Social Security Replaces Less for Couples

Source: U.S. Social Security Administration poster, 1954.

When Social Security was created in the 1930s, wives were mainly full-time homemakers, with their pension benefits based on their breadwinner husbands’ earnings.

But wives went to work in droves after Social Security’s passage. Today, women make up nearly half of the U.S. labor force.  Yet the program’s design remains the same, with the result being a steady decline in married couples’ replacement rates – the percentage of the combined earnings of two working spouses that Social Security replaces when both retire.

A study by the Center for Retirement Research found that the replacement rate for couples has declined from 50 percent for married couples born in the early 1930s to around 45 percent for the oldest baby boomer couples, and it will fall to just 39 percent for Generation X couples when they eventually retire.

A declining replacement rate is an important consideration for working couples as they plan for retirement.

The simple explanation for the declining replacement rate is that household earnings are much higher when both spouses are working, but their Social Security pension benefits do not increase proportionally. The reason is that even if a wife doesn’t work, she still receives a spousal benefit equal to half of her husband’s benefit.  The more a working wife earns, the lower the couple’s replacement rate. …Learn More

Rising Health Costs a Factor in Inequality

Chart: the Healthcare Bite

Inequality is frequently in the news. A new study puts an interesting spin on this now-familiar topic: rising health costs are a significant reason for wage inequality.

The cost of employer-provided health insurance is a larger share of lower-paid employees’ total compensation than it is for the people higher up in the organization. Since insurance costs have been increasing faster than total compensation, squeezing out pay raises, the nation’s lowest-paid workers feel it most.

For people with earnings at the 30th percentile of all U.S. workers, total compensation, including the cost of employer health insurance as well as actual earnings, increased by just 9 percent in inflation-adjusted dollars between 1992 and 2010, according to data in a new study by Mark Washawsky at George Mason University’s Mercatus Center. Total compensation for high-paid workers at the 95th percentile grew 19 percent.

However, the rapidly rising cost of employer-provided health insurance took a larger bite out of lower-paid workers’ earnings – and out of their take-home pay. Inflation-adjusted earnings at the bottom rose by just 3 percent over the 18-year period, compared with a 17-percent increase at the top.

Washawsky correctly notes that employer-provided health insurance is a form of compensation that is valuable to all workers, regardless of how much they earn. The problem for workers living paycheck to paycheck is that they pay their day-to-day bills out of what’s left in that paycheck. That’s where you’ll find the inequality from rising healthcare costs.

So how should policymakers tackle U.S. inequality?  Warshawsky argues that any prescription to reduce wage disparities should “focus on reducing the rate of increase in healthcare costs.”Learn More

Dominos falling

Financial Anxiety Amid Economic Growth

The economy keeps chugging along, unemployment has been bobbing at or below 5 percent all year, and wages have been creeping up.

Yet anxiety is rising, according to a newly released survey by Northwestern Mutual.  In February,
85 percent of Americans said they had “financial anxiety,” particularly about how they would pay for an unexpected emergency or medical bill.

And here’s how financial anxiety affects them:

  • Callout70 percent say it reduces their “happiness,” their mood, or their ability to pursue their dreams, passions, and interests.
  • 67 percent say it impairs their health.
  • 61 percent say it has a negative effect on their home life.
  • 51 percent say it has a negative effect on their social life.

For more than half, the most popular answer to how financial security would change their lives was: “Peace of mind that I never have to worry about day-to-day expenses.”

Northwestern Mutual summed things up by saying “the levels to which financial anxiety is impacting all corners of people’s lives is extraordinary.”

Pretty strong words for a typically cautious insurance company. Learn More

Middle class illustration

More Americans Are Upper Middle Class

Yes, income inequality has risen dramatically over the past 35 years. But something else has happened that might surprise you.

The size of the upper middle class is expanding, as Americans migrate up from the ranks of the middle class and poor, according to a new analysis from the Urban Institute.

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Economist Stephen J. Rose uncovered this finding by defining how much income families needed in 1979, just before inequality really took off, to be counted as rich, upper middle class, middle class, lower middle class, or poor. He anchored his class divisions largely around incomes relative to the federal poverty level. For example, he set the income floor for the upper middle class at five times the poverty level. He then used U.S. Census Bureau survey data to estimate the share of American families falling into each income tier in 1979 and in 2014, with incomes adjusted for inflation. …Learn More

Medicaid Expansion: Winners vs Losers

Low-income residents are in better financial shape in the 31 states that have expanded their Medicaid health coverage under the Affordable Care Act (ACA).

Medicaid expansion

That’s the bottom line in a new study finding that they have fewer unpaid bills being sent to collection agencies and their collection balances are $600 to $1,000 lower than their counterparts in non-expansion states. This contrasts with the years prior to the 2014 Medicaid reform, when residents of would-be expansion and non-expansion states had very similar financial profiles.

State decisions about whether or not to expand their Medicaid rolls are having “unambiguous” and “important financial impacts,” concluded researchers at the University of Michigan, the University of Illinois, and the Federal Reserve Bank of Chicago.

Medical crises are expensive for most workers but are virtually insurmountable for low-income Americans. The annual cost of care for someone hospitalized at some time during 2012, for example, was $25,000 – more than many low-wage workers earn in a year.

To address this risk, the ACA expanded Medicaid health coverage to more people and established a new income threshold to qualify at 138 percent of the federal poverty level – or about $16,000 for an individual. A U.S. Supreme Court decision later gave states the option of expanding their Medicaid programs.

The researchers’ findings were based on credit reporting data on 1.8 million individuals between 19 and 64 years old who are living below 138 percent of the federal poverty.  They analyzed the impact of Medicaid availability on non-medical debt, such as credit cards, in zip codes with the highest percentage of people under the threshold during 2014 and 2015.  [Mortgage debt was excluded.]

The purpose of health insurance is to provide a financial cushion by limiting the spike in out-of-pocket expenditures when a medical crisis strikes. For low-wage workers, this cushion takes the form of Medicaid.Learn More

Illustration

Array of Financial Products is Dizzying

Timeline of financial products since the 1940sRather than put his money in a bank, my cousin, who’s in his mid-40s, makes loans in $25 increments on a peer-to-peer lending website.  He decides on the amount of risk he’s willing to take on – and the riskier the borrowers he chooses, the more he earns on his “savings.”

My cousin’s $25 investments illustrate how much our consumer finance market has evolved over several decades. We all embrace the convenience. Car loans are a more affordable way to buy a vehicle, Internet banking lets homebuyers get several mortgage quotes at once, and paying with cell phones is much easier than paying with cash or even credit cards.

But all this innovation has a downside. One example is the change from installment credit with fixed payments in the early 1960s to revolving credit, which lets consumers choose to pay a small required minimum – and increases the high credit-card interest that undisciplined borrowers pay. A recent and egregious innovation is companies that purchased lawsuit settlements from victims of lead paint poisoning for a fraction of their value.  Both innovations offer convenience in exchange for personal financial impacts that are either excessive or difficult to recognize.

A primary outcome of all this financial innovation is that U.S. households “in aggregate have taken on greater risk,” conclude professors at the Harvard Business School in their 2010 paper, “A Brief Postwar History of US Consumer Finance.”  Consumers now have an enormous amount of latitude – arguably too much latitude – to borrow, shift assets, save for retirement (or not), play the markets, or engage in peer-to-peer lending, they say.

As a result, risks pervade our investment portfolios, savings and retirement accounts, borrowing decisions, and how we purchase consumer goods.  And that’s the problem. …Learn More

Contingent Labor Force Growing Fast

Most workers quickly realize that the best solution to low earnings in a job with scant or non-existent benefits is to move on to something better.

But this is increasingly difficult to pull off, because technology and other powerful forces are reshaping the 21st century economy – and degrading the quality of the jobs that are available.  As companies seek to cut labor costs, technologies like scheduling software for retail and fast-food workers and platforms like Uber and Task Rabbit are making it easier to do.

Chart: Alternative WorkThe result has been a rapidly growing contingent labor force of temp-agency workers, freelancers, independent contractors, workers for contract companies, and on-call workers with unpredictable schedules, according to a recent study by prominent Harvard and Princeton economists.  They estimate that this contingent labor force has increased from 10 percent of all U.S. workers in 2005 to nearly 16 percent today.  Its growth effectively accounts for all of the net job gains over the past decade.

The transformation under way is so apparent that it has earned nicknames like the “gig,” “sharing,” or “on-demand” economy.  The resulting jobs are often touted as giving workers flexibility and the freedom to earn more money – and sometimes they do.  The researchers conducted their own survey of more than 3,800 contingent workers, and business consultants and computer engineers might be good examples of the independent contractors and freelancers who said in the survey that they prefer their arrangements to working for someone else. …Learn More

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