Federal Taxes Have a Good Side Too

This Donald Duck cartoon, funded by the U.S. government in 1943, urged Americans to pay their income taxes to support the war effort. Paying taxes was a patriotic act, to build up the inventory of war planes and battleships to defeat the Nazis – “sink the Axis!” the narrator bellows.

Nobody liked paying taxes then, and they still don’t. Yet there was a growing awareness as the war played out in the 1940s that taxes – like saving your scrap metal – were necessary to advance the greater good.

Things are different today. There doesn’t seem to be as much room in the public conversation for the benefits that federal taxes bestow, such as Social Security, Medicare, Medicaid (nursing home funding) and the Part D prescription drug benefit for retirees, or for government investments in education, roads, and research – or about who would suffer more if deprived of these benefits.

“Most people who do in fact receive significant forms of economic security from the federal government don’t know it,” argued Molly Michelmore, an economic historian at Washington and Lee University, in a recent interview on New York public radio. …Learn More

Financial Videos’ Message: Please Deal

Reflecting a lofty ambition to educate Delaware residents about financial management, state government officials put together some terrific videos.

This is not high-level finance – the speakers tell stories about real people facing up to the dimensional challenges of money and retirement.  Viewers outside Delaware might find one of the 10 online Tedx talks valuable to them. Here are three:

Javier Torrijos, assistant director of construction, Delaware Department of Transportation:
His take on the immigrant experience in a nutshell: “The parents’ sacrifice equals the children’s future,” said Torrijos, who has two sons and whose own father left Columbia for a tough neighborhood in Brooklyn, New York, in 1964 so his children would have a shot at escaping poverty. Today’s immigrants are no different. But the pervasive ethos of family above all else, he argues, is responsible for some of the Latino immigrant community’s financial instability.

When required to make the impossible choice between going to college or straight to work to support family, family usually wins. “That mentality still exists” but needs to change if Latinos are to improve their lot, he said. …Learn More

How Social Security Gets Fixed Matters

Line chart showing who's spending is reduced: workers or retirees? As more baby boomers retire, Social Security’s impending financial shortfall will become more pressing.

To restore solvency, Congress can either cut Social Security’s pension benefits or increase the payroll taxes deducted from workers’ pay.

Both policies would impact how much is available for households to spend. Researchers at the Center for Retirement Research find that the benefit reductions would have an appreciably larger annual impact on retirees than would the higher taxes on workers. But the taxes would be spread over a longer time period.

The new study looks at four specific policies, two that cut retirement benefits and two that raise taxes.  Each policy analyzed would equally benefit Social Security’s finances.

Gauging their separate effects required using a model to predict workers’ behavior. This was necessary because some workers might feel they should retire earlier if more taxes are being taken out of their paychecks. On the other hand, if their future pension benefits will be trimmed, they might decide to work a few more years to increase the size of their monthly checks.

One option for reducing Social Security payouts would be to delay the full retirement age (FRA) at which retirees are eligible to collect their “full” benefits. A second option is trimming Social Security’s annual cost-of-living (COLA) increases.

A two-year increase in the FRA, to 69, would reduce annual consumption in retirement by 5.6 percent for low-income, 4 percent for middle-income, and 2.2 percent for high-income retirees. …Learn More

champagne toast

Changes in Marriage Increase Class Divide

marriage rates by classIn the 1960s, half of all wives were housewives, and their husbands often earned enough money to support a family. Today, these traditional families are a rarity and two incomes have become essential to surviving economically.

A new joint report by the American Enterprise Institute and the Brookings Institution argues that poor and working-class families’ increasingly fragile family structure – despite the rise of dual-income spouses – often leaves them “doubly disadvantaged.” And lower marriage rates among poor and low-income couples help to explain why “America is increasingly divided by class,” write the authors, W. Bradford Wilcox, a professor and director of the National Marriage Project at the University of Virginia, and Wendy Wang, research director for the Institute for Family Studies.

They explain that higher rates of divorce and of couples cohabiting affected the poor’s marriage rate first and most harshly in the 1960s; working-class couples were next, though to a lesser extent in the 1980s. Marriage is far more common among the middle and upper classes.

The authors cite several economic and social forces behind these trends. The losses that less-educated, lower-income men “have experienced since the 1970s in job stability and real income have rendered them less ‘marriageable.’ ”   Stagnant or declining wages for middle- and working class couples impede their ability to afford a home, which is the most valuable financial asset most households own.  Couples lacking property may “have fewer reasons to avoid divorce.” …
Learn More

Boomers’ Mortgage Debt Predicament

You’re not going to like this, baby boomers.debt_home

You have more debt than the two generations born during the early Depression and World War II, much of it compliments of the mortgage bubble that financed your larger, more expensive houses. The housing bubble popped in 2008, but the mortgage on the new house or perhaps a second mortgage continues to plague many.

It should be no big surprise that a new study finds the “substantial” debts taken on specifically by those born in the late 1940s and early 1950s will gobble up more of their not-always plentiful retirement income.

“The evidence clearly shows that many Americans” on the cusp of retiring “continue to be burdened by debt and to be financially vulnerable,” the researchers said.

The lead researcher, Annamaria Lusardi at the George Washington University School of Business, is a national expert in financial literacy. As part of her study, she also wanted to understand how these early boomers manage their debts.  It turns out that people overburdened with debt more often have lower levels of financial literacy. However, debt is also an issue among older workers in poorer health or those who’ve seen their incomes decline, which is fairly common over 50. …Learn More

Tax Cuts, Medicare, and the Kids

deficit chartFederal Medicare spending will increase sharply as baby boomers, with their longer life spans than previous generations, sign up in droves. The Social Security Trust Fund also reports that its reserves will be depleted in 2034, requiring either benefit cuts or new revenues to replenish a program that keeps millions of older Americans either out of poverty or just above water.

These two programs currently account for about 40 percent of the federal government’s $3.7 trillion budget. Most people agree that we need to deal with the financial shortfalls in Medicare and Social Security. And there is precedent. Remember the bipartisan 1983 reform that put Social Security on firmer footing by increasing the program’s revenues and gradually raising its Full Retirement Age?

But there is growing concern among retirement experts and advocates for the elderly that the proposed $1.5 trillion in tax cuts will make future reductions to these critical retiree programs all the more likely in order to rein in growing federal budget deficits.

If cuts to Medicare and other social programs follow a tax cut, it would fly in the face of what regular folks said are their top priorities in a new Kaiser Family Foundation poll: Only a small minority of Americans support tax cuts if they involve cuts to Medicare, Social Security, and Medicaid. …Learn More

thanksgiving

Thankful for Squared Away Readers

Thank you for continuing to read and support Squared Away!

Our goal is to provide reliable information that is not influenced by the desire to sell a product or service, which we hope is a valuable service to you. And as a blog based at the Center for Retirement Research, we are particularly interested in covering what the current research (ours and many others’) can tell us about retirement, personal finance and the economic challenges that people face.

What could be better than a big turkey in the oven and family and friends all around?  Happy Thanksgiving to all.

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