Squared Away Blog

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 6, 2015

Fewer Need Long-term Care Insurance

Years of confinement to a nursing home is everyone’s worst fear for old age.

With a semi-private room now costing about $81,000 annually, the prospect of a lengthy stay is also a popular reason for buying a long-term care insurance policy to cover it.

Undercutting this rationale is a new study led by senior economist Anthony Webb of the Center for Retirement Research, which sponsors this blog. He finds that U.S. nursing home stays are relatively short: 11 months for the typical single man and 17 months for a single woman.  There’s some unpleasant news in the study, too, because the risk that an older person may one day need nursing home care is 44 percent for men and 58 percent for women.

The significance is that nursing home stays are higher-probability, lower-cost events than previously thought, which reduces the appeal of purchasing long-term care insurance.  This finding helps to explain why so few older Americans – 13 percent – buy the coverage to protect their financial assets from potentially being drained by nursing home bills. …Learn More

November 20, 2014

Income and Disparate Death Rates

The differences in Americans’ longevity, depending on one’s income level, are striking.

The annual death rates for 50- to 74-year-old men and women with the lowest earnings are more than double what they are for high earners.

This gap in life spans, which is well-documented in the research literature, has been growing with each new generation.  A recent study digs deeper to uncover specific ailments, such as heart disease, that may be driving the growing disparity.

Brookings Institution researchers Barry Bosworth, Gary Burtless, and Kan Zhang used data from a nationally representative sample of almost 32,000 older Americans that included the causes of individual deaths occurring between 1992 and 2010.  The survey contains detailed information about the cause and timing of the deaths, as well as interviews with family of the survey participants after they die.

The researchers compared the mortality rates linked to specific diseases for high- and low income people, defined as those whose earnings in their prime working years fell either above or below the median, or middle, income. They found that the risk of dying from the nation’s leading causes of death – cancer and heart conditions – has declined significantly for high-income Americans, both men and women. No such improvements were evident, however, for low-income men and women. …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 30, 2014

Strange Influences on Financial Decisions

It would be nice to think that careful financial planning is behind the critical decision of when to start collecting Social Security benefits.

But psychological traits – perhaps impatience or one’s fear of losing money – can also affect whether an individual claims his benefits right at age 62 or waits a few years to increase his monthly income from Social Security.  A new study reveals another powerful influence that can jeopardize financial security: how a person’s dollar benefits might appear on the printed Social Security statement.

Business professors Suzanne Shu at UCLA and John Payne and Namika Sagara at Duke University tested this on people over age 40, controlling for psychological influences on the research subjects, such as their impatience, loss aversion, and expectations of how long they’ll live.

In the first experiment, some people were shown tables presenting their monthly Social Security benefits for each claiming age from 62 to 70 – this layout highlights the significant benefit increases that come with each year of delay.

A second set of subjects saw more complex tables displaying their total potential benefits accumulated over their entire time in retirement, which depends on both the age they first claimed and on how long they’ll live. This presentation emphasized a different aspect of the decision: the later someone claims and the longer he lives, the more money he’ll receive over many years. Die young, however, and the accumulated benefits are higher for those claiming at 62.

The experiment’s outcome was significant. The cumulative tables “make people want to claim earlier” – six months earlier than people shown the tables with monthly benefits – Shu said during a recent presentation. …Learn More

October 21, 2014

Fraud Comes with Aging, Mental Decline

Sometimes research seems merely to confirm the obvious. One example is a new study showing that the cognitive decline that naturally comes with aging makes a senior more vulnerable to fraud.

This isn’t especially surprising, but it is important. Amid a shortage of solid research about fraud among the elderly, this study provides important insight into how and under what circumstances they are increasingly being taken to the cleaners by scammers.

In their study, Keith Gamble at DePaul University and researchers at the Rush University Medical Center used a survey of older Chicagoans known as the Rush Memory and Aging Project, which contains an unusual amount of information about aging, cognition, and financial fraud.

In addition to measuring changes over time in the cognitive functioning of its participating seniors – mostly women – the annual survey asks if they’ve ever been a victim of fraud.  It also includes six questions designed to get at their susceptibility to fraud – Do they have difficulty ending a phone call? – and two questions asking about their willingness to take undue financial risks.  In this case, the undue risk is whether they’d accept a bet with 50/50 odds that they could either double their annual income or lose 10 percent of that income.

Here are their findings: …Learn More