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 23, 2014
How Emotions Meddle with Money
Our 401(k) retirement system requires most workers to save for the future. But it’s difficult to reach this increasingly important goal, because our emotions – overconfidence, pleasure, fear of loss – get in the way.
“We believe our own nonsense,” is how Daylian Cane, a professor in the Yale School of Management, explains financial behavior in a new public television program, “Thinking Money: The Psychology Behind our Best and Worst Financial Decisions.” The short video above is taken from the program.
Further clouding our judgment are a vast array of consumer products, and the stress produced by how easy it is to purchase them with a credit card swipe and how hard it is to pay off the cards.
“Thinking Money,” a production of Maryland Public Television, covers many topics covered by this blog, including help for people trying to overcome their emotional obstacles.
“Thinking Money” is scheduled to air in its entirety on public television stations around the country in coming weeks. Click on “Learn More” for a list of broadcast dates in major cities. …Learn More
October 2, 2014
Primer: Home Equity → Retiree Income
Americans who are 62 or older had an estimated $3.6 trillion in total equity locked up in their homes in the first quarter of 2014, according to the National Reverse Mortgage Lenders Association. A new primer suggests they should start thinking seriously about using it to generate some extra retirement income.
The primer, published by the Center for Retirement Research at Boston College, which sponsors this blog, discusses two ways retirees can use home equity to generate income: by downsizing into a less expensive house or condominium or by taking out a reverse mortgage.
Click here to read the booklet online and learn how these strategies work and how much money each can provide. Their pros and cons are detailed in the graphic below, excerpted from the booklet:
September 23, 2014
Retirement: a Good State of Mind
Is retirement good for one’s mental health? The evidence is all over the place.
One study concludes that retiring sooner means a higher incidence of dementia. Other studies show it benefits physical health, which can affect one’s state of mind. Research from different countries reach different conclusions about their own retirees’ sense of well-being: the English and Finnish find that retiring improves it, while Korean and U.S. researchers don’t.
Seeking some universal truths about retirement in the Western world, a new study of the United States and 11 European countries finds that it improves subjective well-being, measured both in terms of satisfaction with one’s life and the incidence of depression. The study is based on two comparable sets of surveys of age 50-plus Americans and Europeans taken in 2004, 2006, and 2010.
An analysis of retiree well-being faces some tricky analytical issues, which have plagued past studies and which the new study had to overcome. For one thing, people who are depressed may be the most likely to retire, creating the statistical equivalent of a chicken and egg problem. The new study also had to account for the negative financial consequences of leaving or losing one’s job – which can reduce satisfaction and increase depression – in order to isolate the influence of retirement, independent of its effect of lowering income. …Learn More
September 18, 2014
On Moms, Deadbeat Boomers, and Utopia
This blog has a single writer posting just two articles a week. So it’s impossible to keep up with all the news that crosses the transom.
But perhaps because the work world is gearing back up this fall, there have been a lot of interesting stories lately about financial behavior. Here are three worth noting:
Fatherhood adds to paychecks – motherhood, not so much. A new study estimates that women actually face about a 7 percent “wage penalty” for each child. So, having two children reduces a woman’s hourly wages by 14 percent, according to a new study out of the University of Massachusetts at Amherst. In contrast, annual earnings for fathers are about 8 percent higher than similarly situated men who have no children. This research sheds more light on the wage gap.
Baby boomers are having to pay off college loans they took out decades ago. Some 155,000 older Americans are now seeing deductions from their Social Security checks to pay their federal student loans – up from 31,000 a decade ago – according to the U.S. Government Accountability Office. Parents often co-sign loans for a child’s education, but the GAO report says that about three out of four dollars of boomers’ loan balances are for their “own education.” Baby boomers never borrowed the large amounts that today’s steep college tuitions demand. But what’s not discussed in the report is that the garnisheeing of Social Security benefits may be due to a cultural artifact of the 1960s and 1970s – when attitudes toward repaying student debt were, well, loose. Laws requiring repayment have become more stringent. …Learn More
September 16, 2014
Canadian Pension Reform: the Long View
Policymakers often worry that increasing government pension benefits won’t necessarily help retirees, if the reforms cause workers to change their behavior in ways that counteract them. For example, some workers might save less if they know pension benefits are rising, offsetting the income boost they’ll get from a larger pension.
However, researchers examining Canada’s pension reform over five decades confirm that they have materially improved the financial well-being of retirees there.
To reach this conclusion, Kevin Milligan of the Vancouver School of Economics and David Wise of Harvard University tracked the financial status of older Canadians from 1960 through 2010. They analyzed some 100,000 families between 55 and 80 years old using Canada’s Survey of Consumer Finances, the Survey of Labor and Income Dynamics, and the Family Expenditure Survey.
They conducted simulations to estimate what benefits would have been if no policy changes had been made since the 1960s. This simulation showed that the poverty rate, based on the incomes of Canadians from ages 70 through 79, would have been 34 percent. But today, in the aftermath of reforms, only 4 percent of older Canadian families are poor. [The researchers did a second simulation based on an alternative poverty measure: how much older Canadians spend on shelter, food, clothing and other goods. This also showed a decline in the poverty rate, albeit smaller.] …Learn More