This is a repost from Forbes. 
 

Getty Images, royalty free

Elder abuse will get worse as 10,000 people turn 65 every day for the next ten years. A growing pool of fragile people – retirees, older workers and survivors – are susceptible to financial exploitation. Sure, thieves and legal exploiters are the perpetrators, but the root of elder financial abuse is our retirement system that for 40 years has required individuals to accumulate and handle very large pots of money to last their lifetime. In 2017, $14.5 trillion (85% of GDP) is in self-directed retirement accounts, which are targets for financial predators.

Bottom line: our 401(k) and IRA system invites financial abuse. We can warn people, but offering financial protection advice to older Americans with lump sums is as effective as saying “be careful” before sending a group of mentally and physically impaired and socially isolated people out on a bus with thousand dollar bills pinned to their shirts.

Helpful experts provide tips (I will in my next blog) about how to help yourself or loved ones. But providing “tips” inadvertently blames the victim. They can barely have an effect because the U.S. do-it-yourself retirement system practically begs financial predation to occur.

Requiring professionals who handle Individual Retirement Accounts to be fiduciaries, legally bound to act in their clients' best interest, would have helped prevent legal financial abuse. Sadly, that regulation was overturned by the Trump Administration and Republicans in Congress. The headline in Bloomberg news told the story – “The ‘Fiduciary Rule May Sound Boring, But Its Collapse Threatens Your Retirement.” Now professionals handling IRAs, the fastest growing type of retirement account, are held to a lower professional standard. They can't lie, but they can manage your account without putting your interests first because they are not required to be fiduciaries.

Just how widespread is financial abuse among the elderly? One in 20 older adults said they were financially mistreated in the recent past, according to a study financed by the Justice Department. In one year, the prevalence of emotional abuse among elders was 4.6%; 1.6% for physical abuse, 0.6% for sexual abuse, 5.1% for potential neglect, and a whopping 5.2% for current financial abuse. Even this number doesn't tell the whole story as it only considers abuse by family members.  The Government Accountability Office also found elder abuse to be a growing epidemic. And because our unique American system advises workers to acquire 8–10 times their final salary in retirement individual-directed accounts, with no realistic option to acquire a fair and efficient lifetime annuity, elder financial abuse is far more prevalent in the U.S. than in other nations.

survey of four nations found financial abuse to occur less than one percent of the time in these nations and five times more in the U.S.—a finding consistent with the Department of Justice survey. Stories of abuse confirm the survey’s findings. The New York Times, in a story aptly called “Declaring War against Financial Abuse Among the Elderly,” described a 87-year-old women who was defrauded of $127,000 by a younger friend. The abuse came in the form of mild and gentle persuasion of the older woman to loan money.

Another chilling story came in an advice column to The Moneyist from “Concerned for my Golden Years":

I have a situation that keeps me awake at night. I have no family left. I’m 65 and concerned about being victimized as I get older. I have some reason to believe … I have cognitive decline. How do I protect myself from being taken advantage of as I get older? I am already wrestling with a bank investment adviser putting me in an investment with ridiculous fees. Currently I am able to undo the damage but what if I wasn’t able to do that? As my mother got older (she died at 92), I felt people had the attitude that they could “fleece” her anyway they wanted to and it was appropriate. With her I went through crooked lawyers, accountants, church members, the investment “people who lunch,” charities, and on and on. .. Who will help me? My net worth is about $1.3 million, but money goes fast as my health needs increase.

This concerned retiree, who like many Americans has saved throughout her life in an effort to live comfortably in her "golden years," reminds us that our retirement system and lack of financial safeguards leave older Americans on their own and in the dark, grasping blindly to hold on to their savings. We should be adding financial protections, but instead the Consumer Financial Protection Board and the federal government under the current Congress and Administration are backing away from much-needed regulation that would protect everyday Americans and worry the financial advisement industry.

It's true that a large share of financial abuse comes in the form of theft and illegal behavior outside the money management industry. But abusive financial practices that are completely legal, like selling inappropriate products when the advisor is not a fiduciary, can be just as harmful, and this exploitation will be on the rise as more and more elderly people have cash nest eggs.

August 2018 Unemployment Report for Workers Over 55

August2018 Jobs ReportThe Bureau of Labor Statistics (BLS) today reported a 3.1% unemployment rate for workers age 55 and older in August, which represents no change from July. Although the economy is still expanding, the fastest-growing job sectors for older workers pay wages so low they claim food stamps.click

Most of the job growth for older workers is in unstable or low-paid jobs, including jobs in the home health and personal care aid sectors. From 2016 to 2026, the economy is expected to add 11 million jobs, an increase of 7.4%. In contrast, the home health and personal care aid sectors will add almost 1.2 million jobs, an increase of 43%. In 2008, workers 55 and older made up approximately 25% of home health and personal care aides. Today, they represent a third.*

At just $23,200, the median wage for health and personal care aides is below the national average of $31,100. Their wages are low enough that 14% of older workers employed as health and personal care aides claim food stamps, compared with 4% of all older workers.

Aiming to curtail public subsidies to employers who pay low wages, U.S. Senator Bernie Sanders and U.S. Representative Ro Khanna introduced legislation to recapture from companies every dollar their workers receive in public assistance.

In the meantime, the growth of low-wage work for older workers leaves many near-retirees unable to afford food, let alone save for retirement. Expanding Social Security and creating Guaranteed Retirement Accounts (GRAs) will ensure older workers are not stuck in low-wage jobs because they can’t afford to retire. GRAs allow workers to save in safe, efficient investment vehicles over their lifetime.

*Authors' calculations using Bureau of Labor Statistics (BLS) and Current Population Survey (CPS).


This is a repost from Forbes. 
 

Getty Images, Royalty free

Trump's recent executive order will help the wealthy avoid taxes and do little to promote retirement security.

The order directs Treasury to review the rules on required minimum distributions from tax favored retirement plans. The intent is to change the rules so elders can keep more money in 401(k)s and individual retirement accounts longer – delaying collecting after age 70 1/2.

This rule change matters to the wealthy because IRAs and 401(k) type plans get tax breaks by deferring tax on the contributions and the buildup. Though the public goal of the tax break is to allow people to save for retirement security, the danger is that rich people shift money in the IRAs and 401(k)s from money they save anyway, to avoid taxes. IRAs are tax shelter for the wealthy.

Congress had worked around that danger by requiring distributions from IRA accounts starting at age 70-1/2 so that the money doesn’t languish tax free. If the wealthy do not have to withdraw from their retirement accounts, they will never pay taxes. Their heirs will, but the taxes will be paid in the future. The heirs have an additional benefit because the money in the untouched IRA builds-up tax-free. Also, the heirs' tax rate will likely be lower. All features lower taxes on the wealthy and their families. Delaying paying taxes on an IRA will mean a large tax break for wealthy families and little else. Trump wants to help them delay paying taxes on IRA balances.

President Trump’s initiative will disproportionately benefit the very wealthy, do nothing to increase middle-class retirement security, and increase the budget deficit.

Retirement account participants benefit from the $120 billion tax break mostly, in the form of deferral.  The government grants these tax breaks hoping to induce households to accumulate wealth to finance retirement.  The tax break is not intended to facilitate the bequests.

To prevent IRAs being used as a mechanism for accumulating dynastic wealth, the government therefore requires participants to take required minimum distributions (RMDs) starting at age 70 ½, when the overwhelming majority has retired.  A RMD is the minimum percentage of the market value of the IRA or 401(k) at the end of the previous calendar year that must be withdrawn during the current tax year in order to avoid a penalty. The RMD increases from 3.65% of the account balance at age 70 ½ to 8.77% at age 90.  These withdrawals are subject to income tax, the tax revenues partially offsetting the cost of the tax expenditure.  To illustrate, let's say Anna attained 70 ½ years of age during 2018. The market value of her account on 31 December 2017 was $100,000.  She must withdraw at least $3,650 during 2018 to avoid a penalty.

If current RMD rules burden retirement plan participants who are using their plans to actually finance retirement, then perhaps the rules should change. Would they prefer to withdraw smaller amounts, perhaps out of uncertainty about how long they might live, or the investment returns they will experience?  Tony Webb, my colleague here at the New School,  who helped me with this post, examined this point and found the opposite. Even participants who were highly anxious about becoming poor would choose to withdraw percentages of their wealth at least equal to the RMD, and sometimes, considerably less because they are worried. They want more money of course, but they may hoard the IRA and die with more money than they intended. Most workers need the opposite of what Trump proposes -- more money in retirement at earlier ages.

Thus, relaxing the RMD limits will do nothing to benefit households using their retirement plans to finance retirement. Instead, relaxation would enable the wealthy to continue to accumulate wealth free of taxes on interest, dividends, and capital gains, to pass on as a gift to their heirs. Households should, of course, be free to consume or bequeath their wealth as they see fit.  But tax dollars should not be used to subsidize wealthy heirs. We have better things to do with our tax money.

Instead of proposing reforms to benefit the wealthy, President Trump should focus on the retirement savings crisis facing the middle class. Among workers aged 55-64, about 33 percent have no retirement wealth, and the median IRA and 401(k) balance of the remainder is a mere $60,000.

A better plan is to help people accumulate more money and convert to a fair annuity. We don’t know when we are going to die, and we all need insurance against outliving or money. Traditional pensions and Social Security insure against that risk; we need more retirement plans with annuity features.

Rather than worsening the retirement crisis by giving away more money to the wealthy, or cutting Social Security benefits, policymakers should both strengthen Social Security and expand retirement plan coverage. Guaranteed Retirement Accounts (GRAs) are individual accounts requiring employers and employees to contribute with a fair and effective refundable tax credit provided by the government. GRAs provide a safe, effective vehicle for workers to accumulate personal retirement savings over their working lives.

This is a repost from Forbes. 
 

Beautiful Pinneys Beach on the island of Nevis - Caribbean Getty Images, Royalty free

Summer is over and its back to work and school. Odds are you, as an American, got less paid vacation than if you lived in any other economically developed country.

In the U.S., there is no legal requirement that employers offer any paid vacation at all. Nevertheless, 77% of U.S. workers have access to some paid vacation time. Who doesn’t get paid time off?  Part-timers, lower income and workers in small businesses. For those of us who get paid vacations, workers with 10 years on the jobs average 17 days per year. If you lived in the United Kingdom or Germany, your employer would be legally required to provide 20 days per year; in Denmark or France, 25 days.

When you add in mandatory public holidays, the U.S. falls further behind.  Again, no private employer is required to give time off for holidays in the U.S., but on average, we get eight per year.  In the UK, nine; in France and Denmark, 11. (Don’t we have just as much to celebrate as Denmark? Come on!)

So there’s a big vacation and holiday gap between us and the rest of the rich world.  But the paid time off gap is even worse.  Consider paid sick days.  Again, the U.S. doesn’t require them, but around 60% of workers have some paid sick days. Of the 34 countries in the Organization for Economic Cooperation and Development (OECD), only two—the USA and South Korea—do not mandate any paid sick leave.  In contrast, 28 of the 34 countries provide at least six months.  Yes—almost all other developed countries have legal requirements for six months of paid sick leave.

Well, but we love our newborn children and their new mothers, right?  Maybe we do, but our policies don’t show it.  Mandatory paid maternity leave in the U.S.?  (You know the answer by now, right?)  Zero required at the national level.  Estimates are that only 11% of American workers have access to paid maternity leave. Our competitor nations? Fourteen weeks in Germany; 16 weeks in France; 18 in Denmark; and a whopping 39 weeks in the .UK.

All this adds up to Americans working more hours than our competitors—6% more hours annually than the average U.K. worker, 18% more than in France, 26% more than in Denmark and 31%—almost one-third—more than the average German worker.

But isn’t it better for the economy if we work more and have less time off? No. In her 2016 book, economist Heather Boushey argues that solving work-family conflicts would help drive more sustainable economic growth. And Americans agree. A recent study by the Pew Research Center found that 85% support paid sick leave for themselves, 82% favor paid maternity leave, while 69% support paid leave for new fathers and 67%for paid sick leave to take care of family members.

But all that is legally required at the federal level is twelve weeks of unpaid leave, and we exempt small businesses (those with fifty or fewer employees) from even that minimal standard.  Some states are acting on their own—six (plus the District of Columbia) require some paid family and medical leave.  But we won’t close the gap with our economic competitors without national legislation.  Look for this issue to be fought over in upcoming elections, and maybe some day you’ll get more paid time off from work.  Hey, all of us working people deserve it. Happy Labor Day!

This is a repost from Forbes. 
 

Credit: Getty Royalty Free

Hundreds of underground seismic motion detect early warnings signs of earthquakes. Economists have their own recession early warning detectors and some are going off.

Early warnings for recession include:

  • Oil prices – and other commodity prices – increased steeply before nearly every U.S. recession since World War II. What are oil prices doing now? They’ve been rising in the first half of 2018 (gaining more than 20 percent) and reached their highest level in August this week at $70 a barrel according to MarketWatch.
  • Asset bubbles precede recessions, but, of course you never know if healthy prices are air-filled bubbles or solid growth until they are pricked. Equity prices rose quickly before the dot-com bust in 2000 and housing prices went through the roof before the financial crisis of 2008. The Financial Times noted two weeks ago that profit margins seem to be peaking – reaching their highest levels in 10 years – and the SP 500 price earnings ratio has been climbing steadily from 14.87 in June 2012 to over 25 this month. 20 seems to be the Goldilocks number.
  • Interest rates also begin to act oddly before recessions, but the reasons change and the reasons matter in whether its a good signal.  Burglar sensors detect thieves and dogs moving on your patio.  When interest rates on short-term debt (say, three-month Treasuries) is higher than the interest on long-term debt (say, 10-year Treasuries) it is a sign that market actors think prices will fall and demand for loanable funds will be in the doldrums. When the yield curve inverts, it can represent a crowd sourcing for information about the business person’s expectations. The yield curve is somewhat inverted now. The gap between short and long is the smallest since 2007. The 2-year and 10-year yields on Monday, August 24, 2018 narrowed to as little as 18.3 basis points, the smallest differential since 2007, having started the year more than 30 basis points higher. This signal could be orange or red. 

And other traditional pre-recession early warning systems are flashing orange to red.

The National Bureau for Economic Research (NBER) – a nonprofit organization founded in the 1920s by economists and universities to help a modern US government maintain economic order and full employment – tracks the chronology of the U.S. business cycle. Its Business Cycle Dating Committee looks at real GDP, economy-wide employment, and real income as indicators for economic health.

  • Real personal income is not doing very well since wage growth is anemic in this expansion. But, consumer spending is growing fast – too fast? – and capacity utilization and industrial production is not particularly robust – a bad sign and a correlate to imminent downturns.
  • Since the current recession indicators are generally less perfect predictors, economists are trying out other early warning indicators. Other trends have preceded recessions and they are flashing red, like private debt accumulation. When households and corporations have access to easy credit, debt default risk increases. The pattern of 2008 seems to be repeating itself as a similar credit bubble is forming again. Now, compared to 2008 when households were using liar loans and subprime mortgages, corporations are using readily available and cheap debt to give cash from their balance sheets to shareholders as increased dividends. Too many of these extra liabilities can eventually force corporations into cutbacks, which would in turn drive down activity and cut tax revenues.

And when the recession happens, we want to know how deep it will be. Economic inequality can make recessions deeper and more prolonged.  For instance, right before the great recession (2006-2007), the nation’s bottom 40 percent of households held no net worth and consumed almost 25 percent of the nation’s goods and services. Moving up to the middle class, households in the bottom 60 percent of the income distribution accounted for 40 percent of the nation’s consumption. But when unemployment rose to over 10 percent, households in 2008 drastically cut consumption. In an unequal economy when many households have no wealth and can’t self-insure against a downturn, cuts in personal consumption are particularly drastic and the recession grows deeper.

Lastly, some economic measurements that we think of as good indicators are not always helpful. The unemployment rate is low but it may truly indicate an overheated economy with no more capacity to grow. The official unemployment rate does not include workers who are discouraged or marginally attached to the labor market. The non-inclusive definition of the unemployment rate combined with the fact that wages have been stagnant for decades indicates that the labor market is actually not robust.

One of the best indicators of a coming recession is time, and it is about time for a recession. This expansion, which started in June 2009, is the second longest ever recorded in August 2018 – 9 years and two months old. The longest was exactly ten years in the 1990s. The average length of an expansion is 4 years and 9 months. Though business economists surveyed are optimistic – most of them think the economy will go into recession by 2020 -– we know the tax cuts have not produced economic investment. Most academic and government economists know that models, including surveys of hunches, are inaccurate. Even the IMF agrees predicting is inaccurate.

The best we can do is watch the correlates to previous recessions, which right now paint an ominous picture.

This is a repost from Forbes. 
 

Getty Pictures, Royalty Free

Realtors screamed and home owners worried.

In late 2017, Congress and the President wanted to make the $1.5 trillion plus cuts in corporate and other taxes not look so big. So they raised taxes for some people by drastically limiting the deductions for state and local property and income taxes (SALT), capping the deductability of mortgage interest, and increasing the standard deduction (which makes itemizing less valuable). Of course, these tax hikes affect people with houses and mortgages, especially those living in states with high real estate and income taxes.  Before this change, they could write off those SALT taxes when they paid federal income tax. The National Association of Realtors (NAR) led the scare, predicting house values would generally fall, and especially in California, New York, Massachusetts, and New Jersey.

But housing prices generally have not fallen.  In the first half of 2018, the Federal Housing Finance Agency’s house price index rose by 3.8 percent.  Even in California, housing demand is strong.  The chief economist for the Relators  said, “We thought there would be some impact…but the market is saying, so far, there is not an impact.”

But don't tax deductions affect housing values? Generally, economists would not expect the change in the tax deductibility to have a major impact on house prices because several other factors have larger effects on home values than government tax breaks. Of course, those tax breaks can be a factor in buying a home or willingness to bid up the price--they just aren't the biggest factor.

Let’s look at the big picture. We might want to say good riddance to special deductions for owning a home. Mortgage deductions and other tax subsidies for home ownership may in fact be bad policy.  They tell society that the government wants you to own a single-family house. But home ownership could be bad for you financially and inefficient for the larger economy.  Not only is renting a perfectly decent decision but housing tax breaks may steer too much investment capital into housing debt and away from productive investments and diversified household portfolios. Harvard economist Edward Glaeser has argued that tax subsidies and related policies result in “the government...essentially bribing Americans to live in suburban, detached homes.”  And the 2007 financial and economic crash was caused in significant part by too much housing debt, especially for lower and middle income households.  That rise in debt, amplified significantly by risky Wall Street financial manipulation, ended up putting the entire economy at risk.

So why aren't the loss of the SALT deductions for some taxpayers and the mortgage deduction cap suppressing housing prices?

First, the tax bill also contained a large increase in the standard deduction, which is a significant gain for most households.  Using the standard deduction means less itemizing overall, so the value of the mortgage and tax deductions fell for many taxpayers.  Relatively few taxpayers will be deducting their state and local property taxes so they are untouched--in fact, they are probably a bit better off.  So they may want to buy a house, pushing up demand and keeping prices high.  Only high tax payers in states with both high income and property taxes may feel a pinch from losing the SALT and mortgage deductions.

Second, housing prices are what economists describe as “sticky downwards.”  Homeowners are notoriously prone to overvalue their house and reluctant to lower the asking price until faced with continuing bad news – and, of course, no offers.

Third, buyers, especially higher-income consumers, are wealthier because of the legislation's other windfall tax breaks, especially lower rates. And they feel wealthier because of the run-up in the stock market.  The psychological effect of both may be bidding up the price of the better houses they want to buy.

Does this mean we shouldn't worry about house prices?  No.  Prices could fall as the Federal Reserve continues to raise interest rates, although some fear that could tip the economy into recession which of course would lower house prices.  And there are some signs of weakness in housing markets.  For example, new private housing starts have barely reached the levels of just before the 2007 economic collapse.  There seems to be some slowing of price increases in places where the tax bill has its largest negative impacts. And slow income growth for many American households means that buying a house is moving beyond their reach.  A recent report concluded that in twenty large metropolitan areas, middle-class families are increasingly unable to afford a house.

Like many other aspects of today's economy, we may see housing prices favoring the rich over the middle class and below. House prices for higher income families may be rising, which might in turn nudge more and more middle-class families with stagnant incomes out of the housing market and also put upward pressure on rents.  If that megatrend continues, it may swamp whatever effects the tax legislation is having and housing prices will fall.

This is a repost from Forbes. 
 

A for sale sign outside a mansion at Miami Beach. (Photo by: Jeffrey Greenberg/UIG via Getty Images)

Everybody worries and everybody worries about retirement in a different way.

Almost everyone nearing retirement wonders whether they should pay off their mortgage. To answer the question yourself, start with the financial golden rule: get interest, don’t pay it. Real estate brokers, home developers and banks love the 30-year mortgage -- they have marketed long mortgages for generations. A 30-year encourages people to stretch to ever more expensive homes. That works for banks. A 30-year mortgage doubles the interest revenue for mortgage lenders.  Marketing works. Despite the much lower cost of a shorter term mortgage, over 90% of mortgages are 30 year.  

Example: In April 2018, a 30-year mortgage charged a 4.18% interest rate and a 15-year 3.75%. Borrowing $100,000 for half the time, lowers the total interest payment by 60% not 50% from $75,626 to $30,900. But why pay a bank anything? Put the mortgage interest payment in your own retirement account, you earn the interest, and the return accumulates tax free.

My conversation with two correspondents about their mortgages may help individuals make good mortgage payoff decisions for themselves.  

First question: "Ms. Ghilarducci, I am over 60, but have two children still in school, one in college and one in high school.  I have two homes, one is our residence and the other a vacation home.  I have a 15-year loan (3.35%) on my home that matures in 2029 and a 30-year mortgage (4.25%) on the vacation home whose term ends in 2045.  I can pay off one of these loans using stock I have now.  After reading your article in Forbes, it seems the right thing to do, but which one should I pay off?  Any thoughts you have will be appreciated.  I understand that you cannot give me financial advice. Thank you."

My answer: I wrote "I think you already have the answer -- I am a teacher after all. What do you think the right answer is?" She shot back with exactly the right answer:

“Unless conventional wisdom is that you always pay off your home first in case something happens, I would pay off the second house and then put that payment toward the first because that one costs about $900 per month in interest and my home is about $500 per month in interest. The second house will cost about 260k to pay off, while my home is more like 180k, so that will use most of my stock... also may be a consideration.” I couldn't do better with that.

Second question: "My mortgage is about 400 dollars per month for principal and interest. I pay another 500 dollars to escrow to pay insurance and taxes. The tax and insurance do not go away if I pay off the mortgage early. I could pay off early but would do so by selling stocks with high appreciation or IRA shares with tax obligations. It seems that I am better off paying the monthly installments for the remainder of the mortgage than withdrawing the 34,000 dollars from my accounts to pay off the mortgage to save $1,200 this year and even less in the years to come.  Mortgage rate is 3 5/8 percent per year."

My answer: If the cash you need to pay off your mortgage is earning a higher rate of return and liquidating triggers high transactions costs, paying off your mortgage may not make sense. But it probably does. Your question contained the false certainty your stocks will always appreciate. (Two weeks ago, the Financial Times suggested profits may be at their peak.)  If you pay off your mortgage you guarantee yourself a 3 and 5/8 percent  return. It is hard to get a guaranteed return. Assuming your stocks returns will always be positive and more than, say 3 and 5/8 percent is highly risky. In fact, we know your stocks' value will fall in the next recession. But tapping your IRA before you retire is not a good idea. May I suggest sprucing up your IRA by owning only index funds, you will earn more by paying lower fees. And, instead of withdrawing, cut your consumption in order to double up on the mortgage principal payments to cut interest costs. 

Still not sure? Use a mortgage payoff calculator to analyze your choices. But do one thing, construct scenarios where your property taxes increase and your house does not appreciate. Simulate the 2008 crises and scenerio your home falling 20% in value. I like the calculators from Dinkytown – a former Wall Street Journal columnist Jonathan Clements turned me on to them. And Clements makes a relevant point about paying off your mortgage in an economic expansion. He writes, "... I like to see people in retirement with lower fixed costs. The lower your fixed costs, the less money you need to pull out of your portfolio every year. That’ll leave you in good shape if we get a period of rough financial markets." You don't want to pull money out of the stock market at distressed prices to make a mortgage payment.

In sum: there are two sides to retirement planning -- accumulate wealth and reduce spending. Paying off your mortgage is preparing for less income, more expenses, and a coming recession that might hit when you retire. Eliminating your monthly mortgage payment leaves room for fun and other expenses. Besides, paying off all debt transfers money from the bank's pocket to yours. 

Unless you like banks and think they don’t make enough profit, you’ll want to keep the money for yourself. Paying off your mortgage means paying yourself first.