Earnings Growth: Better at the Top

U.S. inequality can be measured two ways – by wealth or by earnings. Either way, most working Americans are losing out.

It’s the 1920s again for the richest 1 percent of Americans, and a recent analysis of the wealth gap illustrates why they’re able to live like the fictional Jay Gatsby, portrayed by Leonardo DiCaprio in the new movie, “The Great Gatsby.”

The value of their wealth rises and falls with the stock market. But since the 1960s, they have consistently held 33 percent to 39 percent of the wealth owned by all Americans, including their stock, mansions, commercial real estate, and businesses, according to economist Edward Wolff at New York University. In 2010, the last year examined by Wolff, the richest 1 percent’s share was 35 percent – that was before the Dow flew past 15,000.

The U.S. wealth gap is enormous, partly because most Americans have little wealth to speak of. Most people instead gauge their financial well-being by the size of their paychecks, and income inequality is rising sharply.

Between 1993 and 2011, the earnings of the top 1 percent of U.S. earners grew by nearly 58 percent, after adjusting for inflation. Earnings include salaries, bonuses, stock options, dividends, and capital gains on stock portfolios. That far outpaced the 6 percent rise for the rest of U.S. workers during the same 18-year period, according to a new analysis by economist Emmanuel Saez at the University of California, Berkeley. …Learn More

Layoffs After 50 Cause Severe Losses

For the average older worker who loses his job, his income a decade later is 15 percent lower than if he had escaped the layoff.

It gets worse: His pension wealth is worth 20 percent less, and his financial assets are 30 percent smaller.

The enormous financial hit delivered to older workers who experienced a layoff sometime during the 1990s was reported recently by researchers at the Center for Retirement Research, which supports this blog. First, the researchers pinpointed all workers in the data set who were over age 50 and lost a job between 1992 and 2000. They then examined their financial outcomes – earnings and assets – a decade later and compared them with outcomes for those who avoided layoffs during that time.

Unemployment rate for workers ages 55+If the financial fallout during the 1990s was that dramatic for unemployed older workers, it will be even worse for many of the 3.2 million jobless baby boomers at the peak of the Great Recession, the longest downturn in post-war U.S. history.

The Great Recession hit just as members of the biggest demographic bulge ever were either hitting retirement age or lining up on the runway. Record numbers of them sustained severe hits to their financial security, because the jobless rate for older workers reached record highs.

The research suggests that the recession’s effects may last into old age for many boomers. One key reason for their grim prospects is that older workers have more difficulty snaring new jobs than do young adults. Many boomers never found employment and are being forced to retire grudgingly, simply because they lack options. …Learn More

Infographic: Pension coverage U.S. & Australia

Aussie Employer Mandate Fuels Saving

Consider this: 92 percent of Australian workers have 401(k)-style plans, while less than half of Americans have any kind of pension coverage on their current job.

This yawning disparity exists, because the Australian government requires employers to contribute 9 percent of each worker’s earnings to a personal account, which participants invest much like a 401(k). Under reforms to Australia’s system, employer contributions will rise gradually until 2020 – to 12 percent.

Even though Aussie employers are mandated to make the contributions, economists argue, the money ultimately comes from workers – through lower wages. But U.S. workers, left on their own, have proved to be poor savers, and the fact remains that putting the onus on employers to ensure that retirees have something in savings is working better than our catch-as-catch-can system.

“Australia has been extremely effective in achieving key goals of any retirement income system,” concluded a new report by the Center for Retirement Research, which supports this blog. …Learn More

Student Loans = No House, No New Car

Here’s what Will Flannigan, 26, would rather do with the $401.58 he pays on his student loans every month.

• Save.
• Buy a house: the mortgage payment on a house he looked at was the same as his rent, but renovating or fixing anything would be unaffordable.
• Replace his 2006 Ford Focus – it’s red but he calls it a “lemon.”
• Buy new clothes – thrift shops are standard.
• Eat dinner out at someplace other than a fast food restaurant.

Flannigan is getting married in August – to a woman who pays about $250 per month for her college loans.

Three out of four people now paying off student debt – whether graduates or their parents – are just like Flannigan: they’re delaying important life goals in order to make their payments, according to a new survey by Harris Interactive sponsored by the American Institute of CPAs (AICPA). About 40 percent also said they have delayed saving for retirement or buying a car, to name just two deferred goals.

This survey, which was random and based on telephone interviews, illustrates the reason behind the growing concern among financial advisers, 20- and 30-somethings, and their parents that paying for a college education has become a burden with financial implications for years, even decades.

“It’s indentured servitude – that’s what it is,” said Flannigan, a Kent State graduate (2010), whose loan payments equal one-quarter of his salary as the online editor of Farm and Dairy, in Salem, Ohio, near Youngstown. Payoff horizon for his $62,000 loans: more than 25 years, according to his loan documents, he said….Learn More

Photo of bottom half of runners

Few Boomers Catch Up on 401(k) Saving

Only 13 percent of older workers take advantage of the “catch-up” contributions to their retirement accounts permitted by the IRS for anyone over 50, according to new data provided by Fidelity Investments.

This is hardly surprising, since prior research has estimated that only about 10 percent of all workers are contributing the maximum $17,500 per year that everyone, regardless of age, is allowed to contribute under IRS guidelines for 2013. Since the vast majority never reach that cap, the “catch-up” 401(k) contribution enacted to encourage people to save more when they hit their 50th birthday – an additional $5,500 per year – is largely irrelevant to them.

But the catch-up contribution data, which Fidelity culled from its 401(k) client database representing some 12 million workers, are yet another reminder of a fundamental problem with the U.S. retirement system: Americans simply are not saving enough to ensure their financial security in old age.

In short, members of the Me Generation don’t seem to be doing a great job of taking care of Me. …Learn More

Illustration: Happy birthday squared away blog

Our Mission at Year 2

The best place to invest, the coolest cash back rewards, the smartest or cheapest or lowest-rate mortgage – infinite spin ushers out of the financial world every day, and it’s all aimed at you.

That’s among the reasons the Center for Retirement Research at Boston College started this blog in May 2011. The blog’s focus is not financial products but financial behavior: what people do, why we do it, and how we can do it better. At its two-year anniversary, the Squared Away Blog hopes that it has become a reliable source of information for a growing number of readers of all ages who struggle every day to save and invest for their own or their children’s futures.

It’s important to explain to readers what “reliable” means for a blog housed at a university think tank. First, it’s about credibility. We are not selling anything. The blog is supported by a grant from the U.S. Social Security Administration, which has an interest in making sure Americans get good financial information.

Second, Squared Away routinely covers the latest research – our own or others – about financial behavior, or we use it to inform other articles you’ll read here. That’s because empirical research, which uses statistical analysis to figure out what’s really going on, is critical to understanding and tackling our personal finance challenges. …Learn More

Piecing together Social Security

Getting What You Need for Retirement

You can’t always get what you want. But if you try sometimes you just might find you get what you need.

Rolling Stones, 1969.

There is nothing better that most people can do to get what they’ll need in retirement than delaying when they start collecting Social Security.

The recent PBS documentary, “The Retirement Gamble,” sounded the alarm for many viewers who may be ill-prepared for the financial challenge of a long life – and not much retirement savings in the bank.

To address this growing issue, financial advisers often emphasize retirement-survival strategies to their baby boomer clients. These strategies revolve around the complexities of figuring out how much to save, how to invest, or the best way to spend one’s 401(k) assets post-retirement.

But the real problem facing most Americans is that they have meager balances in their 401(k)s – or none at all.

Putting off when one claims Social Security “is the best deal in town,” concluded an analysis by Steven Sass, program director at the Center for Retirement Research, which supports this blog. …Learn More