Posts Tagged "saving"

Around 50, U.S. Workers’ Earnings Fall

Here’s a sobering thought: by the time most workers get into their 50s, their earnings are declining.

Although older workers don’t necessarily see smaller paychecks, their earnings are effectively shrinking, because they no longer keep up with inflation, according to a study charting the inflation-adjusted, or “real,” earnings of some 5 million U.S. workers over their lifetimes.

The first decade in the labor force, between ages 25 to 35, is crucial – that’s where the wage gains are concentrated, the researchers find. Real earnings plateau sometime between 35 and 45, and this plateau occurs earlier than previous research had indicated. By the time most people move into the oldest age group in the sample – 45 to 55 – their earnings are falling.

The chart below shows the percentage changes during three discrete decades in the labor force for people whose earnings are in the middle of all U.S. workers’ earnings. For the 45-55 age group, other data in the study pinpoint the earnings decline as actually beginning around 50.

Economists have been refining their analyses of lifetime earnings patterns for decades. The researchers’ methodology improves on past techniques and then applies it to an extremely robust data set: the Social Security Administration’s earnings records for U.S. workers from the 1970s through 2011.

When they looked at all workers, they found that earnings, adjusted for inflation, rise by 38 percent over a typical person’s lifetime. But these lifetime patterns vary dramatically by a worker’s income bracket. …Learn More

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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

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Tapping 401(k)s, IRAs Early Is Costly

It’s fairly easy to withdraw money prematurely from 401(k)s and IRAs – a practice that depletes roughly one-fourth of account balances over a worker’s lifetime.

U.S. workers on average withdraw 1.5 percent annually from their retirement account assets.  When they do, they forgo years of investment gains they could have earned had they left their money alone.

Early withdrawals can pose a problem for many Americans at a time financial security in retirement increasingly hinges on these defined contribution plans.  The potential for leakages has also grown in recent years, in part due to the shift away from traditional employer pensions to 401(k)s that place control in employees’ hands.  Further, the assets being held in IRAs, which have more liberal withdrawal policies, are increasing as workers changing jobs and retiring baby boomers roll their employer-sponsored 401(k)s into IRAs.

Figure: Sources of Premature Withdrawal This chart shows the sources and relative amounts – as a percent of total plan assets – of different types of these premature and permanent withdrawals from defined contribution plans.  These estimates, by the Center for Retirement Research, which supports this blog, are based on data from the mutual fund company, Vanguard. They total slightly less than 1.5 percent, because plan participants in Vanguard’s client base earn more than the general population and may have somewhat lower withdrawal rates.

To help preserve workers’ savings, the study proposed ways these premature withdrawals could be restricted: …Learn More

Procrastinators Are Not Big Savers

The Greek poet Hesiod, circa 700 B.C.

Saving for retirement is a modern-day imperative, but even the ancient Greek poet Hesiod – quoted in a new study – advised us not to tarry:

Do not put off till tomorrow and the day after; for a sluggish worker does not fill his barn.

So what about procrastinators, who place more importance on today’s enjoyment than on preparing for the future?  The new study asked whether people with this personality trait make different decisions about retirement saving than non-procrastinators and found that they do.

Up to one in five people were procrastinators in the study’s data base of more than 155,000 workers at numerous employers.  The researchers identified procrastinators in the sample as the people who waited until the final day of open enrollment to choose their health plan from among their employer options.  (To separate them from employees who intentionally delayed so they could collect enough information, the researchers looked at how often people used various online employee benefit tools – these strategic delayers were very active; procrastinators were not.) …Learn More

The Influence of Language on Saving

If so many human characteristics are universal, why does something so basic as the household saving rate vary from 10 percent in Belgium to 4 percent in the United States?

Traditional economic explanations point to built-in retirement account defaults, government mandates or financial incentives. But UCLA behavioral economist Keith Chen mines the study of linguistics for an unorthodox explanation of the wide global disparities in saving.

Discussing his early findings in this new field in the video above, Chen explains one aspect of grammar that may influence saving.

To find out what that is, watch the video. This Ted talk was filmed in Edinburgh, Scotland in 2012. …Learn More

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

5 Reasons Workers’ Stable Wealth Is Bad

Americans build wealth as they age, and this pattern of accumulation has been similar over three decades of U.S. Survey of Consumer Finances data collected by the Federal Reserve.

In the chart below, net wealth is expressed in terms of annual incomes for ages 20 through 64; for example, someone with $150,000 in wealth and $50,000 in income has a wealth-to-income ratio of 3. Net wealth equals financial assets such as 401(k)s and housing, minus debt and mortgages; income includes employment earnings and investment gains.  This measure does not include Social Security or defined benefit (DB) pensions.

Chart: Ratio of Wealth to Income

The stability of this wealth-to-income ratio over 30 years may, at first glance, be comforting.  But it shouldn’t be – wealth should have increased during this time for five reasons.

1. Longer life spans than in the early 1980s require that Americans save more to fund more years in retirement.

2. Health care costs are rising, so people will need more wealth to cover their out-of-pocket costs. …Learn More

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