Over the past 25 years, the difference in wealth held by white and black households in the United States has nearly tripled, to $236,500.
In December, Squared Away wrote about the difficulty that black families have in trying to accumulate wealth so they can pass it on to their children. New research out of Brandeis University’s Institute on Assets and Social Policy now finds that the gap between the median net worth for white and black households has widened to a chasm, as blacks have fallen farther behind.
The study also quantified the reasons for the widening gap and found that the difficulty of building up housing equity is the largest factor.
A house is usually the single largest asset owned by middle-class American families. But starkly different homeownership patterns between blacks and whites – ownership rates are lower for blacks, who also own their homes for fewer years than whites – accounted for 27 percent of the increase in the wealth gap.
Housing’s impact has been “incredibly large” and is the “key driver” of the growing black-white wealth gap, said Thomas Shapiro, the institute’s director. “It’s part of the disadvantage that keeps working its way through the life course” from one generation of a black family to the next, he said. …Learn More
A few more jobs reports like February’s might put a dent in the nation’s still-high unemployment rate. The Bureau of Labor Statistics said U.S. employment surged by 236,000 last month, nudging the jobless rate down to 7.7 percent.
But a summary of unemployment rates for various age groups, recently published online by the Urban Institute, showed variations in the rate, by age. Rates have been consistently lower over the past decade for older workers than for those in their 20s, 30s, and 40s – even during and after the Great Recession.
In a still-sluggish economy, one might wonder: are older workers who remain on the job somehow depriving younger adults of work?
There is “absolutely no evidence of such ‘crowding out’, ” concluded the Center for Retirement Research, which supports this blog, in a recent study analyzing the labor market from 1977 through 2011. To rigorously test this relationship, the researchers tried several statistical variations – even looking at the older-younger worker dynamic during the Great Recession. They kept getting the same result: no crowding out.
In fact, they noted that their own evidence and research by others suggests the opposite. When older people have jobs, they add to consumer demand and fuel the economy. The authors conclude that “greater labor force participation of older workers is associated with greater youth employment and reduced youth unemployment.”Learn More
The American psyche gets a lot of credit for fueling the boom in U.S. home prices, which ended in 2006. As houses increased in value, homeowners felt richer, and they spent more. Similarly, falling house prices led to declines in consumer spending as households found themselves poorer and less able to access credit, according to a new paper, “Wealth Effects Revisited: 1975-2012,” by economists Karl Case, the late John Quigley and Robert Shiller.
In this interview, Case explains this “wealth effect.”
Q: Why were our spending decisions influenced by our psychology during the housing boom?
Case: The increase in house prices was like magic. They went from the 1950s until 2006 without ever falling nationally. The numbers are astonishing. If you look at the Federal Reserve’s Flow of Funds Accounts, the value of the owner-occupied housing stock in the United States increased from $14 trillion to $24 trillion. All of a sudden the collective balance sheet of U.S. households had $10 trillion worth of assets that it didn’t have before. That’s a very big number.
The first thing I asked myself is, How did I behave? I bought a house in Wellesley [Massachusetts] for $56,000 in 1976. When I sold it in 1991, it was a $240,000 asset. I know my behavior changed. I was in my 40s, and I found myself with a quarter million dollars that I didn’t know I had. It made me feel wealthier, and I spent more and saved less than I otherwise would have. Home equity loans and second mortgages made it possible for homeowners to withdraw their newly acquired equity to finance a higher level of spending and/or a new or bigger home.
Q: How do we decide we’re feeling richer?
Case: Household wealth is made of many things: houses, cars, and financial assets. The value of any asset, including housing, is determined by what people are willing to pay for it. What determines that? Our expectation of whether it will go up in the future. If you have a house I think is going to go up 10 percent per year, I’m willing to pay more for it than if I think it’s not going up at all. That’s how psychology drives the housing market.
In annual surveys for another paper, we asked 5,000 people going forward 10 years, what do you expect the average annual increase to be in the value of your house? They said 8-10-12 percent per year. They were feeling better because their house was worth more. That leads to more spending.
Q: Is it fair to say the housing market was one of the primary influences on the economy?
Case: Absolutely. Our finding has been very controversial. Some people say housing’s wealth effect doesn’t exist. Our own earlier work suggested that it works when the housing market is on the way up but not on the way down. We now have evidence that it works in both directions. …Learn More
More than half of baby boomers and Generation Xers do not realize how much they are likely to pay out of their own pockets for medical bills after they retire.
Many “were seriously underestimating the amount of savings they would need to accumulate in order to cover health in retirement,” according to what may be the first comprehensive survey and analysis of what Americans expect to pay – and how far off their estimates are.
The good news is that Medicare pays roughly 60 percent of retirees’ total costs. The bad news is that they have to somehow cover the other 40 percent, which is particularly expensive for those who live longer (read women).
If this new study carries one big message, it is that boomers need to learn more about what will certainly be one of their biggest retirement expenses. For example, by 2020, the range of out-of-pocket spending is expected to vary from $2,453 per year for a typical person with low health care needs to $7,272 for the typical high spender. Boomers also may not be aware that the bite that Medicare premiums take out of their monthly Social Security checks will increase sharply by 2020.
The new analysis of the disparity between future retirees’ expectations and what they’re facing was conducted by law professors Allison Hoffman at the UCLA School of Law and Howell Jackson at the Harvard Law School. …Learn More
Enrollment in 401(k)s is higher in companies that use auto-enrollment than in companies that don’t. But the innovation falls short of an ideal solution to the nation’s low retirement savings.
That’s because corporations using it contribute less of their workers’ earnings to the plan than do companies without it, according to a revised paper by Urban Institute researchers Barbara Butrica and Nadia Karamcheva.
“Firms are profit-maximizers, so we’d expect that, if there is some cost to providing these benefits, they may reduce their match rates to control their costs,” Butrica said.
The researchers found that employers that automatically enroll employees in their plans match their employee contributions up to 3.2 percent of earnings, which is lower than the 3.5 percent average match by employers in their study without auto enrollment. Their statistical analysis shows that it has a significant effect.
Americans are saving very little for their retirement, and news and reports often focus on what individual employees are or are not doing right. Why don’t they save enough? Do they properly invest their 401(k) savings?
This research adds a different perspective: the conflict corporations face between providing better benefits to employees – so they can recruit and retain talent – and maximizing profits to satisfy Wall Street or investors seeking higher profits.
Corporate motivations and decisions can “substantially affect future retirement security,” the authors wrote in an executive summary of their paper funded by the Retirement Research Consortium, which supports this blog. …Learn More
Reflecting the sea change in lifestyles for the over-65 set, the share of their total income that America’s elderly earn from working has almost doubled over the past two decades.
That’s a central conclusion of research by the Brooking Institution’s Barry Bosworth and Kathleen Burke, who compared the 1990 and 2010 sources of income for the nation’s age 65-plus population in a paper funded by the Retirement Research Consortium, which supports this blog.
Some things haven’t changed. The share of the elderly’s income that comes from Social Security, employer pensions and – for the poor – government aid such as welfare has hardly budged over the past two decades.
But the earnings the elderly derive from employment soared from 18 percent of their total income in 1990 to 31 percent currently. The primary reason is that more Americans are working longer and delaying retirement, a multifaceted response to better health, more education and – at least for some – growing financial insecurity. …Learn More
This blues lyric by Buddy Guy probably sums up your reaction to news that debt can make you depressed.
But what’s also true is that one’s reaction to debt hinges on what type of debt the person has – and not all debt is depressing. Further, people approaching their retirement years and those with less education who are in debt are more likely to get the blues, according to new research.
Lawrence Berger, an associate professor of social work at the University of Wisconsin in Madison, determined that a 10-percent increase in the dollar amount of an individual’s debt increases his or her depressive symptoms by 14 percent.
To be clear, having debt does not lead to full-blown clinical depression. But it does trigger the garden variety blues that most people experience. Symptoms vary from losing one’s appetite or being unable to shake the blues to feeling lonely…Learn More