September 2015

Photo of happy teens

Don’t Worry About Money. Just Be Happy

The adage that money won’t buy happiness has been proved wrong – at least up to a point. One famous study found that one’s well-being increases as income rises, though the benefits subside around $75,000 per year.

But what about the reverse? Do people who are happy earn more money? Yes, say two British economists.

Their study in the Proceedings of the National Academy of Sciences concluded this after following American teenagers for a more than decade through the National Longitudinal Study of Adolescent Health. In 1994 and 1996, this survey asked high school students to react to statements like “You were happy” and “You felt hopeful about the future.” In a 2008 follow-up survey, when most of them were around age 30, they were asked how much money they were making.

People who reported having a happy adolescence earned about $3,400 more than the average gross income of all the survey respondents; the average was $34,642. However, the opposite effect was more consequential: young adults who had a “profoundly unhappy adolescence” were earning 30 percent less – equivalent to a $10,000 hit to their earning power. …Learn More

House on a stack of money

Changes to Reverse Mortgages Continue

The federal government continues to work out the kinks in its reverse mortgage program. The latest change allows a non-borrower to remain in her home after her spouse, who signed the reverse mortgage, has died.

The federal government established its reverse mortgage program in the 1990s to provide an alternative source of income for retirees over age 62. These Home Equity Conversion Mortgages (or HECMs) are secured by the equity in borrowers’ houses, and the loans are repaid only when they move or die. The loans are federally insured to ensure that borrowers get all the funds they’re promised, even if the lender fails, and that lenders are repaid, even if the value of the property securing the loan declines.

A June 2015 regulation effectively allows lenders to permit a surviving, non-borrowing spouse to remain in the home, postponing loan repayment until she moves or dies. To qualify, the original reverse mortgage must have been approved by the Federal Housing Administration prior to August 4, 2014, and the property tax and insurance payments must be up to date and other conditions met.

The spousal provision adds to earlier changes, detailed in a 2014 report by the Center for Retirement Research, aimed at improving the HECM program’s fiscal viability while protecting borrowers and lenders. These regulations were a response to riskier homeowners who had tapped their home equity to cope with the Great Recession. The regulations reduced the amount of equity that borrowers could extract upfront and also introduced financial assessments of homeowners to ensure they’re able to pay their taxes and insurance. …Learn More

Prime-Age Job Market Still Weak

Job Market chart

The job market appears in fine form. August’s unemployment rate, at 5.1 percent, is now at half of its Great Recession levels.

But while the media latch on to the unemployment rate in the federal government’s monthly jobs reports, economists like Gary Burtless of the Brookings Institution are interested in a different number that’s also part of the monthly update: labor force participation among people in their prime working years, ages 25 through 54.

They are the heart of the labor market, and the trend in their participation rate paints a bleaker picture of the job market, Burtless noted in a recent report. In August, the rate was just 80.7 percent – and still below the 83 percent level prior to the 2008-2009 recession.

Labor force participation is the percentage of Americans working or looking for work. It’s critical to how the job market’s faring, because when it declines it means that even people in their prime working years are giving up on finding a job, indicating underlying weakness in the job market.

On a brighter note, the percentage of prime-age workers who have jobs is rising, though this also remains below pre-recession levels.

Burtless concludes, “The labor market is healing, but the sustained drop in participation is an indicator that the job market is still some way from robust good health.”Learn More

Photo of man running late

401(k) Catch-up: Help for the Few

Longer lives, eroding Social Security benefits, and rising health care costs – these are just some of the reasons older workers need to save more in their 401(k)s.

To encourage them, Congress in 2001 approved a “catch-up contribution” for workers over age 50.  The size of this additional tax-deductible contribution started at $1,000 in 2002 and jumped to $4,000 by 2005 and $5,000 in 2006.  (After 2006, it continued to increase, though only at the rate of inflation, and is currently $6,000.)

But the catch-up contribution has not turned into a broad-based solution to Americans’ retirement woes that some proponents had claimed at its passage.  According to researchers at the Center for Retirement Research (which supports this blog), it helps only a select group of older workers: those who were already contributing at or near the tax-deductible maximum allowed on their regular 401(k) contributions. It’s a group with higher-than-average incomes and wealth than the typical older worker. …Learn More

Photo of house

Home Buying Not Tied to Student Debt

A popular assertion these days is that young adults paying off student loans can’t afford to buy a house. This might be the financial equivalent of Chicken Little.

Contrary to concerns that the sky is falling – or, rather, the first-time homebuyer market is falling due to student debt – a new study finds very little evidence to support this view.

The researchers tracked the home-buying behavior of more than 5,000 college-going young adults for a full decade through the National Longitudinal Survey of Youth. They confined the analysis to people who attended college – graduates and non-graduates alike – in contrast to previous research that compared the behavior of all young adults and found that borrowing got in the way of homeownership.

The new study actually found they were slightly more likely than non-borrowers to purchase a house. But this could be due to the fact that the borrowers tended to be the type of people who persist and complete their degrees, attend more expensive schools, and possess other socioeconomic advantages. This comparison of borrowers and non-borrowers still didn’t settle the question of whether the probability of owning a home actually decreases as the level of student debt rises.

When the researchers further narrowed the analysis only to individuals who held student loans, they found no relationship between the amount of money borrowed and the probability of homeownership. “If you have $30,000 in debt you’re no less likely to buy a home than if you have $3,000 in debt,” said one of researchers, Jason Houle, an assistant professor of sociology at Dartmouth College.

The findings, Houle said, “cast doubt on this idea that student loan debt is dragging down the housing market.” …Learn More

Lightbulb = $

In Support of Allowances for Kids

With summer’s chaos subsiding and school starting, it’s time for a financial lesson wrapped in an allowance!

The conventional wisdom behind a weekly allowance is that it impresses on children the limited value of a dollar.  But the benefits of financial education are not well-founded in academic research. The benefits of an allowance might have something to do with kids’ confidence in handling their money, which research shows is central to how well adults manage their finances.

Kids between ages 8 and 14 who get an allowance were two times more likely to feel knowledgeable about managing their money than kids who do not – 32 percent versus 16 percent – according to a survey of 1,000 parents and 881 children by T. Rowe Price.  The kids with allowances also feel they know more about credit, student loans, and other financial matters. …Learn More

Medicare Hotline Complaints Detailed

Last month, Squared Away published a primer for new Medicare enrollees choosing between their two available options: an Advantage plan or traditional Medicare plus a Part D drug plan and/or supplemental Medigap policy.

Millions of beneficiaries receive their Medicare benefits without any major problems. But Medicare rights center logotoday’s blog is about a report detailing complaints to the national telephone hotline operated by the Medicare Rights Center, a non-profit patient advocacy organization.  Two of the top issues reported by seniors were denials of coverage and rocky transitions from employer or other health insurance into Medicare.

Here are some of the findings:

  • 60 percent of calls about Advantage plans involved denials of coverage for physician care, home care, therapy, medical equipment, tests and other services. Some calls about coverage denials also involved traditional Medicare. However, in contrast to private Advantage plans, Schwarz said that private Medigap plans must follow Medicare’s lead in determining what’s covered.  “If Medicare pays, then Medigap pays,” she said.
  • The majority of denials of drug coverage involved medications not on the list approved by the senior’s drug plan.This primarily affects either seniors starting new medications or new plan enrollees who learn that their plan doesn’t cover all their medications.  Advantage and Part D drug plans are not permitted to deny coverage in the middle of a plan year if they’ve been covering a drug for a specific medical condition, unless the drug is removed for a specific reason, such as the appearance of a new generic.  They can, however, remove the drug from the list when the senior’s annual policy expires, Schwarz said. …

Learn More

12