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
January 29, 2015
Retirement Saving: Excuses and Regrets
U.S. workers have a long list of reasons, many of them legitimate, for why they can’t come up with the money for a retirement savings plan.
But here’s the rub: we live in a 401(k) world. Workers who aren’t convinced of the urgency of saving should listen to people who have already retired. Even though many current retirees have defined-benefit pensions, they have become largely unavailable to most people still working today. And these retirees say they’ve learned the hard way that saving is key.
Excuses now and regrets later – these two takeaways came out of a nationally representative survey of workers and retirees by HSBC, a global financial institution.
Saving for retirement is not a major priority for 81 percent of the workers surveyed. The chart shows that saving takes a back seat to myriad other financial concerns, topped by the impact of the global economic downturn and the U.S. job market.
Things are much clearer to retirees. Nearly half of them, when asked for the latest age at which people should start preparing to retire, said before 30. Many retirees – about two out of five – said “they did not realize that their preparation had fallen short until it was far too late.”
Whatever obstacles they face, the question facing workers is: what can they do to save or save more? …Learn More
January 22, 2015
Winging It in Retirement?
Saving should be the centerpiece of any retirement plan today. But a new survey indicates that many Americans on the cusp of retiring have given little thought to the other key issues they’ll face in retirement.
A majority of older Americans recently surveyed by the American College of Financial Services, an educational organization for financial professionals, said they have set a goal for how much money to save to “live comfortably” as retirees. And, when asked to assess their own progress, they feel they’re doing a good job of it. Granted, the survey was limited to a select group of about 1,000 people over age 60, all of whom have at least $100,000 in investable assets.
But the financial risks posed by the transition away from full-time work and a regular paycheck are complex and continual – and preparing for them goes well beyond contributing to a 401(k).
Only a minority of people planning their retirement take into account these important financial issues: …Learn More
December 4, 2014
How to Think About Self-Control
“Self-control” is a catch-all label for resisting all sorts of temptations, including overspending. According to a new study, controlling overspending can be broken down into three distinct behaviors:
• Setting goals such as buying a house or saving money.
• Monitoring bank statements to systematically track where your money goes.
• Committing to the goal in the face of short-term temptations to spend.
Data for the study came from a nationally representative U.S. survey of households over age 50. The survey has extensive information about the households’ finances and about each individual’s resolve to set goals, track their finances, and carry out their commitments – whether financial or non-financial.
Households lacking self-control disproportionately have lower net worth – no surprise there. The largest effect is on their liquid financial assets, such as checking and savings accounts and IRAs. Impulsive consumption “is more likely to have an immediate impact on liquid holdings than on illiquid assets,” such as property, said the researchers, who are from Goethe University in Frankfurt.
More interesting is their analysis of the role played by self-control’s three individual components. The study found that the third ingredient – the ability to stick to commitments – draws the darkest line between success and failure in accumulating net worth.
But the researchers also divided net worth into “real wealth” – homes, other property, or vehicles – and financial wealth, which is more easily liquidated than property. Commitment again proved most important in determining whether people own property. But when it comes to accumulating financial wealth, monitoring one’s finances plays the largest role.
Everyone talks about self-control. This study clarifies what it is.
November 11, 2014
Paid Sick Time Wins on Ballots
In last Tuesday’s election, voters in Massachusetts and three cities – Oakland, California, and Montclair and Trenton, New Jersey – approved paid sick time initiatives that benefit working mothers in particular.
These election results come on the heels of a slew of similar initiatives approved in the past year covering all or certain groups of workers in California and in San Diego, Washington, DC; Eugene, Oregon; several New Jersey municipalities; and the Tacoma suburb of SeaTac, according to an inventory of sick time laws compiled by the advocacy group, A Better Balance.
Mandated paid sick time for employees is growing in popularity but is still unavailable to significant numbers of working mothers, who, the data show, are more often responsible for children’s health than fathers. This issue is one more thing that – like lower pay – can disadvantage single women struggling to secure their personal finances today or save for retirement in the future, especially low-income women.
Research by Usha Ranji, associate director of women’s health policy for the health care non-profit organization, the Kaiser Family Foundation, found that 39 percent of working moms are forced to miss work when a child is sick, because they don’t have back-up child care; of them, 60 percent do not get paid for that time – a decade ago, fewer than half of this group were in this position. …Learn More
October 14, 2014
A Thriving Underground Money Culture
Recent immigrants – whether from Mexico, Africa or China – often form groups that regularly contribute to a pool of money. Group members then take turns pulling out $500 or $1,000 in accumulated cash.
These savings groups are one aspect of a pervasive underground money culture bustling beneath the surface in U.S. communities of immigrants and other low-income workers.
Savings groups are one of four types of “informal” financial arrangements identified in a new report, “An Invisible Finance Sector: How Households Use Financial Tools of Their Own Making.” These arrangements create a strong social commitment to saving typically absent in the formal U.S. banking system.
The four arrangements discussed in the report are:
- Savings groups, also known as lending circles, which are primarily found in immigrant communities.
- Interpersonal loans.
- Storing more than $100 in cash at home.
- Money guards who safeguard someone else’s savings. …
September 9, 2014
How Much For the 401(k)? Depends.
How much must 30-somethings save in their 401(k)s to prevent a decline in their living standard after they retire?
No two people are alike, but the Center for Retirement Research estimates the typical 35 year old who hopes to retire at 65 should sock away 15 percent of his earnings, starting now. Prefer to retire at 62? Hike that to 24 percent. To get the percent deducted from one’s paycheck down into the single digits, young adults should start saving in their mid-20s and think about retiring at 67.
These retirement savings rates are taken from the table below showing the Center’s recent estimates of how much workers of various ages should save to achieve a comfortable retirement; they represent the worker’s contribution plus the employer’s contribution on their worker’s behalf. Expressed as a percent of their earnings, they also vary depending when a worker retires.
To derive these savings rates, the Center’s economists assumed that a retired household with mid-level earnings needs 70 percent of its past earnings. They then subtracted out the household’s anticipated Social Security benefits. The rest has to come from employer retirement savings plans, which determine the percent of pay required to reach the 70 percent “replacement rate.” …Learn More