Workers racing

Retirement System Urgently Needs Fixing

The state of our retirement preparedness is captured in this fact: about half of U.S. private sector workers at any given time are not enrolled in an employer retirement plan.

To be clear, they are not currently enrolled. Some of them have participated in a plan in the past or will in the future. But this inconsistency is the problem, largely because so many employers still don’t offer 401(k) savings plans to their employees.

The financial toll of not saving consistently is modest retirement account balances. Yet saving has become increasingly urgent as traditional pensions have virtually disappeared from the private sector and Social Security is replacing less of workers’ incomes over time.

401k and IRA chartIn 2019 – after several years of economic growth and a surging stock market – the typical working household, ages 55 to 64, that saves in a 401(k) had only $144,000 in its 401(k)s and IRAs combined, the Center for Retirement Research found in an analysis of the Federal Reserve’s 2019 Survey of Consumer Finances.

That’s just $9,000 more than they had in the 2016 survey, and $144,000 won’t go very far.

A $144,000 account would yield $570 per month for retirement if a couple purchases an annuity that pays a guaranteed income for the rest of their lives. For most retirees, the annuity payments – totaling just under $7,000 per year – would be their only source of income outside of Social Security.

There are also enormous differences between high- and low-income households’ savings, which reflect the nation’s economic disparities and uneven employer coverage. The highest-income older households in the study had $805,500 in their combined 401(k) and IRA accounts, compared with just $32,200 for low-income households. …Learn More

The Economics of Being Black in the U.S.

Unemployment DisparitiesThe COVID-19 recession demonstrates an axiom of economics. Black unemployment always exceeds the rate for whites, the spikes are higher in recessions, and, in a recovery, employment recovers more slowly.

A record number of Black Americans were employed in 2019. But when the economy seized up in the spring, their unemployment rate soared to 17 percent, before floating down to a still-high 12.1 percent in September.  Meanwhile, the white unemployment rate dropped in half, to 7 percent.

The much higher peaks in the unemployment rate for Blacks than whites and the slower recovery are baked into the economy.

This phenomenon occurred during the “jobless recovery” from the 2001 downturn. When the economy had finally restored all of the jobs lost in that recession, the Black jobless rate remained stubbornly higher.

And after the 2008-2009 recession, as the University of California, Berkeley’s Labor Center accurately predicted at the time, Black unemployment hovered at “catastrophic levels” longer than the white rate did.  This disparity is now the issue in the COVID-19 recession.

Geoffrey Sanzenbacher, a Boston College economist who writes a blog about inequality, gives three interrelated reasons for Black workers’ higher unemployment rates.

First, “The U.S. still has a tremendous amount of education inequality, and the unemployment rate is always higher for people with less education,” he wrote in an email. Despite the big strides by Black men and women to obtain college degrees, roughly 30 percent have degrees, compared with more than 40 percent of whites, he said.

Second, Black workers without degrees are vulnerable because they are more likely to earn an hourly wage. An hourly paycheck means that a company can cut costs by simply reducing or eliminating a worker’s hours. “It’s much easier to lay off hourly workers, whose employment is more flexible by nature, than salaried workers,” Sanzenbacher said. …Learn More

Students in class

How High School Finance Courses Fail

States with personal finance course requirementIn more than 30 states, completing a personal finance course is required for a high school degree.

The requirement started gaining traction around the country in 2005, despite the long-running debate about whether the courses even work.

A new study gets at whether high school instruction is effective by asking a fresh question: do the finance classes make people feel better about their situation – and feeling better about one’s finances is an indication things are, in fact, improving.

This departs from past studies focused on objective measures like credit scores and past-due loans.

The researchers find that high school courses have generally been a positive development: adults who grew up in states that require the courses do, in fact, feel better about their finances compared to people from states lacking a requirement.

But what’s interesting in this study is that a group of disadvantaged Americans feel worse off for having taken the courses: high school graduates who didn’t go on to college. Rather than helping them manage their financial challenges, the classes are only making things worse.

Before examining the reason for this, consider how the researchers measured the feeling of well-being. They used recent data from a series of questions asked by the FINRA Investor Education Foundation: Do you feel you have control over your money? Could you afford an unexpected expense? Do you have a sense of achieving your financial goals?

Most important, FINRA asked, do you have the financial “freedom to make choices that allow a person to enjoy life”? FINRA’s survey was conducted in 2018, but this question is relevant in the COVID-19 recession. Enjoying life is essentially the flip side of having financial stress, which is currently very high among low-income workers without college degrees.

The researchers argue that adults with no more than a high school diploma who’d taken the personal finance classes feel worse, because the classes delivered a “harsh dose of reality” that can “make economically vulnerable people more aware of their precarious financial situation.” …Learn More

An apartment building

Deep Financial Woes Portend Rent Crisis

The economy shows some signs of improving. More than 1 million people went back to work last month, pushing the unemployment rate down to 8.4 percent.

But housing experts say a sure sign of trouble ahead is the crisis unfolding among the third of U.S. households who are renters. Things can only get worse for them, because so many were already vulnerable prior to the pandemic after many consecutive years of rising rents that strained their budgets.

Prior to the pandemic, Harvard’s Joint Center for Housing Studies estimates that more than 40 percent of U.S. renters paid more than 50 percent of their incomes for rent – far more than is affordable for most workers. And these rent-burdened households aren’t confined to the lower-income brackets; they extend into the middle class.

The end of the federal government’s $600 weekly supplement to unemployment benefits in July will increasingly strain renters too, said Whitney Airgood-Obrycki, a researcher at the center.

COVID-19 and the resulting recession “is piling on top of an existing affordability crisis,” she said.

This gloomy assessment is backed by other evidence that residents of the four largest metropolitan areas – New York, Los Angeles, Chicago, and Houston – are running out of resources and face “serious financial problems,” warns a report by NPR and Harvard’s T.H. Chan School of Public Health.

Over a third of the households in these four cities have already plowed through most or all of their savings to cover rent, mortgages, credit card bills and necessities, raising concerns they will not be able to “weather long-term financial and health effects of the coronavirus outbreak.” The situation is particularly bad for low-income families. …Learn More

Map of South Central

Examining the Black-White Wealth Gap

The Black Lives Matter protesters have brought renewed attention to the enduring economic inequality that separates Black and white America.

Homeownership is at the heart of this disparity.

For many Americans, their largest source of wealth is the value they have built up in their homes over time. The house is also traditionally the primary way for moderate- and middle-income parents to pass wealth on to their children.

But less than half of African-Americans own homes, and the ones who do have a fraction of the equity whites have due in large part to the nation’s long history of segregated housing, economists say.

Further, the tidal wave of foreclosures a decade ago reduced the already low homeownership in minority communities, which felt the brunt of the housing market collapse. The Black homeownership rate is just 42 percent – 5 percentage points lower than it was in 2000. White homeownership remained stable throughout the crisis and is now around 72 percent, the Urban Institute said.

Home equity is a big part of wealth graphThe upshot of this combination of fewer Black owners and less equity for those who own a house is that the typical African-American worker has $4,400 in home equity, compared with $67,800 for whites. The home equity gap accounts for about half of the Black-white disparity in total wealth.

A web of systemic reasons explain the home equity gap. Black homebuyers have more debt, in part because they are twice as likely to receive a mortgage with a high interest rate as white buyers with comparable incomes. …Learn More

Recession Slams Millennials – Again

Woman waving to a friend

Several young adults in my life have been derailed by the COVID-19 recession.

A few examples. My daughter-in-law just finished her graduate degree in occupational therapy and sailed through her certification only to be met by a stalled job market. A friend’s daughter, fresh out of nursing school, has already been turned down for one job. My nephew, a late bloomer who had finally snared a job making jewelry for a major retailer, was laid off and is floundering again.

Student loans, the Great Recession, and now a pandemic – Millennials can’t seem to catch a break.

Going into this pandemic, people in their 20s and 30s already had lower wages, more student debt, and less wealth than previous generations at the same age. This recession arrives at a critical time when Millennials were trying to catch up, build careers and strive for financial goals.

For the youngest ones, this is their first recession. But the downturn is the second blow for older Millennials, many of whom had the bad luck of entering the job market in the midst of the Great Recession a decade ago.

Does this double jeopardy put them in danger of becoming “a lost generation”? Millennials’ predicament prompted the Federal Reserve Bank of St. Louis to ask this question in a new report on their finances.

The COVID-19 recession, the report said, “could upend many of their lives.”

The situation is far from hopeless, of course – they have several decades to make up for this rough patch! There’s no reason they can’t overcome the setbacks with some pluck and determination.

But this will require much more effort to pull off amid the highest unemployment rate since the Great Depression. The Federal Reserve estimates more than 5.5 million Millennials have become unemployed this year – African-Americans bore a disproportionate share of the layoffs.

Young adults were over-represented in the food service, hospitality, and leisure industries slammed by state shutdowns to control the pandemic. And as the recession plays out, Millennials, with their shorter tenures in the labor market, will continue to be vulnerable to layoffs.

Don’t forget about Generation Z either. The recession will be a tough period for its oldest members, who are just graduating from college and haven’t built up their resumés. They may be less appealing job candidates when so many experienced people are eager to work and willing to compromise on pay at a time of sky-high unemployment. …Learn More

Cars in line at a food back in Austin Texas

Money, Virus Angst Combine for Low-Paid

There’s COVID-19 stress, and then there’s money stress. The combination of the two is becoming too much for many low-income workers to bear.

Two out of three people in families that earn less than $34,000 a year told the U.S. Census Bureau in April that they are “not able to control or stop” their worrying several days a week or more. The feelings are the polar opposite for families earning more than $150,000: two out of three of them said they are not worried at all.

The daily blast of pandemic news has pushed U.S. inequality into the spotlight, exposing the financial pressures low-income Americans are dealing with. Despite the unprecedented $3 trillion in financial assistance passed by Congress, the anxiety was probably a contributing factor in the protests that erupted in dozens of U.S. cities last week.

When governors shut down their economies to control the pandemic, the lowest-income workers – disproportionately African-American and Latino – had barely recovered from the previous recession. Yet nearly half of the increase in incomes for all U.S. families over the past decade has gone to the 1 percent of families with the highest earnings. One glaring example of this disparity is homeownership, which is usually the largest form of wealth by the time people reach retirement age. Homeownership rates across the board declined after the financial crisis, but African-American and Latino rates fell more and are still below 2007 levels.

Low-income workers are now bearing the brunt of the current downturn. Economists estimate the true U.S. unemployment rate could be as high as 20 percent. The layoffs have been concentrated among low-wage workers: nearly 40 percent of people living in households earning less than $40,000 have lost their jobs.

The fundamental challenge of surviving from day to day is evident in the miles-long lines of cars at some U.S. food banks. About a third of Americans are having problems paying for all kinds of essentials – rent, utilities, or food – but the number rises to almost half for African-Americans and Latinos, according to a Kaiser Family Foundation poll in mid-May. Children are being disproportionately impacted by rising food insecurity.

Spotty health care coverage is another layer of stress. Workers on the front lines in nursing homes, meat processing plants and grocery stores are more at risk of contracting COVID-19 but less likely to have health insurance from their employers. They may avoid seeing a doctor, even if they have symptoms, out of fear of being unable to afford the charges. …Learn More