Remote Work Has Pushed Up House Prices

Slack, Citizens Bank, Penguin Random House, Verizon, 3M, Twitter – the list is long and growing of companies that have allowed employees to continue working remotely even though the pandemic seems to be easing.

The COVID-19 upheaval in lifestyles – the moving around to larger homes, to the countryside or to an affordable city – is pushing up house prices.

John Mondragon at the Federal Reserve Bank of San Francisco and Johannes Wieland at the University of California, San Diego, estimate that remote work fueled a 15 percent rise in house prices over the two-year period that ended in November 2021. That’s more than half of the total price increase for that period, which was a record, the researchers said.

A few different types of lifestyle changes drove the price hikes. But the bottom line is that remote work caused a frenzy of buying activity that wouldn’t have happened otherwise. The increase in demand sparked competitive bidding for properties – and prices shot up. And the parts of the country where remote work was more common had significantly larger price increases.

The price increases “reflected a change in fundamentals rather than a speculative bubble,” the researchers concluded.

Soon after the pandemic began, workers who were changing their living arrangements made the news. Renters left behind expensive apartments in New York or San Francisco to escape COVID’s dangers. Now working remotely, they used their newfound freedom to become first-time homeowners in an appealing suburb nearby or a rural area halfway across the country where they could afford to buy a house.

The need for larger homes also heated up market activity. Having more space was suddenly more valued by workers who required an additional bedroom to set up a home office or now had to accommodate both spouses working from home – and, early in the pandemic, children attending classes on Zoom.

The researchers stress that they measured only the price increases resulting from an increase in aggregate housing demand nationwide. In other words, people didn’t add to total demand if they simply moved from Chicago, where they sold a condominium, to Des Moines, Iowa, where they purchased a house of similar value. …Learn More

Parents Work Less After Kids Leave Home

When children grow up and become financially independent, how do parents adjust their finances? Are they finally spending money on themselves? Saving more for retirement? Paying down debt?

No one has come up with a convincing answer yet. Especially puzzling is that past research has shown that parents seem to reduce their consumption after the adult children move out. Yet there’s no evidence that much of the extra money is going into 401(k)s. So what’s going on?

A new study for the first time finds a missing puzzle piece: parents, freed from the obligation to support their children, are choosing to work less.

Parents work one to two hours less per week after their adult children leave home for good, according to researchers at the American Enterprise Institute and the Center for Retirement Research.

Consistent with this finding, their household income declines roughly 4 percent because they’re working fewer hours or finding less demanding jobs with lower pay.

Reaching this conclusion required a series of steps. First, the researchers broadened the definitions of saving and consumption used in earlier studies to see if that shed any light on the issue. Finally, they looked at the parents’ decisions about work.

In the past, the estimates of saving had largely been confined to putting money in 401(k)s. Perhaps something could be learned by counting paying off a mortgage or other debts as a form of saving. But the researchers still found no evidence parents are paying their debts off faster after the kids leave.

So where is that extra money going? …Learn More

Americans Say They Need a Finance Class

For all of Americans’ financial shortcomings, at least we recognize there is a problem.

More than 80 percent of adults believe states should require a personal finance class in high school and wish they’d taken one themselves, according to a March survey by the National Endowment for Financial Education (NEFE).

Rarely do we see that much agreement on anything, and it indicates people don’t always feel confident about the choices they are making. A famous questionnaire takes the measure of their insecurity: less than a third of people surveyed correctly answered three basic questions about interest rates, inflation, and investment risk.

Of course, people over 60 have more experience, and 92 percent of them think financial education is important. But 79 percent of 18- to 29-year-olds also feel strongly that a financial class should be required for a high school degree. And both men and women agree.

Unfortunately, there hasn’t been much agreement on whether financial education actually does much good. NEFE would like to put forward some new evidence that it does work.

NEFE asked four economists to do a meta-analysis of 76 studies in 33 countries that tested the effectiveness of a wide variety of financial lessons at all ages. In one study, elementary students exhibited more self control after hearing stories that helped them visualize the future. One story was about a girl who explored, through time travel, a choice between buying things now or saving up for a bike. The researchers in another study described workers as effectively “flipping a coin” to decide between a 401(k)-style or Roth retirement account. But after watching videos about the accounts’ different tax consequences, they answered more questions about the accounts correctly.

The researchers’ conclusion: “Financial education improves financial knowledge and financial behaviors.” …
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Explaining Social Security’s Earnings Test

The reduction in benefits for some people who collect Social Security while simultaneously working is frequently called a “tax.”

It is not a tax. Under a Social Security rule known as the Retirement Earnings Test (RET), some benefits are withheld if the worker earns above a certain level – $19,560 in 2022 – and has not yet reached his full retirement age under the program. At that age, the government starts paying the deferred benefits back incrementally.

As older workers plot a path to retirement, they should have a clear understanding of this financial impact. But a new study finds they have a poor grasp of the tradeoff that is the central feature of the RET: a smaller monthly check now, while they’re working, in return for a bigger check later.

Failing to understand this concept has real world consequences. Retirement experts encourage boomers to work as much as possible to improve their finances. But someone who doesn’t understand the RET might decide against working more to prevent a perceived benefit cut.

The researchers experimented with how to improve understanding of the RET by showing some 1,000 older workers numerous graphic representations of the financial impact. The best way to illustrate the study’s main finding – that a bar chart emphasizing the shift in benefits from now to later worked best – is to focus here on two pairs of blue bar graphs.

Some workers saw a simple bar graph (below, left) showing that the individual who fully retired at age 62 would receive a $1,000 monthly benefit for life. A second bar graph (below, right) showed a smaller benefit –  about $750 per month – for someone who started Social Security at 62 while he was still working. At 67, his full retirement age, the benefit jumps to about $1,100 when Social Security starts paying back the withheld amount.A second group of workers also saw the simple bar graph (above, left) of the 62-year-old retirees’ stable $1,000 benefit. But the second bar graph (below) illustrated the shift in benefits for a Social Security recipient who is still working.Learn More

Enhancement to Savers Tax Credit is Minor

The Savers Tax Credit sounds great on paper. Low-income people get a federal tax credit for saving money for retirement.

But this part of the tax code always seems to disappoint.

The House recently overwhelmingly passed a bill, the Secure Act 2.0, that – along with numerous other retirement provisions – makes the savers credit more generous for some low-income workers.

Under current law, taxpayers can get one of three credits – 10 percent, 20 percent, or 50 percent of the amount they save in a 401(k). The Secure Act, which is now headed for the Senate, would somewhat increase the top income levels for the 50 percent credit – from $20,500 currently to $24,000 for single taxpayers and from $41,000 to $48,000 for married couples. The dollar value of the caps on their credits would remain at the current $1,000 and $2,000, respectively.

The House bill would also eliminate the 10 percent and 20 percent credits for higher-income workers and begin phasing out the dollar caps once taxpayers exceed the $24,000 and $48,000 income levels.

The proposed tweak to the tax structure “is not a dramatic change to who gets the credit,” said Samantha Jacoby, the senior tax legal analyst for the Center on Budget and Policy Priorities.

The House also failed to fix the fundamental flaw in the savers credit: it is non-refundable. This means workers who don’t owe any taxes don’t qualify. Without refundability, Jacoby and Chuck Marr write in a recent report, the House bill “ignores a critical reason why so few people with low and moderate incomes claim the credit.”

Disappointment with the tweaks to the savers credit is apparent in the context of the entire bill, which gives much more to higher-income people. For example, the House increased the age that taxation of 401(k) withdrawals kicks in from 72 to 75. Some retirees with modest incomes will tap their savings long before that and won’t benefit from the provision.

“Overwhelmingly, the people who will benefit from this bill are the people who are higher income and already have secure retirements,” Jacoby said.

Another barrier to use of the savers credit is a lack of awareness that it exists. The share of tax filers who claim the credit has increased in the past 20 years but still hasn’t reached 10 percent, according to a report by Transamerica Institute. …Learn More

Got a Retirement Plan? Race Plays a Role

The following statistic will sound familiar since I use it regularly: about half of U.S. workers are not saving enough and may see their standard of living drop when they retire.

A major culprit in this poor state of preparedness is that millions of Americans at any given moment don’t have a traditional pension or 401(k) savings plan at work.

A new study takes a close look at who these people are and shows stark differences along racial lines. A large majority of Hispanic workers in the private sector – two out of every three – do not have access to a pension or 401(k)-style plan, and more than half of Black workers do not have access. Although the numbers are lower for Asians (45 percent) and whites (42 percent), they are still substantial.

Other estimates of private sector coverage, also from this study by John Sabelhaus of the Brookings Institution, show big gaps between high- and low-paid workers and workers with and without college degrees, and at large and small employers.

Coverage also varies from state to state: In Pennsylvania, 41 percent lack access to a retirement plan, but in Florida, 59 percent do not have coverage.

Sabelhaus is certainly not the first to document disparities in retirement plan access for different demographic groups. But his methodology advanced the ball, resulting in more reliable estimates. By using three data sources, he could compensate for their shortcomings while taking advantage of the unique information in each one. He combined recent data from the U.S. Census Bureau, the IRS, and the Federal Reserve Board. …Learn More

Too Much Debt Taxes Baby Boomers’ Health

work related stress

Staying healthy is becoming a preoccupation for baby boomers as each new medical problem arises and the existing ones worsen.

The stress of having too much debt isn’t helping.

The older workers and retirees who carry debt are less healthy than the people who are debt free, and higher levels of debt have worse health effects, according to Urban Institute research. The type of debt matters too. Unsecured credit cards have more of an impact than secured debt – namely a mortgage backed by property.

Debt can erode an individual’s health in various ways. The stress of carrying a lot of debt has been shown to cause hypertension, depression, and overeating. And it can be a challenge for people to take proper care of themselves if they have onerous debt payments and can’t afford to buy health insurance or, if they are insured, pay the physician and drug copayments.

This is an issue, say researchers Stipica Mudrazija and Barbara Butrica, because the share of people over age 55 with debt and the dollar amount of their debts, adjusted for inflation, have been rising for years. In this population, increasing bankruptcies – a high-stress event – have been the fallout.

In an analysis of two decades of data comparing older workers and retirees with and without debt, the researchers found that having debt is tied to the borrowers’ declining self-evaluations of their mental and physical health. Older people who are in debt are also more likely to be obese, to have at least two diagnosed health conditions, or to suffer from dementia or various ailments that limit their ability to work.

The bulk of their debt is in the form of mortgages, which increasingly have strained household budgets in recent decades as home prices have outpaced incomes. Piled on top of the larger mortgage obligations can be payments for credit card debt, medical debt, car loans, and college loans – often for the boomers’ children. …Learn More