April 9, 2015
Retirement Coverage Expanded: UK vs US
President Obama signed a January memo officially launching his MyRA program to encourage saving by low-income and other Americans who lack a retirement plan through their employers.
The United Kingdom is also addressing pension shortfalls for uncovered workers in a much more ambitious way. The U.K. program, put in place in 2012, has two key provisions that MyRA lacks: it automatically enrolls workers so more will save in the first place, and it provides them with matching contributions.
The U.K. program has enrolled 1.8 million of the 4 million workers targeted, primarily at small employers. A 2014 study by the Center for Retirement Research, which supports this blog, described the program and compared it with MyRA.
The United Kingdom’s retirement income problems largely stem from the contraction of the government’s retirement system. A first stab at improving retirement income security came in 2001, when the government mandated that employers with five or more workers offer a low-cost retirement savings plan that workers could volunteer to join. That program gained little traction among workers or financial firms.
The 2012 reform was much bolder. In addition to mandating a 3 percent employer match (starting in 2017), the government matches 1 percent, with both matches contingent on the employee saving 4 percent of his earnings. To manage the program and offer a low-cost savings plan to employers, the National Employment Savings Trust, or NEST, was established. …Learn More
March 12, 2015
Navigating Taxes in Retirement
The tax landscape shifts suddenly when most Americans leave the labor force to retire. The single most important thing to remember is that income taxes can fall dramatically, because retirement incomes are typically lower and because all or a portion of your Social Security benefits will be tax-exempt.
This was among the tax insights supplied by Vorris J. Blankenship, a retirement tax planner near Sacramento, California, who has just finished the 2015 edition of his 5-inch thick “Tax Planning for Retirees.” The following is an edited version of tax information he supplied to Squared Away:
Lower taxes in retirement. Brian and Janet are a hypothetical couple renting an apartment in Nevada, a state with no income tax. In 2013, Brian earned $40,000 at his job, and Janet’s wages were $20,000, for a total income of $60,000. They took the standard deduction on their federal tax return and paid income tax of $5,111.
Brian retired on December 31, 2013. In 2014, he received Social Security payments of $15,000 – $2,750 of which was taxable – and a fully taxable pension from his former employer of $10,000. About one-third of retirees pay some income taxes on their Social Security benefits, because their retirement income exceeds certain thresholds in the tax code.
In 2014, Janet again earned $20,000, but the couple’s total household income declined to $45,000 from $60,000. They took the standard deduction on their federal tax return and paid income tax of only $1,248.
The 75 percent reduction in their taxes is much larger than the 25 percent decline in their income after Brian retired. …Learn More
March 10, 2015
9 Measures of U.S. Economic Inequality
The interactive chart above illustrates the increasing U.S. disparity over the past 50 years between how much wealth the rich own – shown on the right side of the chart – and everyone else on the left.
The vast majority of Americans build wealth week by week, saving a little bit of their paychecks. Workers set aside wealth in less obvious ways too, by contributing some of that paycheck to Social Security and possibly paying down a mortgage.
Differences in earnings add up over a lifetime and contribute to how much wealth people are able to accumulate. This is explored in the Urban Institute’s series of nine charts, including the one above. Take the earnings trend over a half century shown in Chart No. 2 on the Urban Institute’s website: the nation’s top-paid workers have enjoyed increasing incomes, while wages have essentially been flat for those at the bottom. [All income and wealth data are in constant 2013 dollars and are comparable.]
The charts, when taken together, also illustrate how much larger is the wealth disparity between the top and bottom than is the earnings disparity. This is especially true of racial inequalities, even when the researchers control for income and age.
In Chart No. 5 on the Urban Institute’s website, the total value of the lifetime earnings of the typical white baby boomer born between 1943 and 1951 is $2 million – 30 percent more than African-Americans’ lifetime earnings of $1.5 million.
The typical white American families’ retirement savings (Chart No. 7) is $130,472 – seven times more than African-American families at $19,049. [Wealth data were provided only for families, not for individuals.] A report by the Federal Reserve Bank of St. Louis reached similar conclusions about the income and wealth gaps for black families.
To see all nine of the Urban Institute’s charts and its report, click here.Learn More
March 4, 2015
Some Spouses Shun Retirement Planning
Retirement is a joint project for married couples, but remarkably only 43 percent of couples plan for it together.
Are wives to blame?
Some husbands expressed frustration that their wives don’t engage in planning during a focus group conducted by Hearts & Wallets. One man reported that his wife “is not interested in investing,” and another said “all my wife cares about is if we’re going to have the money.”
A San Francisco man volunteered this worst-case scenario: “If I were to get hit by BART on the way home, she would be clueless about what to do with whatsoever there is or how to handle anything.”
Hearts & Wallets cofounder Laura Varas calls it the issue of the “uninvolved spouse.” In a new analysis of its 2013 survey data on 5,400 US households, the financial research firm found that 80 percent of these uninvolved spouses are wives among couples approaching retirement age. The good news is that younger wives are more engaged, Varas said. In early- and mid-career couples, fewer than 60 percent of uninvolved spouses were women.
Yet it’s hard to imagine how anyone can avoid this conversation, given the myriad issues to resolve: Will you stagger your retirement dates, especially if your ages are far apart? If saving and paying off the mortgage are twin retirement goals, are you both still contributing enough to your 401(k)s to ensure you get the full employer match? Have you coordinated your strategies for claiming Social Security? Will you be financially secure if your spouse dies first? …Learn More
February 19, 2015
Ranking: Top Cities for Successful Aging
With snowstorms hammering the eastern United States, some baby boomers may be looking for a permanent escape when they retire.
Yet Southern cities did not come out on top in the Milken Institute’s new ranking of the Best Cities for Successful Aging, a ranking based on a fairly comprehensive set of factors important to seniors. Take frigid Iowa City, the No. 1 small city: it gets credit for its transportation and the affordability of its assisted living and adult day care services.
Milken Institute economist Anusuya Chatterjee saw common themes among the top-ranked metro areas. They tended to have vibrant economies, quality healthcare services, opportunities for intellectual stimulation and active lifestyles, and easy access to amenities like grocery stores, transit, and culture.
University towns often fill these requirements, she said. Madison, Wisconsin – home of the University of Wisconsin – was the top-ranked large metropolitan area.
Financial considerations also influenced the rankings, such as living costs and the cost of day services for the elderly or assisted living. Convenience amenities have financial implications too – a monthly subway pass is cheaper than owning a car.
The methodology, explained in more detail later, was more rigorous than what’s typically found in city rankings. Here are other surprising results: …Learn More
February 12, 2015
Immigrant Flows Impact Social Security
Manuel Carvallo immigrated from Mexico at age 40 and became a U.S. citizen at 51. The Georgia pension consultant just reached another milestone, accumulating the 10 years of U.S. work experience required to receive a small Social Security pension when he retires.
Millions of immigrants from around the world who work here illegally could get the same opportunity as Carvallo under President Obama’s executive actions on immigration, which propose to give many of them temporary legal work papers and Social Security numbers. Great uncertainty remains about where U.S. immigration policy is heading as Congress actively seeks to reverse the president’s administrative actions
What is clear is that when undocumented immigrants – farm workers, hotel workers, and household and restaurant staff lacking green cards or other legal status – do pay into Social Security, they often have little prospect of ever receiving benefits. In 2010, some 3 million such workers with fake or expired Social Security numbers added a $12 billion bonus to the Social Security Trust Fund, the U.S. Social Security Administration estimated. …Learn More
February 3, 2015
The Impact of Taxing Health Premiums
Excluding the health insurance premiums paid by employers and employees from workers’ taxable earnings is the federal government’s largest single tax expenditure, amounting to some $250 billion a year in lost revenue.
Eliminating the exclusions – as some in Washington have proposed – would sharply increase how much is taken out of workers’ paychecks for payroll taxes and for income taxes. But any such proposal would also put more money in their pockets when they retire by increasing the earnings base on which their Social Security benefits are calculated.
Urban Institute researchers Karen Smith and Eric Toder recently estimated the policy’s impact on workers’ taxes and benefits and found that it varied widely for different income groups and among people born in five different decades, the 1950s through the 1990s.
Their analysis took into account the myriad idiosyncrasies of the U.S. tax code, including a regressive payroll tax, a progressive income tax, Earned Income Tax Credits paid to the lowest-wage workers, and the cap on payroll taxes for the highest earners. To evaluate the proposals’ impact, the researchers added the premium amounts paid by both the employer and employee to workers’ taxable incomes – just as the deficit reduction proposals would do.
The resulting tax bite would be largest for the middle class. That’s because middle-income workers are more likely to have employer-provided health insurance than lower-income workers, and their insurance premiums are a larger share of their income than they are for higher-income groups. Under the proposal, middle-income workers’ federal income and payroll taxes would rise by an amount equal to 3.5 percent of their lifetime earnings. …Learn More