tipped earners in upscale venues. It subsidizes current consumption without building a single dollar of long-term financial security.

A tax code must maintain horizontal equity. The No-Tax-On-Tips provision violates a fundamental provision -- individuals with identical economic capacity should face identical tax liabilities. There is no economic or ethical justification for why a retail clerk, a distribution center packer, or a home health aide earning $35,000 entirely in standard hourly wages should pay higher federal income taxes than a restaurant server or bartender earning an identical $35,000 split between base wages and $5,000 in discretionary tips.

This arbitrary favoritism distorts labor markets, creates immense industry pressure to reclassify ordinary wage income as “discretionary tips” to evade taxes, and forces standard low-wage workers to subsidize their peers.

The key selling point of a “no-tax-on-tips” policy is liquidity. People reliant on tip income often face tight financial constraints and avoid saving because they cannot afford to lock up their cash. The Retirement Security Act (RSA) solves this by introducing a dual-ledger IRA system that blends complete tax deductions with immediate cash flexibility.

Under this framework, 100% of an individual’s IRA contribution is tax-deductible, but the funds are automatically split: 60% goes into a locked Retirement Reserve, and 40% goes into a completely liquid Flexible Savings ledger. Savers can withdraw from this 40% buffer at any time, permanently tax-free and penalty-free. For example, if a worker contributes $4,000 to an IRA, they get a tax deduction on the full $4,000, yet they can immediately access and spend $1,600 of it without penalty. The remaining $2,400 is locked until age 59½. This simple shift provides a powerful incentive to save for people who are liquidity-constrained, eliminating the fear of asset lock-up while firmly protecting the core retirement nest egg from premature leakage.

Traditional deductible IRAs suffer from an inherently regressive design. A high-income earner in the 32% marginal tax bracket saves $320 in immediate taxes for every $1,000 contributed, whereas a low-income worker in the 10% bracket saves only $100 for making the identical economic sacrifice. If a worker has zero income tax liability, a traditional deduction yields a $0 financial benefit.

The RSA framework completely flips this incentive structure to prioritize wealth-building at lower incomes. While high-income earners continue to receive a standard tax deduction (balanced by the new ledger rules), low-income workers qualify for a progressive federal match. Under the traditional framework, a low-income worker in the 10% bracket captures a minor $100 tax benefit per $1,000 saved, while a high-income earner in the 32% bracket extracts a $320 federal subsidy for the same contribution level.

The RSA framework changes these dynamics entirely. A high-income earner continues to receive their standard tax deduction, but a low-income worker with zero income tax liability receives a direct, 50% federal matching contribution ($500 for every $1,000 saved) deposited straight into their locked retirement core, all while keeping 40% ($400) of their own principal 100% liquid.

The combination of the progressive match and the 0% effective tax rate on the flexible buffer ensures that the federal government provides its highest aggregate subsidy rate to lower income quartiles. The credit phases down smoothly as income rises, transitioning into a standard deduction for high-income earners who utilize the account primarily for its structural liquidity advantages.

Because the 40% flexible allocation removes the primary behavioral barrier to retirement plans—the fear of asset lock-up during a financial emergency—the overall surge in both individual participation and average contribution rates across the entire economy will be substantial. Consequently, the near-term federal tax expenditure impact will be quite large, as billions of dollars in adjusted gross income are deferred from the immediate tax base by savers capitalizing on the 40% untaxed cash allowance. High-income individuals will aggressively maximize their contributions to capture the unique benefits of the liquid asset split, further compounding this near-term revenue effect.

However, this elevated public expenditure represents a high-leverage shift from consumption-side tax breaks to structural asset accumulation. A massive influx of private capital expands the domestic investment pool, reducing household dependence on state-sponsored safety nets and creating a highly resilient, self-funded workforce. Crucially, building this broad-based foundation of robust private savings serves as an indispensable prerequisite for systemic Social Security reform. By successfully engineering a parallel asset base for every American worker, policymakers will finally possess the structural flexibility and financial cushion needed to stabilize long-term public entitlement programs for generations to come.

Through this design, a worker who chooses to save does not lose their tax preference; they capitalize on it through asset accumulation. Instead of receiving a tax break when spending cash, the worker receives a functionally identical “no tax on cash” benefit when saving their income.

Appendix: Statutory Language of the RSA

Section 101. Structural Modification of Individual Retirement Accounts (IRAs)

Effective January 1, 2029, the Individual Retirement Account (IRA) architecture under Internal Revenue Code Section 408 is modified to transition individual, non-employer-sponsored retail savings into a dual-ledger system. All individual contributions are 100% deductible from adjusted gross income (AGI) in the taxable year of the contribution, up to a statutory individual limit of $7,000 (adjusted annually for inflation).

• Workplace Plan Preservation: This structural modification applies strictly to individual retail IRAs. Employer-sponsored qualified retirement plans—including traditional 401(k), Roth 401(k), 403(b), and 457(b) frameworks—remain completely unchanged, operating under their existing statutory contribution limits, non-discrimination testing, and withdrawal rules.

• The Bifurcated Ledger Split: Upon receipt of any individual IRA contribution, the qualifying financial institution must automatically segment the principal according to a strict 60/40 structural split:

  • The Retirement Reserve Ledger (60%): Formulates the locked core. To eliminate premature account leakage, funds on this ledger and all associated investment earnings are completely locked and cannot be distributed under any circumstances until the holder passes age 59½, except in cases of total permanent disability or death.

  • The Flexible Savings Ledger (40%): Establishes the liquid buffer. Funds on this ledger may be withdrawn at any time, permanently tax-free and penalty-free, up to the aggregate amount of the historical principal deposited.

Section 102. The Progressive Low-Income IRA Match

For single filers with an AGI below $35,000 (and joint filers below $70,000), the federal government will provide a direct, matching contribution equal to 50% of the worker’s qualified individual IRA contribution, deposited directly into the account’s locked Retirement Reserve Ledger.

• Phase-Out: This matching credit phases out linearly at a rate of 5% per $1,000 of AGI above the baseline, reaching 0% at $45,000 for single filers and $90,000 for joint filers.

• Workplace Exclusion: Contributions made by an employee to an employer-sponsored 401(k) or similar workplace plan are excluded from this specific retail IRA federal match mechanism, ensuring zero cross-contamination of public funding between workplace plans and individual retail accounts.

Section 103. Repeal and Transition of Special Income Exemptions

Any temporary provision excluding tip income from federal gross income calculation is repealed effective December 31, 2028. All earned income, whether received as base salary, hourly wages, or discretionary tips, shall be treated identically under the federal income tax code. Funds captured from the sunset of this exemption are structurally earmarked to fund the Section 102 low-income retail savings match.

Related Reading: For a deeper analysis of the broader legislative vehicles and budget mechanics driving these structural changes, readers should review the companion paper, Tax Reconciliation and Retirement Policy.

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One of the most frequently cited financial metrics is EBITDA. It appears in earnings releases, stock analyses, private equity transactions, and merger negotiations. Yet it is also one of the most misunderstood numbers in finance.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In practice, analysts begin with a company’s net income and then add back interest expense, taxes, depreciation, and amortization.

The purpose of EBITDA is to answer a specific question: How profitable is the underlying business before considering how it is financed?

That distinction matters because two companies can operate essentially identical businesses while reporting very different net income. One company may have little debt, while the other may owe billions of dollars and face substantial interest payments. EBITDA attempts to strip away those financing differences and focus on the operating business itself.

For that reason, EBITDA can be a useful tool. But it also has an important limitation: shareholders do not receive EBITDA. They receive whatever remains after all the company’s obligations—including interest payments—have been satisfied.

Consider two companies with identical operations. Each generates $500 million in revenue and incurs $400 million in operating expenses. Both therefore produce $100 million of EBITDA. At first glance, the companies appear equally profitable.

Now suppose Company A carries very little debt. It pays only $5 million per year in interest expense and ultimately reports $75 million in net income.

Company B, by contrast, has accumulated a large amount of debt. Its annual interest expense is $95 million. After paying lenders and taxes, it reports only $4 million in net income.

The striking fact is that both companies report the same EBITDA: $100 million.

An analyst focused exclusively on EBITDA might conclude that the two businesses are equally attractive. In one sense, that is true. Their underlying operations generate the same amount of operating profit. But shareholders do not own the operations in isolation. They own the residual claim after everyone else has been paid.

In Company A, most of the operating profit ultimately belongs to shareholders. In Company B, most of the operating profit belongs to creditors. The business may be generating $100 million of EBITDA, but nearly all that value is being consumed by interest payments.

Defenders of EBITDA would correctly point out that high interest expense is not entirely a deadweight cost. Interest payments generally reduce taxable income, creating what finance professionals call a tax shield. That benefit is real. In this example, Company B pays only about $1 million in taxes compared with roughly $20 million for Company A. Yet the tax shield offsets only a fraction of the additional interest burden. Company B saves about $19 million in taxes but pays approximately $90 million more in interest expense. Shareholders are still substantially worse off.

This illustrates both the strength and the weakness of EBITDA.

• The strength: EBITDA helps analysts compare operating businesses without being distracted by financing choices.

• The weakness: Financing choices are not irrelevant. A company that has borrowed too much may leave very little value for shareholders even if its underlying operations appear healthy.

This is why experienced investors rarely stop at EBITDA. After seeing the EBITDA figure, they immediately ask additional questions:

• How much debt does the company have?

• How much interest must it pay each year?

• How much cash remains after those payments?

• How much profit is left for shareholders?

A useful analogy is that EBITDA measures the horsepower of the engine. It tells us something important about the vehicle’s capabilities. But it does not tell us how much weight the vehicle is towing. Two trucks may have identical engines. If one is pulling an empty trailer and the other is hauling a massive load, their performance will be very different despite having the same horsepower.

Likewise, two companies may report identical EBITDA. If one is carrying a heavy burden of debt, shareholders may receive far less benefit from that operating performance than the EBITDA figure suggests. EBITDA is therefore best viewed as a starting point rather than a conclusion. It can tell us whether a business has a strong engine. It cannot tell us how much of that power ultimately reaches shareholders.

The danger of using EBITDA as a definitive measure of health is not merely theoretical; financial history is littered with corporate collapses where analysts clung to glowing operating metrics while businesses were suffocating. During the telecom meltdown of 2002, companies like WorldCom masked enormous cash drains by classifying routine operating costs as capital expenditures. Because operating expenses lower EBITDA but capital investments do not, this trick kept EBITDA looking robust while the actual business was bleeding cash. Similarly, the Dot-Com crash of 2000–2001 popularized customized “Pro Forma” adjustments that added back marketing and customer acquisition costs, leading investors to back startups with zero path to net profitability. Even successful looking “roll-up” strategies, such as Valeant Pharmaceuticals in 2015, used heavily adjusted EBITDA figures to hide the massive, unsustainable debt loads required to acquire other firms.

Today, this exact dynamic is repeating itself in the artificial intelligence infrastructure boom. Wall Street analysts are aggressively valuing specialized AI cloud providers and enterprise software firms on massive EBITDA multiples, ignoring skyrocketing stock-based compensation (added back as a “non-cash” expense) and billions in hardware debt collateralized directly by depreciating microchips. Because training and maintaining AI requires continuous, intense computing power, treating these foundational, recurring operational outlays as ignorable capital expenditures misstates the actual profit margins. Ultimately, the heavily adjusted EBITDA metrics seen across modern AI valuations closely resemble the deceptive “Pro Forma” metrics of the Dot-Com era, promising future profitability while obscuring the heavy capital burdens required to stay alive.

This exact dynamic is playing out across the AI infrastructure ecosystem, where massive operating profits are paired with heavy capital burdens.

We can see this structural strain clearly in the current financial profiles of the market’s primary infrastructure players.

· For example, Oracle Corporation leverages its legacy profitability to generate a massive $27.4 billion in EBITDA yet carries over $123 billion in net debt to finance its intensive cloud expansion.

· Similarly, specialized private hyperscalers like CoreWeave boast phenomenal EBITDA margins above 50% but operate with gross leverage ratios near 5.8x to secure advanced hardware facilities.

· In the hardware and physical layers, semiconductor giant Broadcom utilizes its $37.2 billion in EBITDA to service a substantial debt load exceeding $70 billion.

This structural blind spot becomes uniquely dangerous in hyper-paced environments where companies must aggressively scale just to keep pace with rapid technological shifts. Frontline AI developers like OpenAI and Anthropic face an unprecedented capital treadmill: the moment a frontier model is completed, the company must immediately secure tens of billions of dollars in compute infrastructure to train the next generation, or risk total obsolescence within a year. Evaluating these foundational players on an EBITDA basis completely strips out the massive interest burdens, capital leases, and compute liabilities required to sustain their market positions. In a sector where technology degrades at an exponential rate, an analyst relying on EBITDA is evaluating a business as if its current assets will last forever, completely ignoring the reality that the cash required for technological survival is already spoken for.

When reading modern analyst reports on enterprise AI and software companies, look specifically for these red flags:

• “Rule of 40” calculations using Adjusted EBITDA: Analysts frequently add a company’s growth rate to its Adjusted EBITDA margin to see if it equals or exceeds 40%. If they used net income or free cash flow instead, many hyped AI firms would fail the test completely.

• Massive gaps between EBITDA and Free Cash Flow (FCF): If a company boasts $100 million in Adjusted EBITDA but has deeply negative Free Cash Flow, it means they are rapidly burning cash on hardware or heavy stock dilution just to keep their “profitable” operating engine running.

The Ultimate Takeaway: As billionaire investor Warren Buffett famously remarked regarding the metric: “Does management think the tooth fairy pays for capital expenditures?”

Just like the historical market cycles of the past, today’s AI valuations rely heavily on metrics that promise profitability eventually—if you agree to ignore the very real, recurring expenses required to build and sustain the technology. If a company must constantly spend cash to replace its equipment, update its technology, or service its debt, that cash is gone. EBITDA can tell you if a business has a great engine, but it won’t stop you from driving off a cliff if you ignore the balance sheet.

I found this article on the importance of cash flow and the EBITDA limitation useful.

https://www.ghjadvisors.com/ghj-insights/the-importance-of-cash-flow-and-the-ebitda-limitation

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The speech argues that American households are struggling with their finances—even during periods when the broader economy appears strong—and that neither major political party has demonstrated the ability to address these challenges in a sustainable way.

At the same time, Social Security is moving toward a funding crisis that will require difficult decisions that Republicans and Democrats have repeatedly failed to confront.

Rising out-of-pocket health-care costs, burdensome student debt, inadequate retirement savings, and the approaching Social Security shortfall are not isolated problems but interconnected challenges.

Recent policy debates on renewal of the ACA premium tax credits, student debt reform, and improved retirement savings incentives show that Congress is incapable of balancing the needs of struggling households in a way that is fair to taxpayers.

Absent changes to the political system, the projected Social Security deficits will lead to automatic cuts to Social Security benefits in around seven years.

The third-party health care, student debt and retirement incentive proposals outlined in this speech are both desirable on their own merits but are also necessary for the adoption of a Social Security reform adjusting both future taxes and benefits.

Thank you all for being here.

We are standing at a crossroads—not just in this district, but across our entire nation.

Look around us.

We are told by the headlines that our economy is strong.

We are told by the talking heads in power that everything is on the right track—and we are told by the talking heads out of power that the sky is falling.

[Pause]

My perspective is different.

Even when the macroeconomy is strong, everyday households are struggling. Struggling to save. Struggling to pay off debt. Struggling to maintain health insurance or cover the out-of-pocket costs of a routine medical procedure.

And even in years with robust economic growth, the federal debt-to-GDP ratio continues to climb.

The actuaries of the Social Security Trust Fund have projected a hard truth: absent immediate action from Congress, the Trust Fund will be forced to implement automatic benefit cuts of 20 percent as early as 2033.

That is just seven years away.

[Long Pause]

Our tax code creates strange, destructive distortions. Democrats want to raise rates; Republicans want to cut them. Neither side ever considers broadening the base.

Many young adults have completely given up on the possibility of ever owning a home. We have a massive housing supply crisis because our capital gains tax structure creates a “lock-in” effect—preventing families from selling, upgrading, and building equity.

The crisis is structural. And neither major political party is capable of dealing with it.

[Pause]

Let’s look at the facts. Let’s look at how raw politics has completely replaced sustainable policy, starting with three core issues hitting your household budget: healthcare, student debt, and retirement savings.

Healthcare:

The Republicans have eliminated Medicaid enhancements and the temporary enhanced premium tax credits have been phased out.

Centrist Democrats chose to make the tax credits temporary. This decision facilitated elimination of the credits by the Trump Administration and the Republican Congress.

Moreover, Centrist Democrats have been unable to fix some of the glaring problems with the ACA including:

· the volatile impact of high tail-risk expenditures on benchmark premiums,

· the rigid non-portability of plans during job transitions,

· systemic tax disparities that punish independent workers, and

· the crushing burden of high out-of-pocket costs and deductibles.

Progressive Democrats want Medicare for All. Let’s be completely candid: it cannot work.

It lacks any viable transition path from our current mature healthcare system, forces millions with excellent existing plans into worse coverage, and triggers severe medical labor shortages and longer wait times.

Worse, it places the federal government completely in charge of provider compensation, covered services, and politically sensitive reproductive care. Imagine the catastrophic disruption to your personal medical access if Medicare for All had been fully enacted before an administration controlled by Donald Trump and a budget department led by Elon Musk took the wheel.

[Pause]

My approach skips the ideological theater. We use targeted tax reconciliation to pivot away from opaque employer tax subsidies and build a market-oriented safety net based on seven pillars:

• First: We establish a Federal Catastrophic Healthcare Subsidy. This absorbs the costs of the most expensive 1% of medical cases, solving the “tail risk” problem and driving down premium costs for everyone on the state exchanges.

• Second: We create Universal Portability by merging employer and marketplace insurance. Your health insurance will be tied to you, not your job—ending “job lock” and preventing immediate loss of coverage if you are laid off.

• Third: We establish Universal CHIP as a National Pediatric Foundation. Moving children into the Children’s Health Insurance Program lowers family premiums and cuts federal subsidy costs.

• Fourth: We expand Medicaid to 200% of the Federal Poverty Level nationwide. This is far more effective than private market credits for lower-income households who cannot afford massive deductibles.

• Fifth: We right-size the Premium Tax Credit, shifting the punishing “subsidy cliff” from 400% up to 600% of the poverty level to protect the squeezed middle class.

• Sixth: We introduce an above-the-line deduction for the individual market, ending the unfair tax bias that punishes freelancers, gig workers, and self-employed entrepreneurs.

• Seventh: We transform FSAs and HSAs into active, consumer-driven Health Wallets—eliminating “use-or-lose” rules and allowing unused funds to roll over directly into retirement savings.

[Long Pause — Let the checklist land]

II. The Student Debt Crisis & K-12 Foundation

Now look at student debt. Another total stalemate.

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The progressive wing demands broad, un-targeted loan forgiveness. It is fiscally reckless, and the courts rightfully struck down their executive overreach.

Meanwhile, the Republicans replaced the SAVE plan with their new Repayment Assistance Plan—or RAP—and they completely botched it.

[Pause]

The average person defaulting on student loans today is nearly 40 years old. Yet the RAP program forces borrowers into a punishing 30-year repayment timeline with no allowances for forbearance. It creates a toxic marriage penalty, fails to index parameters to inflation, and its harsh borrowing caps actively punish young professionals during their training and residency years.

I am proposing a balanced, fiscally disciplined off-ramp from the federal student loan system that concentrates government support at the very beginning of repayment:

1. A Three-Year Zero-Interest Period for all new conventional federal loans. Because the interest rate is zero percent, every single dollar paid goes straight to reducing principal—allowing borrowers to crush their debt early.

2. Repeal the Student Loan Interest Deduction to pay for it. This deduction primarily benefits upper-middle-income households who do not face the worst financial strain.

3. Delay RAP Eligibility. Borrowers must complete those three interest-free years on a conventional schedule first, making a serious dent in their principal before resorting to a government safety net.

4. A 5 Percent Private Refinancing Bonus for borrowers who move their loans into the private market after 60 months of on-time payments, clearing the federal balance sheet.

5. Abolish the Marriage Penalty by introducing completely separate RAP payment schedules for married and single borrowers.

6. Automatic Inflation Indexing for all RAP payment thresholds and protected income amounts.

7. A Stable, Fixed 4.5 Percent Interest Rate on all federal student loans, protecting borrowers from market interest-rate shocks.

8. Senior Borrower Installment Plans. For older borrowers carrying a balance after 20 years, we allow a transfer directly to a low-interest Treasury or IRS installment plan, cutting Department of Education red tape.

[Pause]

But let’s be entirely honest: we cannot talk about student debt without talking about the collapsing quality of our educational outcomes.

The student debt crisis is fueled by a K-12 foundation that is completely fractured. National assessments show reading and math proficiency for our lowest-performing elementary and middle schoolers are on a steady, multi-year downward slide.

The result? A catastrophic higher education drop-out trap.

Nationwide, the college non-completion rate sits between 40 and 45 percent. Borrowers who leave school without a degree account for over half of all federal student loan defaults. They get the worst of all worlds: the financial scar of the debt, with zero college wage premium to pay it off.

[Pause]

Why? Because both major parties are trapped in an ideological stalemate over institutional bundles—vouchers versus the status quo.

We need to break up the vertical monopoly of public education. The future lies in Course Choice Rather Than School Choice.

[Emphasis]

Think of it like the reform of the electric utility industry. The utility continues to own and operate the physical grid, but you get to choose which generator supplies the actual electricity flowing into your house.

In education, your local public school remains the community platform. The district keeps providing the facilities, transportation, counseling, and sports. But the instruction itself becomes a regulated marketplace for learning.

If a parent wants their child to take physics from a former NASA engineer, or advanced calculus from a top-tier professor rather than the school’s regular classroom teacher, public funding will follow that individual course. By using targeted federal competitive grants and incentive structures, we can build state course marketplaces and destroy the monopoly power of mediocre lectures.

[Long Pause]

III. Retirement Security

Look at retirement security. Congress passes bipartisan legislation like SECURE 1.0 and 2.0—but who does it actually help?

It helps Wall Street. It protects institutional fee retention. It prioritizes front-end account creation while completely ignoring back-end wealth preservation.

Washington loves to congratulate itself on expanding voluntary 401(k) sign-ups. But their broken system allows billions of dollars to leak out every single year through abandoned accounts, excessive administrative fees, and full account depletion during family emergencies.

Through tax reconciliation, we will build a universal, portable, low-fee retirement system:

• Universal Auto-IRAs: A workplace-independent, automatic enrollment framework that captures multiple part-time income streams and guarantees automatic rollovers during job transitions.

• IRA and 401(k) Parity: Expands IRA contribution limits and allows employers to pay matching contributions directly into your personal, portable IRA, freeing small businesses from acting as complex corporate fiduciaries.

• Automated Spousal Funding: Builds a joint marital payroll default that automatically routes split contributions to a caregiving spouse’s IRA while permanently eliminating legacy separate-filer tax penalties.

• Core Account Preservation: Explicitly prohibits pre-retirement distributions from exceeding 50 percent of account assets to ensure long-term savings are protected.

• Hardship Fee Restructuring: Replaces the punitive 10 percent early withdrawal tax penalty with a smaller, dedicated fee that deposits a percentage of the disbursement right back into your own Social Security account.

• FSA Roll-Overs: Eliminates wasteful “use-it-or-lose-it” rules, automatically rolling unused year-end FSA balances into a non-deductible IRA.

• De-Risked Target Date Funds: Restricts predatory, high-fee private credit products from infiltrating default portfolios, ensuring smooth transitions into inflation-protected assets.

By botching these retirement bills, Congress has left working-class wealth preservation completely exposed. But we must see the broader picture: fixing our broken retirement framework—alongside repairing our fractured student debt and health insurance systems—is not just about fixing three isolated problems.

These household balance sheet reforms are the absolute prerequisites to saving Social Security. We cannot ask a squeezed workforce to absorb future retirement adjustments if their income is leaking out through high-fee accounts, crushing debt, and unpredictable medical costs. We have to secure the household foundation first.

Long Pause]

IV. The Social Security Imperative & Third-Party Choice

So the actuaries of the Social Security Trust Fund Project that absent action by Congress under current law there will be an automatic 20 percent cut to Social Security benefits.

Will a political system dominated by the Republicans and the Democrats ever put us back on a sound financial track?

What is it about recent congressional performance on healthcare, student debt, or retirement savings that suggests they can prevent automatic benefit cuts to Social Security in seven short years?

[Pause — Look at the audience]

Can you envision how destructive these automatic benefit cuts will be to affected households and to the economy?

I guess Congress can simply repeal current law and allow and mandate the Treasury cover the difference, but I don’t think that this approach will be sustainable for that long.

We must face the truth about this program: Social Security is a massive, incredibly complex intergenerational pact. To make it fair to all generations, a real solution will require structural adjustments on both sides of the ledger—to benefits and to taxes.

And to be fair to younger adults we must increase their ability to save outside of the Social Security system. This requires changes to health care, changes to student debt and better retirement savings incentives.

The answer to the question can the two major problems prevent the impending Social Security problem is clear. The answer is No.

They couldn’t even come up with a reasonable compromise on the phase out of the ACA premium tax credit.

[Pause: Look at Audience]

My professional life has been dedicated to analyzing household finances, federal budgets, and macroeconomic indicators—including designing structural policies to help everyday people deal with the persistent inflation that has returned under both major presidential administrations. That is the core of my expertise, and it remains the foundation of my platform.

But our crisis is not merely economic.

Like most Americans, I am alarmed by pervasive institutional corruption, tribal infighting, and the rise of public intolerance. We are trapped between a corrupt Republican Party that weaponizes cruelty, and a Democratic Party that stands for nothing but its own re-election—even pursuing diplomatic appeasement with foreign regimes that crack down on their own citizens.

A broken society cannot maintain a stable economy. But we must face the practical reality: we cannot solve our broader cultural or geopolitical crises, and we cannot protect families from persistent inflation, if our nation is fundamentally bankrupt.

[Pause]

You have a choice. If you want a new course, you must vote for an independent, structural alternative.

The political establishment loves to tell you that a third-party vote is a “wasted vote.” But in a closely divided House of Representatives, that is flatly untrue.

Think about the math.

In a closely divided Congress, a relatively small number of independent voices in the House will hold the absolute balance of power. Neither major political party will be able to elect a Speaker without input from people in the center, people who want sustainable better financial outcomes for households and for the Treasury.

I will be one of those voices. I will use that leverage to force both sides to face our fiscal reality at both the household and federal levels.

We will move this nation forward in the correct direction, restore belief in the American dream, and ensure our country remains a model of structural stability and principle.

Thank you. I look forward to working with you—and for you.

I am now available for questions.

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Tax Reconciliation and Capital Gains Taxes

A Third Party Tax Reconciliation Approach To Student Debt

A third Party Tax Reconciliation Approach to Health Care

· Among Colorado Democrats there is a strong positive correlation between positions on Medicare-for-all and criticism of Israel and the partisan lean of the district.

· Colorado Republicans are fundamentally aligned on most issues with a minor exception regarding tariffs.

· The fundamental Republican litmus test is support for President Trump. President Trump is not now opposing any Colorado Republican candidate.

· CO-8 the only true toss-up in the state where a robust Democrat primary will determine whether a progressive or a centrist will oppose the incumbent Republican.

· Democrats will nominate viable centrist candidates in three Republican leaning districts CO-3 CO-4 and CO-5. Can these centrists win in a year where there should be a blue wave?

· Democrat failure in CO-03, CO-04, CO-05 and CO-8 in 2026 should cause the party to look inward and perhaps cause voters to consider a third-party alternative.

Introduction: A potential national blue wave is providing a significant tailwind for Democrats as the nation heads toward the 2026 midterm elections, but all political contests are local and factors specific to each state and contest shape results.

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Four distinct factors are shaping congressional races in Colorado in 2026 and beyond:

· A favorable macro-environment that gives Democrats a systemic advantage in competitive margins.

· An escalating progressive and democratic socialist challenge to establishment norms in deep-blue urban strongholds like CO-1.

· A true swing territory in CO-8 where both a fiercely contested Democrat primary and a razor-thin general election will define the exact ideological profile needed to win a toss-up electorate.

· An intentional effort to field pragmatic, district-matched centrist Democrats in traditionally Republican-leaning districts like CO-3, CO-4, and CO-5.

To understand how these competing forces and internal party tensions will manifest on Election Day, we must look directly at the underlying partisan math and current battlefield status of each individual seat.

Current Political Status of Colorado’s Eight Congressional Districts

• CO-01 [Denver Urban Core]: Diana DeGette (D) | Leaning: D+29

• CO-02 [Boulder & Northern Front Range]: Joe Neguse (D) | Leaning: D+20

• CO-03 [Western Slope & San Luis Valley]: Jeff Hurd (R) | Leaning: R+5

• CO-04 [Eastern Plains & Douglas County]: Lauren Boebert (R) | Leaning: R+13

• CO-05 [Colorado Springs & El Paso County]: Jeff Crank (R) | Leaning: R+5

• CO-06 [Aurora & Denver South-Metro Suburbs]: Jason Crow (D) | Leaning: D+11

• CO-07 [Jefferson County & Central Mountains]: Brittany Pettersen (D) | Leaning: D+8

• CO-08 [Northern Front Range]: Gabe Evans (R) | Leaning: EVEN (R+0)

Note: The Cook Partisan Voting Index (PVI), the statistic used in the bullets above, does not display the simple candidate-to-candidate margin or raw voter spread within a district; rather, it quantifies how much more Democrat or Republican a district behaves relative to the entire United States. The metric is calculated by isolating the two-party vote share (completely stripping out third parties) from the two most recent presidential elections, weighing the most recent cycle more heavily, and subtracting the national major-party baseline from the local district average. Consequently, a massive local victory margin like the 55-point spread in Denver’s CO-01 registers as a D+29 because the metric filters out the national baseline, indicating that the district’s major-party electorate is exactly 29 percentage points more Democrat than the national baseline average.

Factors Impacting the 2026 Colorado Congressional Midterms

The 2026 midterm landscape in Colorado presents a paradox defined by two powerful, competing national forces: the severe geopolitical, economic, and institutional crises surrounding the current Trump administration that lay the groundwork for a sweeping “Blue Wave,” juxtaposed against a significant leftward drift within the national Democrat brand that threatens to stall that momentum.

On one side, the baseline conditions for a massive anti-incumbent shift mirror the historic wave election of 2006. Under the Trump administration, severe geopolitical mismanagement failed to prevent the closure of the Strait of Hormuz, triggering a harsh domestic energy price shock and sticky inflation. Paired with highly controversial, aggressive domestic ICE enforcement actions, tracking of political enemies, and autocratic executive overreach, the administration has deeply alienated moderate and independent voters.

In a small, fiercely independent purple state like Colorado -- where unaffiliated voters now account for over 50% of the active electorate—this intense dissatisfaction with executive overreach should naturally fuel a sweeping Democrat realignment.

On the other side, an equally potent counterweight exists in the significant leftward drift of the national Democrat brand, which actively hamstrings the party’s ability to capture these frustrated voters. While many center-right independents are eager for an alternative to Trump’s autocracy, the national party’s increasingly extreme ideological platforms on economic policy and foreign affairs give mainstream voters deep pause. Rather than offering a pragmatic, stabilizing baseline, the national party is frequently perceived as captive to its furthest-left factions.

For Colorado’s vital independent center, the choice becomes an agonizing calculation: using their ballot to reject Trump’s executive overreach risks inadvertently empowering a progressive agenda they view as fundamentally unfeasible. The following structured comments analyze how this intense national tug-of-war is playing out locally across the state’s individual congressional districts.

Comment One: Democrat Candidate Ideological Views Correlate with District Partisan Lean

Democrat candidates in safe, progressive districts actively champion “Medicare for All,” and frequently criticize Israel reflecting a long-term leftward evolution that is occasionally accelerated by primary friction.

In Colorado’s deepest-blue urban center, Denver’s CO-01 (D+29), the policy landscape has veered sharply left, forcing established Democrats to aggressively defend their progressive flanks. Thirty-year incumbent Diana DeGette has steadily migrated leftward over her career, but intense pressure from democratic socialist and progressive factions nearly prevented her from securing a ballot spot on the ballot at the state Democratic convention. She is now relying on ads featuring AOC to win against progressive challengers.

This Colorado Sun survey accurately describes CO-1 candidate positions on issues and all three candidates including the incumbent have moved fairly far to the left. The winner of the convention Melat Kiros is running an explicitly ant-Israel campaign. Her rhetoric as evidenced by her posts appears both vehemently anti-Israel and antisemitic.

In contrast, safely insulated incumbents Joe Neguse (CO-02, D+20), Jason Crow (CO-06, D+11), and Brittany Pettersen (CO-07, D+8) face no meaningful primary challenges, allowing them to concentrate on the general election.

Democrat candidates in competitive or conservative districts bypass single-payer rhetoric to focus on ACA modifications and local concerns. Unchallenged in her primary, Brittany Pettersen (CO-07, D+8) avoids the mandate entirely to protect her centrist suburban position, focusing instead on high-visibility issues like medical debt and behavioral health. In redder territory—CO-03 (R+5), CO-04 (R+13), and CO-05 (R+5)—Democrat contenders like Eileen Laubacher, Alex Kelloff, Dwayne Romero, and Jessica Killin target market-friendly stabilization models: saving rural clinics, expanding telehealth, capping premiums, and modernizing VA networks.

As Colorado’s most competitive toss-up seat, the dead-even CO-08 Democrat primary serves as a direct proxy war over healthcare policy, pitting progressive Manny Rutinel and his $3.4 million single-payer platform against centrist Shannon Bird, who explicitly rejects a mandate in favor of a voluntary “Medicare for All Who Want It” option.

On the Mideast, most Democrats outside CO-1 pair criticism with Netanyahu with the stance that Hamas must be fully dismantled. Absent from that discussion is a plan on how to dismantle Hamas without the use of force.

On the issue of health care and the issue of Israel there is a clear correlation between the Democrat lean of the district and the partisan drift.

Comment Two: Position of Republican Candidates and Closeness to Trump

An issue-by-issue analysis of health care among Colorado’s Republican candidates is functionally impossible because the party maintains absolute ideological uniformity. There is no internal dissent: zero Republican candidates or incumbents support Medicare for All, no one broke ranks over preserving the ACA premium tax credits, and all stand aligned on standard federal spending restraints.

Colorado Republicans are also fairly closely aligned in their support for Israel. The internal division among Republicans is defined by a hawk-versus-isolationist split that aligns closely with how safe a district is. Traditional defense hawks running in highly competitive or suburban seats fully back international security assistance packages as essential to national defense. However, “America First” populists leveraging safe margins in deep-red strongholds, such as Lauren Boebert in CO-04, emphasize cuts to foreign assistance without specifically targeting Israel.

Because there are no policy cleavages to map against the Cook PVI, evaluating the Republican field requires pivoting away from specific issues to look at a candidate’s structural proximity to Donald Trump.

On the right, the primary rift factor is not healthcare or social policy—it is trade and executive power. The case of freshman incumbent Jeff Hurd (CO-03, R+5) proves just how thin the margin for dissent is. Hurd became one of only six House Republicans to vote with Democrats to lift the administration’s emergency tariffs on Canada, explicitly warning that normalizing broad emergency executive trade powers would backfire under a future Democrat president. The reaction was immediate: Trump labeled Hurd a “RINO,” rescinded his endorsement, and backed a hardline primary challenger.

The national party persuaded Trump to back down to avoid losing the district, something Trump did not do in redder parts of the nation. So, the political lean statistic appears to affect candidate selection for both parties.

Comment Three: Likely 2026 Outcomes

The overarching landscape of Colorado’s 2026 midterms centers on a single question: can national headwinds and optimized candidate recruitment overcome the natural gravity of a district’s Cook Partisan Voting Index (PVI)? While a national blue wave provides a potent tailwind, the path to actually altering the state’s congressional map is strictly restricted to a narrow 3.5-district playing field...

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This memorandum represents the fourth installment in a series examining the potential provisions of a comprehensive third-party tax reconciliation bill. The first three memos in this series addressed areas where the two major political parties hold drastically different ideological perspectives, frequently resulting in a volatile, “one-step-forward, two-steps-back” approach to policy progress. These initial analyses include:

• A Third Party Tax Reconciliation Approach to Health Care Reform

• A Third Party Tax Reconciliation Approach to Student Debt

• Tax Reconciliation and Capital Gains Taxes

In contrast to those deeply polarized issues, this fourth memo on tax reconciliation and retirement policy addresses an area that enjoys a meaningful degree of bipartisan consensus. However, despite this political agreement, recently enacted legislative changes have proven fundamentally inadequate for the very households that face the greatest difficulties saving for the future. The structural reforms presented in this memorandum are designed to move past these limitations—expanding retirement savings, lowering systemic costs, and substantially improving long-term financial outcomes for the entire population.

Key Proposals

• Universal Auto-IRAs: Establish a workplace-independent, automatic enrollment framework for all workers to capture multiple part-time income streams and receive automatic rollovers during job transitions.

• IRA and 401(k) Parity: Allow employers to provide employer matches into IRAs and expand IRA contribution limits to reduce the need for small employers to create their own 401(k) plans.

• Automated Spousal Funding: Launch a joint marital payroll default that automatically routes split contributions to a caregiver’s IRA, while eliminating legacy income phase-outs and separate-filer tax penalties.

• Core Account Preservation: Limit the amount of funds which can be disbursed prior to retirement. Replace existing tax penalties with a fee which allocates a percent of the early disbursements to the person’s own Social Security account.

• FSA Balance Rollovers: Eliminate the “use-it-or-lose-it” FSA rule with a rule mandating automatic rollover of FSA funds to a non-deductible IRA.

• De-Risked Target Funds: Update default regulations to restrict high-fee private credit and mandate smooth transitions into inflation-protected assets.

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Introduction:

Retirement savings policy has reemerged as a critical component of federal tax and budget debates, serving as one of the few arenas where Congress has consistently secured bipartisan consensus. However, recent structural reforms are unlikely to yield higher net retirement savings for the households struggling most to balance long-term asset accumulation with basic household emergencies.

This memorandum evaluates the operational mechanisms of recent legislative and executive interventions, identifies core structural vulnerabilities in the contemporary framework, and proposes targeted, structural reforms designed to safeguard wealth for low- and moderate-income families.

Recently enacted retirement reform proposals:

The SECURE Act of 2019, now commonly referred to as SECURE 1.0 focused primarily on expanding access to retirement plans and modernizing portions of the retirement system.

· allowed several small firms to participate in a single shared retirement plan, reducing administrative costs and complexity for small employers;

· raised the required minimum distribution age from 70½ to 72;

· allowed older workers to continue contributing to traditional IRAs after age 70½ if they still had earned income;

· encouraged employers to offer annuity and lifetime-income products inside retirement plans;

· expanded retirement-plan access for part-time workers;

· and required many inherited IRAs to be withdrawn within 10 years rather than over the beneficiary’s lifetime.

Congress followed with SECURE 2.0 in 2022, also enacted on a bipartisan basis rather than through reconciliation. Among other changes, the law:

• expanded automatic enrollment requirements for many new retirement plans;

• increased catch-up contribution limits for older workers;

• improved retirement-plan access for part-time employees;

• allowed certain student-loan payments to qualify for employer retirement matching contributions;

• created emergency savings “sidecar” accounts linked to retirement plans;

• increased the required minimum distribution age further over time;

• expanded tax incentives for small businesses establishing retirement plans;

• and replaced the old Saver’s Credit with the new Saver’s Match beginning in 2027.

The 2025 tax reconciliation legislation did not create a comprehensive new retirement framework comparable to SECURE 1.0 or SECURE 2.0. Its principal retirement-related initiative instead centered on the creation of so-called “Trump Accounts,” new tax-favored investment accounts established for children and designed to encourage long-term savings beginning at birth. Key provisions included:

• creation of “Trump Accounts,” tax-advantaged savings and investment accounts established for eligible children, with assets intended to accumulate over time through family, employer, private, and federal contributions;

• a temporary federally funded $1,000 seed contribution for children born between 2025 and 2028, with the limited eligibility window reducing the bill’s long-term budget score under reconciliation rules;

• expanded opportunities for parents, employers, and private donors to contribute to those accounts subject to annual limits;

• and favorable tax treatment for investment earnings and certain qualifying withdrawals within the accounts.

The Trump administration subsequently supplemented this framework through executive action, particularly through efforts to promote IRA participation and implementation of the Saver’s Match previously enacted under SECURE 2.0.

In April 2026, President Donald Trump signed an executive order directing Treasury, IRS, and the Department of Labor to establish “TrumpIRA.gov,” a federal portal designed to help workers without employer retirement plans open and compare low-cost IRAs.

The executive order primarily directed Treasury, IRS, and the Department of Labor to create a federal IRA information and enrollment portal intended to make retirement saving easier for workers lacking employer-sponsored plans. It also encouraged administrative coordination and public outreach related to the Saver’s Match previously enacted under SECURE 2.0.

The executive order did not create new retirement subsidies, mandate employer participation, establish automatic enrollment, or substantially modify the Saver’s Match itself. Its primary practical effect was creation of administrative and informational infrastructure intended to increase participation in existing retirement programs.

Beginning in tax year 2027, eligible lower- and moderate-income workers will receive direct federal matching contributions deposited into their retirement accounts.

Key features of the Saver’s Match include:

• a federal match equal to 50 percent of up to $2,000 in annual retirement contributions;

• a maximum annual federal contribution of $1,000 per eligible worker;

• direct deposit of the federal contribution into retirement accounts rather than reduction of tax liability;

• eligibility for many workers with little or no federal income-tax liability;

• automatic federal expenditure increases if participation and contributions rise;

• and no major near-term sunset provision currently built into the program.

Issues with Recent Retirement Reform Efforts

While recent statutory updates have successfully expanded plan access, their underlying design remains heavily influenced by the retirement-services industry, focusing primarily on increasing total plan participation and encouraging voluntary savings through tax incentives and automatic enrollment.

Consequently, these reforms have functioned better as upscale substitution mechanisms for households already positioned to save, rather than addressing the deeper structural bottlenecks facing lower- and middle-income workers who lack financial flexibility.

Crucially, contemporary policy prioritizes front-end account creation while largely ignoring back-end wealth preservation. Significant retirement assets continue to be lost through abandoned accounts, excessive administrative fees, fragmented structures driven by frequent job changes, and punitive early-withdrawal policies during periods of household financial distress.

The following sections examine these core system vulnerabilities and propose targeted structural interventions to achieve true long-term wealth preservation.

Issue One: Expanding IRA Access and Making IRAs a True Parallel System to 401(k) Plans

Employer plans remain the strongest retirement-saving channel for many households, but millions of workers are outside that system. In March 2025, 72 percent of private-sector workers had access to employer-sponsored retirement benefits, which means more than one-quarter still did not.

Crucially, this point-in-time snapshot severely understates the structural damage to lifetime wealth accumulation. Because modern career paths are fluid, millions of workers who have plan access today will transition into a “coverage desert” tomorrow—whether by moving to a small business, launching a freelance initiative, or downshifting to part-time status. Over a full 40-year working career, the percentage of Americans who spend multi-year stretches completely locked out of the 401(k) system is vastly higher than 25%. When a worker encounters these inevitable coverage gaps, they face an “automation cliff.” Because individuals are up to 15 times more likely to save when deductions are automated, the absence of a parallel, workplace-independent IRA structure means that personal savings velocity completely flatlines during these transitional years, permanently fracturing the momentum of early-career compounding.

The gap is especially important for workers at small firms, gig workers, part-time workers, workers with multiple jobs, young adults, and non-working spouses. These groups often need a portable account that does not depend on one employer relationship. IRAs are the natural vehicle for that role, but current policy does not do enough to ensure that every household actually opens, funds, and preserves one.

The need for a stronger IRA system is also evident in household balance-sheet data. Federal Reserve data show that retirement accounts, including IRAs, Keogh accounts, 401(k)s, 403(b)s, and thrift savings accounts, were held by only 54.3 percent of families in 2022. CRS analysis of the same data found especially large income gaps in IRA ownership: about 63 percent of households with income of $150,000 or more owned IRAs, compared with only 8.8 percent of households with income below $30,000.

This is the basic policy problem: the workers most likely to need IRAs are often the least likely to have them.

There has been some progress toward automatic IRA coverage. State auto-IRA programs have expanded rapidly, and Georgetown’s Center for Retirement Initiatives reports that, as of May 2026, 17 state programs were open to all eligible employers and workers. These programs are an important step because they use payroll deduction and default enrollment rather than relying entirely on voluntary account opening.

But automatic IRA access alone is not enough. The account has to be created, remain open, receive contributions, avoid excessive fees, and survive job changes and financial emergencies. Otherwise, the system may create more small accounts without solving the deeper problem of long-term retirement accumulation.

This account fragmentation is driven by a fundamental policy misstep: the statutory insistence on treating the employer as the primary gatekeeper of high-limit retirement plans. SECURE 1.0 and 2.0 focused heavily on nudging small firms to adopt complex 401(k) plans. But forcing small businesses to act as financial fiduciaries saddles them with administrative overhead and subjects their workers to high retail-layer fees. There is no structural or economic reason why individual IRAs must possess lower contribution limits than 401(k)s, nor why current tax law bans employers from contributing matches directly into a worker’s personal, portable IRA. True parallel parity requires decoupling retirement security from specific employer relationships entirely, allowing small firms to bypass 401(k) setups altogether by matching directly into a universal, portable IRA.

A more complete reform would put IRAs on a more equal footing with 401(k) plans. That means expanding automatic IRA enrollment for workers without employer plans, strengthening incentives for regular contributions, allowing automatic rollover of small 401(k) balances into low-fee IRAs, and limiting rules that permit complete depletion before retirement.

IRAs are also essential for non-working spouses. A spouse with little or no earned income can still build retirement savings through spousal IRA rules when the household has sufficient earned income. But that opportunity is underused if households do not understand the rule or lack an easy default mechanism for opening and funding the account.

Young adults also need earlier attachment to the retirement system. Trump Accounts may create some early-life savings infrastructure, but those accounts will matter only if they remain active and eventually connect to the broader retirement system. A dormant account created at birth is not a substitute for an IRA system that encourages regular contributions beginning early in working life.

The central goal should be to make IRAs a universal fallback retirement account. Every worker without a 401(k), every worker with multiple jobs, every young adult entering the labor market, and every eligible non-working spouse should have a simple, low-fee IRA available by default. The policy challenge is not merely to create more accounts. It is to create accounts that remain open, receive contributions, and are protected from unnecessary erosion or full pre-retirement depletion.

Related data and background:

• BLS, Employee Benefits in the United States, March 2025

• Federal Reserve, 2022 Survey of Consumer Finances summary

• CRS summary on retirement account ownership by income

• Georgetown Center for Retirement Initiatives state auto-IRA tracker

• Center for Retirement Research analysis

• Behavioral evidence from H&R Block experiment

• A look at 401(k) Plan Fees (Department of Labor)

Issue Two: Abandoned 401(k) Accounts and Excessive Fees

One important weakness in recent retirement reforms is that policymakers have focused heavily on expanding the number of retirement accounts while paying far less attention to preserving account balances after workers change jobs. SECURE 2.0 expanded automatic enrollment and increased retirement-plan participation, but these changes will also increase the number of small inactive 401(k) accounts left behind when workers move between employers.

These abandoned or “stranded” accounts create several problems. Small inactive accounts are often subject to disproportionately high administrative and investment fees, which can significantly erode retirement savings over time. In some cases, accounts may eventually be transferred to state unclaimed-property systems through escheatment processes if account owners lose contact with plan administrators.

Congress has recently considered legislation designed to reduce retirement-account escheatment. However, preventing escheatment addresses only part of the larger problem. Even when accounts remain active, many workers continue to lose substantial retirement wealth because small dormant accounts are frequently invested in relatively high-fee products.

A more effective solution would require automatic rollover of small inactive 401(k) balances into low-fee default IRA accounts when workers leave employers. Such a system would help preserve retirement balances, reduce fee erosion, simplify account management for workers with multiple jobs over time, and build naturally on the automatic-enrollment framework already expanded under SECURE 2.0.

High fees remain one of the least discussed but most economically significant threats to long-term household retirement savings, particularly for lower- and middle-income workers with relatively modest account balances.

This automatic rollover mechanism forms the vital structural pipeline connecting front-end account creation with long-term wealth preservation. By automatically sweeping dormant, low-balance 401(k) assets out of fragmented employer plans and into a consolidated, low-fee default IRA system, policy would simultaneously resolve the “stranded account” crisis while giving the parallel IRA framework the critical mass and asset scale it currently lacks. Instead of forcing workers to manage a trail of administrative wreckage across every job transition, the automated transfer mechanism transforms the IRA into a robust, lifetime financial anchor.

Discussion:

• “Stranded Savings”

• “How to Minimize the Impact of 401(k) Fees”

Issue Three: Pre-Retirement Depletion of Retirement Assets

A second major weakness in recent retirement reforms is that they continue to allow substantial pre-retirement depletion of retirement accounts. The problem is not merely that workers fail to save enough. It is also that workers increasingly use retirement accounts as emergency funds, debt-management tools, or last-resort liquidity sources before retirement.

Research on pre-retirement use of 401(k) funds finds that workers who access retirement savings before retirement often have other debts and weak credit positions, suggesting that withdrawals are frequently driven by broader financial stress rather than casual consumption. Other research similarly finds that retirement assets in IRAs and 401(k)s can be tapped relatively easily to finance pre-retirement needs, despite tax penalties and plan restrictions.

Current law discourages early withdrawals mainly through tax penalties rather than through strong preservation rules. Traditional IRAs and many employer retirement plans generally impose ordinary income tax and an additional 10 percent penalty on taxable distributions taken before age 59½, unless an exception applies. Roth IRAs are somewhat more flexible because contributions can generally be withdrawn before retirement, but early withdrawals of earnings may still be subject to tax and penalty rules. Trump Accounts generally cannot be withdrawn before the year the child turns 18; after that point, they are generally treated like traditional IRAs and subject to the same distribution rules.

These rules create a serious policy problem. They penalize workers for withdrawing funds early, but they do not prevent full account depletion. A worker facing financial distress may still empty an entire retirement account, pay income taxes and penalties, and reach retirement with little or nothing left. The penalty can be harsh precisely when the household is already under financial pressure, while still failing to preserve retirement assets.

There is a real tradeoff. If retirement accounts were completely locked up until retirement, contributions would likely fall because many households would be unwilling to save in accounts that provide no access during emergencies. But the current system moves too far in the other direction. It allows 100 percent depletion of retirement balances before retirement, relying mainly on punitive tax penalties after the fact.

A better system would preserve some access to emergency funds while protecting a core retirement balance. One approach would prohibit pre-retirement distributions from exceeding a fixed share of account assets. For example, 40 or 50 percent of accumulated retirement balances could be permanently protected from pre-retirement withdrawal except in the most extreme circumstances.

Another approach would create an emergency-liquidity compartment inside retirement accounts. For example, a fixed portion of contributions, such as 30 percent, could automatically flow into an emergency account available for pre-retirement use, while the remaining balance would be protected for retirement. This approach would acknowledge that households need liquidity while preventing complete depletion of long-term retirement assets.

While both mechanisms attempt to restrict asset leakage, the structural creation of an emergency liquidity compartment is policy-preferred over a rigid percentage cap. A hard cap on total balances introduces unnecessary volatility, as a worker’s available emergency liquidity would fluctuate with market cycles. Conversely, an explicit partition (e.g., an 80/20 or 75/25 split where 20% to 25% of contributions automatically fund a liquid emergency tier up to a fixed dollar ceiling) leverages the psychological power of mental accounting. By separating liquid safety nets from the core asset-building engine, this design explicitly signals to households which funds are operational, and which are untouchable, optimizing both short-term resilience and long-term wealth preservation.

The current 10 percent penalty should also be reconsidered. A more coherent system would restrict full depletion directly rather than imposing a harsh penalty on households already facing financial stress. Some early distributions could remain subject to ordinary income tax, and policymakers could consider a smaller dedicated charge, such as a 5 percent payroll-style contribution to Social Security or another retirement trust fund, instead of the current blanket penalty.

The core reform principle should be simple: retirement policy must prevent the possibility of 100 percent depletion of retirement accounts before retirement.

Readings:

· David Bernstein, Pre-retirement use of 401(k) funds

· Urban Institute analysis of early retirement withdrawals

· IRS guidance on exceptions to early-distribution penalties

· IRS guidance on Trump Accounts

Issue Four: Retirement Security for Non-Working Spouses and Caregivers

Another weakness in the current retirement system is that retirement savings incentives remain tied too heavily to continuous formal employment. Workers with stable long-term labor-force participation generally accumulate retirement assets through employer plans and payroll deduction. But many spouses, particularly caregivers and stay-at-home parents, spend substantial periods outside the paid labor force and therefore accumulate far smaller retirement balances.

Current law partially addresses this problem through “spousal IRAs,” which allow a non-working spouse to contribute to an IRA based on the earned income of the working spouse. However, the existing system remains limited and underused. Many households are unaware that spousal IRAs exist, contribution patterns are highly uneven, and restrictive rules apply when married couples file taxes separately.

The current framework also assumes a relatively cooperative household financial structure. In practice, retirement savings decisions are often controlled primarily by the working spouse. This creates particular problems in marriages involving unequal financial power, restrictive prenuptial agreements, or eventual divorce. A spouse who spends years outside the labor market performing caregiving work may reach middle age or retirement with minimal retirement assets despite contributing substantially to household well-being.

Current retirement policy therefore fails to treat caregiving and household labor as activities that justify systematic retirement accumulation.

Several reforms could improve this system.

One reform would eliminate or substantially relax restrictions on spousal IRA contributions for married couples filing separately. Current rules effectively discourage retirement accumulation in some households with fragmented finances or marital instability.

Another reform would normalize automatic spousal retirement contributions whenever one spouse participates in an employer-sponsored retirement plan. For example:

• employer payroll systems could automatically offer a parallel spousal IRA contribution option;

• tax software could default households into spousal IRA contributions unless they opt out;

• or a portion of retirement-plan contributions could automatically flow into a spouse’s IRA account unless the household declines.

The larger goal would be to make spousal retirement saving routine and automatic rather than optional and poorly understood.

Automatic spousal contributions would also better reflect the economic reality that household retirement security is often produced jointly, even when only one spouse formally earns wages. A retirement system centered entirely on individual wage income systematically disadvantages caregivers and many non-working spouses.

Policymakers should also reconsider income-based restrictions on spousal IRA eligibility. High-income households are often assumed to have adequate retirement savings already, but unequal control of household assets can still leave non-working spouses financially vulnerable, particularly in divorce situations involving restrictive premarital agreements or uneven asset ownership structures.

The broader principle is straightforward: retirement policy should not assume that only formal wage earners deserve systematic retirement accumulation. A modern retirement system should provide automatic and durable retirement-saving pathways for caregivers and non-working spouses as well as traditional full-time workers.

Readings:

• IRS guidance on IRA deduction limits and spousal IRAs

• IRS overview of IRA contribution rules

Issue Five: Student Debt and Retirement Savings

One of the largest impediments preventing younger households from building retirement savings is the high level of student debt carried by many borrowers during the first decade of their working lives. Monthly student-loan payments often directly compete with retirement contributions, emergency savings, home purchases, and family formation.

SECURE 2.0 attempted to address part of this problem by allowing certain employer retirement plans to treat student-loan payments as if they were retirement-plan contributions for purposes of employer matching contributions. Under this approach, workers making student-loan payments may still receive employer retirement-plan matches even if they are unable to contribute directly to the 401(k) plan themselves.

Although this reform may increase retirement balances for some borrowers, it has important limitations. Many younger workers do not have access to employer-sponsored retirement plans at all, and many smaller employers are unlikely to adopt the optional feature. As a result, the provision primarily benefits borrowers already working in relatively stable jobs with access to established 401(k) systems.

The policy also effectively expands tax-preferred retirement contributions for eligible borrowers while channeling additional assets into the 401(k) industry. Critics may reasonably question whether the approach is overly dependent on expanding retirement-plan contributions and fee-generating retirement accounts rather than solving the underlying student-debt problem itself.

The broader problem is that retirement policy increasingly attempts to accommodate large student-debt burdens rather than reducing those burdens early in working life.

A more effective approach would focus on accelerated student-debt reduction during the first years after graduation. Earlier retirement of student debt would free younger households to begin retirement saving sooner, accumulate assets earlier in life, and reduce long-term dependence on complex retirement subsidies.

One proposed alternative framework would:

• provide temporary zero-interest federal student loans during the early repayment period;

• delay entry into income-driven repayment systems during the first years after graduation;

• encourage refinancing into private credit markets once borrowers achieve greater financial stability;

• reduce marriage penalties embedded in current repayment systems;

• protect borrowers from inflation erosion during repayment;

• and concentrate federal assistance earlier in borrowers’ careers rather than extending debt burdens over long repayment horizons.

The broader goal would be to help borrowers eliminate student debt earlier in adulthood so that retirement saving becomes possible without permanent dependence on increasingly complicated tax-preferred retirement arrangements.

Readings:

• “A Third-Party Tax Reconciliation Student Debt Proposal”

Issue Six: Health-Care Costs, Health Savings Accounts, and Retirement Saving

Saving for retirement has become increasingly difficult because many households face high out-of-pocket health-care costs even when they possess relatively comprehensive health insurance coverage. Deductibles, co-payments, prescription costs, dental expenses, vision care, and long-term-care concerns often compete directly with retirement saving for limited household resources.

As a result, many households prioritize contributions to Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) over contributions to 401(k) plans or IRAs. This behavior is economically rational because households often fear near-term medical expenses more than distant retirement risks.

Current policy partially recognizes this tradeoff by providing favorable tax treatment for HSAs and FSAs. However, the interaction between health-care savings and retirement savings remains fragmented and sometimes punitive.

One particularly problematic feature involves Flexible Spending Accounts, which often operate under “use-it-or-lose-it” rules. Workers who fail to spend remaining balances within specified periods may forfeit part of their savings. This structure effectively imposes penalties on households attempting to budget conservatively for uncertain medical expenses.

The broader problem resembles the weaknesses discussed earlier involving retirement accounts. Policymakers frequently rely on forfeitures, penalties, or restrictive withdrawal rules rather than designing systems that preserve household savings over time.

A more coherent approach would integrate health-care savings and retirement savings more directly. One proposal would automatically roll unused Flexible Spending Account balances into non-deductible IRA accounts rather than allowing forfeiture of unused funds. Such a reform would:

• reduce wasteful end-of-year spending incentives;

• preserve household savings rather than penalizing caution;

• encourage longer-term asset accumulation;

• and create a smoother connection between health-care saving and retirement saving.

This type of reform would be particularly valuable for middle-income households struggling simultaneously with health-care expenses, student debt, emergency savings needs, and retirement preparation.

The larger principle is that households attempting to save responsibly should not face repeated penalties and forfeiture rules merely because financial needs evolve over time. Current policy too often punishes households already struggling to balance competing savings demands.

Readings:

• Economic Memos health-care reconciliation proposal

Issue Seven: Creating Better Default Portfolios for Automatically Enrolled Workers

The automatic-enrollment provisions contained in SECURE 2.0 represent more than a technical retirement-policy reform. In practice, they amount to a federal endorsement of the 401(k) system itself. When Congress and Treasury encourage or require automatic enrollment, the government is implicitly advising workers that participation in these plans is an appropriate and prudent financial strategy.

Once the government assumes that quasi-advisory role, it also assumes a responsibility to ensure that the default investment options into which workers are automatically enrolled are financially sound and reasonably protective during periods of economic stress.

Current default investment structures are often heavily dependent on conventional stock-and-bond allocations and target-date funds that may expose workers to substantial inflation risk, interest-rate risk, or correlated market declines during stressful economic periods. Many workers automatically enrolled into retirement plans have little understanding of the underlying portfolio risks and frequently remain invested in default options for long periods without making active portfolio decisions.

This issue becomes even more important as policymakers continue expanding automatic-enrollment systems. Automatic enrollment works partly because it assumes that default options are likely to be suitable for ordinary workers. But if the default portfolios themselves are poorly constructed or excessively exposed to certain forms of market risk, then the government may effectively be steering households into fragile investment structures.

Concerns about portfolio quality have become more significant as portions of the financial industry and some policymakers push for expanded inclusion of higher-risk assets such as private credit, private equity, and other illiquid investment products inside retirement accounts. Advocates argue that these products may increase long-term returns or broaden investment opportunities. Critics argue that many of these investments involve higher fees, lower transparency, valuation uncertainty, and potentially significant downside risk during economic downturns.

If policymakers are going to encourage broad participation in 401(k) plans through automatic enrollment, then retirement policy should include stronger safeguards regarding default investment design. At a minimum, policymakers should establish clearer guardrails limiting excessive risk exposure and requiring greater transparency regarding fees, liquidity risks, and downside scenarios.

More importantly, policymakers should actively encourage inclusion of financial products designed to provide greater protection during periods of inflation, rising interest rates, or broader financial instability. Retirement policy should focus not only on maximizing returns during favorable markets but also on preserving retirement security during stressful economic periods when many households are most vulnerable.

The broader principle is straightforward: if government policy increasingly nudges workers into retirement plans automatically, then government also bears some responsibility for the quality and resilience of the investment structures receiving those funds.

Related discussion of inflation risk and retirement portfolios:

Readings:

• “How to Protect Workers from Inflation”

• “How Best to Expand Investment Opportunities”

Issue Eight: The Unintended Savings Penalty of Untaxed Tips and Overtime

While exempting tips and overtime hours from the federal income tax base is intended to boost the near-term take-home pay of lower-income hourly and service workers, it introduces a severe structural distortion: the erosion and practical destruction of lower-income retirement and healthcare savings incentives.

Traditional asset-building vehicles—including traditional IRAs, 401(k)s, Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs)—rely entirely on the value of an income deduction to alter household savings behavior. When a worker’s marginal tax rate on a significant portion of their earned income is reduced to zero through selective exemptions, the financial utility of these deductions simultaneously drops to zero. For an hourly or tipped worker whose remaining taxable AGI is already fully neutralized by the standard deduction, locking up liquid capital in a retirement or health account yields zero immediate tax relief.

The current tax-deferred framework effectively demands that low-AGI workers accept significant illiquidity without providing any offsetting federal subsidy. Consequently, policies that narrow the tax base via income exemptions inadvertently disincentivize long-term asset accumulation among the households most vulnerable to financial shocks.

To mitigate this structural friction, policy design must pivot away from income deductions and toward direct tax preferences that decouple the savings incentive from a worker’s marginal tax bracket. For example, rather than offering a functionally useless tax deduction, a modernized framework could utilize a structured federal match. Implementing a 100 percent government match on the first $1,000 of taxable tips or overtime contributed to an IRA would reverse the behavioral math. By shifting from a regressive deduction system to a direct matching credit, retirement policy can preserve asset-building opportunities for low-tax-burden households without relying on the leverage of an income tax liability.

Conclusion:

Recent and proposed retirement changes have proven inadequate for households struggling financially. Because the federal government actively prioritizes 401(k) plans over other household savings options, it has an institutional obligation to improve plan outcomes. Here are some potential reforms:

· Establish a Universal Auto-IRA Framework: Implement a national, workplace-independent default IRA framework with automated enrollment for all workers lacking employer plans.

· Create an Automated Spousal IRA Default: Establish an automated, marital-joint enrollment mechanism that automatically opens and funds a spousal IRA for a non-working caregiver when the primary earning spouse triggers a workplace 401(k) deduction, removing separate-filer administrative barriers.

· Decouple Small-Business Matching: Amend tax law to grant individual IRAs contribution limit parity with 401(k) plans, allowing small employers to bypass complex company plan administration by matching directly into their employees’ portable, personal IRAs.

· Enact Automated Rollover Pipelines: Mandate the automatic clearing of dormant, small-balance 401(k) assets out of fragmented employer plans and into a consolidated, low-fee national default IRA system upon a worker’s termination, preserving early-career compound interest.

· Restructure Pre-Retirement Account Leakage: Enact a Core Preservation Rule that legally isolates 50% to 60% of an account’s peak value from pre-retirement distribution. Replace the punitive 10% tax penalty with a 5% diversion fee routed directly back into the worker’s future Social Security trust fund.

· Mandate Health Spending Rollovers: Eliminate the inefficient “use-it-or-lose-it” statutory design of Flexible Spending Accounts (FSAs) by requiring the automated rollover of unspent end-of-year balances directly into a worker’s traditional IRA.

· De-Risk Default Portfolios and Modernize Distribution: Direct the Department of Labor to update QDIA regulations to restrict high-fee, illiquid private credit concentrations in target-date funds, requiring default portfolios to transition smoothly into dynamic, inflation-hedged distribution models (utilizing assets like inflation-indexed securities) rather than relying on static, outmoded withdrawal rules.

The persistent failure of recent bipartisan retirement legislation to move the needle for lower-income savers stems from a fundamental conflict of interest: federal policy has effectively allowed the Wall Street firms running these 401(k) networks to hold the pen, prioritizing institutional fee retention over friction-free asset accumulation for the working class.

The proposals presented here prioritize the needs of households facing the hardest time saving rather than the commercial interests of Wall Street. Automatic enrollment is meaningless if savings are immediately eaten away by friction. True structural reform ensures that hard-earned savings actually persist and grow—demanding lower asset fees, plugging early-career leakage, banning high-risk toxic assets from default funds, and anchoring portfolios against the twin threats of inflation and interest rate exposure.

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This proposal optimizes federal revenue generation and accelerates economic growth by combining lower marginal tax rates on capital gains with a broader capital gains tax base. By reducing transaction penalties while systematically closing structural loopholes, this framework unlocks stagnant capital and ensures long-term fiscal solvency.

· Targeted Capital Gains Compression: Lowers the top statutory rates to 12.5 percent and 17.5 percent to unlock “locked-in” assets, lower the cost of capital, and immediately boost market liquidity.

· Surtax Realignment: Increases the Net Investment Income Tax (NIIT) to a flat 6.0 percent to preserve progressivity among high-income earners and offset initial rate reductions.

· Housing Market Integration: Uniformly applies the new rates to real property to eliminate tax arbitrage and dismantle the “lock-in effect,” freeing stagnant residential inventory for older homeowners and expanding supply.

· Repeal of Section 1031 Exchanges: Phases out like-kind real estate deferrals over five years to remove artificial distortions in asset allocation and permanently broaden the tax base.

· Modified Basis Adjustment at Death: Replaces complete step-up with a fractional 50 percent basis adjustment, deferring the tax liability until a voluntary sale occurs to eliminate estate-planning lock-in without forcing disruptive liquidity events.

· Programmatic Pre-Tax Asset Conversion: Implements an automated 5-year post-inheritance window for conventional retirement assets, shifting final balances from ordinary income schedules to capital gains rates to protect heirs from tax-bracket spikes while accelerating Treasury receipts.

· Taxation of Inherited Roth Vehicles: Automates the transition of inherited Roth funds into standard taxable brokerage portfolios after five years to integrate compounding growth back into the active tax base without assessing distribution penalties.

· Post-Mortem Excise Tax on “Mega-Roths”: Enacts a flat 5.0 percent levy on inherited Roth balances exceeding $10 million to cleanly capture extreme wealth insulated in tax shelters (the Peter Thiel exception) while actively encouraging unlimited lifetime capital accumulation below that threshold.

· Abolition of the Federal Estate Tax: Repeals the federal estate and gift tax regime entirely to eliminate double-taxation and protect family-owned businesses and farms from predatory, forced liquidations.

· Entitlement Solvency Integration: Introduces a 2.5 percent levy on capped capital gains contributions to fund Social Security, aligning the interests of entitlement advocates with supply-side proponents of lower tax rates.

Previous memos considered how the tax reconciliation bill could be used to facilitate health insurance reform and student debt reform. The primary focus of this article outlining a third-party tax reconciliation program involves improvements to capital gains tax rules.

Democrats strongly feel that the existence of a preferential tax rate on capital gains (a lower tax rate on capital gains than income) is unfair. Several problems with this argument exist:

· The decision to realize a capital gain is optional, and higher rates discourage capital gains realizations.

· Current law allows for complete step-up in basis at death, leading to the complete avoidance of capital gains taxes.

· The combination of higher capital gains tax rates and step-up in basis discourages sales by older homeowners with large gains, reducing the inventory of homes for sale.

· Some real estate investors avoid all capital gains taxes for business and investment purposes by putting properties into Section 1031 exchanges.

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Introduction:

An alternative approach to capital gains taxation—one that lowers rates while broadening the tax base—can both increase federal revenue and stimulate economic growth. The approach towards lower rates and a broader tax base is guided by Arthur Laffer’s insight that a revenue-optimizing tax rate exists somewhere in the middle, never at the 0 percent or 100 percent endpoints. Just as higher ordinary income rates past the optimal point discourage work, higher capital gains rates past the optimal point drastically lower optional asset realizations. These alternative capital gains tax rules could also involve earmarking more funds from capital gains tax and net investment income tax receipts towards entitlement programs, offsetting or preventing projected insolvencies.

1. Restructuring of Long-Term Capital Gains Tax Rates

The proposal flattens the long-term capital gains and qualified dividends schedule by reducing the top two statutory rates by 2.5 percentage points, while maintaining the existing income brackets to preserve progressivity. The bottom tier is left untouched to protect lower-income savers.

The restructured schedule maps directly onto current statutory income thresholds:

· 0 Percent Bracket: Retained for low-income investors.

· 12.5 Percent Bracket: Replaces the current 15% rate, applying to the exact same income ranges.

· 17.5 Percent Bracket: Replaces the current 20% rate, applying to the exact same top-tier income cutoffs.

By directly lowering the transaction penalty on realizations, this targeted reduction lowers the cost of capital, unlocks “locked-in” assets, and immediately injects liquidity back into the broader market.

2. Expansion of the Net Investment Income Tax (NIIT)

To partially offset the revenue impacts of the capital gains tax reduction and ensure continued progressivity among high-income earners, the proposal increases the Net Investment Income Tax (NIIT) established under Internal Revenue Code Section 1411.

• Rate Adjustment: The NIIT rate will be increased from its current statutory level of 3.8% to a new flat rate of 6.0%.

• Threshold Retention: The tax will continue to apply to the lesser of net investment income or the excess of Modified Adjusted Gross Income (MAGI) over the existing statutory thresholds (currently set at $200,000 for single filers and $250,000 for married couples filing jointly).

3. Application of Unified Rates to Real Property and Market Liquidity

The newly proposed 12.5% and 17.5% long-term capital gains brackets apply uniformly to real estate, including principal residences, while leaving existing Section 121 statutory exclusions fully intact.

Maintaining a unified rate schedule prevents structural distortions and tax arbitrage. By lowering the top statutory rate to 17.5%, this policy directly facilitates transactions by long-tenured homeowners whose lifetime asset appreciation exceeds the standard $250,000/$500,000 single/married exclusion limits. (Note, proposal 10 includes a 2.5 percent trust fund levy, which if adopted, could apply to gains below the exemption thresholds.)

Reducing this transaction penalty expands active housing inventory, enables growing families to move up into larger homes, and removes a major tax barrier for older homeowners. Rather than remaining locked in a primary residence until death solely to secure a basis adjustment for heirs, seniors are economically empowered to downsize or relocate closer to family.

Crucially, while this proposal preserves the current zero percent tax tier for gains falling within the standard Section 121 statutory limits, this design choice represents a significant area for future policy optimization. Critics could reasonably argue that introducing a modest, low-baseline capital gains rate on all residential real estate transactions would generate substantial, predictable federal revenue while still entirely preserving geographic and social mobility.

4. Repeal of Section 1031 Like-Kind Exchanges and Rate Uniformity

To eliminate artificial distortions in capital allocation, this proposal advocates for the full repeal of Internal Revenue Code Section 1031, which currently permits real estate investors to defer capital gains tax indefinitely by rolling transaction proceeds into replacement properties.

There is no sound economic justification for maintaining a distinct or preferential tax rate for gains realized on investment real estate versus other capital assets.

To prevent an abrupt liquidity freeze in commercial real estate markets and to proactively generate significant short-term federal revenue, the repeal of Section 1031 will be phased in. There will be an immediate ban on the acquisition of new 1031 properties, the open-ended rolling over of basis is immediately terminated, only 50 percent of gains realized in the first five years after the enactment of the proposal will be subject to a capital gains tax, and 100 percent of realizations will be subject to tax from year 6 onwards.

5. Structural Reform of Basis Adjustment at Death and Mitigation of Capital Loss Penalties

The proposed change establishes a new cost basis automatically adjusted to a midpoint exactly halfway between the decedent’s historical cost basis and the fair market value.

Under current framework guidelines governed by Internal Revenue Code Section 1014, the tax basis of a capital asset held at death is adjusted to its fair market value on the date of the decedent’s passing. The complete elimination of basis at death creates an incentive for some households to maintain ownership of assets until death to reduce the tax liability of heirs. This provision can be especially onerous to older homeowners sitting on a large gain in their primary residence. They may prefer to downsize and move but this action could substantially reduce their legacy to their heirs.

For assets that have declined in value, the basis will similarly be adjusted to the midpoint between historical cost and fair market value. By preventing an absolute step-down, this provision preserves 50 percent of the embedded capital loss, allowing heirs to utilize the remaining loss to offset future gains when the asset is sold.

To eliminate liquidity friction at death, no tax liability is triggered by the transfer itself. The tax is deferred entirely until the beneficiary chooses to liquidate the asset, at which point the gain or loss is recognized under the unified 12.5 percent and 17.5 percent statutory rate schedule.

Gains on the sale of a primary home will be reduced by an exemption equal to $250,000 so the new tax should not substantially reduce liquidity for people who sell an inherited home.

6. Structural Reframing and Capital Gains Reclassification of Inherited Traditional Retirement Assets

To accelerate capital velocity into liquid, productive market investments and eliminate multi-generational tax insulation, this paper proposes a standardized 5-year duration for tax-deferred inheritance structures (such as traditional IRAs and 401(k)s). Rather than utilizing punitive regulatory penalties or forcing mandatory liquidations that trigger destructive ordinary income tax spikes, this policy implements a seamless, non-coercive reclassification at the conclusion of the 5-year post-inheritance window.

· Five-Year Tax-Sheltered Horizon: Non-spouse beneficiaries retain the right to maintain inherited assets the traditional tax-deferred shell for up to five calendar years following the decedent’s passing.

· Programmatic Reclassification at Year 5: On December 31 of the fifth calendar year, the tax-deferred status of the account automatically expires. The account structures dissolve seamlessly, and the underlying securities are programmatically transitioned into standard taxable brokerage portfolios. No early withdrawal penalties or compliance fees are assessed.

· Application of Unified Capital Gains Rates: Upon this automatic conversion, the embedded growth is detached from ordinary income schedules. The cost basis of the securities is automatically adjusted to a midpoint exactly halfway between the decedent’s historical cost basis and the fair market value at the time of conversion. Moving forward, all subsequent liquidations face the paper’s unified 12.5 percent and 17.5 percent capital gains rate schedule.

By replacing extended tax-insulation windows with an automated 5-year transition, this framework achieves clean, predictable revenue realization for the Treasury while providing a smooth, friction-free path for heirs to integrate inherited wealth into the standard market.

Macroeconomic and Revenue Impact Analysis: While compressing the inheritance window from 10 years to 5 years accelerates the transition of assets, this programmatic framework functions as an optimized, pro-taxpayer mechanism that simultaneously raises structural federal revenue. Under current law, non-spouse heirs inheriting conventional, pre-tax retirement accounts face a severe structural penalty: because these accounts possess a zero-tax basis, all forced distributions are taxed as ordinary income. When heirs inherit these assets during their peak earning years, a massive year-10 liquidation stacks directly on top of their existing salary, creating a destructive tax bracket spike that can consume up to 37 percent of the wealth. By fundamentally shifting these assets away from ordinary income schedules and onto the paper’s unified 12.5 percent and 17.5 percent capital gains brackets—while providing a 50 percent basis step-up at conversion—this policy fundamentally defuses that ordinary income tax liability.

From a public finance perspective, this provision serves as a highly efficient revenue accelerator. Pulling the automatic conversion window forward by five full years captures substantial revenue for the Treasury significantly faster, maximizing the time-value of collection. Furthermore, because the underlying securities are programmatically transitioned into standard taxable brokerage portfolios rather than being liquidated under duress, they are permanently integrated into the active tax base. Moving forward, all subsequent dividend payments, realized gains, and compounding growth generate annual tax revenue, subject to the unified capital gains rates and the updated 6.0 percent Net Investment Income Tax (NIIT). This accelerates capital velocity, broadens the permanent tax base, and yields predictable, elevated revenue realizations that far outpace the current, uncoordinated 10-year deferral system.

7. Implementation of a 5-Year Structural Transition for Inherited Roth Assets

Current statutory rules allow non-spouse beneficiaries to hoard assets inside an inherited Roth IRA for up to ten years completely tax-free, with no annual distribution mandates. To optimize public finance outcomes and accelerate capital integration, this paper replaces the uncoordinated 10-year liquidation rule with a uniform 5-year operational boundary, converting inherited Roth vehicles into standard taxable assets without forcing disruptive liquidations or assessment penalties.

The 5-Year Automatic Conversion: The inherited Roth vehicle retains complete tax-free growth status for exactly five calendar years following the owner’s death. On December 31 of the fifth calendar year, the tax-exempt status of the account expires automatically. No forced asset liquidations, withdrawal mandates, or compliance penalties are triggered.

Existing rules governing Roth IRAs rely on penalties for undistributed funds after 10 years. I have a strong aversion to penalizing taxpayers in this manner. This policy simply automatically converts undistributed Roth funds to taxable assets five years after they are inherited.

To establish an equitable baseline, the assets receive a clean step-up to their fair market value on the date of conversion. Moving forward, all subsequent capital appreciation or dividend growth generated by these assets is fully integrated into the tax base, subject to the unified 12.5 percent and 17.5 percent capital gains rates, alongside the updated 6.0 percent Net Investment Income Tax where applicable.

Inherited IRA Rules Explainer

This video details how the IRS manages current inheritance windows and the complexities that beneficiaries face under the existing 10-year rule, highlighting the exact baseline compliance hurdles that your 5-year automatic conversion model eliminates.

8. Implementation of a High-Balance Post-Mortem Excise Tax on “Mega-Roth” Structures

This paper proposes a flat 5.0 percent Post-Mortem Excise Tax on the aggregate fair market value of all inherited Roth IRA and Roth 401(k) accounts exceeding an absolute baseline threshold of $10 million on the date of the decedent’s passing.

· Complete Insulation for Standard Savers: Every dollar of accumulated Roth wealth below the $10 million ceiling remains entirely exempt from this levy, fully shielding standard savers who utilized the accounts under standard statutory contribution limits.

· Preservation of Lifetime Accumulation Incentives: A 5.0 percent tax rate is mathematically negligible relative to the compounding benefits of a tax-exempt vehicle over several decades. Because the rate is so low, it exerts zero downward pressure on an entrepreneur’s or investor’s desire to maximize growth. The explicit objective of this policy is to actively encourage savers to accumulate as much capital as possible their Roth vehicles. The levy functions as a modest back-end equalization mechanism at the end of a lifecycle, rather than a punitive barrier during it.

· Administrative Liquidity: The 5.0 percent excise tax is assessed at the account level and paid directly out of the mega-Roth assets before the remainder of the balance undergoes the programmatic 5-year transition into standard taxable brokerage portfolios outlined in Section 7.

Policy Motivation and Distinctions

Under current regulatory frameworks, unique asset positioning—such as placing founders’ private equity shares, start-up options, or highly discounted assets inside a Roth shell—has permitted select individuals to accumulate “mega-Roth” balances stretching into the billions of dollars. A prominent public example of this structural breakdown is tech investor Peter Thiel, who famously amassed a multi-billion-dollar Roth IRA using early-stage startup shares. Because these structures completely insulate explosive lifetime wealth creation from both ordinary income and capital gains schedules indefinitely, they operate as unintended, permanent federal tax havens.

It is critical to note that this framework does not exclusively target Peter Thiel or any single individual, nor does it adopt the friction-heavy mechanisms previously proposed by Congress. Past drafts of the 2021 Build Back Better Act attempted to target these accounts aggressively by capping total IRA contributions at $10 million and forcing massive, immediate lifetime distributions of 50% to 100% on excess balances for high earners. Those previous designs created severe distortions: they required invasive, ongoing annual valuations of private assets, disrupted active capital compounding during the owner’s lifetime, and penalized high-wealth accumulation itself.

By shifting the mechanism entirely to a low-rate, post-mortem excise tax, this framework successfully captures a fair slice of lifetime capital accumulation that completely escaped the standard tax loop, generates immediate federal revenue from previously unreachable tax shelters, and maintains the integrity of broader capital markets—all while keeping the psychological incentive to build substantial private wealth fully intact.

9. Complete Elimination of the Federal Estate and Gift Tax Regime

This paper proposes the total repeal of the Federal Estate Tax, Generation-Skipping Transfer Tax, and Gift Tax (Chapter 11, 12, and 13 of the Internal Revenue Code).

· Harmonization with the New Tax Base: Under the unified framework established in this bill, the transfer of wealth at death is already fundamentally reordered through partial step-up in basis (Section 6) and the 5.0 percent mega-Roth post-mortem excise tax (Section 8). Maintaining a separate estate tax layer constitutes uncoordinated double-taxation.

· Elimination of Forced Liquidity Events: By abolishing the estate tax, the federal government completely removes the threat of forced, predatory liquidations of family-owned businesses, agricultural land, and illiquid private enterprises.

· Eradication of the Wealth-Destructive Avoidance Industry: Repealing the estate tax dismantles a massive, economically dead-weight compliance industry dedicated to constructing complex trusts, valuation discounts, and artificial holding companies designed solely to bypass asset-transfer penalties.

Policy Motivation and Economic Rationale

The traditional federal estate tax is an obsolete, friction-heavy revenue instrument. While conceptually designed to limit dynastic wealth concentration, in practice, it operates primarily as a tax on the illiquid and the poorly advised. Ultra-high-net-worth families routinely utilize sophisticated legal structures to shelter billions in liquid wealth, while mid-tier entrepreneurs and multi-generational family business owners are frequently hit with massive, unexpected tax bills that force the dissolution of productive firms. Furthermore, the estate tax raises a negligible fraction of federal revenues while imposing massive systemic compliance costs.

By pairing the total repeal of the estate tax with the dynamic baseline reforms introduced earlier in this paper, we achieve a far more equitable and efficient economic equilibrium. Rather than assessing a massive, punitive tax on an arbitrary date (death) based on subjective, easily manipulated asset valuations, the tax code under this framework shifts entirely to a realization-based and liquidity-aware model.

Standard inherited assets retain their underlying tax exposure through modified basis carryover, meaning the tax is only paid when the heir voluntarily chooses to sell the asset in an orderly, market-driven transaction. Meanwhile, the uniquely insulated tax-haven properties of ultra-high-balance Roth accounts are cleanly accounted for via the non-disruptive 5.0 percent post-mortem levy. Sweeping away the estate tax removes a major psychological barrier to lifetime domestic capital investment, simplifies the tax code, and ensures that federal revenue generation tracks actual economic transactions rather than arbitrary lifecycle events.

10. Creation of a 2.5% Tax Subject to a Ceiling for Contributions to Social Security

The preceding seven proposals were designed to increase capital gains realizations to increase revenue and expand economic growth. This proposal allocates a new 2.5% tax subject with fees provided to the Social Security Trust fund.

To maintain the historical and legal design of Social Security as a contributory social insurance program rather than a general welfare surcharge, this levy must be tied to future benefit calculations.

To achieve this integration, policymakers could choose between two primary structural approaches:

· The Parallel Factor Approach: The policy introduces an Average Indexed Capital Earnings (AICE) factor into the standard Social Security administration framework, acting as a parallel calculation to the traditional wage-based Average Indexed Monthly Earnings (AIME) formula.

· The Direct Integration Approach: Alternatively, capital gains subject to the levy could be blended directly into the existing AIME formula alongside traditional wage earnings.

Regardless of the path chosen, implementing this policy introduces a distinct structural challenge that must be resolved by Social Security Administration actuaries. Because asset realizations are inherently volatile and “lumpy” compared to steady lifetime wages, a single large liquidation could artificially distort a taxpayer’s 35-year earnings history or crowd out years of legitimate wage contributions. Actuaries will need to design an appropriate smoothing mechanism—such as a multi-year rolling average or a modified indexation formula—to ensure these capital contributions scale the Primary Insurance Amount (PIA) in an actuarially sound, equitable manner.

The 2.5 percent levy would apply uniformly to all long-term capital gains and qualified dividends recognized within the newly established 12.5 percent and 17.5 percent statutory brackets and to gains on principal residences below the $250,000/$500,000 exemption.

The total volume of capital gains subject to this levy is capped at $50,000 per year, yielding a maximum annual Trust Fund contribution of $1,250 per taxpayer.

By embedding this 2.5 percent payroll tax directly inside the OASI funding stream, any future legislative effort to increase the baseline capital gains rate introduces an immediate, quantifiable threat to Social Security solvency because higher rates lower realizations and reduce contributions to the Trust fund. In fact, advocates concerned strictly about Trust Fund Solvency and retirement income could favor further reductions in capital gains taxes which would increase realizations and new Social Security contributions.

This architecture improves the solvency of the Trust fund, expands retirement benefits for people who realize gains, and aligns the interest of entitlement advocates with the interests of people favoring lower capital gains tax rates.

Conclusion

The ten policy proposals outlined in this memo represent a cohesive framework, but they are by no means the only configurations possible. Future iterations of this program could explore different permutations of these ideas—such as adjusting the phase-in timeline for the Section 1031 repeal, altering the specific percentage split for basis adjustments at death, or modifying the annual cap on capital gains subject to the Social Security levy. Because tweaking these variables can significantly alter macroeconomic outcomes, it is vital to establish a process that moves away from rigid ideological battlelines. Instead, modifications to these proposals must be guided by a rigorous, objective cost-benefit analysis. This process should actively seek out and integrate input from individuals with diverse perspectives, ensuring that the final legislative package is stress-tested against real-world economic conditions rather than political dogmas.

Central to evaluating any modification is a two-sided principle rooted in the insights of Arthur Laffer. While historically applied to ordinary income tax, the Laffer Curve logic applies acutely to capital gains taxation because realizations are entirely optional; when tax rates are too high, investors simply lock in their assets, freezing market liquidity and starving the Treasury. There is an undeniable optimum rate for revenue generation—it is demonstrably not 100 percent, but crucially, it is also not 0 percent. Recognizing that this optimum lies between these two extremes is what guides the balanced reforms suggested for Section 1031 exchanges and the eventual taxation of inherited Roth IRAs. By capturing revenue at an optimized threshold without completely erasing the incentive to invest, the government can maximize public finance health while sustaining economic velocity.

Ultimately, reforming capital gains is not just a theoretical math exercise; it has a profound, real-world impact on broader economic growth and major societal pain points. This is especially true in the residential housing market, where the current tax code forces an artificial freeze on inventory. When an elderly homeowner faces a massive tax penalty for downsizing or moving closer to family, they choose to stay put to preserve a full step-up in basis at death. This lock-in effect starves the market of entry-level housing supply, which is a vital driver of macroeconomic expansion. Furthermore, it adds unnecessary financial friction to incredibly difficult, emotional end-of-life housing decisions—including transitions into assisted living or managing long-term care spend-down rules. A truly complete tax reconciliation framework must recognize these intersecting pressures, ensuring that capital gains rules unlock market velocity rather than penalizing families during critical life transitions.

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Key Findings:

The incoming Federal Reserve chair is walking directly into a classic dual-mandate nightmare. Across every core asset class, the data flatly refuses to cooperate -- flashing warning signs of a slowing economy right alongside stubborn, cost-push inflation.

Here are the key contradictions tearing through the macro landscape right now:

· The Yield Curve vs. TIPS: Nominal bonds are bracing for sticky long-term inflation (10-year implied at 3.10%), while the TIPS market bets long-run price pressures will eventually normalize (5-year, 5-year forward at 2.28%).

· Main Street vs. Wall Street Forecasters: Consumers expect inflation to remain highly elevated at 3.20% over the next five years, while professional economists model a much cooler, anchored 2.40% baseline.

· Global Central Banks and Bond Markets Versus the White House Universal inflationary pressures are forcing global central banks—from Tokyo to Sydney—to navigate intense policy constraints, effectively raising the global floor for interest rates. This systemic shift threatens to spike long-term U.S. borrowing costs and block the rate cuts intensely desired by the President and some financial market participants.

· Low Unemployment vs. Hiring Freezes: The headline jobless rate is historically low at 4.3%, yet broad payroll growth has cratered to 115,000, and U-6 underemployment has jumped to 8.2% as recent graduates hit a white-collar brick wall.

· Surging Oil vs. Crashing Metals: Geopolitical shocks have spiked retail gasoline to an inflationary $4.50+ per gallon, but a 16.7% plunge in copper prices screams that the global industrial engine is rapidly cooling.

· AI Bubble vs. Small-Cap Distress: Mega-cap tech is on a tear -- driving a 122% one-year return for semiconductors (SMH). While interest-sensitive homebuilders plunge 16.6% and the domestic Russell 2000 sinks into an 11% correction.

· Distress in private credit markets but stable junk bond yields: A financial crisis if it occurs will be self-inflicted.

· Broader issues than oil and Strait of Hormuz: Market is highly fixated on oil but electricity prices are also increasing and alternative routes for oil don’t resolve Hormuz related issues on food and fertilizer.

· Inflation versus recession: Can’t rule out a stagflation.

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Introduction:

Even in normal periods, macroeconomic forecasting is an inherently imprecise process, much more art than science. The current economic environment is not normal. I have not seen so many divergent economic signals, with some statistics suggesting a strong perhaps overheated economy and other signals flashing warning signs of impending inflation.

This post considers data in nine areas – (1) the conventional Treasury yield curve. (2) TIPS securities (3) surveys of inflation, (4) international interest rates, (5) junk bond and private credit markets, (6) labor markets, (7) commodity markets, (8) electricity prices (9) stock markets.

The Conventional Yield Curve:

Extracting concrete inflation forecasts from the conventional nominal yield curve requires anchoring the analysis in the classical Fisher framework separating nominal interest rates into two components – the real rate and expected inflation and by assuming the real rate remains constant at 1.5%.

Applying this framework to a 10-year nominal Treasury yield of 4.60% extracts an implied inflation expectation of 3.10% over the next decade. Applying this framework to a 30-year bond yield currently above 5.00% isolates an even higher implied ultra-long-term forecast of 3.50%.

Both estimates exceed the Federal Reserve Board’s 2.0 percent target.

The steepness of the conventional yield curve may partially reflect depressed short rates because of expectations of a Fed rate cut a desired outcome of the President and the new Fed chair.

The 10-year and 30-year rates did show some upward movement this week. There is substantial nervousness that further increases in expected inflation could raise long rates and spill over to the equity market.

Signals from the TIPS Market:

Treasury Inflation-Protected Securities (TIPS) provide alternative, direct market estimates of expected inflation by stripping real interest rates out of nominal yields, revealing a distinct divergence when compared to the conventional curve over intermediate intervals:

The 5-year breakeven inflation rate recently rose to 2.69%, signaling that investors expect cyclical price pressures to keep inflation modestly above target over the immediate five-year horizon.

The 5-year, 5-year forward inflation expectation rate stands near 2.28%. This structural metric isolates expectations for the half-decade beginning five years from now, indicating that institutional investors believe long-run trend inflation will eventually subside and normalize.

The inflation expectations from the conventional yield curve exceed the inflation expectation from the TIPS market, possibly because the TIPS market is less liquid than the conventional one.

For more on the TIPS market and inflation expectation consider this article:

Consumer and Professional Inflation Surveys

Surveys complement market-based measures by capturing expectations among distinct economic actors, providing vital context for how inflation expectations translate into real-world behavior. The latest data reveals a stark divergence between heightened short-term anxieties and relatively stable long-term anchors.

University of Michigan Surveys of Consumers Near-term household expectations remain highly elevated, with consumers projecting a 4.5% inflation rate over a 1-year horizon. This reflects immediate sensitivity to trade tariffs and stubborn core service costs, though metrics have eased marginally from their spring peaks. Looking further out, the 5-year horizon sits at a more moderated 3.4%, indicating that while immediate pressures are acute, consumers expect some cooling over the long term.

Federal Reserve Bank of New York Survey of Consumer Expectations Short-term household outlooks have steadily ticked higher, with the 1-year expectation currently sitting at 3.6%. This trend is driven largely by lower-to-middle-income cohorts facing localized, non-discretionary price pressures. Over the medium to long term, consumer anxiety flattens out but remains sticky, with expectations landing at 3.1% for the 3-year horizon and hovering right at the 3.0%threshold for the 5-year mark.

Federal Reserve Bank of Philadelphia Survey of Professional Forecasters Professional economists have aggressively adjusted their near-term models upward to absorb recent geopolitical shocks and spiking commodity costs, projecting a sharp 6.0% annualized rate for the immediate quarter and a 3.5% full-year baseline. However, their long-term structural assumptions remain firmly anchored, with the 10-year horizon projected at 2.4% -- a figure that remains closely aligned with the Federal Reserve’s target.

The consumer survey pushes up the average at both the short and long horizons.

· The Short-Term Horizon (Next 12 Months): Household expectations average 4.05% (across the Michigan and NY Fed surveys), outpacing the professional forecasters’ full-year baseline of 3.50%. Combined, the short-term consensus sits at 3.87%, though professionals expect immediate quarterly spikes to peak as high as 6.0%.

• The Long-Term Horizon (5 to 10 Years): Long-term anchors remain intact but show a clear structural gap. Consumer surveys yield a long-term average of 3.20%, while professional forecasters project a much cooler 10-year baseline of 2.40%.

The survey data closely tracks the broader pattern seen in the TIPS market, reflecting significantly higher inflation expectations in the short term than in the long term.

Many economic surveys of consumers have indicated a high level of pessimism, not only about inflation but about the future of the economy. For more about the growing level of economic pessimism captured in consumer surveys consider this article:

International Interest Rates:

Inflation is increasingly a global phenomenon rather than a purely domestic one applying pressure to all central banks.

Recent Central Bank Actions and Policy Benchmarks

Bank of Japan (BOJ) — Policy Rate: 0.75%

Meeting Date: April 28, 2026

Official Document Link: https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2026/k260428a.pdf

Action: In a 6–3 split decision, the BOJ maintained its key overnight rate at 0.75% (a level unseen since 1995). The split vote led to a market rebellion causing the domestic yield curve to steepen sharply as the 10-year Japanese Government Bond (JGB) surged to a 30-year high of 2.80%.

Reserve Bank of Australia (RBA) — Policy Rate: 4.35%

Meeting Date: May 5, 2026

Official Document Link: https://www.rba.gov.au/media-releases/2026/mr-26-12.html

Action: In a hawkish, split 8–1 board decision, the RBA raised its cash rate target by 25 basis points to 4.35%. With headline inflation surging to 4.6% following global energy infrastructure disruptions, the board explicitly warned that domestic firms are rapidly passing through escalating fuel and transport costs into consumer goods and services.

Bank of England (BoE) — Policy Rate: 3.75%

Meeting Date: April 29, 2026

Official Document Link: https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2026/april-2026

Action: The Monetary Policy Committee (MPC) voted 8–1 to maintain its key Bank Rate at 3.75%. While a softer real economy prompted a rate hold, the April Monetary Policy Report revealed that near-term consumer price inflation projections have been revised upward to 3.3% for the third quarter due to the Middle East supply shock, meaning policy is likely to remain restrictive.

Bank of Canada (BoC) — Policy Rate: 2.25%

Meeting Date: April 29, 2026

Official Document Link: https://www.bankofcanada.ca/2026/04/fad-press-release-2026-04-29/

Action: The Governing Council held its target for the overnight rate at 2.25%, continuing its extended pause. While global peers are hiking or tightening aggressively to fight energy-driven inflation, Canada’s massive domestic oil reserves naturally cushion it from the worst of the Middle East supply shock. Instead, the primary concern for the BoC is a significant softening of aggregate demand. The domestic economy is under severe stress due to escalating U.S. tariff pressures and deep trade uncertainty ahead of the upcoming CUSMA review, both of which are actively depressing Canadian business investment and exports. The central bank is locked in a defensive hold—unable to ease because of global baseline inflation pressures, but unable to tighten further without worsening the domestic demand slump.

European Central Bank (ECB) — Policy Rate Benchmark

Reporting Period: May 2026 (Tracking late April operations)

Official Document Link: https://www.ecb.europa.eu/press/stats/mfi/html/ecb.mir2605~8bd04df5cc.en.html

Action: The ECB maintained an ultra-vigilant operational posture as core services inflation remains deeply stubborn against the rising tide of global crude prices. Eurozone corporate borrowing costs remain locked at a 3.57%, while household housing credit indicators hover at 3.35%.

Concluding Thought:

Monetary policy appears to be tightening in most parts of the world.

Events in Japan are especially vital because Japanese institutional investors are the world’s largest sovereign holders of foreign fixed income -- collectively owning well over $1 trillion in U.S. Treasuries alone. The sudden upward spike in long-end JGB yields may have large financial implications.

Labor Markets and the Federal Reserve’s Dilemma:

The labor market is central to inflation analysis because the Federal Reserve operates under a dual mandate: maximum employment and price stability.

Current U.S. labor data present a mixed picture:

• The headline unemployment rate stands at approximately 4.3 percent, modestly above the cycle low but still low by historical standards.

• Nonfarm payroll growth slowed to roughly 115,000 jobs in April, well below the average monthly gains recorded during 2024.

• The U-6 underemployment rate, which includes discouraged workers and those working part-time for economic reasons, rose to 8.2 percent in April 2026, up from 8.0 percent in March and 7.9 percent in February—a meaningful 0.3 percentage point increase over two months.

• Unemployment among workers ages 20 to 24 has climbed to roughly 8 to 9 percent, and recent college graduates are encountering a noticeably weaker hiring environment, particularly in technology and other white-collar sectors.

• Prime-age labor-force participation (ages 25 to 54) remains near 83.5 percent, close to the highest level in more than two decades.

• Labor-force participation among workers age 55 and older remains below pre-pandemic norms, reflecting a sustained increase in retirements and reduced workforce attachment among some older Americans.

Source:

https://www.bls.gov/news.release/pdf/empsit.pdf?utm_source=chatgpt.com

Junk Bonds vs. Private Credit:

The corporate credit landscape highlights another set of issues.

Public high-yield “junk” bonds have remained surprisingly resilient. Because many public speculative-grade companies locked in fixed, ultra-low interest rates during the pandemic, their trailing default rate has stayed low, near 3.3%. Deeper public market trading has allowed these bonds to absorb macro volatility smoothly.

In stark contrast to the public fixed-income markets, the massive, un-regulated private credit market is showing acute signs of structural distress:

· Floating-Rate Risk & Cash Squeeze: Private direct lending is almost exclusively structured on floating interest rates pegged to benchmark SOFR. Because these rates adjust automatically with central bank policy, sustained high interest rates directly erode borrower interest coverage ratios, rapidly accelerating both headline defaults and “shadow” credit distress.

· Concentrated Exposure to Software (SaaS): Direct lenders have heavily concentrated portfolios in the Software-as-a-Service (SaaS) sector, which commands nearly 20% of total direct lending assets. These loans were heavily underwritten on multiples of recurring revenue rather than actual EBITDA. With generative AI tools now rapidly disrupting legacy software business models and driving a collapse in public software valuations, private credit funds face localized asset impairments across their largest sector exposure.

· Payment-in-Kind (PIK) Debt: Borrowers who cannot afford their escalating cash interest payments are being allowed to defer payments by issuing more debt via PIK toggles. Non-cash PIK payments now make up roughly 8% of total investment income for major public Business Development Companies (BDCs), masking a significant shadow default rate.

· Maturity Extensions & Arbitrary Marking: Instead of declaring formal defaults or enforcing covenants, funds are quietly executing amend-and-extend modifications to prolong loan durations, while keeping stressed assets marked near face value to obscure real valuation drops.

· Redemption Gates: As worried institutional and wealthy retail allocators attempt to trim their exposure, perpetually non-traded BDCs and evergreen private credit funds are facing surging redemption requests, forcing several major funds to enforce strict quarterly liquidity caps and slam shut “redemption gates” to freeze cash withdrawals.

This private credit distress creates a potential dilemma for the incoming Fed chair that goes far beyond the standard inflation-growth dynamic. Historically, central banks have been forced to abandon their macroeconomic goals and inject massive liquidity into the system just to halt a financial sector panic. The classic precedent is the 2008 subprime crisis.

While no central banker wants to preside over a systemic financial crisis, a severe and unchecked private credit contraction could, if triggered, inadvertently break the Fed’s primary policy deadlock. Should a large crisis manifest, the subsequent freezing of credit creation, forced asset liquidations, and aggressive retrenchment in corporate spending would induce a sharp, deflationary contraction in aggregate demand.

For further readings

See the 2026 credit trap: Why Wall Street gates the exits

and

How best to expand investment opportunities inside retirement accounts?

Commodity Markets:

Current commodity prices provide highly mixed signals about the global inflation path. Surging oil prices stemming from recent geopolitical shocks indicate a real risk of resurgent inflation. Some industrial and commodity and metal prices indicate the world economy may be cooling. The energy squeeze and the closure of the straits is impacting costs and food prices and alternative pipelines for oil won’t facilitate movement of food and fertilizer.

This crisis may not fully resolve quickly and future stagflation can’t be ruled out.

The price of oil has surged significantly as a direct result of ongoing conflict, driving intense market volatility fueled by shifting rumors regarding the ultimate duration of the hostilities. This structural energy premium has passed directly down the line to retail consumers, with U.S. gasoline prices averaging an elevated $4.50 to $4.63 per gallon and retail diesel remaining stubbornly sticky near $5.64 per gallon. High diesel prices impact the supply chain and the cost of food and other goods.

The energy shock has not yet fully worked through the broader economic system to impact underlying core prices. Modern Vector Autoregression (VAR) studies indicate that these second-round energy effects now transmit to Core CPI with a prolonged three-to-nine month lag, acting as a slow structural fuse rather than an immediate catalyst.

However, historical context provides a critical buffer: the notorious oil shocks of the 1970s represented a far greater percentage increase relative to the baseline economy. Because the modern global economy is significantly less energy-intensive per dollar of real GDP, the mechanical, long-term pass-through to non-energy goods may ultimately be smaller than the historical precedents of the late twentieth century.

This energy-driven cost pressure clashes directly with the price action across the metals complex, where a widespread cooling trend points to softening global demand. Gold, the global flight-to-liquidity standard, established an all-time intraday high of $5,598 per ounce (with a record close of $5,411 per ounce) on January 28. The market has since experienced a distinct 19% drawdown, with gold floating near $4,550 per ounce.

A similar exhaustion of momentum is visible in silver, the market’s dual-nature monetary and industrial indicator. Silver previously touched a spectacular, record-breaking high of $121.64 per ounce on January 29, 2026, but has fallen to around $78 per ounce due to a short squeeze.

Copper is a complex macro outlier. The London Metal Exchange (LME) copper price has fluctuated between $13,400 and $14,153 per metric ton, its relatively high price floor reflecting factors impacting both demand and supply.

· Short-Term Cyclical Demand Destruction: The macro engine is slowing. China’s industrial production growth has decelerated, dragging down order flows for copper cathodes and rods. With crude oil hovering above $110 per barrel and keeping central banks hawkish, the broader global economic slowdown has actively triggered price-induced demand destruction, flipping Chinese spot copper premiums into discounts.

· The Peru Energy Crisis: On the supply side, major operational shocks are capping output. Peru issued an emergency decree (Decreto de Urgencia 003-2026) prioritizing electricity for residential households amid a national power deficit. This has forced rolling power rationing across major mining operations, immediately driving up marginal costs and curbing refined production.

· The Sulfuric Acid Bottleneck: Roughly 20% of global copper relies on acid-intensive leaching processing. Ongoing shipping blockades in the Strait of Hormuz have choked off Middle East sulfur exports, while China has restricted its own sulfuric acid exports. This sudden bottleneck has spiked the cost of this vital chemical input, threatening deep production cuts across major mining hubs in Chile and Africa.

· Rigid Structural Tech Demand: Providing a hard floor against a total demand collapse are multi-decade, inelastic capital programs. Hyperscale artificial intelligence data center expansions—housing power-dense infrastructure like Nvidia’s HGX systems—are projected to draw massive additional tonnage this year, alongside state-directed electrical grid overhauls that require up to five times more copper per megawatt than legacy power systems.

Copper is not cleanly decoupled from the business cycle; rather, it is highly sensitive to it. However, because near-term mine supply growth has slowed to a crawl against a deep projected refined global deficit for the year, the metal’s price cannot easily collapse. The current high baseline is a highly complex, temporary equilibrium between visible macroeconomic slowing and intense, rolling supply destruction.

Expanding this examination to agricultural and soft commodity futures reveals that the food complex does not signal economic cooling; rather, it actively amplifies resurgent inflation as energy shocks diffuse directly into agricultural curves.

The closure of the Strait of Hormuz directly disrupts agricultural markets via three channels: skyrocketing nitrogen-fertilizer input costs, penalized transport logistics, and intensified biofuel arbitrage. Front-month futures for heavy-input and energy-linked staples like wheat, corn, soybean oil, and palm oil are experiencing sharp price increases as farmers scale back plantings or divert crops to fuel. Conversely, luxury soft commodities like cocoa and coffee are bucking this inflationary trend with downward price corrections driven by bumper harvests and normalizing weather in West Africa and Brazil. Sitting firmly on the inflationary ledger, the cost of beef has surged because elevated corn and diesel prices have drastically raised the cost of animal feed and long-haul transportation, forcing cattle ranchers to pass these compounding expenses directly down the line.

While expanded overland bypass networks like Saudi Arabia’s East-West pipeline and the UAE’s fast-tracked Fujairah routes can mitigate global energy shocks by rerouting millions of barrels of crude, they offer no relief for regional food security. Because the Gulf states rely almost entirely on the Strait of Hormuz to import the bulk of their agricultural staples, a prolonged maritime closure leaves their domestic food supply chains critically exposed, irrespective of how much oil they manage to pipe to the open ocean. In fact, long-term macroeconomic estimates suggest that a multi-season closure could ultimately drive global food price inflation above headline energy inflation. While energy markets can eventually find equilibrium through alternative drilling and reserves, the disruption to the Gulf’s seaborne fertilizer exports—which represent nearly half of the global urea trade—threatens a structural compression of agricultural yields that could trigger a prolonged, systemic global food crisis.

Electricity Prices:

Increases in electricity prices, which outpace inflation preceded and are compounding problems caused by the oil shock. Rates in many parts of the country are increasing at a 5% to 7% annual rate.

The primary structural driver altering this domestic demand curve is the hyper-accelerated buildout of high-compute artificial intelligence data centers. The commercial sector’s thirst for power is expanding so rapidly that the EIA projects commercial electricity consumption will equal residential use this year and fully surpass it next year for the first time in American history.

Rather than maximizing supply for this computational boom, the Trump administration’s regulatory freeze on wind leases, solar tariffs, and clean energy tax credits creates self-inflicted headwinds. Sidelining these low-cost, rapidly deployable technologies restricts domestic energy volume during a period of historic load growth, shooting the economy in the foot by inflating consumer utility bills and undermining American competitiveness.

Electricity prices, like oil prices, impact core inflation with a lag creating a headwind for future inflation.

Corporate Equities:

The stock market, the most analyzed and discussed part of the economy, does not provide clear evidence of where the economy is going. Some sectors and funds appear to be in a bubble that will increase if policy makers decide to adopt expansionary policies. Other sectors and funds could benefit from expansive policies.

The difference is somewhat highlighted by comparing returns on the market weighted S&P 500, VOO which was 25.8% substantially higher than the return from the equal weighted S&P 500 14.5%. The former is dominated by some large tech companies.

The dispersion in returns, the existence of bubble and bust sectors, can be more clearly demonstrated by comparing sector ETF returns.

· The one-year return for a major semiconductor ETF (SMH) is 122.3%,

· The one-year return for a consumer discretionary fund (VCR) is 7.0%.

· The one-year return on a homeowners (ETF) is -7.2%.

Dispersion in returns across sectors and funds is even larger since the onset of the war between March 3, 2026, and May 19, 2026. Between these dates energy VDE has increased by 9.3% and semiconductors SMH has increased by 39.1%. By contrast, consumer discretionary has increased by 1.0% while homebuilders has fallen by a negative -16.6 %.

Even more vividly, the small cap index the Russell 2000, which relies primarily on domestic economic activity and is highly sensitive to interest rates, is now in correction territory. The total drawdown from its previous high is close to 11 percent.

So how should the incoming staff interpret the performance of the stock market when shaping policy given that some sectors are in a bubble and other sectors are distressed? My concern is that a monetary expansion would stimulate the bubble and do little to assist the distressed sectors and could actually worsen the distressed sectors if the monetary expansion led to higher expected inflation and higher interest rates.

Conclusion: The Ultimate Dual-Mandate Dilemma:

The incoming Federal Reserve leadership faces the classic policymaker’s nightmare: clear evidence of slowing aggregate demand and stubborn inflationary pressures existing at the exact same time. Under its dual mandate of price stability and maximum employment, the central bank is being pulled in two opposite directions by an economic matrix that refuses to resolve into a singular trend.

Many market participants including the President of the United States want rate cuts, but various expectations of inflation are elevated. Moreover, central banks do not directly control the long end of the yield curve and changes in long maturity bond yields are not consistent with the desires of investors.

The headline unemployment rate remains historically low at 4.3%, yet new entrants and recent graduates are hitting a brick wall trying to find work. In the equity markets, a massive, soaring bubble in mega-cap technology and semiconductors coexists with substantial distress in small caps and interest-sensitive homebuilders.

This structural fragmentation extends across every major asset class, creating a landscape of profound macro uncertainty. While a geopolitically driven supply shock has pushed retail gasoline and crude oil prices sharply upward, vital industrial barometers like copper have retrenched significantly, signaling a cooling global manufacturing engine.

The new Fed chair will have to coordinate with other global central banks that appear to be tightening, a global backdrop that could easily prevent the immediate interest rate cuts intensely desired by both financial markets and the President. Navigating this cross-current requires recognizing that the signals are genuinely mixed, and any heavy-handed, politically driven domestic policy shift risks breaking one side of the mandate to fix the other.

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Competition in the Education Industry was republished on Economic Memos in December 2025, although the original version was written nearly a decade earlier. The essay applies industrial organization theory to education reform and argues that the central problem in public education is not a lack of competition per se, but the fact that competition has been introduced at the wrong level.

The essay critiques charter schools and broad voucher programs because they attempt to create competition between entire schools. That approach duplicates buildings, transportation systems, administrators, and support staff—functions characterized by substantial economies of scale. In many communities, especially rural areas, the local school is effectively a natural monopoly. Creating multiple competing institutions in such environments can weaken all providers rather than improve outcomes.

The essay proposes an alternative model in which schools function as regulated platforms rather than vertically integrated monopolies. The central policy recommendation can be summarized in a simple phrase: course choice rather than school choice. The school district would continue to provide facilities, transportation, counseling, meals, and extracurricular activities, but students could choose among competing providers for individual courses such as mathematics, physics, foreign languages, or computer science.

The proposed structure is analogous to the one created by the reform of the electric utility industry. Utilities continue to operate the grid, while customers may purchase electricity from competing generators.

In education, the school remains the platform, while instruction becomes a contestable service. Although no state or country has fully reorganized K–12 education into a complete marketplace for individual courses, several jurisdictions have implemented important elements of this model.

In Colorado, Florida, Utah, and Louisiana, students may enroll in approved outside courses while remaining enrolled in their local public schools. In these programs, public funding follows the course, so families generally pay nothing when they choose from the state’s approved list of providers. If a parent prefers that a student take physics from a former NASA engineer rather than the school’s regular physics teacher, the course can be publicly funded if that instructor or organization has been approved by the state or district.

Minnesota’s Postsecondary Enrollment Options program applies the same principle to college coursework. High school students may take courses at colleges and universities at public expense, with no tuition cost to the family.

New Zealand’s Te Kura and Australia’s distance education systems also provide publicly funded access to specialized courses for students who remain enrolled in local schools, particularly in rural and remote communities.

These examples are broadly consistent with the model proposed in this essay, which also contemplates state or district vetting of outside providers. The goal is not an unregulated market in which any instructor automatically qualifies for public funding. Rather, approved providers would need to satisfy standards relating to subject-matter expertise, curriculum quality, student outcomes, and financial integrity. Once approved, these providers would be eligible to compete for student enrollments.

These systems demonstrate that the school-as-platform model is operationally feasible and that course-level competition can be introduced without requiring families to pay twice for education.

The most important barriers in states that have not adopted this model are political. Teachers’ unions and other stakeholders often oppose reforms that could shift students and funding away from traditional classroom assignments. Many policymakers are also reluctant to alter a familiar system when the benefits, while potentially large, are not immediate.

In states that have adopted elements of this approach, the main obstacles are administrative rather than ideological. Funding formulas must allow money to follow individual courses, accountability rules must define who is responsible for outcomes, and districts need systems for scheduling, transcripts, and quality control. These practical challenges slow implementation, but they are fundamentally management issues rather than conceptual flaws in the model.

The federal government could accelerate adoption while preserving local control.

One useful tool would be competitive grants administered by the U.S. Department of Education. States could receive funding to build course marketplaces, modern transcript systems, and interoperable student records that allow students to combine instruction from multiple providers.

Congress could also provide greater flexibility in Title I and other federal education programs. A portion of these funds could be used to purchase approved outside courses for disadvantaged students, giving low-income families access to specialized instruction that is often available only to wealthier households.

Rural education initiatives could help small districts aggregate demand and jointly contract for advanced mathematics, science, language, and career courses. This would be particularly valuable in areas where staffing shortages make it difficult to offer a full curriculum.

The federal government could support the development of common accreditation and data standards so that credits earned from outside providers transfer seamlessly across districts and states. National standards would reduce administrative barriers and increase confidence in course quality.

Research and demonstration projects could identify which course-level competition models most effectively improve student achievement and expand access. Rigorous evaluation would help states distinguish successful approaches from those that do not deliver meaningful benefits.

Continued investment in broadband and educational technology would make it easier for students in underserved communities to access specialized instruction from remote providers.

The federal scholarship tax credit enacted in 2025 may provide an additional mechanism for expanding course-level competition. Beginning in 2027, participating states may authorize Scholarship Granting Organizations to award scholarships to eligible K–12 students for a broad range of educational expenses. Because public school students are eligible, these funds could potentially be used to purchase accredited supplemental courses while students remain enrolled in their local schools. Congress or the Treasury Department could strengthen this connection by clarifying that approved single-course instruction is an eligible expense.

This modification or clarification of the federal scholarship credit is consistent with the argument developed in the original essay: subsidizing individual courses is likely to be more economically efficient than subsidizing the cost of transferring an entire student to a different school.

Private philanthropy could reinforce this model by subsidizing approved courses in areas where the social return is especially high, including mathematics, science, computer programming, engineering, and foreign languages. Foundations, corporations, and individual donors could provide scholarships or endowments that allow students to enroll in accredited supplemental courses at little or no cost.

A philanthropist interested in expanding the number of future engineers, scientists, or multilingual professionals might achieve greater impact by financing thousands of targeted course enrollments than by funding the construction of new institutions. Because the school remains the platform and only the instructional component is subsidized, these investments could leverage the existing public education infrastructure and deliver a high return per dollar spent.

Conclusion

The central insight of Competition in the Education Industry is that education should be reorganized in much the same way as other infrastructure industries. Schools should continue to provide the essential platform—buildings, transportation, counseling, and community -- while instruction becomes a competitive service delivered by diverse providers.

Rather than dismantling neighborhood schools, reform would open them to a broader educational marketplace. This approach preserves local institutions while introducing competition where it matters most: the delivery of learning itself. The future of educational competition lies not in school choice, but in course choice.

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Key Findings

• Expanding retirement options inside retirement plans is a worthy goal.

• Reforms which deserve consideration include removing restrictions on the purchase of Series I bonds inside retirement accounts and the facilitation of increased use of bonds with fixed maturity dates instead of bond ETFs inside 401(k) plans.

• SEC regulated junk bonds are better suited for retirement plans than private credit instruments with their low levels of transparency and gating restrictions.

• There may be a role for redesigned private credit inside a redesigned 529 plan. (This option is succinctly presented to paid subscribers.)

The landscape of retirement savings is undergoing a significant policy shift as federal regulators and the Trump administration aggressively push for the inclusion of private credit within defined-contribution plans. These regulator initiatives follow several years of explosive growth in the private credit market.

The effort to expand the use of private credit began with Executive Order 14330 in August 2025. This order mandated that federal agencies identify and reduce barriers preventing retirement plans from accessing private credit and private equity. This was followed by a Department of Labor proposal in March 2026, which sought to establish a process-based safe harbor. This rule clarifies that plan fiduciaries may include alternative assets if they follow rigorous due diligence, signaling that these complex investments can meet the prudent person standard under ERISA.

The Retirement Investment Choice Act (H.R. 5748) was introduced in Congress to codify these principles into federal law. However, the push for expanded private credit hit a major wall recently as market stresses began to emerge. The narrative of stable, high-yield growth was challenged when several major funds were forced to implement strict limits on withdrawals, commonly known as gating, as they struggled to meet redemption requests.

• Blue Owl Capital took the unprecedented step in February 2026 of permanently closing redemptions on its $1.6 billion OBDC II fund, leaving retail investors trapped in a vehicle with no clear exit.

• BlackRock’s $26 billion HPS Lending Fund and Morgan Stanley’s North Haven Private Income fund also faced massive redemption requests—nearly 10% of their assets—forcing them to fulfill only about half of the requested payouts.

• Blackstone had to intervene with $400 million of its own capital to satisfy $3.8 billion in withdrawal requests for its BCRED fund to avoid an outright gate.

These liquidity issues were compounded by the “software loan problem.” Private credit has a heavy concentration in the technology sector—accounting for nearly 20% of direct loans by end-2025. As AI disruption began to squeeze the Software-as-a-Service (SaaS) sector, these loans faced valuation obscurity. Because these loans are not traded on a public exchange, their “book value” remained high while the underlying companies struggled, creating a “valuation freeze” that hid real losses from 401(k) participants. This led to a surge in payment-in-kind (PIK) interest—where companies pay debt with more debt—which drove nearly 60% of private credit defaults in early 2026.

The deregulatory push did not stop due to adverse events in the market. The focus shifted from legislation in Congress to executive actions by the Administration.

The administration’s concern that retirement portfolios are underperforming due to legal and institutional restrictions affecting investment opportunities inside retirement accounts is valid. However, the lack of investment opportunities in private credit is not the primary problem caused by restricted investment options.

Key Questions:

Why is the Administration and the Republican Congress so fixated on expanding opportunities for private credit while ignoring other more meaningful investment restrictions, including the use of Series I bonds inside of retirement accounts and the use of bonds with specific maturity dates inside 401(k) plans?

Furthermore, why is there so little interest in the expanded use of low-investment grade bonds inside retirement plans, a risky asset for sure, but one that is potentially less risky than private credit?

Series I Savings Bonds offer individual savers the best possible defense against inflation, featuring guaranteed capital protection backed by the U.S. Treasury. Yet, federal rules dictate they can only be purchased directly via Treasury Direct in individual taxable accounts. Savers are legally barred from holding these powerful inflation-fighting assets inside their 401(k)s or IRAs, where they could provide vital portfolio protection during the inflationary spikes of the early 2020s and in the current geopolitical crisis.

I have written extensively about Series I Savings Bonds on this blog including a practical guide for investors, and a study comparing returns on Series I bonds to returns on a conventional bond fund.

Typical 401(k) plans force savers into open-ended bond ETFs or mutual funds, which lack maturity dates and whose prices which fluctuate wildly based on interest rate movements. When rates skyrocketed, the traditional 60/40 portfolio collapsed because the “40% bond cushion” bled value. Had the financial infrastructure instead facilitated simple defined-maturity corporate or Treasury bond ladders within 401(k)s -- allowing securities to be held to maturity for a guaranteed return of principal -- retirement accounts would have fared significantly better.

This article observes that even in liquid brokerage accounts the advisor focus is often on bond mutual funds or ETFs with no maturity date over individual bonds and bond ladder, which can be held to maturity.

I do not understand why the Administration is so focused on the expansion of risky investment options when current rules and institutional practice preclude less risky investments which would improve overall portfolio risk and return in both retirement accounts and regular brokerage accounts.

The aggressive push to expand private credit within defined-contribution plans appears less like a retail-saver renaissance and more like an institutional bailout. This policy shift is heavily driven by a structural need within the private equity ecosystem to sell more private credit instruments to investors because safer alternatives already exist for pursuing higher fixed-income yields, including the expanded use of sub-investment-grade bonds and bond funds.

Data tracked by industry groups like the Investment Company Institute suggests that standalone high-yield corporate bond funds are rarely offered as core menu options, seemingly restricted to a small minority of larger corporate plans due to fiduciary caution. Instead, high-risk public debt appears primarily integrated behind the scenes within multi-asset target-date funds, where institutional managers routinely allocate a small fraction of the fixed-income sleeve to high-yield bonds to boost performance.

The policy irony is stark: the infrastructure already exists to sprinkle diversified high-risk public debt into retirement plans via institutional oversight. The new push seeks to duplicate this structure, but replace transparent, SEC-regulated junk bond funds with opaque, direct-lending private credit vehicles.

If both private credit and public junk bonds are wrapped inside diversified funds, a critical question arises: which vehicle is riskier for a retail investor? The private credit fund with redemption issues carries vastly greater structural risk.

While a junk bond fund and a private credit fund both hold diversified pools of corporate debt rather than single instruments, their regulatory and operational protections are fundamentally mismatched:

• Regulatory Oversight: Public high-yield bond funds are registered under the Investment Company Act of 1940 and subject to strict SEC disclosure laws. Private credit funds are exempt from standard SEC registration, and their loan covenants are privately negotiated in darkness.

• Valuation and Transparency: Public high-yield bond funds feature daily, market-driven pricing determined by active public trading exchanges. Private credit funds rely on quarterly mark-to-model book values and are highly prone to subjective valuation freezes.

• Sector Allocation Risk: Public high-yield bond funds are broadly diversified across heavy industry, retail, healthcare, and energy. Private credit funds carry severe concentration in tech and Software-as-a-Service (SaaS) sectors, which account for roughly 20% of direct loans.

• Current Default Profile: Public high-yield bond funds experience a trailing 12-month default rate of approximately 3.4%, which is transparently reflected in real-time. Private credit funds experience a trailing 12-month default rate of approximately 5.5%, which is heavily masked by payment-in-kind debt structures.

• Liquidity and Exit Risk: Public high-yield bond funds offer continuous daily liquidity, as these funds cannot unilaterally block investor withdrawals. Private credit funds suffer from structural illiquidity and are prone to gating, redemption halts, and capital lockups.

Public junk bonds have largely avoided the worst excesses of the current credit cycle because their pricing is exposed to daily public market scrutiny. If a borrower underperforms, the public fund’s Net Asset Value adjusts instantly and transparently.

In contrast, a private credit fund experiencing redemption issues shifts the burden of structural illiquidity directly onto the investor. Pushing private credit into retail plans hides this systemic distress by burying opaque, un-tradable assets inside target-date funds, resulting in quiet underperformance that investors cannot see or react to.

A critical risk shared by both public junk bond funds and proposed private credit retail funds is the lack of a definitive maturity date, which exposes investors to severe interest rate and price risk.

When an investor builds an individual bond ladder, each security has a fixed maturity date. If interest rates spike and bond prices fall, an investor holding an individual bond to maturity faces zero capital loss; they are legally guaranteed to receive their full principal ($1,000 par value) back at expiration.

Mutual funds and ETFs do not behave this way. To maintain a constant investment mandate (e.g., maintaining a high-yield portfolio with an average duration of 5 years), fund managers must continuously sell bonds approaching maturity and buy new, longer-term debt. Consequently, a bond fund never matures.

Because bond funds never hit a maturity finish line where principal is guaranteed to return, they behave like perpetual directional bets on interest rates. When interest rates climbed rapidly, public bond funds suffered massive, unmitigated capital losses on paper. The traditional 60/40 portfolio can fail miserably at times, as discussed here and in other articles in the financial press.

By inserting private credit funds—which also lack true maturity structures for the end investor—into the 401(k) ecosystem, regulators are expanding an asset class that suffers from this exact same perpetual duration trap, while layering on severe redemption restrictions.

Consider a scenario where a standard, daily-liquid 401(k) mutual fund or target-date fund holds a seemingly conservative 5% allocation to a private credit vehicle managed by an institution like Blue Owl or Blackstone. If that underlying private credit vehicle hits a wall and enforces a strict redemption gate, the broader 401(k) mutual fund cannot liquidate that 5% asset.

Because the 401(k) mutual fund is legally obligated to provide daily liquidity to plan participants, its managers will not attempt to force a redemption from the gated private credit firm. Instead, the mutual fund is forced to internalize the illiquidity. The book value of that 5% private credit holding will either freeze at an artificial price or slowly mark downward based on internal models.

A retiree attempting to shift capital out of the mutual fund into cash will be forced to sell their shares at a loss, permanently locking in the hidden, depressed valuation of the frozen private credit slice.

A younger worker rebalancing their portfolio to buy the dip will unwittingly pump fresh capital into a mutual fund that is forced to use that liquidity to subsidize a structurally frozen, underperforming, and illiquid asset class.

Portfolio Design: Integrating Private Credit for Long-Horizon Goals

While private credit introduces severe liquidity mismatches within daily-liquid retirement frameworks, Modern Portfolio Theory (MPT) does validate its inclusion in specialized, long-horizon portfolios.

Literature Synthesis: The Theoretical Case for Illiquidity

• Markowitz (1952): Establishes that expanding the asset menu optimizes the efficient frontier, provided the alternative asset offers a structural “alpha” or risk-adjusted return uncorrelated with the broader portfolio.

• Ang (2014): Demonstrates that institutional and long-horizon investors can harvest a distinct “illiquidity premium”—excess returns earned by holding assets that cannot be readily traded—acting as a compensated factor for capital lock-up.

• Munday et al. (2018): Provides empirical validation, showing that private credit funds historically deliver persistent outperformance relative to liquid public debt (such as high-yield bonds), justifying the underlying structural complexity and fees.

Harry Markowitz’s foundational theory demonstrates that a broader asset base can optimize an investor’s efficient frontier, maximizing returns for a given level of risk—provided that the alternative asset offers an “alpha” (excess return) that is structurally uncorrelated with the rest of the portfolio (Markowitz, 1952).

Most proposed expansions of private credit to relatively unsophisticated retail investors with limited liquidity are structurally flawed. When market volatility strikes and redemption gates slam shut, a seemingly stable asset collapses in value leaving investors a choice between taking a large loss or sitting still on an illiquid asset with uncertain future value.

For our paid subscribers, we have engineered a proprietary structural solution, which would allow for the use of a modified private credit instrument into a newly redesigned 529 account.

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· Elevated Insurance Costs: As of May 12, 2026, the 5-year breakeven inflation rate has climbed to 2.69%, placing it in the low-90s percentile of historical readings. This indicates that inflation protection is currently “expensive” relative to history.

· Near-Term Anxiety: The rise in the 5-year breakeven (+24 bps since February) has outpaced the 10-year breakeven (+17 bps), suggesting the market is more concerned with immediate geopolitical shocks than a permanent shift in long-term inflation.

· The “Liquidity Trap”: Breakeven rates are not pure forecasts of inflation expectations. During periods of market stress, TIPS often become less liquid, which can artificially depress breakeven rates and mask true inflation expectations.

· Instrument Mismatch: While individual TIPS offer robust protection, many 401(k) investors are forced into TIPS ETFs. These funds lack the fixed-maturity certainty of individual bonds and expose investors to price volatility when real interest rates rise.

· The Tax-Deferral Advantage: For the first $10,000 of annual savings, I Bonds often outperform TIPS in taxable accounts by acting as a “pseudo-IRA,” allowing for up to 30 years of tax deferral.

· Hedging Limits: Recent 2026 research indicates that inflation-linked bonds provide significant, but not absolute, protection; a diversified mix including nominal bonds and equities remains essential for managing real portfolio volatility.

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Introduction

A recent Wall Street Journal article observed that market-based inflation expectations and the cost of purchasing inflation insurance have risen since the start of the Middle East war. The article focuses on the relationship between yields on Treasury Inflation-Protected Securities (TIPS) and yields on conventional Treasury securities of the same maturity. The difference between these two yields is known as the breakeven inflation rate.

The article reports that the 5-year breakeven inflation rate recently rose to roughly 2.7 percent and the 10-year breakeven inflation rate to roughly 2.5 percent. In practical terms, this means investors are currently paying more for inflation protection than they were before the recent oil and geopolitical shock.

This memo expands on the article by more fully explaining the measurement of the potential cost and breakeven point associated with the use of TIPS versus conventional bonds inside a portfolio, examining the time trend and factors impacting the cost of inflation insurance, and discussing the cost shift associated with the ongoing war in the Mideast.

Research Note: To support this analysis, I have curated a technical Annotated Bibliography (available below the paywall) that aggregates Federal Reserve research, peer-reviewed performance studies, and structural comparisons of TIPS and Series I Bonds to help investors evaluate the strategic role of these assets in a diversified portfolio.

The goal is to provide a practical framework for deciding when inflation protection appears cheap or expensive relative to history.

Background on TIPS and Breakeven Inflation

A nominal Treasury bond promises fixed coupon and principal payments in ordinary dollars. If inflation turns out to be higher than expected, the purchasing power of those payments declines.

A TIPS bond promises a real return. Its principal is adjusted over time with changes in the Consumer Price Index (CPI). Coupon payments are calculated as a fixed percentage of this inflation-adjusted principal. At maturity, the investor receives the greater of:

• The inflation-adjusted principal, or

• The original principal.

This structure protects against unexpected CPI inflation.

A basic relationship used to compare conventional and TIPS securities, which is used to find a breakeven point is:

Breakeven inflation = nominal Treasury yield − TIPS real yield

For example, if a 10-year nominal Treasury yields 4.47 percent and a 10-year TIPS yields 2.00 percent, the 10-year breakeven inflation rate is approximately 2.47 percent.

If CPI inflation averages more than 2.47 percent over the next ten years, the TIPS should outperform the nominal Treasury when both are held to maturity. If inflation averages less than 2.47 percent, the nominal Treasury should outperform.

The breakeven inflation rate therefore represents the market price of inflation insurance.

Breakeven points are not pure inflation forecasts. The breakeven point can be expressed as:

Breakeven inflation = expected inflation + inflation risk premium − TIPS liquidity premium

• Expected inflation reflects the market’s best estimate of future CPI inflation.

• Inflation risk premium reflects how much investors are willing to pay to hedge inflation uncertainty.

• TIPS liquidity premium reflects the fact that TIPS are often less liquid than nominal Treasuries.

As a result, a rise in the breakeven point can reflect --higher expected inflation, a higher premium for inflation insurance, improved TIPS liquidity or some combination of these factors.

Similarly, sharp declines in a breakeven point during crises may reflect market dislocations rather than a genuine collapse in inflation expectations.

The breakeven inflation rate can be viewed as a market-based measure of the cost of inflation protection, because it reflects expected inflation, the premium investors are willing to pay for inflation insurance, and liquidity differences between TIPS and nominal Treasuries.

Analysis

The principal market-based inflation compensation series published by the Federal Reserve and available through FRED begin in January 2003. This start date reflects the maturation of the Treasury Inflation-Protected Securities (TIPS) market rather than an arbitrary limitation of the data.

The U.S. Treasury first issued Treasury Inflation-Protected Securities (TIPS) in 1997, but the market was initially small and relatively illiquid. Five-year TIPS were not introduced until 1999, and several years of issuance and trading activity were required before the Federal Reserve could construct reliable constant-maturity real yield series.

By 2003, the market had become large and liquid enough for breakeven inflation rates to be interpreted as meaningful market indicators. In principle, approximate breakeven measures can be constructed back to 1997. In practice, most analysts focus on the post-2003 period because earlier data are more heavily affected by thin trading and unstable liquidity premia.

The main FRED breakeven series now provide more than two decades of market history.

5-Year Breakeven Inflation Rate

• Historical low: -2.24% (November 2008)

• Historical high: 3.59% (March 2022)

• Current reading (May 12, 2026): 2.69%

• Approximate percentile: low-90s percentile

10-Year Breakeven Inflation Rate

• Historical low: 0.04% (November 2008)

• Historical high: 3.02% (April 2022)

• Current reading (May 12, 2026): 2.47%

• Approximate percentile: mid-80s percentile

The current breakeven points are both high with the breakeven point highest at the 5-year maturity. Both measures are well above their long-term medians but remain below the peaks reached during the 2021–2022 inflation surge.

Breakeven inflation rates are highly sensitive to changes in growth expectations, commodity prices, and market liquidity.

Great Recession (December 2007 to June 2009)

Before the financial crisis, both 5-year and 10-year breakeven points were generally in the low-2 percent range.

During the crisis:

• 5-year breakeven fell to -2.24% in November 2008.

• 10-year breakeven fell to 0.04% in November 2008.

These extraordinary declines reflected falling growth expectations, collapsing commodity prices, severe liquidity stress, and forced selling of TIPS. The negative 5-year breakeven almost certainly understated true long-term inflation expectations because of temporary market dysfunction.

COVID Recession and Inflation Surge (2020–2022)

Breakeven points dropped sharply during March 2020 as financial markets seized up and investors sought liquidity.

Following aggressive fiscal and monetary stimulus, breakeven rates rebounded rapidly and later rose to record highs during the 2021–2022 inflation surge:

• 5-year breakeven reached 3.59% in March 2022.

• 10-year breakeven reached 3.02% in April 2022.

These peaks coincided with strong demand, supply-chain disruptions, and a sharp increase in global energy prices.

Recent Geopolitical Shock (February to May 2026)

As of May 12, 2026, market-based inflation protection is noticeably more expensive than it was in February 2026, before the recent oil and geopolitical shock.

• The 5-year breakeven rose from 2.45% to 2.69%, an increase of 24 basis points.

• The 10-year breakeven rose from 2.30% to 2.47%, an increase of 17 basis points.

The increase is larger at the 5-year horizon than at the 10-year horizon. This suggests that markets are more concerned about near-term inflation pressures than about a permanent shift in long-term inflation expectations.

Interpretation and Investment Implications

Current market pricing indicates that investors expect somewhat higher inflation over the next several years, but the recent oil and geopolitical shock has not, at least yet altered long-run inflationary expectations as much as previous events.

Inflation compensation is elevated but remains below the extreme levels reached during the post-pandemic inflation episode.

For many small investors, an annual allocation to Series I Savings Bonds provides a reliable, low-volatility inflation hedge with unique tax advantages. However, it is a significant limitation of the current financial landscape that I Bonds cannot be held within retirement accounts—the primary vehicle for investable funds for most households. Furthermore, while individual TIPS can be held in IRAs, many 401(k) plans restrict participants to mutual funds or ETFs. These “perpetual” TIPS funds lack a fixed maturity date, exposing investors to interest rate volatility that can offset inflation gains, unlike the stable principal of an I Bond or the guaranteed outcome of an individual TIPS bond. This creates a strategic dilemma: investors must choose between the direct inflation protection of I Bonds in taxable accounts or the often-imperfect fund-based protection available in employer-sponsored retirement plans.

The central investment implication is that Treasury Inflation-Protected Securities (TIPS) are generally most attractive when inflation protection can be purchased before inflation concerns become widely recognized and incorporated into market prices. Like other forms of insurance, inflation protection tends to be cheapest when perceived risk is low and most expensive after the threat has become obvious.

TIPS therefore serve two distinct roles. Strategically, they help preserve purchasing power by linking principal and interest payments to the Consumer Price Index. Tactically, they may offer particularly attractive value when breakeven inflation rates are low relative to historical norms and real TIPS yields are positive.

At present, breakeven inflation rates are elevated, indicating that inflation insurance has become more expensive since February 2026. This does not eliminate the strategic case for holding TIPS, but it does suggest that the market has already incorporated a meaningful increase in near-term inflation concerns.

Author’s Note: The Inflation Protection Research Series

The following annotated bibliography provides a technical roadmap for investors seeking a more complete understanding of this instrument. The bibliography reviews articles published by government and academic economists covering issues related to the breakeven concept, TIPS and Series I securities, market anomalies, and studies on their use inside portfolios.

Annotated Bibliography: TIPS, I Bonds, and Inflation Dynamics

I. Foundational Mechanics and Data Sources

Sources focused on the technical definition, calculation, and raw data of breakeven inflation.

Federal Reserve Bank of St. Louis – FRED (Federal Reserve Economic Data) The primary repository for the 5-Year [T5YIE] and 10-Year [T10YIE] Breakeven Inflation Rates. These series represent the market’s inflation expectations derived from the difference between nominal and real Treasury yields. They are the industry standard for real-time monitoring of inflation protection costs.

https://fred.stlouisfed.org/series/T5YIE

U.S. TreasuryDirect – “TIPS vs. I Bonds: A Comparison” This is the primary regulatory source for distinguishing between the two securities including a discussion of annual purchase limits and yields. There is a $10 k limit with some leeway on Series I and a multi-million dollar limit on TIPs. TIP yields are determined by market auctions and can be negative. Series I bond yields are never negative.

https://treasurydirect.gov/research-center/history-of-savings-bond/comparing-tips-to-i/

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Introduction

The political debate over student debt is trapped in the same kind of ideological and legal stalemate that has long frustrated health care reform, a similarity which results in this essay being analogous to a previous one on the use of the reconciliation process to move health care reform forward.

Progressive student debt proposals rely on broad loan forgiveness that is poorly targeted and fiscally expensive. Many student borrowers do not require large-scale debt cancellation, and the budgetary resources devoted to blanket forgiveness are needed for other national priorities. The Biden Administration’s most ambitious discharge efforts were based on contested legal authority and were quickly struck down by the courts.

Republicans moved sharply in the opposite direction. The student loan repayment system enacted in the 2025 tax bill replaced the SAVE plan with a more restrictive Repayment Assistance Plan (RAP). As a result, Republicans now own both the design of the current system and its consequences.

Recent analyses on this Substack have documented several shortcomings in the new framework:

• RAP repayment periods and total borrower costs are substantially higher, even for borrowers with relatively modest balances.

• Failure to index RAP parameters to inflation will steadily erode the value of available relief.

• Current RAP rules create a significant marriage penalty.

• New borrowing limits on conventional loans impose severe costs on physicians and other professionals during extended training periods.

• Longer repayment periods and the near elimination of forbearance options are likely to increase the number of workers entering retirement with outstanding student debt.

Both political parties have become overly reliant on income-driven repayment (IDR) as the principal mechanism for managing student debt. IDR programs are also administratively complex and discharges do not always occur in a timely manner

The current RAP program requires 360 qualifying monthly payments before discharge, with little or no allowance for forbearance. This structure is likely to result in a growing number of workers entering retirement still carrying student debt a problem which already exists based on a WSJ finding that the average person defaulting on student loans is already nearly 40 years old.

This paper outlines a third-party tax reconciliation approach to student debt that reduces reliance on IDR and encourages faster repayment through conventional amortizing loans. The central objective is to help borrowers eliminate student debt early in their careers so they can begin saving for retirement, purchasing homes, and building long-term financial security. This objective is particularly important for younger workers who may face reductions in future Social Security benefits and therefore will need to accumulate more private savings.

A core principle of this proposal is that student debt reform must balance the interests of borrowers and taxpayers. Borrowers need a repayment system that is fair, predictable, and structured to eliminate debt early in life rather than extending repayment into middle age and retirement. Taxpayers, however, also deserve assurance that federal student lending will remain fiscally responsible and that relief will be targeted toward borrowers who genuinely need assistance.

The current political debate often treats these goals as mutually exclusive. Broad forgiveness proposals can expose taxpayers to very large costs with little targeting, while highly restrictive repayment systems can impose unnecessary burdens on borrowers and increase defaults. The reforms proposed here are designed to strike a middle path: provide substantial liquidity and repayment assistance during the years when borrowers are most financially constrained, while encouraging principal reduction and limiting long-term taxpayer exposure.

The key design principle is straightforward: government support should be concentrated at the beginning of repayment, when it is most effective, and should diminish over time as borrowers gain earning capacity.

The Third-Party Approach

Provision One: Zero-Interest Period for Conventional Loans

All new federal student loans should carry a zero percent interest rate during the first three years of repayment. Borrowers currently in an IDR program who elect to convert to a conventional repayment schedule should also receive a three-year zero-interest period beginning at the time of conversion.

The first several years after graduation are the period when borrowers are most financially constrained. Earnings are lower, housing costs are high, and many borrowers are establishing households and families. Eliminating interest during this period allows all payments to reduce principal directly, substantially accelerating debt reduction.

This reform allows borrowers to initially choose conventional repayment and only move to the IDR option if the conventional option is unaffordable.

The temporary zero-interest period is designed to be fiscally disciplined. Rather than providing indefinite subsidies, the government offers concentrated support during the first three years of repayment, when borrowers are least able to absorb interest costs. By accelerating principal reduction, this temporary subsidy may reduce defaults and future discharge costs.

Provision Two: Repeal the Student Loan Interest Deduction

The federal tax deduction for student loan interest should be repealed.

This deduction primarily benefits upper-middle-income households and provides limited assistance to borrowers facing the greatest financial strain. Because Provision One eliminates interest during the first three years of repayment, most borrowers would receive greater benefits from the zero-interest period than from the existing tax deduction.

Borrowers with existing loans could be grandfathered under current law to avoid concerns about retroactive changes. Alternatively, the deduction could be phased out gradually over several years.

Repealing this deduction offsets part of the cost of the broader reform package and helps ensure that taxpayer resources are concentrated on provisions that directly accelerate repayment.

Provision Three: Delay Eligibility for RAP

Borrowers should not be eligible to enter RAP until they have made three years of payments under a conventional repayment schedule.

Because loans would carry a zero percent interest rate during this period, borrowers would have a meaningful opportunity to reduce principal before entering a long-term IDR program.

This approach ensures that IDR serves as a true safety net rather than the default repayment option for nearly all borrowers.

Requiring three years of conventional repayment protects taxpayers by reserving long-term repayment assistance for borrowers who continue to face genuine financial constraints after making a substantial initial effort to repay.

Provision Four: Five Percent Principal Reduction for Borrowers Who Refinance into the Private Market

Borrowers with either RAP loans or conventional Direct Loans should be eligible for a one-time principal reduction equal to 5 percent of their outstanding federal student loan balance if they refinance their loans into a private student loan after making at least 60 months of on-time payments.

This provision is designed to align borrower incentives with taxpayer interests while encouraging a gradual transfer of seasoned loans from the federal balance sheet to private lenders.

From the borrower’s perspective, the 5 percent reduction provides a meaningful incentive to refinance after establishing a solid repayment history. By that point, many borrowers will have improved credit profiles and more stable earnings, allowing them to qualify for lower-cost private financing.

From the taxpayer’s perspective, this proposal reduces long-term federal exposure by encouraging borrowers to move performing loans into the private market. A limited one-time subsidy may substantially reduce the number of borrowers who remain in RAP for 20 to 30 years and ultimately qualify for partial or full discharge.

The 60-month requirement is not arbitrary. Five years of on-time payments demonstrates a sustained commitment to repayment and provides borrowers sufficient time to stabilize their financial circumstances. It also ensures that the federal government does not subsidize immediate refinancing by borrowers who would likely have exited the federal system without additional incentives.

The principal reduction should be applied directly to the borrower’s federal loan balance immediately before refinancing.

This approach treats federal assistance as a targeted off-ramp from long-term federal repayment programs rather than an open-ended promise of eventual forgiveness. Borrowers receive a clear incentive to eliminate federal debt more rapidly, while taxpayers benefit from reduced credit risk and lower long-term subsidy costs.

Provision Five: Separate RAP Payment Schedules for Married and Single Borrowers

RAP should include distinct payment schedules for married and single borrowers to eliminate the current marriage penalty.

Under current rules, many couples face sharply higher payments after marriage because household income is combined and the RAP percentage is applied to total household income. This discourages marriage and creates inequities between similarly situated borrowers.

A more rational system would widen the lower payment brackets for married couples and apply repayment percentages marginally rather than to all income once a threshold is crossed.

Eliminating the marriage penalty does not increase taxpayer subsidies indiscriminately. Instead, it corrects a structural distortion that penalizes family formation and often pushes borrowers into private refinancing or strategic tax filing decisions. A marriage-neutral system better aligns payments with actual ability to pay while preserving repayment obligations.

A detailed analysis of this issue appears in the Substack article, https://www.economicmemos.com/p/how-to-fix-the-rap-student-loan-marriage.

Provision Six: Index All RAP Parameters to Inflation

All RAP payment thresholds, protected income amounts, and related parameters should be automatically indexed to inflation.

Without indexing, inflation steadily reduces the real value of income protections, causing borrowers to pay a larger share of their earnings over time.

Automatic indexing would preserve the intended structure of the program and prevent hidden benefit reductions.

Indexing does not create new subsidies. It simply maintains the original balance between borrower and taxpayer obligations that Congress intended when the program was enacted.

A discussion of the failure to link RAP payments to inflation appears in this Substack article, https://www.economicmemos.com/p/inflation-and-the-rap-trap-how-rising

Provision Seven: Fixed 4.5 Percent Interest Rate on Federal Student Loans

Federal student loans should carry a fixed 4.5 percent interest rate rather than rates linked to the May 10-year Treasury yield.

The federal government is better equipped than individual borrowers to absorb interest-rate risk. Market-based rate adjustments create unnecessary volatility and can significantly increase borrowing costs during periods of higher interest rates.

A stable 4.5 percent rate would provide predictability and reduce borrowing costs without introducing significant fiscal risk.

The objective is not to eliminate taxpayer compensation but to establish a stable and transparent rate that preserves a reasonable federal return while protecting borrowers from excessive interest-rate fluctuations.

Provision Eight: Treasury or IRS Installment Plans After 20 Years

Borrowers who still carry balances after 20 years of repayment should be allowed to transfer those balances to a Treasury or Internal Revenue Service installment plan with a very low interest rate.

This reform would:

• Provide a simplified collection system.

• Lower interest costs for older borrowers.

• Reduce administrative burdens on the Department of Education.

• Prevent defaults among borrowers approaching retirement.

This approach also recognizes that, under current law, forgiven student debt may generate tax liabilities, meaning many borrowers ultimately owe money to the Treasury regardless.

Taxpayers benefit because Treasury and IRS installment systems are well established and may improve collection rates while reducing administrative costs.

Provision Nine: Reform Chapter 13 Bankruptcy Treatment

Chapter 13 bankruptcy plans should be required to allocate a meaningful share of disposable income to student loan repayment.

Under current practice, unsecured creditors such as credit card issuers may receive substantial payments while student loan balances continue to grow. Requiring some payment toward student debt would improve repayment outcomes and better reflect the public nature of federal student lending.

Because this reform affects federal loan recovery rates, it may be suitable for inclusion in budget reconciliation legislation, subject to parliamentary review.

Budget Reconciliation Considerations

Budget reconciliation rules limit legislation to provisions with direct effects on federal spending or revenues. Most proposals outlined in this paper should satisfy this requirement because they alter:

• Federal loan subsidy costs.

• Tax expenditures.

• Interest receipts.

• Loan recovery rates.

• Treasury collection revenues.

Some provisions, particularly bankruptcy reforms, may face procedural scrutiny under the Byrd Rule. However, the majority of the package appears well suited for reconciliation.

Conclusion

The student debt debate has become polarized between expansive forgiveness proposals and increasingly burdensome repayment systems. Both approaches rely too heavily on income-driven repayment and postpone debt resolution far into borrowers’ working lives.

A third-party tax reconciliation approach offers a more practical alternative. By providing a temporary zero-interest period, encouraging early principal repayment, indexing repayment protections, eliminating marriage penalties, and creating a low-cost Treasury payment option for older borrowers, policymakers can help borrowers retire their debt much earlier.

This proposal rejects both indiscriminate loan forgiveness and excessively punitive repayment systems. The goal is to create a student loan framework that offers targeted assistance when borrowers are most vulnerable while preserving strong incentives for repayment and protecting taxpayers from unnecessary long-term subsidy costs. Student debt reform should be judged not only by how much relief it provides, but by whether it balances fairness to borrowers with responsible stewardship of public resources.

Although this paper does not address every problem in the federal student loan system, some issues -- such as the financing challenges faced by physicians and other professionals during lengthy training periods -- deserve further attention. These borrowers often carry exceptionally large balances while earning relatively modest incomes during critical early career years. The reforms proposed here substantially improve their circumstances, but additional targeted measures may be warranted. No single reconciliation package can solve every problem simultaneously. The objective of this paper is to identify a practical set of reforms that materially improves the current system while remaining fiscally responsible and legislatively achievable.

The central goal is straightforward: student debt should be a temporary obligation that facilitates educational opportunity, not a financial burden that persists into middle age and retirement.

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The Middle East remains defined by active conflict and unresolved security challenges, including the continuing closure of the Strait of Hormuz, Hamas’s refusal to disarm, Iran’s continued proxy activity, reports of Hamas personnel being trained in Turkey, ongoing threats to U.S. partners in the Gulf, and a fragile ceasefire in Lebanon. In the United States, especially in New York, there is rising antisemitism, protests at the doors of synagogues, and political figures increasingly shaped by primary electoral incentives rather than substantive policy or security concerns. The result is a widening disconnect between regional security realities and the domestic political narratives used to interpret them.

Memo

The Middle East today remains an active and unstable security environment, with direct consequences for both Israel and the Gulf allies of the United States. Hamas continues to refuse disarmament in Gaza, Iran maintains pressure through regional proxy networks including Hezbollah, and there have been reports of facilitation or training links involving Hamas personnel in Turkey. At the same time, several Gulf states continue to face attacks attributed to Iran, even as broader ceasefire arrangements remain fragile. Against this backdrop, political discourse in parts of the United States increasingly fixates on symbolic debates over Israel and Palestine while engaging only selectively with broader regional security concerns.

Nowhere is this more visible than in recent controversies surrounding protests at synagogues in New York City and debates over buffer-zone enforcement intended to protect houses of worship. In some instances, political rhetoric has blurred the line between protected protest and conduct perceived by many as intimidation, including the surrounding or targeting of religious institutions.

This tension also exposes a difficult constitutional boundary between freedom of speech and freedom of religion. Democratic societies traditionally protect broad political expression, including protest directed at controversial institutions or events. At the same time, once political actors begin effectively policing what may or may not be discussed within houses of worship—or tolerate sustained pressure campaigns directed at religious institutions because of the views expressed there—they risk crossing a line that undermines the autonomy and protected status of religious spaces themselves.

It is in this space that figures such as Jack Schlossberg have drawn attention, reflecting the pressures of navigating competing political constituencies. His attempt to condemn antisemitic rhetoric while also criticizing a synagogue-hosted real estate event illustrates the broader tension: an effort to maintain balance in a polarized environment that can appear less like policy clarity and more like political calibration. For some observers, this reflects responsiveness to multiple audiences; for others, it suggests a preference for positioning over decisive moral or policy clarity.

The reaction is particularly notable given his family legacy. His grandfather, President John F. Kennedy, authored Profiles in Courage, a study of political leadership defined by moral clarity under pressure. In contrast, the current environment often appears less concerned with courage in governance than with minimizing political risk. Whether this reflects a modern “profiles in cowardice,” a structural incentive toward caution, or simply a political culture that prioritizes messaging over substance remains an open question.

More broadly, criticism of West Bank-related real estate activity often reflects a disconnect from the underlying strategic geography of the region. Communities such as Ma’ale Adumim, Gush Etzion, and Ariel are not remote abstractions but are located in close proximity to Israel’s population centers. Ma’ale Adumim lies only a few miles east of Jerusalem, Gush Etzion sits just south of the city, and Ariel is roughly 25–30 miles from Tel Aviv, placing it within the broader commuting and security corridor of central Israel.

Past negotiations, including proposals in 2000 and 2008, reflected this geographic logic by envisioning Israeli retention of major settlement blocs near the Green Line in exchange for territorial swaps elsewhere. The 2005 withdrawal from Gaza, in which Israel removed all settlements and military presence, remains a defining reference point in Israeli strategic thinking, particularly in light of the October 7 attacks, which reshaped perceptions of territorial withdrawal and security vulnerability.

A central but often underemphasized driver of the shifting political and security landscape in the Middle East is the role of Iran. Across the region, Iran’s activities -- through direct military capabilities and a wide network of aligned non-state actors -- are widely viewed by Arab governments, Israel, and many outside observers as a destabilizing force. This perception has contributed to an unusual but increasingly visible convergence of interests among states that were historically divided by other disputes, including the Israeli Palestinian conflict. While the Palestinian question remains unresolved and deeply significant, it is no longer the only or even always the primary axis through which regional actors interpret security threats.

What is striking is that this shift is broadly understood in much of the region but is often only partially reflected in parts of American political discourse, particularly in highly localized political environments such as New York City. There, debates frequently center on symbolic positioning and domestic electoral dynamics, while the broader strategic reordering driven by shared concerns over Iranian power projection receives comparatively less attention. The result is a divergence in emphasis: what is seen in the Middle East as a central organizing security issue is often treated in American politics as a secondary or abstract concern.

These domestic political dynamics are not cost-free internationally. Statements about Israel, Iran, or regional military engagement crafted primarily for domestic primary audiences are closely watched by allies and adversaries alike. Israeli policymakers confronting immediate security pressures, along with Gulf states concerned about Iranian expansionism or a potential U.S.–Iran accommodation, evaluate not only formal policy decisions but also the consistency and credibility of American political rhetoric.

The broader strategic concern is not simply rhetorical inconsistency but the effect such inconsistency can have on regional calculations about American staying power and deterrent credibility. During earlier Middle East crises, including the 1973 war, U.S. commitments were understood by allies and adversaries alike to carry operational and political weight, allowing Washington to exercise both reassurance and restraint. Today, by contrast, mixed signals within American political discourse can encourage uncertainty across the region. Adversaries may conclude that American resolve is weakening or temporary, while allies may increasingly feel compelled to act independently if they believe U.S. support is conditional, politically unstable, or subject to rapid domestic reversal.

This divergence produces an unusual inversion in perspective. Many actors in the region -- Arab governments, Israeli policymakers, and others directly exposed to these security dynamics -- now operate within a framework shaped significantly by deterrence and shared threat perception. Meanwhile, segments of American political discourse remain more focused on intra-party positioning and local political signaling than on the underlying structural forces driving regional alignment.

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Introduction:

A recent post at this blog, Student Loans and the Marriage Incentive Problem, showed that the newly enacted Repayment Assistance Plan (RAP) creates a substantial marriage penalty for people with student debt. While the program was intended to streamline the federal system, its mechanical design creates a massive “marriage tax” for couples walking down the aisle in 2026. This post documents the financial impact of marriage on borrowers and proposes specific policy fixes to restore marriage neutrality to our student loan system.

The RAP Program:

Two differences between the new RAP student loan program and previous Income Driven Replacement (IDR) loan programs create a financial penalty for married people, which discourages people to get married when one or more person, have student debt.

Previous Income-Driven Repayment (IDR) plans were based on “discretionary income”—a concept that shielded a portion of your earnings (usually 150% to 225% of the poverty line) from any payment calculation. RAP eliminates this shield. Instead, it applies a graduated payment percentage to your entire household Adjusted Gross Income (AGI), thereby increasing student debt payments when household income rises due to marriage.

RAP uses a graduated payment schedule tied to income and applies the repayment percentage directly to total income.

The Current Graduated Tiers:

• Up to $10,000: $10 monthly minimum

• $10,001 – $30,000: 1% of total AGI

• $30,001 – $50,000: 4% of total AGI

• $50,001 – $75,000: 7% of total AGI

• $75,001 – $100,000: 9% of total AGI

• Over $100,000: 10% of total AGI

RAP is an “all-or-nothing” system: once your income hits a new tier, the higher percentage applies to every dollar you earn, not just the incremental amount. Because these rates apply to the entire household income and lack an incremental structure, marriage acts as a “bracket-shifter” that can instantly double or triple a borrower’s monthly bill.

Additional features of RAP (beyond the income calculation and tier structure):

• Minimum payment requirement of $10 per month, including for very low-income borrowers

• Interest waiver: waives interest when a borrower’s required payment does not fully cover accruing interest

• Principal reduction support: up to $50 per month may be applied toward principal even when payments are low

• Negative amortization protection: loan balances are prevented from growing due to unpaid interest

• Forgiveness after 360 months (30 years) of qualifying payments

• Elimination of most deferment options for newer loans, including unemployment and economic hardship deferments

• Forbearance limits: capped at 9 months within any 24-month period

• Dependent credit: $50 monthly payment reduction per qualifying dependent

• Spousal income integration: household income used when filing jointly

• Spousal allocation rule: when both spouses have RAP loans, total payments are divided based on relative loan balances

The Marriage Penalty

The RAP program replaces multiple previous IDR programs to create a simpler repayment framework, but it introduces a severe financial penalty when one or more individuals enter a marriage with RAP student debt.

A Representative Case Study

Consider a graduate with $35,000 in RAP debt earning $40,000 a year. As a single filer, they pay $133/month (4% tier). They marry a partner with no debt who also earns $40,000. Together, their $80,000 AGI pushes the borrower into the 9% tier.

• Current RAP Penalty: Their payment jumps to $600/month.

The severity of this payment spike isn’t uniform; it depends entirely on how a couple’s debt is distributed, whether one or both spouse has debt and how much debt.

While this higher payment technically reduces the loan balance quicker and speeds up repayment, it comes at a significant cost. This involves one spouse effectively subsidizing the other, which is fundamentally unfair. More importantly, for a young couple starting a life together, this jump is often unaffordable and creates a massive liquidity crisis.

Beyond the Baseline: The Need for Empirical Research

While the example above illustrates the mechanical “jump” caused by the RAP tiers, the real-world impact varies wildly across different household configurations. We must acknowledge the vast array of student debt pairings that face unique financial hurdles:

• The Debt-Asymmetry Gap: A physician with high debt but high earning potential marrying an educator with modest debt.

• The Dual-Professional Trap: An MBA and a JD both entering marriage with six-figure balances, where combined incomes trigger the maximum 10% “success tax” on every dollar earned.

• The Low-Income Liquidity Squeeze: Two public service workers whose combined income barely crosses a tier threshold, yet triggers a payment increase that wipes out their ability to save for basic emergencies.

The sheer variety of these combinations—where debt levels, interest rates, and income disparities collide—highlights a critical gap in our current policy understanding. Detailed empirical research on marriage penalty examples is urgently needed to quantify how many households are being forced into “strategic non-marriage” or private refinancing simply to survive the RAP algorithm.

Potential Policy Fixes:

To keep the RAP program from becoming a deterrent to family formation, we need to restructure the engine under the hood using three distinct pillars.

We can reduce the marriage penalty with two adjustments.

First, the payment percentage on the RAP loan should be applied to incremental income above each new tier rather than total income.

Second, the bottom bracket or brackets could be widened. For example, the lowest bracket would be $10,000 if single and $20,000 if married with the higher married brackets shifted up by $10,000.

By implementing a $20,000 floor and shifting to marginal brackets, the payment in our case study would drop from $600 to approximately $210/month.

The married couple still pays more than the single filer ($210 vs. $133), but the increase is indexed to their actual ability to pay. This preserves essential household liquidity while still ensuring a faster repayment track than the single filer—creating a “marriage neutral” system that benefits both the family and the taxpayer.

The analysis here centers on one representative couple but there are countless other cases defined by various asymmetries in debt and income, which wil produce different outcomes.

The RAP modifications considered here are not the only way to fix the marriage penalty and do not correct for the full range of problems.

Conclusion: On the need to fix a poorly designed program

The marriage penalty is not an isolated glitch; it is a structural symptom of a program that is fundamentally poorly designed. I have written extensively on the various “RAP Traps” that now define the federal student loan landscape, and the picture they paint is increasingly draconian:

The RAP brackets are not indexed to inflation, meaning that as nominal wages rise, borrowers are pushed into higher repayment tiers even as their real purchasing power stays flat. See this paper on how inflation will fairly quickly undermine the RAP program.

The program’s reliance on AGI effectively discourages the use of Roth assets, forcing a choice between long-term financial health and immediate monthly survival.

The RAP program can result in four times the cost and twice the time to repay compared to the now defunct SAVE plan for many borrower with relatively modest income and debt levels.

Most student borrowers starting their careers face two primary hurdles: relatively low initial salaries and a desperate need for liquidity to start a family. While politicians across the spectrum, including our Vice President, consistently emphasize the importance of young adults forming families, the reality is the current RAP program does not work on a wide range of levels including incentivizing marriage.

Author’s Note: Going on vacation for a couple of weeks but when I return one of the first items on the agenda will be the creation of a paper listing the provisions of a tax reconciliation bill that will modify the RAP program, to rectify these problems. This is entirely feasible and consistent with Senate rules, because as you know RAP itself was enacted through the reconciliation process. In the meantime, you have access to a blog with a lot of timely information on policy personal finance and politics.

· The Pardon Power: From Hamilton’s Mercy to Political Currency

· The 2026 Midterm Outlook: Structural Shifts to Policy Stalemate

· Crucial Financial Decisions

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“He is also to be authorized to grant ‘reprieves and pardons for offenses against the United States, EXCEPT IN CASES OF IMPEACHMENT.’ Humanity and good policy conspire to dictate, that the benign prerogative of pardoning should be as little as possible fettered or embarrassed.”

— Alexander Hamilton, Federalist No. 74 (1788)

The abuse of the pardon is a documented systemic failure. Predecessors in both parties have exploited the power for personal or political ends:

Bill Clinton ignited a firestorm with the last-minute pardon of billionaire fugitive Marc Rich (whose wife was a major Democratic donor) and HUD Secretary Henry Cisneros, who had pleaded guilty to lying to the FBI during his background check.

Joe Biden faced backlash for commuting the sentence of Michael Conahan, the “kids-for-cash” judge, and for the 2024 full pardon of his son, Hunter Biden.

Donald Trump has taken abuse of the process to a new level, as documented in the memo The Pardon Power is Broken with two of the most troubling examples the pardoning of January 6 rioters and the 2025 pardon of Changpeng Zhao -- the crypto billionaire whose company provided infrastructure for a Trump-affiliated venture. When a pardon directly enriches the President’s own sphere, mercy becomes a transaction.

Perhaps most illustrative of the “mercy as transaction” model was the late 2025 pardon of Democratic Representative Henry Cuellar. By pardoning a political opponent, the executive effectively neutralized a bribery investigation with hopes of getting Cuellar to switch parties. Leader Hakeem Jeffries’ view on the pardon was “the right outcome has been achieved,” and Cuellar remained a Democrat.

The system is broke and can’t be fixed by Congress and the courts, partially because neither Congress nor the courts want to fix the system but also because the Supreme Court has ruled in cases like Ex parte Garland that the pardon power is “not subject to legislative control.” Any meaningful change requires a Constitutional Amendment.

In February 2026, Representatives Johnny Olszewski (D-MD) and Don Bacon (R-NE) introduced a Constitutional Amendment known as the Pardon Integrity Act. Their approach relies on a Congressional Veto, requiring a two-thirds supermajority to nullify a pardon.

While some scholars argue that even an amendment could be challenged for violating the “basic structure” of separation of powers, there is no historical precedent for a ratified amendment being overturned.

While the Pardon Integrity Act (2026) proposed by Representatives Olszewski and Bacon seeks to restrain executive overreach through a reactive “Congressional Veto,” my proposal advocates for a proactive structural shift via an Independent Pardon Review Board. The Olszewski-Bacon amendment relies on a high political bar—requiring a two-thirds supermajority in both chambers to nullify a pardon within 60 days — which risks falling prey to the same partisan inertia that currently plagues the system. In contrast, an Independent Review Board would create a mandatory “sunlight” mechanism, providing a public, investigative report on all petitions before a decision is finalized. This model, similar to successful systems in Canada and the UK, shifts the focus from back-end political rejection to front-end transparency and accountability.

Furthermore, a critical distinction lies in the scope of eligibility. While the Congressional model focuses on the power to overturn, my proposal explicitly utilizes the Constitutional Amendment to prohibit pre-conviction pardons and pardons for fugitives on the lam. By ensuring the legal process reaches its conclusion before mercy can be considered, this approach eliminates the “get out of jail free” card that currently incentivizes lawlessness within the bureaucracy. While both paths require the heavy lifting of a Constitutional Amendment to bypass current Supreme Court precedents, a structural board offers a more consistent guardrail against the “transactional mercy” witnessed in recent years than a purely legislative veto.

Despite the obvious need, the two-party system is unlikely to fully disarm a power they hope to one day wield. Given this bipartisan inertia, the only path forward may be a Constitutional Convention. The two-party duopoly is not going to support this Constitutional Convention, so the first step has to be the formation of a viable third party.

Authors Note: Best to read this memo while listing to the classic song Lawyers, Guns and Money. I am on vacation for a couple of weeks. Enjoy!

#presidential pardons #Lawyers, Guns and Money

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Introduction: Achieving financial prosperity requires a series of critical structural choices made across the arc of a working life and into retirement.

Decision One: Prioritize Debt Reduction Over Retirement Savings

Mainstream advice mandates maximizing retirement contributions, yet this often ignores the high cost of mandatory debt. Sustaining long-term obligations creates a “liquidity trap” where lifetime interest on a typical $35,000 student loan can exceed $100,000, while the associated credit degradation imposes an annual $5,000 “bad credit tax” through inflated insurance premiums and subprime rates. This risk compounds during financial shocks, often necessitating a 401(k) withdrawal that triggers penalties and taxes, effectively vaporizing 40% of your hard-earned equity. Decision One argues for a strategic pivot toward total ownership, ensuring your future is built on liquidity rather than assets balanced against a mountain of debt.

Decision Two: Balance Roth vs. Conventional Contributions

For modern workers, the choice between Roth and Conventional accounts is a high-stakes balancing act between today’s survival and tomorrow’s liquidity. With health insurance subsidies and student loan payments (RAP) now tied to AGI, the wrong choice can trigger an effective marginal tax rate exceeding 50 percent. Unfortunately, the desperate measures required to survive these current costs often result in a tax-heavy retirement portfolio that cannot support an adequate standard of living. Decision Two explores how to navigate these “AGI traps” to ensure your current savings don’t become a future liability.

Decision Three: Optimize Health Savings through HSAs and FSAs

This decision involves using tax-preferred accounts to fund high out-of-pocket medical expenses. Health Savings Accounts (HSAs) are used in conjunction with qualified high-deductible plans and offer generous benefits, but low and middle-income earners often face significant difficulty funding them. Flexible Spending Accounts (FSAs), a benefit available only for employer-sponsored plans are limited by the use-or-lose stipulation. Decision Three explores the appropriate use of these accounts to bridge the gap between high-deductible mandates and actual household liquidity needs.

Decision Four: Utilize Series I Savings Bonds for Inflation Protection

Inflation is a major threat to a secure financial environment, and Series I Savings bonds are the most effective hedge against it. These bonds offer a unique composite rate that combines a fixed return with semi-annual inflation adjustments, ensuring your principal maintains its purchasing power regardless of price surges. Unlike traditional bonds, which often see their market value plummet when interest rates rise, I Bonds are non-marketable assets that protect against both valuation losses and the corrosive effects of a high-CPI environment. Decision Four examines how to integrate I Bonds into a tax-resilient portfolio and advocates for rule changes that would allow these “inflation-proof” assets to be held within IRAs and 401(k)s.

Decision Five: Roll Over 401(k) Funds to Low-Cost IRAs When Switching Jobs

Leaving retirement assets in a former employer’s 401(k) is a common mistake that exposes your savings to significant loss of funds due to fees. An annual plan fee of 1.3% can strip over $160,000 in lifetime wealth from a typical account, effectively consuming more than the annual yield of the bond portion of the portfolio. This creates a scenario of negative real returns where your savings are depleted by management costs rather than being grown by the market. Decision Five advocates for rolling these “stranded savings” into a low-cost IRA to regain investment control and eliminate administrative leakage.

Decision Six: Strategically Eliminating Mortgage Debt

The elimination of mortgage debt before retirement is a multi-stage process that often begins with a 30-year term for initial affordability but must evolve as your financial capacity grows. To avoid a permanent debt cycle, homeowners should aggressively pivot to a 15-year mortgage through refinancing when rates drop or income rises, effectively trading short-term liquidity for massive interest savings—potentially over $440,000 on a standard $540,000 loan. In the final decade of a career, the decision becomes a trade-off between maximizing “catch-up” contributions and directing surplus cash toward principal to ensure 100% equity by day one of retirement. Entering retirement debt-free is the ultimate hedge against sequence-of-returns risk; it lowers your necessary withdrawals, protecting your portfolio from market volatility and preventing the AGI spikes that trigger higher taxes on Social Security and Medicare IRMAA surcharges.

Decision Seven: Neutralizing Sequence of Returns Risk

Retirement security is often dictated by the “Retirement Date Lottery”—the simple luck of your exit date relative to market cycles. Because early-retirement crashes can permanently deplete a portfolio, a robust plan must move beyond static withdrawal rules toward dynamic resilience. Building a “floor” for essential expenses with assets that protect principal, such as Series I Savings Bonds, allows you to fund consumption during equity troughs without forcing sales at market bottoms. By replacing rigid withdrawal rules with dynamic spending and utilizing Roth assets to stabilize your AGI, you can avoid the cascading costs of IRMAA surcharges and Social Security taxation. Careful planning can prevent market volatility from determining your standard of living.

Decision Eight: Strategically Delaying Social Security Claims

The decision to claim Social Security involves a high-stakes trade-off between the immediate liquidity of smaller payments at age 62 and the guaranteed, inflation-adjusted growth offered for those who delay claiming benefits. Claiming at 62 results in a 30% reduction compared to claiming at the full retirement age. Claiming at 70 instead of the full retirement age increases benefits by 8 percent per year. These certain returns often will exceed uncertain returns in the market.

There is no one-size-fits-all solution to the question of when to claim benefits. Individuals with low levels of liquid assets may have to claim as soon as they retire. Individuals with chronic health conditions or shorter life expectancies may find that claiming early remains a more rational choice. Early claims can prevent rapid depletion of retirement assets during a market downturn and mitigate sequence risk.

Decision Nine: Converting Traditional Retirement Assets to Roth Assets

Retirees who delay Social Security while living off brokerage accounts often enter a temporary, low-marginal tax bracket. This “strategic window” allows you to convert traditional retirement assets to Roth status at a lower cost, shifting your wealth toward a tax-free future. Because traditional withdrawals are taxed as ordinary income, while brokerage sales only tax capital gains, this period is ideal for neutralizing the “tax torpedo.” Paying a modest tax toll now prevents future Required Minimum Distributions (RMDs) from inflating your income, protecting your Social Security from secondary taxation and keeping Medicare IRMAA surcharges low.

The math of these conversions often yields an internal rate of return between 28% and 30%, frequently outperforming market expectations. For instance, paying a $2,000 tax bill today can eliminate $7,000 in future liabilities within five years. This maneuver requires sufficient non-retirement assets to cover living expenses and the immediate tax liability. But beware of and obey the five-year rule.

Decision Ten: Selecting Traditional Medicare with Medigap

The choice of Medicare coverage is a high-stakes decision between the low upfront costs of Medicare Advantage and the comprehensive security of traditional Medicare.

Medicare Advantage plans often sometimes have low or zero premiums but they utilize prior authorization methods extensively and often have very restrictive provider networks. Traditional Medicare combined with a Medigap supplement is more expensive monthly, but it is accepted by 98 percent of providers throughout the nation and covers virtually all out-of-pocket costs. Crucially, choosing Traditional Medicare during initial enrollment is vital; in most states, switching back from an Advantage plan later triggers medical underwriting, allowing insurers to deny coverage or charge exorbitant rates based on pre-existing conditions.

Conclusion

True security is found in the elimination of mandatory overhead and the neutralization of tax-code penalties that target the unprepared. By prioritizing liquidity and debt-free ownership, you ensure that you control your financial destiny rather than the system controlling you.

For additional analysis on these issues go to: Ten Pivotal Decisions: A Roadmap to Financial Prosperity.

More will follow after my vacation.

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#debt, #inflation, #taxes, #health expenses

Mainstream financial planning often fails because it prioritizes the size of the “pile” while ignoring the structural traps of debt, inflation, and AGI-linked surcharges. This memo presents Ten Decisions -- a comprehensive roadmap for optimizing the household balance sheet. By shifting focus from simple accumulation to structural integrity, these ten steps provide a strategic path to neutralizing systemic risks and securing long-term liquidity.

Introduction: The Logic of Structure

Most financial advice is built on a single, flawed premise: that wealth is measured solely by the total value of your investment accounts. This “accumulation-only” mindset ignores the reality that a large portfolio cannot protect you from a high-overhead lifestyle, fee-heavy accounts, or a tax code that penalizes high Adjusted Gross Income (AGI).

To achieve true financial independence, you must look beyond the market and focus on the structure of your balance sheet. This memo outlines ten decisions which define a prosperous financial life. These steps move the goalposts from “more assets” to “better ownership” by focusing on three core pillars:

· Debt Neutralization: Moving from a life of interest payments to one of total equity.

· Tax Sensitivity: Managing AGI today to avoid “Tax Torpedoes” and premium surcharges tomorrow.

· Inflation Immunization: Protecting purchasing power through non-marketable assets like Series I Bonds.

By executing these 10 Decisions, you stop being a passive accumulator of wealth and start becoming a strategic architect of your own financial resilience.

Decision One: Prioritize Debt Reduction Over Retirement Savings

The conventional wisdom from most financial advisors is to immediately contribute to a 401(k) to at the very least capture company match. An overemphasis on saving for retirement is often a mistake for many young adults with student debt who would be much better off rapidly reducing debt.

Prioritizing debt reduction creates several long-term structural advantages:

· Interest Savings: Accelerating repayment can save tens of thousands in interest; e.g., paying off $100,000 in loans over 5 years instead of 20 could save ~$54,000.

· Credit Protection: Lower debt reduces missed-payment risk and helps preserve a strong credit score, avoiding the long-term “tax” of higher borrowing costs on mortgages, auto loans, and credit cards.

· Liquidity & Resilience: Paying down debt and building an emergency fund reduces reliance on early 401(k) withdrawals, preserving retirement savings.

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Essentially, focusing on debt today prevents you from becoming part of the growing demographic of seniors who reach age 65 still carrying mortgages and student loans. If you must save, consider a Roth IRA which allows for the withdrawal of original contributions without penalty, providing a necessary safety valve for liquidity.

Source: Younger workers need to prioritize debt reduction over saving for retirement

Decision Two: Seek a Balance Between Roth and Conventional Retirement Contributions

The traditional rule governing the decision on whether to contribute to a Roth or conventional retirement account was – choose the Roth account when your tax bracket is low and choose conventional deductible accounts when marginal tax rates are high. The logic is incomplete for workers today who may have their health insurance or their student loan linked to their adjusted gross income.

A worker claiming the premium tax credit for state exchange insurance and/or paying off a RAP student loan often has a de-facto marginal tax rate of over 50 percent, which can be substantially reduced by choosing a conventional retirement account over a Roth one. (The contribution to the conventional retirement account reduces AGI; the contribution to the Roth account does not reduce AGI.)

However, a high reliance on conventional retirement accounts, which are fully taxed in retirement can be especially detrimental, for workers who have larger distributions in retirement because they have not eliminated their mortgage. Moreover, the absence of non-taxable Roth distributions often leads to increased tax on Social Security benefits and increased premium payments.

When possible, workers should seek a balance between maintaining liquidity and savings through a Roth account. This balance will not always be achievable. Consider for example a person reliant on state exchange health insurance who would lose all health insurance unless she reduces AGI to a level below 400 percent FPL.

Pro tips:

· If possible, open and fund a Roth account when your marginal tax rate is really low and you are not purchasing health insurance or repaying a RAP student loan.

· If possible, get employer-based health insurance and a conventional student loan, neither of which are linked to AGI.

A prosperous life isn’t just about how much you save, but how much of that savings you actually get to keep when the government starts measuring your AGI in your 70s.

Source: Liquidity Today, Tax Traps Tomorrow

Decision Three: Optimize Health Savings through HSAs and FSAs

To secure a prosperous future, you must view health-related tax advantages as a core component of your investment strategy. Taking full advantage of Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) allows you to pay for predictable and unpredictable medical costs with pre-tax dollars, effectively granting yourself a 20% to 30% discount on healthcare depending on your tax bracket.

The “Triple Tax Advantage” of the HSA

If you have a High-Deductible Health Plan (HDHP), the HSA is perhaps the most powerful savings vehicle in the U.S. tax code. It offers a “triple tax advantage”:

1. Tax-deductible contributions (lowering your current AGI).

2. Tax-free growth on invested funds.

3. Tax-free withdrawals for qualified medical expenses.

Unlike other accounts, HSA funds belong to you forever; they do not expire and can eventually function as a secondary retirement account after age 65. However, as noted in recent economic analysis, current HSA structures can be improved. Many users are forced to choose between funding an HSA and a 401(k), and the lack of “pre-deductible” coverage for chronic medications can sometimes lead people to skip necessary care to save money.

The FSA: Use It or Lose It

For those without an HDHP, the Flexible Spending Account (FSA) offers similar pre-tax benefits for medical, dental, and vision costs. However, you must be cautious: FSAs are generally “use-or-lose” platforms. If you do not spend the balance by the end of the plan year (or a short grace period), the money reverts to your employer. Use these for predictable expenses like contact lenses, prescriptions, or planned dental work.

The Path to Improvement

These savings accounts increase liquidity and reduce AGI, which can increase premium subsidies or lower RAP student loan payments. However, there are limitations – the previously mentioned use-or-lose stipulation on FSAs, a tax deductibility feature which favors higher income individuals, and payment burdens caused by linking HSAs to higher deductibles.

Sources:

· Improving High Deductible Health Plans and Health Savings Accounts

· Health Savings Account (HSA) Overview - Healthcare.gov

· FSA vs. HSA: How They Compare - Mayo Clinic

Decision Four: Build a Foundation with Series I Savings Bonds

A key pillar of a prosperous life is protecting your purchasing power from the corrosive effects of inflation. The Series I Savings Bond is the best hedge against inflation and is an essential part of every portfolio.

Series I bonds can only be purchased directly from the U.S. Treasury. Unlike traditional bonds or Treasury Inflation Protection Bonds (TIPS), the Series I Bond never falls in value. Investors cannot redeem an I-Bond for the first 12 months and redemptions prior to five years result in a loss of three months of interest. There is an annual per-individual limit of $10,000 on the value of Series I bonds, which can be purchased. The limit is $20,000 for a married couple and additional purchases are possible through a trust or a business.

Performance: I-Bonds vs. Traditional Bond Funds

Research comparing a steady $500 annual investment in Series I Bonds versus a traditional investment-grade bond fund over 27 years reveals I-Bond strategy often produces competitive—and sometimes superior—outcomes.

Traditional bond funds carry market risk; when interest rates spiked after the COVID-19 pandemic, decades of gains in some bond funds were eroded. In contrast, Series I Bonds provided resilience and steady growth precisely when the market was most volatile.

Series I bonds could be a valuable source of retirement savings if the stock market and traditional bonds fall in value early in retirement.

By incorporating Series I Bonds, you aren’t just saving money; you are buying insurance against the unpredictability of the global economy.

Sources:

· Series I Savings Bonds an Essential Investment

· Series I Bonds vs. Bond Funds: 27 Years of Head-to-Head Results

· Series I Bonds: Practical Guidance, Portfolio Applications, and Policy Pathways

Decision Five: Roll Over 401(k) Funds to Low-Cost IRAs When Switching Jobs

One of the most expensive mistakes a worker can make is leaving retirement assets in a former employer’s 401(k) plan when the plan charges high fees.

An annual fee of 1% or 1.3% can result in paying over $100,000 to $166,000 in lifetime fees—wealth that should be supporting your retirement instead of the plan sponsor.

In low-interest-rate environments, these fees can even exceed the yield on the bonds in your account, leading to a negative real return.

Inactive accounts are not just losing money to fees; they are vulnerable to state “escheatment” laws. If an account is deemed abandoned, states can seize and liquidate the assets, meaning you lose out on all future market gains or in a worst case scenario lose the entire account.

When you leave a job, you should almost always roll your funds into a low-cost IRA at a reputable firm like Vanguard, Fidelity, or Schwab. This allows you to – reduce fees, and administrative burdens, gain investment control, and reduce the likelihood of escheatment.

There is some downside from this rollover strategy in that 401(k) laws are somewhat less protected from creditors.

The Policy Gap

While legislation currently proposed in Congress, the SAFER Act of 2026, attempts to limit state seizure of accounts, it ignores the more pervasive problem of fee erosion. A more effective policy fix would be universal automatic portability -- mandating that funds automatically move from high-fee employer plans to low-fee IRAs whenever a worker changes jobs. Until such a system exists, the responsibility lies with you to execute the rollover and protect your “stranded savings” from being depleted by the system.

Sources:

· How to minimize the impact of 401(k) fees

· Stranded Savings: Inactive accounts, missing rollovers, and the hidden cost of fees

Decision Six: Refinance to a 15-Year Mortgage and Retire Debt-Free

For many homeowners, a 30-year mortgage is a necessity to make the initial purchase affordable. However, staying in a long-term debt cycle into your senior years is a significant threat to financial independence. The goal is to aggressively transition to a 15-year mortgage when rates drop or your income rises, ensuring you enter retirement with 100% equity in your home.

The math is clear. Opting for a 15-year fixed mortgage on a $540,000 loan balance requires a monthly principal and interest commitment of approximately $4,585, which is $1,065 higher than the $3,520 required for a 30-year term. The 30-year mortgage is likely the only affordable option at the time of the initial house purchase.

While the 30-year option offers greater short-term household liquidity and lower mandatory monthly overhead, it results in a total interest expense of $727,200, more than doubling the $285,300 in interest paid over the shorter term. A buyer capable of using the 15-year mortgage would reduce their long-term interest obligation by $441,900 and decreases the total cost of the home from $1,267,200 to $825,300.

Home buyers who cannot initially afford payments on a 15-year mortgage should refinance if an increase in income or a reduction in rates makes the shorter term feasible.

It is essential to enter retirement without mortgage debt. Large taxable withdrawals to cover a mortgage raise your Adjusted Gross Income (AGI), which must persist regardless of market conditions. There is nothing more damaging to a secure retirement than high payment obligations occurring in a market downturn early in retirement.

The higher payments can trigger higher taxes on your Social Security benefits and lead to Medicare premium surcharges (IRMAA).

Eliminating that monthly payment before you stop working is the single most effective way to protect your retirement portfolio and maintain control over your tax destiny.

Source:

When Mortgage Debt Meets Retirement: Why Roth Assets Matter More than you think

Decision Seven: Develop a Distribution Plan to Neutralize Sequence Risk

A prosperous life is not just built on average returns; it is built on the sequence of those returns. Understanding the “Sequence of Returns Puzzle” is critical because market crashes, which occur early in retirement or at the end of a career, can have a devastating impact on retirement security.

Financial security in retirement can be determined by the simple luck of your start date.

A retiree who started in January 2000 faced two crashes, the dotcom bust followed by the 2008 crisis. The worker entering retirement in 2007 experienced one severe crash followed by a long bull market.

· The Divergence: Following the same 4% withdrawal rule, a 2007 retiree using a 100% equity portfolio could end up with 3.5x more wealth by 2025 than someone who retired just seven years earlier.

Strategies to Insulate Your Portfolio

Academic models often assume a static 4% withdrawal rate, failing to account for real-world consumption needs. Since no “silver bullet” exists for the Retirement Date Lottery, resilience requires moving beyond accumulation toward dynamic distribution:

· Prioritize deep diversification into assets that cannot lose principal value. While traditional bonds are subject to market pricing, Series I Savings Bonds provide an absolute floor, allowing you to fund life during equity troughs without selling at the bottom.

· Shift away from rigid rules. True resilience means adjusting spending based on performance—reducing withdrawals or skipping inflation bumps when the market demands capital preservation.

· Prioritize “essential” spending (housing, healthcare) from stable sources, reserving market-linked assets for discretionary goals. This protects your basic standard of living from sequence volatility.

· Use Roth assets to manage your AGI. Minimizing “cascading” costs like IRMAA premiums prevents a secondary drain on liquidity during lean market years.

Sources:

· The Sequence of Returns Puzzle: Why Timing Hurts Workers and Retirees in Opposite Ways

· Preliminary Results: The Retirement Date Lottery

· When Higher Withdrawal Rates Backfire: Rethinking Guyton–Klinger

· Limitations of Retirement Plans Based on Solvency Rather Than Consumption

Decision Eight: Delay Claiming Social Security Benefits

Choosing when to claim Social Security is a high-stakes trade-off between a longer period of smaller payments and a shorter period of significantly larger ones. While you can claim as early as age 62, the Social Security Administration (SSA) and most financial planners advocate for waiting as long as possible to maximize your guaranteed, inflation-adjusted lifetime income.

Your Full Retirement Age (FRA) depends on your birth year (currently age 67 for those born in 1960 or later). Claiming at your FRA ensures you receive 100% of your primary insurance amount. Claiming benefits at age 62 results in a 30 percent loss of annual benefits compared to the benefit at the full retirement age.

The largest possible annual retirement benefit occurs for people who retire at age 70. Benefits increase by 8 percent per year for each year of delay between the full retirement age and age 70.

The SSA may temporarily reduce benefits for people claiming before the FRA who continue to work if earnings exceed a certain threshold.

A worker claiming at age 70 can receive a monthly benefit roughly 77% higher than if they had claimed at age 62. For 2026, the maximum possible monthly benefit for a worker retiring at age 70 is $5,181, compared to just $2,969 for someone claiming at 62.

Delaying doesn’t just help you; it maximizes the survivor benefit for your spouse. If you are the higher earner, your spouse will inherit your higher monthly amount for the rest of their life after you pass away.

The “break-even age” is the point at which the total cumulative benefits of waiting longer catch up to and exceed the total benefits of starting early.

• Wait to 67 vs. 62: You typically break even around age 78-79.

• Wait to 70 vs. 62: You typically break even around age 80-81.

• Wait to 70 vs. 67: You typically break even around age 82-83.

While the math favors waiting, personal circumstances and market circumstances often dictate a different path.

People with shorter life expectancies, either because of a terminal condition or a chronic disease might be better off claiming early.

Retirees with low levels of liquid financial assets and retirees with immediate liquid needs may want to claim early.

People entering retirement without mortgage debt are in a better position to delay claiming and obtain the higher retirement benefit than people entering retirement with debt. (See Decision Six.)

Retirees experiencing a sharp decline in the market early in their retirement may have an incentive to claim early to prevent asset sales in a weak market. (See Decision Seven.)

Sources:

• SSA: Delayed Retirement Credits

• AARP: Reasons to Claim Early or Late

• SmartAsset: Calculating Your Break-Even Age (2026 Update)

Decision Nine: Convert Traditional Retirement Assets to Roth Assets Early in Retirement if Possible

Retirees who delay Social Security and live off brokerage accounts typically land in a lower marginal tax bracket.

(The delay in claiming Social Security benefits substantially lowers marginal tax rates because the decision to claim benefits directly increases AGI and marginal tax rates and increases the tax base. The tax rate on non-retirement assets is lower than the tax rate on conventional retirement assets because only the capital gain part of non-retirement funds is subject to tax and the capital gains tax rate is lower than the tax on ordinary gains.)

These circumstances create a strategic window to convert traditional retirement assets into Roth assets at a lower tax cost, effectively increasing your ratio of tax-free wealth.

A shift to Roth assets will prevent forced future withdrawals from pushing you into higher tax brackets, which protects your Social Security from being taxed and keeps your Medicare premiums low.

The Triple Benefit of Converting Traditional Retirement Assets to Roth Assets Early

1. Lowering Future RMDs: By reducing the balance in your Traditional IRA now, you shrink the size of your mandatory withdrawals (RMDs) later, preventing a massive tax spike and increase in premiums in your 70s and 80s.

2. The “Tax Torpedo” Shield: Since Roth distributions don’t count toward your Adjusted Gross Income (AGI), they won’t trigger the “Tax Torpedo”—the secondary taxation of Social Security benefits that hits many middle-income retirees.

3. Tax-Free Inheritance: Unlike traditional IRAs, which your heirs will have to pay taxes on, a Roth IRA passes to your beneficiaries completely tax-free.

The Math: Paying a Small “Toll” for a Large Gain

Imagine converting $35,000 early in retirement resulting in an immediate $2,000 tax bill. The additional tax on funds in a conventional account compared to funds in a Roth would in around five years be around $7,000.

By paying the $2,000 “toll” now, you save $5,000 later. That is a 28% to 30% internal rate of return on your tax payment – a return which is unlikely to occur in the market.

The Five-Year Rule: Remember that every conversion has its own five-year “waiting period” before earnings can be withdrawn tax-free. This makes early retirement the “Golden Era” for these moves.

Source: Converting Traditional Retirement Assets to Roth Assets in Retirement

Decision Ten: Select Traditional Medicare with Medigap Over Medicare Advantage

The choice between Traditional Medicare (Parts A & B) with a Medigap (Supplemental) plan and Medicare Advantage (Part C) is a critical late-stage financial decision. While Medicare Advantage often features $0 premiums and peripheral perks, it frequently functions as a liquidity trap for those with chronic or serious health needs.

Provider Access and Network Restrictions

The primary advantage of Traditional Medicare combined with Medigap is the preservation of provider choice and geographic flexibility:

· Traditional Medicare: Access is granted to any physician or hospital in the United States that accepts Medicare (approximately 98% of providers). There are no network restrictions or geographic boundaries.

· Medicare Advantage: These private HMO or PPO plans generally restrict care to a local network. Access to premier national institutions often results in denied coverage or substantial out-of-pocket costs.

The Prior Authorization Barrier

Research from the Kaiser Family Foundation (KFF) and the American Hospital Association (AHA) indicates a rising trend of care denials within Medicare Advantage. Private insurers frequently utilize “prior authorization” for services that Traditional Medicare covers automatically. Federal audits have confirmed that Advantage plans occasionally deny “medically necessary” care that would be standard under the traditional framework. Furthermore, many hospital systems are terminating Advantage contracts due to high denial rates, further narrowing available networks.

The Financial Illusion of Low Premiums

Medicare Advantage plans are marketed on low monthly costs, but this creates significant structural risk:

· Margin Squeezes: Recent federal payment updates to Medicare Advantage have remained nearly flat. In response to tighter margins, private insurers often increase administrative friction or further restrict networks to maintain profitability.

· Cost Predictability: A Medigap plan (such as Plan G) involves a higher monthly premium but covers nearly all out-of-pocket costs. This transforms healthcare into a predictable expense, insulating the retirement portfolio from the sequence risk of a sudden $8,000 out-of-pocket maximum during a medical crisis.

In most states, the decision to opt for Medicare Advantage is difficult to reverse and Switching from Advantage back to Traditional Medicare after the onset of an illness often triggers “medical underwriting.” This allows private Medigap insurers to deny coverage or charge exorbitant rates based on pre-existing conditions. Selecting Traditional Medicare with Medigap during the initial enrollment period is the only guaranteed method to secure comprehensive, unrestricted coverage for life.

Sources:

· Near-Flat Medicare Advantage Updates: The Coming Squeeze

· KFF: Over 35 Million Prior Authorization Requests in Medicare Advantage

· American Hospital Association: Concerns with Medicare Advantage Denials

Conclusion: Ownership Over Accumulation

A prosperous financial life is built on much more than just piling into savings and investments. As these 10 Decisions demonstrate, real security is found in the elimination of mandatory overhead and the neutralization of tax-code traps that penalize the unprepared.

While the industry measures success by the height of your savings, a superior metric is your ability to maintain a consistent standard of living across any market cycle. By following this ten-decision framework, you prioritize liquidity and debt-free ownership, ensuring that you control your tax destiny rather than the system controlling you.

Author’s Note

Economic Memos is a digital publication dedicated to the intersection of economic policy, personal finance, market investment, and political analysis. While the majority of our research and analysis is provided free to the public, we offer premium insights for our dedicated readers.

To explore our full library of technical memos and policy frameworks, please take advantage of the following offers:

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Visit us at www.economicmemos.com to subscribe or learn more about our “Beyond Accumulation” philosophy.

#debt, #taxes, #IRAs, #Roth, #Risk

Introduction

In politics, being genuine is everything. One of the clearest examples in modern American politics came during George W. Bush’s first presidential campaign when he was asked to name his favorite political philosopher. Bush answered: “Jesus Christ.” The answer was mocked by some, but it worked because it felt consistent with the man’s world view. He did not sound like a consultant had handed him a line; he sounded like himself.

That is the standard voters often use, especially on moral and foreign policy questions. They may forgive disagreement; they rarely forgive calculation. Authenticity is coherence. A politician is most convincing when the position sounds like something they would say regardless of the audience.

This and a meaningful divide about U.S. relations with Israel are the reasons why the Democratic primary in New York’s 10th Congressional District has become more important than an ordinary House race.

The Contrast in Models

Goldman represents the older model: support for Israel’s security and opposition to BDS, combined with criticism of particular policies. Lander represents a newer model: greater willingness to condition aid and an increasing comfort with coalitions that include anti-Zionist activists.

My View: While Goldman’s positions align more closely with mine, I find neither candidate particularly genuine. I find Lander fairly dangerous due to the company he keeps and the precedents he sets.

The Israel Bonds & Technion Controversy

As City Comptroller, Lander oversaw the elimination of roughly $40 million in Israel Bonds from city pensions by early 2025. While he defends this as a “fiduciary” decision, the timing suggests political ambition. In 2016, Lander called the BDS movement “insidious.” His recent moves—praised by divestment groups -- suggest a shift driven by the changing winds of the progressive left rather than a change in Mideast reality.

Furthermore, Lander’s mayoral choice, Zohran Mamdani, has advocated for ending the partnership between Cornell University and Israel’s Technion University, suggesting New York should effectively evict the Israeli institution from its Roosevelt Island campus. Voters deserve a congressman who opposes such attempts to isolate world-class research institutions from our economy.

The “Bibi” and Iran War Red Herrings

Both candidates use Benjamin Netanyahu as a political “fig leaf.” Criticizing “Bibi” is easy, but it ignores the fundamental problem: Israel lacks a receptive peace partner. The same security challenges -- Iranian proxies, Hezbollah, and Hamas -- will persist long after Netanyahu.

There is an election this year, and the Jerusalem Post reported today (April 24, 2026) that Netanyahu has revealed a diagnosis of early-stage prostate cancer. When people focus solely on him, I ask: “What do you think of Naftali Bennett or Benny Gantz?” I usually get a blank stare, proving that much of the “anti-Bibi” rhetoric is a distraction from the harder reality of Israel’s survival.

Goldman’s Equivocation: Goldman recently stated he will vote against any additional money for the current war with Iran over his opposition to the war and Netanyahu. While I share qualms about the rationale for the war and wish the focus were on regime change to protect the Iranian people, Goldman’s pronouncement is neither useful nor genuine. It is a reactive attempt to avoid a primary surge by his opponents, not an attempt to explain and move forward constructive policy.

The Authenticity Gap

The primary in NY-10 isn’t just a clash of policies; it is a study in the erosion of political sincerity. In a 1999 debate, when asked to name his favorite political philosopher, George W. Bush famously answered, “Jesus Christ,” adding: “He changed my heart.” When pushed to explain further, he simply stated, “If they don’t know, it’s going to be hard to explain.” Whether you agreed with his theology or not, the answer resonated because it was unvarnished and consistent with his character. It wasn’t a “consultant-approved” line; it was a glimpse into a conviction that existed regardless of the audience.

In NY-10, we see the opposite.

Brad Lander performs a delicate dance, phasing out $40 million in Israel Bonds under the dry veil of “fiduciary duty” while simultaneously aligning with activists like Zohran Mamdani who seek to uproot Israeli institutions from New York soil. It is a calculated pivot to satisfy a rising progressive base without technically “endorsing” BDS.

Dan Goldman, meanwhile, offers a reactive brand of support. His sudden refusal to fund the current war effort against the Iranian regime -- despite Iran’s role as the primary architect of regional instability -- smacks of political survival rather than strategic clarity.

Both men are essentially “reading the room” rather than leading it. In an era where voters crave the “Jesus Christ” level of authenticity—a position held because it is actually in one’s heart -- NY-10 is being offered two versions of the same political hedging. Lander panders to the fringe of the party and Goldman equivocates to avoid a primary surge. Neither is speaking from a place of settled, genuine conviction.

The Strategic Danger

Lander’s approach—conditioning aid and divesting from bonds—does not empower moderates; it emboldens adversaries. It signals to Iran and its proxies that international pressure can successfully decouple Israel from its strongest ally.

Goldman remains the favorite due to incumbency, but a Lander victory would signal that the anti-Israel wing of the party has moved from protest to institutional power. This primary is about whether the Democratic Party still knows the difference between criticizing an ally and helping to isolate one.

Authors Note: Consider the 90-day-free coupon for access to additional articles on policy, politics and personal finance.

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Inactive accounts, missing rollovers, and the hidden cost of fees

Introduction:

A bipartisan bill from Representative Mike Lawler (New York’s 17th Congressional District) and Representative Sam Liccardo (California’s 16th Congressional District) targets the state seizure of inactive retirement accounts -- but it sidesteps the larger, more persistent problem: the lack of automatic rollover for high-fee 401(k) accounts into low-fee IRAs.

Legislation
regarding retirement accounts in Congress consistently prioritizes the needs of
investment firms over the needs of workers.

A bipartisan proposal in Congress seeks to address a quiet but consequential flaw in the retirement system. Representatives Mike Lawler and Sam Liccardo have introduced the Safeguarding Americans’ Fairly Earned Retirement (SAFER) Act of 2026, which would limit the ability of states to take custody of inactive investment and retirement accounts.

Under current state “escheatment” laws, financial institutions can be required to transfer accounts deemed abandoned -- often after just a few years of inactivity -- to state control. The proposed legislation would prohibit this practice unless the account holder is confirmed deceased and would require stronger safeguards before any transfer occurs.

The bill is framed as a protection for savers, but it is narrowly targeted at one outcome -- state seizure -- rather than the broader system that produces inactive accounts, often charging high fees, in the first place.

The scale of both issues. -- the escheatment of inactive accounts and the gradual depletion of inactive accounts due to high fees -- are significant.

The First Problem: Escheatment

States collectively hold roughly $70 billion in unclaimed property, including bank accounts, securities, and retirement-related assets. Individual states have built large balances; California alone holds more than $15 billion and returns only a small fraction annually.

When investment accounts are escheated, they are typically liquidated, meaning owners who later reclaim funds receive only the value at the time of seizure rather than the gains that would have accrued had the assets remained invested. In practice, this can translate into very large losses relative to what the account might have become.

More importantly, a meaningful share of these assets are never reclaimed at all. One analysis found roughly $4 returned for every $10 escheated, implying that a majority of value is never reunited with owners.

Across states, return rates vary widely, but many fall well below 50 percent, and in some cases far lower. In practical terms, that means a nontrivial subset of investors effectively lose close to 100 percent of their account value -- not through market risk, but through administrative friction, lack of awareness, or difficulty proving ownership years later.

Readings on the escheatment issue:

https://lao.ca.gov/reports/2015/finance/Unclaimed-Property/unclaimed-property-021015.aspx

https://www.govinfo.gov/content/pkg/BILLS-119hr8338ih/html/BILLS-119hr8338ih.htm

https://www.uppo.org/blogpost/925381/334404/UPPO-Survey-Examines-State-Unclaimed-Property-Return-Rates

https://finance.yahoo.com/news/us-government-holding-70b-belongs-123000008.html

https://www.cbsnews.com/news/california-unclaimed-funds-federal-state-crackdown/

The Second Problem: High Fees on Stranded Accounts

The vast majority of accounts are not escheated, but remain in place, often subject to higher fees leading to a substantial loss of wealth over time.

Even for those who eventually recover funds, the economic loss is not just the temporary deprivation of assets but the permanent loss of compounding during the period of state custody. Over long horizons, that foregone growth can exceed the original balance itself.

Research published in this blog, How to Minimize the Impact of 401(k) Fees shows even an annual fee of 1 percent to 1.3 percent can result in a substantial drain in wealth over the lifetime of the account.

A median-wage worker, being stuck in a high-cost plan can result in paying over $100,000 to $166,000 in lifetime fees -- compared to just $42,000 in a well-managed, low-cost plan. This “leakage” is particularly damaging for older workers with larger balances and in low-interest-rate environments where fees can actually exceed bond yields, resulting in a negative de-facto return. Because these fees are deducted from returns rather than explicitly billed, most workers remain unaware that they are losing significant portions of their retirement security to the sponsor of their plan.

Also consider this educational video on the compounding impact of fees:

The persistence of inactive accounts is not primarily a function of neglect, but of system design. Workers frequently change jobs, leaving behind small balances in employer-sponsored plans. While recent reforms such as the SECURE Act and SECURE 2.0 Act expanded automatic enrollment into retirement plans, they did not create a universal automatic rollover mechanism that moves balances into a new employer plan or a low-cost IRA when workers change jobs.

By mandating automatic enrollment for most new plans, the legislation pulls millions of new savers into the system, many of whom will inevitably leave behind small “micro-balances” when they change jobs.

The Secure Act 2.0 does include a provision allowing but not mandating employers clear out all accounts less than $7,000 without the employee’s permission. But there is no guarantee the replacement IRA has a low fee and there is no automatic movement from a high-fee account for worker with accounts exceeding $7,000.

The most effective way to reduce loss of income from high fees in stranded accounts is a regulation mandating universal automatic portability from the firm-sponsored 401(k) plan to a low-fee IRA for all workers leaving their current employer.

For plan sponsors, this change is an invitation to “clean up” their plan rosters by unilaterally purging a significantly larger pool of former employees into default IRAs without their consent. While this helps employers avoid the costs of audits and recordkeeping for inactive accounts, it leaves workers with a growing trail of fragmented “parking lot” IRAs. Without a universal automatic portability mechanism, this increased threshold doesn’t protect savings; it simply scales the number of accounts vulnerable to high maintenance fees and eventual state escheatment.

The selectivity of the policy response becomes difficult to ignore. Why is Congress addressing the final stage of the problem -- state seizure -- while leaving the earlier, more pervasive sources of value loss largely untouched?

State escheatment is visible and politically tractable. Fee erosion is diffuse, incremental, and embedded in the structure of the system. Addressing it would require confronting industry incentives and redesigning account portability -- steps that would benefit workers more than investment firms.

The SAFER Act addresses an important downstream consequence—premature state seizure—but leaves the upstream problem largely intact. Without automatic portability or rollover into low-cost default accounts, the system will continue to produce dormant balances vulnerable to both fee erosion and eventual escheatment.

Authors Note: Readers interested in deeper analysis on personal debt management, hedges against inflation, the choice between Roth and conventional accounts and different strategies on disbursing funds from retirement account should read and look at the reading list at Beyond Accumulation: Rethinking the Foundations of Financial Security. Most material is free, but some is behind a paywall which can be breached with the 90-day free access option.

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This memorandum evaluates the structural and ideological drivers of the 2026 midterm elections. The evaluation of the 2026 economic and political environment reveals that current conditions favor a blue wave, potentially larger than the one which occurred in 2006. The combination of this likely blue wave, an analysis of the House electoral map based on 2024 and the current narrow margin suggest that Democrats should have a substantial working majority in the 2026 House of Representatives. Despite the favorable blue political environment, Democrats are unlikely to obtain the majority in the Senate because the Democrat brand is toxic in many states and they must defend several open seats in competitive states.

Furthermore, we find that increasingly in many House districts and many states the political center is homeless and that there is a critical need for a new political party that will prioritize pragmatic policies built on pragmatic economic incentives and a consistent moral framework.

Key Findings

· House Exposure: The Republican caucus holds a disproportionate share of the 35 most competitive districts; a Democratic majority is attainable by flipping just 18 seats, a lower hurdle than the 2006 wave. The paper identifies 32 House seats which could flip from Republican to Democrat in a blue wave environment

· The Political Environment: The current political environment where President Trump and his administration are struggling on a wide set of issues is deep blue. It closely resembles the environment which existed in 2006, except for the fact the Democratic brand is now toxic in some states.

· Senate Structural Advantage: Partisan alignment in rural states and a difficult 2026 map for Democrats create a likely “split” outcome where Republicans retain Senate control despite a negative national environment.

· The Homeless Center: A substantial subset of the electorate finds both parties untenable, rejecting the current administration’s performance on inflation and healthcare while simultaneously fearing the progressive wing’s fiscal and foreign policy agendas. This creates a “voter on the couch” dynamic where the non-extreme majority is disenfranchised by the lack of a moderate, results-oriented alternative. We identify 8 seats currently held by Democrats and 14 seats currently held by Republicans where the center has very few if any options.

· Deepening Internal Fragmentation: Radicalization within safe districts has replaced general election competition with primary-driven extremism on the right, while intense divisions over foreign policy and wealth taxes on the left have pitted traditional moderates against an activist base.

· Structural Openings for a Third Party: In deep-blue strongholds and heavily Republican districts alike, the collapse of cross-partisan competition has created a viable opening for a credible third-party alternative. However, success in these districts requires more than tactical positioning; it demands a platform built on a coherent moral framework and substantive principles that distinguish it from the prevailing party orthodoxies. The foundation for this transition is detailed in my previous work.

o A Third-Party Economic Policy Platform: Confronting the two-party failure with durable reform across entitlement, energy, and education sectors.

o A Third-Party Tax Reconciliation: A substantive approach to health care and fiscal policy designed to deliver the long-term stability that the current system has repeatedly failed to achieve.

· The Pendulum Cost: The absence of a stable center has resulted in a “pendulum” approach to governance, where major policies—from health insurance subsidies to energy regulations—are temporary and subject to immediate reversal with each change in power.

Authors Note: Most of the material on this blog is free to all readers but some substantive work is behind a paywall. Here is a 90-day-free coupon. Here is a 20-percent-off coupon, total $48 for annual subscription.Most of the material on this blog is free.

Introduction:

The following memorandum provides a detailed analysis of the structural and ideological forces shaping the 2026 midterm elections. While current conditions reflect the ingredients of a “blue wave” potentially larger than 2006, the political landscape is far more complex. Deepening polarization and a House map defined by narrow margins suggest that while Democrats are positioned to gain a substantial majority, the party remains toxic in rural areas and continues to struggle in the Senate.

Furthermore, we find that in many districts and states, the political center is effectively homeless. Disenfranchised by both parties, these voters highlight a critical need for a new political movement focused on pragmatic policies built upon a consistent moral framework. By examining district-level data and historical parallels, this paper explores why a simple shift in congressional control may fail to address the underlying policy stagnation in Washington.

Comment One: Political Environment

The current political environment closely resembles -- and likely exceeds in severity -- the conditions that preceded the 2006 United States House of Representatives elections. In that earlier period, dissatisfaction was driven by the federal government’s response to Hurricane Katrina and the deteriorating situation in Iraq. The Bush administration, while heavily criticized, maintained a coherent public justification for its policies.

The present political environment, fueled by the current performance of the Trump Administration on a variety of issues, is even less favorable to the Republican party.

The war with Iran was not well explained to the American, has disrupted the world economy, and will likely lead to an inflation rate over 5 percent by November. Interestingly, there is opposition to the war from the anti-war left, from Trump’s MAGA base, and even neoconservatives like me who believe the focus has to be on the Iranian people and the only realistic goal is regime change.

I was really moved by this article about a woman who fled Iran as a teenager after the revolution.

Even prior to the war, political prospects did not look good for the Republican party. Republican health care reforms have resulted in an increase in the number of uninsured or underinsured people, and many Americans personally know someone affected by recent policy changes. ICE deportations have gone too far, and many Americans know of neighbors affected by ICE actions.

Midterm elections generally function as referenda on the party in power and if historic norms hold the Republican party will not do well in November of 2026.

Comment Two: Polarization and Cross-Pressures

The current political environment is not only negative but also highly polarized. This polarization acts as a “speed brake” on the likely 2026 blue wave, as fewer voters remain genuinely persuadable on broad ideological terms compared to 2006.

However, a meaningful subset of the electorate is “cross-pressured”—holding negative views of current Republican governance yet finding themselves aligned with the GOP on specific, prioritized issues. This dynamic creates friction that prevents a uniform electoral shift. The following four areas illustrate where Democratic orthodoxy currently alienates the political center:

• Foreign Policy and Antisemitism: While many lifelong Democrats remain in the party, there is deep disillusionment among those who feel the leadership has been slow to protect pro-Israel voices. This shift is exemplified by high-profile figures like Alan Dershowitz, who recently formally registered as a Republican, citing a “hard left, anti-Israel wing” that has moved into the party’s mainstream. Many centrist voters specifically cite the moral clarity of Republican leaders like Elise Stefanik, who famously challenged university presidents on whether calling for the genocide of Jews violated campus codes of conduct.

• Education and Choice: Many centrist voters support a “middle ground” of charter schools and educational choice as a bridge to student excellence. These voters often align with provisions in recent legislation (such as the 2025 federal tax updates) that provide incentives for educational choice. However, they face significant Democratic opposition to these tax-credit programs, which critics argue reallocates federal funds away from traditional public services.

• Energy Realism: The center frequently seeks an “all-of-the-above” strategy that supports both wind and oil. There remains persistent frustration over the exclusion of oil and gas companies from certain COVID-era liquidity and loan programs, which many viewed as an ideological overreach by the Biden administration that harmed domestic energy security. Voters in energy-producing regions often find GOP rhetoric on “Energy Dominance” more pragmatic than a transition they view as rushed or economically destabilizing.

• Fairness in Athletics: There is a nuanced but firm position in the center that opposes “mean-spirited” rhetoric toward transgender individuals while insisting on the protection of women’s sports. As major international bodies move toward science-based eligibility rules to preserve the female category, Democratic resistance to these distinctions is viewed by many as a denial of biological reality rather than a pursuit of civil rights.

· The Health Care Impasse: This dynamic explains why even a deeply unpopular administration does not automatically result in a landslide. Many cross-pressured voters remain repelled by the President’s elusive “concept of a plan”—a phrase that has come to symbolize the lack of a concrete GOP healthcare alternative—yet they are simultaneously not sold on Medicare for All, which they find fundamentally untenable.

Comment Three: Asymmetric Standards and the Policy Nerd Dilemma

A significant barrier to a uniform electoral wave is the presence of asymmetric standards in how voters evaluate the two parties. While many view the current President as a unique threat to democratic norms and global stability, Democratic candidates are often held to a significantly higher threshold of both personal conduct and policy coherence.

· The “Boy Who Cried Wolf” Effect: Critics argue that because Democrats have framed every Republican opponent since Nixon and Reagan as an existential threat, the current—and arguably more valid—warnings regarding authoritarianism are met with skepticism by the center. Having “called wolf” for decades, the party finds its most urgent alarms partially neutralized by historical rhetorical inflation.

· The Scrutiny Gap: There is a persistent “Rain Man” dynamic among centrist policy experts and voters. While the GOP is often given a pass for vague “concepts of a plan,” Democratic proposals are interrogated down to the arcane details. A voter may be repelled by the President’s character but still find themselves unenthusiastic about a Democratic candidate who endorses niche proposals—such as the student loan discharge for startup employees actually proposed by Hillary Clinton—which seemingly ignore the needs of those in service industries like dry cleaning.

While the policy-obsessed voter typically trends toward the Democratic column, this support is often reluctant rather than enthusiastic. Minor perceived “stupid ideas” or niche inconsistencies can create significant friction, leading these voters to view a single poorly designed tax credit or loan incentive as a “deal-breaker.” This creates an environment where the “Homeless Center” remains paralyzed—acutely aware of the damage being done to national institutions, yet struggling to fully endorse a platform they view as intellectually inconsistent or unfairly targeted.

Comment Four: House Map and Seat-Level Vulnerability

The House map, when evaluated against the current political environment, appears structurally favorable to Democratic gains. There are significantly more close contests in 2026 than in 2006. In 2024, 69 races were decided by 10 percentage points or less and 35 by 5 percentage points or less. By contrast, in 2004, only 23 races were decided by 10 points or less.

Critically, a disproportionate share of the closest races in 2024 were won by Republicans. This indicates that the most electorally vulnerable incumbents are currently concentrated within the Republican caucus.

Below are 32 of the most vulnerable Republican-held seats entering the 2026 cycle, including high-target open seats and expanding battlegrounds in Arizona and Alaska:

• Iowa’s 1st: Mariannette Miller-Meeks (0.19% margin)

• Colorado’s 8th: Gabe Evans (0.73% margin)

• Pennsylvania’s 7th: Ryan Mackenzie (1.0% margin)

• Pennsylvania’s 8th: Rob Bresnahan Jr. (1.6% margin)

• Nebraska’s 2nd: Don Bacon (1.85% margin)

• Arizona’s 6th: Juan Ciscomani (2.51% margin)

• Virginia’s 2nd: Jen Kiggans (3.4% margin)

• California’s 41st: Ken Calvert (3.38% margin)

• New York’s 17th: Michael Lawler (High-priority target in Biden-won territory)

• Michigan’s 7th: Tom Barrett (3.72% margin)

• Arizona’s 1st: David Schweikert (3.81% margin; currently running for Governor)

• Iowa’s 3rd: Zach Nunn (3.82% margin)

• Iowa’s 2nd: Open Seat (Incumbent Ashley Hinson is running for U.S. Senate)

• Colorado’s 3rd: Jeff Hurd (4.98% margin)

• New Jersey’s 7th: Thomas Kean Jr. (5.4% margin)

• Michigan’s 10th: John James (6.13% margin; currently running for Governor)

• California’s 22nd: David Valadao (Narrow top-two survivor)

• Montana’s 1st: Ryan Zinke (Retiring/Not seeking re-election)

• New York’s 1st: Nick LaLota (Targeted swing-district incumbent)

• New York’s 2nd: Andrew Garbarino (Vulnerable to high-turnout shifts)

• New York’s 4th: Open/Target (Republican-held seat in a Democratic stronghold)

• California’s 40th: Young Kim (Targeted swing seat)

• California’s 45th: Open Seat (Incumbent Michelle Steel narrowly unseated in 2024; remains a volatile flip seat)

• Wisconsin’s 3rd: Derrick Van Orden (Targeted 2026 swing seat)

• Pennsylvania’s 10th: Scott Perry (Targeted populist-wing incumbent)

• Wisconsin’s 1st: Bryan Steil (Consistently targeted swing seat)

• Florida’s 13th: Anna Paulina Luna (9.65% margin)

• Florida’s 27th: Maria Elvira Salazar (Democratic target seat)

• Arizona’s 2nd: Eli Crane (Targeted seat with significant Native American voting bloc)

• Alaska’s At-large: Nick Begich (Flipped seat in 2024; highly susceptible to swing dynamics in a high-turnout year)

• California’s 27th: Open Seat (Targeted flip territory following George Whitesides’ 2024 victory)

• North Carolina’s 1st: Open/Target (Impacted by redistricting shifts)

In 2004, the Democrats flipped 31 seats to get a 233 to 202 majority. The current Republican margin is much narrower, and the Democrats could reach that same margin by flipping just 18 seats.

The baseline House forecast, based on the extremely favorable political environment, the current map of contestable seats, and the thin Republican margin, is that the Democratic party will likely have a workable majority in the 2026 Congress, probably exceeding the one that existed in 2006.

Comment Five: Senate Map and Structural Constraints

The same negative political environment that should favor Democratic gains in the House also applies to Senate contests. However, Democrats are no longer competitive in most rural states and the electoral map favors continued Republican control of the Senate both in 2026 and beyond.

· A number of competitive 2024 races are in fairly red states – Texas, Iowa, Ohio, North Carolina, and Alaska.

· Several other competitive races are open seats due to Democratic retirements – New Hampshire, Michigan, and Nevada.

· Jon Ossoff the first Jewish Senator from the deep south will have a tough race in Georgia largely because of some of his recent statements on Israel.

· Susan Collins is likely the favorite in Maine because she is well liked and competent. If she loses it will be entirely because of Trump and the perceived need for a Democratic Senate to hold Trump to account.

· Chances for independents to win a seat exist in Montana and Nebraska but these are red states and Senate contests in these states tend to be decided on a voter preference over which party will have the Senate majority.

My analysis of the 2024 contest for control of the Senate has not changed since the publication of the essay – Will Democrats Snatch Defeat from the Jaws of Victory.

Senate elections are more directly shaped by party alignment than House races. While House outcomes are driven by a large number of district-level contests, Senate races are statewide and fewer in number, making them more sensitive to underlying partisan lean. Voters are more likely to treat these contests as decisions about which party should control the chamber rather than as isolated candidate evaluations.

The implication is that, even under a broadly negative national environment for Republicans, the Senate map may not translate that environment into Democratic gains. This suggests that for many states in the Union there is de-facto one party rule for statewide choices, a situation which requires, and may be ripe for the formation of a third party.

Comment Six: Fragmentation on the Right and the Potential for Three-Way Contests

An additional, less conventional pathway for electoral disruption exists in heavily Republican districts where the decisive contest has shifted to the Republican primary rather than the general election. This is particularly evident in the following districts:

Authors Note: Under the paywall – rest of fragmentation on the right, fragmentation, fragmentation on the left, and the paradox of the efficient gerrymander.

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