This is a repost from Forbes. 

In America you are mostly on your own for retirement. You would be totally on your own if it weren’t for Medicare, Medicaid and Social Security. But Social Security replaces only about 40-50% of income and you will need about 70-80% in retirement.

How much do you need to save to be OK in retirement? You need to calculate a target "number" for retirement – how much you'll need to have saved – and then translate that target number into a weekly amount to be deducted from your paycheck.

You have to make a lot of assumptions in determining how much to deduct from every paycheck in order to retire well. If you are a median worker, you need about $350,000 in addition to Social Security. If you are a typical college-educated professional, you will need over a million or two.

Let’s assume that you replace 80% of your preretirement income in retirement; you earn a little above average ($60,000 in 2019); you work and save consistently for 42 years – no taking breaks, no getting laid off or fired, no divorces, no getting sick – you earn 5% on your investments after fees; you live until 95; and you collect Social Security. Whew, lots of assumptions.

People don't have enough saved for retirement

You need to save 5% of every paycheck if you start at age 25. You need to save 10% if you start at age 35, 22% if you start at age 45, and 52% of every paycheck(!) if you start at age 55.

To tailor your answers and fiddle with the assumptions, go to calculators. The NerdWallet calculator is OK. Make sure you calculate your Social Security benefit – the NerdWallet calculator will send you to an excellent AARP calculator – and avoid the NerdWallet sales pitches. Just use the calculators. My colleague Anthony Webb provides a great consumer guide to retirement calculators.

When you decide the amount you want to save you have to decide how. First stop is your firm’s 401(k). I know half of workers don’t have a 401(k) plan at work, or any kind of plan at all. Those without a workplace plan need an IRA – choose Vanguard with the lowest fee index funds please. But if you are older and catching up you won’t be able to save enough in your IRA, contributions are capped at $6000 - $7000 per year. You will have to amass wealth outside retirement accounts in the form of a paid off house and no debt, and mutual funds (index please).

The Fantasy Play in American Retirement Planning

The tips and guideposts and links to retirement calculators might have seemed to be grounded in a meaningful reality. I set out to answer the fairly ordinary sounding question, “how much do I deduct from my paycheck to be OK in retirement?” However, most retirement saving advice is not connected in any meaningful way to the ordinary lived experiences of the vast majority of American workers. Basically, almost no one starts saving 5% of their paycheck for retirement when they are 25 and continues to do so for 504 months (12 months*42 years) straight without pause.

And the number of people who plan to save 52% of their paycheck when they are 55 is precisely no one. The only chance people have of having a decent pension supplementing Social Security is starting a career job in a union, a large company, or a government job in which you were likely to have a traditional defined benefit pension or a generous 401(k)-type plan. Your only other hope for a secure retirement is a rich spouse or parent and by definition, there are not many of those to go around. I wrote about savings tips hoping a few people could get lucky and follow the advice, but I acknowledge I am offering tips amid the rubble of a broken retirement system – handing out umbrellas during Hurricane Maria.

Very few people have the savings needed for retirement. Most workers approaching retirement do not have enough saved to maintain their living standards in retirement, regardless of income. The typical older worker in the bottom 50% of the income distribution (earning less than $40,000/year) has nothing saved for retirement. The median savings of workers in the middle 40% (earning between $40,000 and $115,000/year) are only $60,000. Among workers in the top 10% of the income distribution (above $115,000/year), the median amount saved is $200,000.

Bottom line

It is easy to know how much you need in retirement. Figure out when you are going to die, when your employer will throw you out, predict all the recessions and invest accordingly, avoid the predator financial advisers and brokers, know the future of your industry, the success of your love life and the life course of your children. I am tongue in cheek of course in listing this string of dos and don’ts to illustrate a major point. American workers are asked to do the near impossible. Other countries have Social Security systems combined with occupational plans that use rules of thumbs to get most workers, those who have worked 30-40 years, to about 70-80 percent of their pre-retirement income in retirement. America needs a pension plan for all plan. The indefatigable Chris Carosa interviewed me about my plan for a universal pension plan a few days ago.


*A word about replacement rates. Andrew Biggs has a good paper on retirement targets and Social Security replacement rates. He finds the college teachers retirement plan, TIAA-CREF recommends a desired replacement ratio of 60 percent to 90 percent of an persons salary during their last year of work. Aon Consulting and Georgia State University recommend an average replacement rate of about 75 percent of final earnings, with low earners requiring replacement rates of close to 90 percent.

This is a repost from Forbes. 

In a previous blog, I noted the surprising support for higher personal taxes among some of the world’s wealthiest people. The very next day, Morris Pearl, a former BlackRock executive and chair of the group Patriotic Millionaires, delivered a straightforward message to New York state lawmakers: "Raise my taxes."

Wealthy proponents of higher top tax rates have a number of different motivations. More federal revenue would help get deficits and the debt under control. But calls for higher taxes aren’t just based in fiscal policy and debt reduction. Some advocates have income redistribution in mind, while other observers worry that ever-more concentrated wealth threatens the legitimacy of the American political system. But increasingly, economists worry that inequality impedes economic growth.

Some proponents of higher taxes want income to be redistributed to the poorest Americans, whose real incomes have been stagnating relative to gains for the wealthy. Census data show that for the bottom 20 percent of the income distribution, real family incomes have barely budged since 1980. Meanwhile, the richest 5 percent have enjoyed nearly 80 percent growth in real incomes, with most of the action occurring in the top 1 percent.

But inequality also hurts the middle class, because inequality hurts growth. Recent work from experts at the International Monetary Fund and others confirms that policies promoting inequality slow growth down.

Even so, since the late 1970s, U.S. gross domestic product has almost doubled—but most of the gains have gone to the wealthy. If you define the middle class as the middle 60 percent of the income distribution (those above 20 percent up to 80 percent), then middle-class income has risen more slowly than overall economic growth. As David Leonhardt estimates, “If middle-class pay had increased as fast as the economic growth, the average middle-class family would today earn about $15,000 a year more than it does, after taxes and benefits.”

Finally, in addition to sharing economic growth more fairly, some thoughtful people are worried about the legitimacy of a system that gives such a high share of wealth to such a small number of people. The problem is compounded when you consider that most of the super-wealthy's income comes from capital income, while the vast majority of Americans rely on labor income—their daily work—for their livelihood. A good deal of that high wealth will be passed on to children, making inherited wealth an ever-increasing source of inequality. Inheritances already represent about 40% of wealth, and this could easily grow as the super-wealthy pass their fortunes on to their children.

Highly unequal and seemingly unfair distributions of wealth delegitimize political and economic systems, which in turn can lead to economic decline and political disruption. MIT economists Daron Acemoglu and James Robinson, in their well-circulated and important 2012 book, Why Nations Fail, argued that throughout history and around the globe there is a positive connection between overall economic growth and how much the average person shared in the wealth. If a nation has the right institutions to ensure the middle class receives a fair share, it will flourish economically.

Economists of all political stripes worry about too much concentrated wealth. The very conservative Nobel laureate James Buchanan, who deeply distrusted government power, favored a marginal tax rate of 100% on all estates above very small amounts. As a libertarian, Buchanan didn’t see why children should inherit massive fortunes, but he also was worried that excessive wealth accumulated by heirs who didn’t earn it would delegitimize the market system and democracy.

Progressive Nobel laureate economist Joseph Stiglitz describes how wealth concentration allows the super-rich to buy political support for lower taxes and regulations. The ultra-wealthy use what economists call “rents”—excessive unearned income—to protect and increase their wealth, while stifling innovation and healthy economic growth.

We have plenty of evidence that a thriving economy needs healthy sources of government revenue, both to provide stable public finance, and support more equal income and wealth distribution, which in turn can drive innovation and economic growth. The legitimacy of our economic and political system depends on more people who created the prosperity sharing in it.

This is a repost from Forbes. 

The idea of taxing the rich is gaining ground. The conservative-leaning Financial Times writes about taxing the American rich almost every week. U.S Representative Alexandria Ocasio-Cortez’s call to raise the top marginal income tax rate to 70 percent has a surprising amount of polling support, and Senator Elizabeth Warren’s call for wealth tax on the super-rich has even more.

But higher taxes aren’t just supported by the poor and middle class. In fact, some of the world’s wealthiest people say they aren’t paying enough taxes. Bill Gates—the second-wealthiest person in the world with an estimated net worth over $90 billion—has paid over $10 billion in taxes so far. His view? Bill Gates says, “I need to pay higher taxes.” His close friend Warren Buffett—number three of the world’s wealthiest, net worth estimated by Forbes at $84 billion—agrees. Buffet says, “I don’t need a tax cut,” and strongly opposes efforts to lower or eliminate the estate tax.

Of course, we shouldn’t overstate the super-wealthy’s support for higher taxes. When the Trump tax cuts were being debated by Congress, many billionaires sent large financial contributions to Republican legislators.

Still, as an economist, I find it a bit surprising that these wealthy people can reconcile their desire for status and wealth with wanting to pay more in taxes. The latter desire evidently comes from two beliefs: paying higher taxes would be fair, and more tax revenue would reduce the deficit.

First, on fairness: Those with the very highest incomes have benefited disproportionately from tax cuts, and that lost revenue is driving the federal deficit ever higher. The Institute on Taxation and Economic Policy estimates that since 2001, “significant federal tax changes have reduced revenue by $5.1 trillion, with nearly two-thirds of that flowing to the richest fifth of Americans.” Twenty-two percent of the tax cuts have gone to the top 1 percent. And by 2025—in just seven more years—ITEP estimates that lost revenue will have more than doubled, to $10.6 trillion, with nearly $2 trillion going to the top 1 percent, those with annual incomes over $420,000.

Second, lost federal revenue means higher annual deficits and a growing cumulative debt burden. To date, the cumulative impact of tax cuts since 2001 is $5.9 trillion. ITEP estimates that it will reach $13.6 trillion by 2025, from lost revenues and increased interest payments on the debt. So for some, more revenues are needed simply to get annual deficits and cumulative debt under control.

So here is the Financial Times and (at least some) prominent super-rich people indirectly legitimating the economics of the Democratic Party’s progressive left wing. The old maxim that “politics makes strange bedfellows” is truly illustrated when a first-term Democratic Socialist member of Congress and the second-wealthiest person in the world both are calling for higher taxes on the rich. If this is a preview of coming economic policy discussions, the next year will be full of fascinating economic and political alliances and debates.

This is a repost from Forbes. 

wrote last month that the market for potential reverse mortgage borrowers is limited to high-income, highly educated people in stable neighborhoods with appreciating home values. Reverse mortgages may make sense for some, but decidedly not all. I aim to extend my analysis of the iffy reverse mortgage market to help the average person plan for retirement.

If you are like the many people I meet who think of their house as a hedge against unforeseen costs in their older, fragile years, I recommend scaling back your hope in reverse mortgages for four reasons:

  1. Home prices may not appreciate—and they may even depreciate, as 2006-2011 taught us—so what you think is a sure thing in 20 years may not be worth what you forecasted.
  2. If you have too much house in your 50s and 60s and you think you are going to downsize later, downsize now. There are two good reasons for downsizing now. One, when you are younger you can handle the enervation and fatigue of a move, as well as the financial hit everyone takes when moving. Selling and moving could cost thousands of dollars and over 10% of the home value. You can handle that cost in your 60s better than in your 80s. Two, people in their 80s are more likely to suffer bad mental and physical effects from relocating, made worse if you sell because you can’t get enough from a reverse mortgage.
  3. Reverse mortgages are for those who want to age in place. Are you sure your home is a good place to age? Experts are concerned that the nation’s housing supply does not match the needs of an aging population. Nearly a fifth of housing in the U.S. is projected to have a disabled or infirm person living in it, yet only a fraction of housing is equipped. Homebuilders are blind to the need. Aging in place is not a good plan if the housing isn’t built right for your older self. The suburbs are lousy for isolated older women.
  4. Reverse mortgages are unattractive if you can’t keep up with the property taxes and maintenance costs as you age and as health care costs take up more of your disposable income. Some of these reverse mortgage products count on defaults: the bank will take your home if you can’t keep up with the carrying costs.

The Consumer Financial Protection Bureau (CFPB) needs more funding to conduct research on reverse mortgages. I predict the results would come out negative for the reverse mortgage product. The CFPB would likely find the reverse mortgage is appropriate only for well-informed people who understand the product and its risks.

In closing, consider moving to appropriate housing in your “younger” older ages—your 50s and 60s—instead of planning to use a reverse mortgage in old age.

This is a repost from Forbes. 

A recent financial advice column for the Financial Times says don’t worry, there won’t be a recession by 2019—something about banks being sound. But as Financial Times economics editor Chris Giles writes, it turns out financial advisers are usually more cheerful than economists and both are confused. So who should we believe?

This month the International Monetary Fund forecasted slow growth, a gloomier prediction than last year’s, with an opaque sentence that says it all: “Risks to global growth tilt to the downside.” Looks to me like the IMF, blaming tariff uncertainties and slow growth in Asia and Europe, thinks there will be a worldwide slowdown by 2020. But the IMF didn’t use the word “recession."

Berkeley professor Brad DeLong is a good economist and aggregator of economic data, and he won’t be pinned down with a prediction. But he points out chillingly that the U.S. government shutdown—if it weren’t bad enough—made key data necessary for predicting recessions late and spotty. The data we do have aren't promising. China is key here and though they won’t admit to a slowdown, Chinese auto sales are down 6% year-over-year. Auto sales kind of predict everything. US auto sales? Basically flat.

For the record I believe we will have a significant slowdown in 2019 for reasons I’ve talked about before.

These conflicting opinions really mean nothing to ordinary people trying to plan their lives. With my economist hat on I say to investors that I don’t know when a recession might hit, but that you want to be in the position that you really don’t care when it happens.

The smart money investors don’t time the market. The reason I say the obvious is because it’s really hard to do nothing. So do something, just don’t time the market.

  1. Do figure out about when you need your money and how much risk you can take. Do invest in stock index funds the further you are from needing the money. Follow really smart stock pickers like Jack Bogle, the recently deceased founder of Vanguard, who helped popularize the index fund. It takes a good stock picker to know that picking stock is a fool’s game and that the vast majority of people should use index funds—this clever insight comes from Chris Carosa.
  2. Do discipline your portfolio. Pick how to allocate risky and less risky assets as you age. Stay the course. Do rebalance when the prices of stocks and bonds change, though I advise a disciplined rebalance done once a year. I pick February to rebalance, though I watch the market hour by hour. If you are about 45 with a portfolio of 60% stocks and 40% bonds and the stock market crashes, buy more stocks when you rebalance. You may have your fingers on the keys at the moment of the crash, but take them off and keep your discipline.
  3. Do use non-conflicted advisers. Vanguard provides non-conflicted advice (although they advise you to invest in Vanguard funds) and charge about the lowest fees you can get. This is because they are a mutual company—the profits go to the account holders who are the shareholders. If you need to talk to someone about your finances because you have more than a house and a retirement account, then pay a fee. Never use an adviser who doesn’t charge you anything. Free advisers cost a lot.
  4. Do fall in love with your stuff. Since a recession is probably coming, don’t buy or do anything with the expectation that your pay will rise or that it will be easy to find a job that pays a lot more. Don’t expect your house value to go up, and don’t expect that if you take on leverage to buy a house that it will pay itself back in appreciation. Don’t borrow to buy a consumer durable. Love your unremodeled kitchen, your vintage appliances, and your ten-year-old car.

I am not sure when a recession is coming. All economists are humbled by our track record. The Economist magazine reminded us in mid-December that economists do much better at predicting GDP growth only a few months ahead, and are much better at predicting expansions than recessions.

Financial advisers are a bit worse—they seem to think sunshine is just around the corner. I get that no one wants to jinx a good thing. I don’t want to be gloom and doom, but prepare for a recession by preparing not to react. Hunker down.

This is a repost from Forbes. 

Pay for the American worker is finally increasing, but slowly. Economists are zeroing in on why pay growth is so sluggish. In December 2018, average weekly pay grew to $948.06, up from around $750 in the first three months of 2009. But adjusted for inflation, the rate of increase is small – average weekly pay grew less than 1% per year for the decade. 

Wage growth is not only small but highly uneven. The big news from the Financial Times today is that the pay of the average bank employee rose 3% last year;,but the chief executives of the top six American banks rose much faster. For example, Morgan Stanley’s head got a 7% raise while his employees’ average pay fell by 2%. Why don’t the bank employees bargain for higher wages? What are American workers afraid of? What keeps wages low? 

When Employers Get Bigger, Wages Get Smaller: A Primer on Monopsony

Economists are offering up a theory called “monopsony” to explain low pay. Not an everyday word, monopsony – "monopoly" is similar and much more familiar. Monopsony refers to a single (big) buyer of labor; monopoly represents the power of a single seller. In monopsony markets, employers are supersized or make themselves the one and only employer relevant for their workers. As such, they can keep wage growth down. Think mining towns: When there’s only one big employer around (and no union to counterbalance them), they can hold wages below the “natural” level. Just as monopolies can keep prices too high, monopsonies keep wages too low. 

The theory of monopsony is old, but its renaissance is new. The last Council of Economics Report from the Obama Administration introduced monopsony as a major force suppressing wages to a larger community outside of academics. Using new data and methods, Temple University and University of Minnesota research found out what happens when a small number of employers come to dominate a local industry: paychecks get smaller. This is exactly what monopsony predicts. In the authors’ words: “higher labor-market concentration substantially reduces wages.” Owen Davis from The New School summarizes the study, which finds a significant jump in local employer concentration, all else equal, can lead to a decrease in wages of at least 15% and a decrease in employer-provided health insurance. Small businesses combining forces is one tool in the tool-box of a potential monopsonist. 

Employers gain power over worker pay when they begin to dominate the locality. Employers also gain power over workers with an employee contract called noncompetes. New research out of Universities of Maryland and Michigan reveal what most readers already know: that workers of high and low pay, high and low skill, sign noncompetes. What's more, many workers think they are enforceable even though many states won’t enforce them. I was stunned at the prevalence of noncompetes. Nearly 40% of workers had signed at least one noncompete promise. Despite the notion that noncompetes prevent workers from being trained by one employer and taking the skill elsewhere – which most economists believe to be a fair use – noncompetes are common in low-skill, low-paying jobs.

The suspicious use of noncompetes as a pure power play came to light when the fast food joint Jimmy Johns was discovered to have forced their sandwich makers to promise not to go to another fast food restaurant. It is not credible that they were taking JJ secrets to McDonalds. But the action froze JJ workers in searching for a better job. Surprisingly, the courts said it was legal, but JJ settled and stopped using them.

Bottom line: Noncompetes scare workers into inaction, which means not looking for a higher wage as well as turning down better job opportunities at competitors and not asking their boss for a counter offer when offered a higher wage. Non-competes are another tool in the toolbox of a would-be monopsonist.

Want more technical understanding that is clear and wonky? Go to Kate Bahn, economist at the Center for Equitable Growth. 

Big companies can dominate consumers. Everyone with cable service knows the frustration of a monopoly. Fewer people understand that big companies can also hold down wages below what they could be when workers do not have countervailing power.

This is a repost from Forbes. 

I am unsure the reverse mortgage industry is sound. It is regulated by various different agencies including the embattled Consumer Financial Protection Bureau, which if the CFPB was allowed to function at full speed, would investigate consumer complaints about reverse mortgages and conduct studies about how well reverse mortgages are serving consumers.

But I do know that a quick check of the numbers suggest reverse mortgages probably won’t help most American seniors close the gap between what they need and what they have for a comfortable retirement. Over 50% of seniors aging into their retirement years do not have enough financial assets to combine with Social Security to maintain their living standards according to the Center for Retirement Research at Boston College.

My team’s research at The New School also shows that even if middle-class older workers convert their home equity into a stream of income for their rest of their lives 40% will still be downwardly mobile, descending from a middle-class lifetime to defacto poverty in old age.

Reverse mortgages will NOT prevent the retirement crises because the average value of an older person's home equity is less than $80,000. Credit card debt and car loan debt does not, surprisingly vary by age or sex. It seems credit card companies and car dealers have about everyone owning $3000 on their credit cards and $12,000 on their car. See the handy table below that displays the surprising high average value of student debt held by older people - - between $12,00 and $16,000 depending on age and sex -- and the surprising low average value of home equity and retirement accounts -- $75,100 and $58,800.

Age of Household Student Loans Equity in own home  Retirement Accounts
55 to 64 years  $    16,000  $     75,100  $     58,800
65 years and over  $    12,000  $     79,200  $     43,800
Single women 65 years and over  $    12,000  $     69,900  $     32,900
Source: U.S. Census Bureau, Survey of Income and Program Participation, 2014 Panel, Wave 2


New research from Ohio University and Jinan University show, using a unique dataset of more than 14,000 senior homeowners in the U.S that seniors, probably like us all, think their home is worth more than the appraiser does. On average, seniors think their home is worth 18.9% more than it is. Lower-income households, and black households regardless of income, tend to overestimate their home’s value more than others, probably because their neighborhoods were not appreciating at the average rate.  Therefore seniors who applied for a reverse mortgage and learned they overvalued their home were likely to not bother taking a reverse mortgage even though they started the application.

I conclude that reverse mortgages may help high-income, highly-educated people in stable neighborhoods with appreciating homes solve their particular problem, which is unrelated to America's retirement crisis problem. But, reverse mortgages will not help most Americans finance retirement, and if reverse mortgage lenders are not well-regulated or scrupulous, complicated reverse mortgage contracts could actually hurt older Americans.