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Debit Card Beats Cash as Budgeting Tool

Plastic or paper?  Americans have spoken.

In 2012, they posted some $79 trillion in financial transactions to their credit and debit cards – and that figure keeps marching upward.

Some researchers view this as a dangerous trend.  Plastic cards, they contend, put distance between a man and his bank account. Without the tactile sensation of handing over one’s hard-earned cash, it’s easy – too easy – to spend money and harder to save.

New research out of The Netherlands has an entirely different take on the cash versus plastic controversy. The study, based on a detailed Internet survey of nearly 1,500 Dutch people about their financial habits, shows that they view the debit card “as the better expense monitoring tool.” (The study compared cash and debit cards, excluding credit cards.) …Learn More

Seniors’ Housing Cost Burden on Rise

For a growing share of older Americans, housing expenses have become an increasingly large financial burden.

Chart: Housing burdenOne in three Americans over age 50 were carrying a severe or moderate housing cost burden in 2012, up from one in four in 2000, according to a new study by Harvard’s Joint Center for Housing Studies and AARP. The Center defined a severe burden as housing costs that consume more than half of household income; a moderate housing burden takes between 30 percent and 50 percent of income.

The Center’s report, Housing America’s Older Adults – Meeting the Needs of An Aging Population,” warns that the nation is unprepared for both the financial and non-financial housing challenges that will accompany the coming explosion in the elderly population. Aging baby boomers will require better access to public transit, handicap access, assisted living facilities and other special services and amenities, and many will need subsidized housing.

Housing is often an older person’s largest single expense. And because housing costs are largely fixed (think mortgage payment, taxes, insurance, upkeep and utilities), they can become a growing burden for people as they age and become more vulnerable to reductions in income. Incomes often decline toward the end of their working years and decline again when they enter retirement. Pensions and Social Security benefits fall again when one spouse dies.

The report finds that: …Learn More

Retirement: a Good State of Mind

Is retirement good for one’s mental health? The evidence is all over the place.

One study concludes that retiring sooner means a higher incidence of dementia.  Other studies show it benefits physical health, which can affect one’s state of mind.  Research from different countries reach different conclusions about their own retirees’ sense of well-being: the English and Finnish find that retiring improves it, while Korean and U.S. researchers don’t.

Chart: Life Satisfaction by CountrySeeking some universal truths about retirement in the Western world, a new study of the United States and 11 European countries finds that it improves subjective well-being, measured both in terms of satisfaction with one’s life and the incidence of depression.  The study is based on two comparable sets of surveys of age 50-plus Americans and Europeans taken in 2004, 2006, and 2010.

An analysis of retiree well-being faces some tricky analytical issues, which have plagued past studies and which the new study had to overcome. For one thing, people who are depressed may be the most likely to retire, creating the statistical equivalent of a chicken and egg problem.  The new study also had to account for the negative financial consequences of leaving or losing one’s job – which can reduce satisfaction and increase depression – in order to isolate the influence of retirement, independent of its effect of lowering income. …Learn More

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On Moms, Deadbeat Boomers, and Utopia

This blog has a single writer posting just two articles a week. So it’s impossible to keep up with all the news that crosses the transom.

But perhaps because the work world is gearing back up this fall, there have been a lot of interesting stories lately about financial behavior.  Here are three worth noting:

Fatherhood adds to paychecks – motherhood, not so much. A new study estimates that women actually face about a 7 percent “wage penalty” for each child. So, having two children reduces a woman’s hourly wages by 14 percent, according to a new study out of the University of Massachusetts at Amherst. In contrast, annual earnings for fathers are about 8 percent higher than similarly situated men who have no children. This research sheds more light on the wage gap.

Baby boomers are having to pay off college loans they took out decades ago.  Some 155,000 older Americans are now seeing deductions from their Social Security checks to pay their federal student loans – up from 31,000 a decade ago – according to the U.S. Government Accountability Office.  Parents often co-sign loans for a child’s education, but the GAO report says that about three out of four dollars of boomers’ loan balances are for their “own education.”  Baby boomers never borrowed the large amounts that today’s steep college tuitions demand. But what’s not discussed in the report is that the garnisheeing of Social Security benefits may be due to a cultural artifact of the 1960s and 1970s – when attitudes toward repaying student debt were, well, loose.  Laws requiring repayment have become more stringent. …Learn More

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Canadian Pension Reform: the Long View

Policymakers often worry that increasing government pension benefits won’t necessarily help retirees, if the reforms cause workers to change their behavior in ways that counteract them.  For example, some workers might save less if they know pension benefits are rising, offsetting the income boost they’ll get from a larger pension.

However, researchers examining Canada’s pension reform over five decades confirm that they have materially improved the financial well-being of retirees there.

To reach this conclusion, Kevin Milligan of the Vancouver School of Economics and David Wise of Harvard University tracked the financial status of older Canadians from 1960 through 2010.  They analyzed some 100,000 families between 55 and 80 years old using Canada’s Survey of Consumer Finances, the Survey of Labor and Income Dynamics, and the Family Expenditure Survey.

They conducted simulations to estimate what benefits would have been if no policy changes had been made since the 1960s.  This simulation showed that the poverty rate, based on the incomes of Canadians from ages 70 through 79, would have been 34 percent.  But today, in the aftermath of reforms, only 4 percent of older Canadian families are poor.  [The researchers did a second simulation based on an alternative poverty measure: how much older Canadians spend on shelter, food, clothing and other goods. This also showed a decline in the poverty rate, albeit smaller.] …Learn More

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Life Spans Not Falling for Less Educated

A September 2012 article on page one of The New York Times reported “disturbingly sharp drops” in life expectancy between 1990 and 2008 for Americans who do not complete high school – five years less for white women and three years less for white men.

This flatly contradicted past studies documenting rising longevity throughout the developed world. Much was also at stake in this dramatic new finding for U.S. retirement experts concerned about the growing financial pressures on retirees from what they’d assumed were virtually uninterrupted gains in longevity

Everyone wants to live longer, but it’s expensive. So who’s right?

In reaction to the 2012 study, a new group of researchers, funded by the U.S. Social Security Administration, took another run at calculating life spans and found that life expectancy is not on the decline for Americans with the least education.

The researchers, from the University of Michigan and Urban Institute, used the same data as in the 2012 study – U.S. Census data and National Vital Statistics.  But they refined the statistical technique. One criticism of the prior paper had been its blunt measure of Americans with the least education, defined simply as those who had not graduated high school.

Yet the segment of the U.S. population that doesn’t graduate high school has shrunk dramatically, becoming an increasingly selective – and disadvantaged – group.  That’s a change from the experience of people born a century ago for whom leaving high school to begin working or marry was the norm. …Learn More

How Much For the 401(k)? Depends.

How much must 30-somethings save in their 401(k)s to prevent a decline in their living standard after they retire?

No two people are alike, but the Center for Retirement Research estimates the typical 35 year old who hopes to retire at 65 should sock away 15 percent of his earnings, starting now.  Prefer to retire at 62?  Hike that to 24 percent.  To get the percent deducted from one’s paycheck down into the single digits, young adults should start saving in their mid-20s and think about retiring at 67.

These retirement savings rates are taken from the table below showing the Center’s recent estimates of how much workers of various ages should save to achieve a comfortable retirement; they represent the worker’s contribution plus the employer’s contribution on their worker’s behalf. Expressed as a percent of their earnings, they also vary depending when a worker retires.

How Much to Save: Table

To derive these savings rates, the Center’s economists assumed that a retired household with mid-level earnings needs 70 percent of its past earnings.  They then subtracted out the household’s anticipated Social Security benefits. The rest has to come from employer retirement savings plans, which determine the percent of pay required to reach the 70 percent “replacement rate.” …Learn More