December 16, 2014
Evaluating a Pension Buyout Offer
Like many baby boomers, I’ve received an offer from a former employer that’s meant to entice: “The Company is offering you a limited-time opportunity to receive this benefit now, rather than waiting until you otherwise become eligible to receive payments from the Plan.”
My 17-year employment as a Boston Globe reporter entitles me to a $1,762 monthly pension for life, starting at age 65. I’m 57 now. But a few weeks ago, the company put two alternatives on the table: take a smaller pension that starts now or trade my pension for a lump sum of $170,000 in cash. The deadline for accepting the new offer: the day after Christmas.
The New York Times Co., which used to own the Globe, has no doubt made this offer to employees for the same reason most companies do: to reduce burdensome pension liabilities and create financial certainty. But what’s in it for me? And how should other boomers think about similar offers coming over the transom?
My first thought was this: I’m working now and don’t want or need a pension right away. This money is for my retirement. I view my decision as choosing between the remaining two options: my original pension at 65 or the new lump sum offer.
A senior economist here at the Center for Retirement Research, Anthony Webb, helped me compare these two options: …Learn More
December 11, 2014
Widows Face More Financial Adversity
Two times more widows than widowers say their spouse’s death carried significant negative financial consequences during the first year after their loss.
This sharp contrast recurred in numerous financial questions recently posed to widows and widowers by New York Life. The contrast also seemed to persist across various income levels, in questions revolving around both essential needs and luxuries. Here’s a sampling of answers given by nearly 900 Americans whose spouses have died sometime in the past decade:
Their answers beg the question: Why the divergence?
One reason is certainly that two-thirds of the widows surveyed reported their income was under $35,000, while a majority of the widowers earned more than that. Adults over age 18 were canvassed, so working women’s lower earnings no doubt contributed to the income and lifestyle disparities.
Pension survivor policies also play a role, since two out of three of the people surveyed were over age 65. …Learn More
November 18, 2014
Pension Cuts Could Hurt Worker Quality
Cuts in public pensions taking place around the country could reduce the ability of state and local governments to recruit and retain top-quality workers, according to new findings by the Center for Retirement Research, which sponsors this blog.
Economists have long argued that pensions and worker quality are related. Pensions, like paychecks, are a form of compensation, one that particularly appeals to workers with the foresight to value financial security in a retirement still decades away. And these are often better, more productive workers.
To examine the effect of pension generosity on worker quality, the Center’s researchers first had to find good measures of each. For worker quality, they used U.S. Census Bureau survey data on workers who have moved between the public and private sectors. The data show that private-sector wages paid to those leaving government were consistently higher than the private-sector wages of people leaving the private sector to work in government – about 7 percent higher, on average, between 1980 and 2012. This wage difference represents the “quality gap” among workers. …Learn More
November 6, 2014
Taxes and Social Security Progressivity
Social Security’s old-age pensions were designed to replace more of the earnings of retired low-wage workers than of higher-wage workers.
But how is this progressivity affected by the federal income taxes paid by all workers and retirees? A study by economists at the Center for Retirement Research, which sponsors this blog, analyzed this complex issue and found that income taxes have not had any real impact on the overall progressivity of the Social Security program.
To reach this conclusion, the researchers used the actual experiences of older American households contained in survey data linked to their lifetime earnings. There were several different tax effects to consider.
First, the payroll tax that funds Social Security is shared by workers and employers, with differing effects. Although the workers’ payroll tax is deducted from their paychecks, workers must still pay income taxes on that amount.
The payroll tax paid by employers, on the other hand, is transferred directly to the federal government, and no income tax is paid. Although the amount transferred is effectively part of workers’ compensation, they do not have to pay income tax on this portion of their compensation. This reduces the taxable income of all workers, but it is more valuable to higher income workers who pay higher tax rates: a one dollar employer contribution costs a taxpayer in the 35-percent bracket just 65 cents, compared with 90 cents for a lower-paid worker in the 10-percent bracket.
Many low-wage workers pay no income taxes or even receive an Earned Income Tax Credit. But a negative tax rate – in the form of a credit for the lowest-wage workers – means they can’t benefit from the tax exemption implicit in employers’ contributions to Social Security on their behalf. …Learn More
October 23, 2014
How Emotions Meddle with Money
Our 401(k) retirement system requires most workers to save for the future. But it’s difficult to reach this increasingly important goal, because our emotions – overconfidence, pleasure, fear of loss – get in the way.
“We believe our own nonsense,” is how Daylian Cane, a professor in the Yale School of Management, explains financial behavior in a new public television program, “Thinking Money: The Psychology Behind our Best and Worst Financial Decisions.” The short video above is taken from the program.
Further clouding our judgment are a vast array of consumer products, and the stress produced by how easy it is to purchase them with a credit card swipe and how hard it is to pay off the cards.
“Thinking Money,” a production of Maryland Public Television, covers many topics covered by this blog, including help for people trying to overcome their emotional obstacles.
“Thinking Money” is scheduled to air in its entirety on public television stations around the country in coming weeks. Click on “Learn More” for a list of broadcast dates in major cities. …Learn More
October 2, 2014
Primer: Home Equity → Retiree Income
Americans who are 62 or older had an estimated $3.6 trillion in total equity locked up in their homes in the first quarter of 2014, according to the National Reverse Mortgage Lenders Association. A new primer suggests they should start thinking seriously about using it to generate some extra retirement income.
The primer, published by the Center for Retirement Research at Boston College, which sponsors this blog, discusses two ways retirees can use home equity to generate income: by downsizing into a less expensive house or condominium or by taking out a reverse mortgage.
Click here to read the booklet online and learn how these strategies work and how much money each can provide. Their pros and cons are detailed in the graphic below, excerpted from the booklet:
September 23, 2014
Retirement: a Good State of Mind
Is retirement good for one’s mental health? The evidence is all over the place.
One study concludes that retiring sooner means a higher incidence of dementia. Other studies show it benefits physical health, which can affect one’s state of mind. Research from different countries reach different conclusions about their own retirees’ sense of well-being: the English and Finnish find that retiring improves it, while Korean and U.S. researchers don’t.
Seeking some universal truths about retirement in the Western world, a new study of the United States and 11 European countries finds that it improves subjective well-being, measured both in terms of satisfaction with one’s life and the incidence of depression. The study is based on two comparable sets of surveys of age 50-plus Americans and Europeans taken in 2004, 2006, and 2010.
An analysis of retiree well-being faces some tricky analytical issues, which have plagued past studies and which the new study had to overcome. For one thing, people who are depressed may be the most likely to retire, creating the statistical equivalent of a chicken and egg problem. The new study also had to account for the negative financial consequences of leaving or losing one’s job – which can reduce satisfaction and increase depression – in order to isolate the influence of retirement, independent of its effect of lowering income. …Learn More