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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.

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Saturday, we broke the record for the longest government shutdown in history--now 23 days and counting -- which was set in 1995-96 when President Bill Clinton refused to accept Medicare premium hikes and program cuts proposed by a Republican-majority House and Senate, and the government shut down for 21 days. What are the chances of a settlement? You need a little bargaining theory to predict a deal. Deals are made when both sides are hurting and the "costs" of settling are less than the costs of a stalemate. If the President, for instance, feels the shutdown helps him, the shutdown will continue. Same thing about the Democrats. If there is significant gain from the shutdown to at least one party, the shutdown will drag on.

The shutdown's economic harm to us all may not be apparent but it is real. On Friday, 800,000 federal workers did not receive paychecks, even though many must keep working as a condition of their employment. Many federal contractors and their employees (including small businesses) also are not being paid.  Consumers are losing. Planning to travel?  Avoid Miami International Airport, where the shutdown-induced shortage of TSA workers caused a partial closing of a terminal.  Expect these air-travel problems to spread.  Last week I was coming back from the American Economics Association convention in Atlanta, and the unpaid TSA workers looked beleaguered or stoic or a mixture of both.  Two days ago they were angry and organized a protest against the shutdown. Will militancy spread?

So the largest and most direct losses from the shutdown are borne by lower-income and middle class federal workers, many of whom live paycheck to paycheck. The TSA militancy was clearly predictable.  The protest contradicts the claim of President Trump's economic adviser's,  Kevin Hassett, that furloughed workers are "better off" due to the shutdown because they didn't have to use up vacation days in December.  Next on the scale of intensity of losers are communities and businesses who depend on federal workers.

But the costs are beginning to add up as the shutdown supresses aggregate demand and increase input costs--we all are losing.  Government shutdowns can hurt the economy just like recessions. The Office of Management and Budget estimated the cost of 2013’s 16-day shutdown at between $2-6 billion of lost output (their mid-range estimate is .02% of GDP overall). Based on those estimates, a shutdown lasting into February could cause up to a .07% loss of GDP, similar to losses in a significant downturn. And as SP Global already noted last week, a  shutdown running into late January would cost the economy $6 billion in lost output--greater than the $5.7 billion Trump wants for the wall.

Will political parties stop the shutdown? The answer is not while Republicans benefit from the public's frustration with government. 

There is good historical and on-the-record evidence on how the President and Republicans may be perceiving gains and losses from the shutdown.  The government shutdown could be part of their long-term government slowdown. Government dysfunction causes the public to lose faith in government. And, the Republicans are on record as the anti-government party.

Exhibit A: President Trump  took ownership of  the looming shutdown  saying “I am proud to shut down the government for border security” suggesting he perceives the stalement is to his advantage.  Just like Bill Clinton held fast to preventing Medicare cuts.

Yet the wall remains Trump's bottom line while public support for it falls. A new NPR/Ipsos poll reports  70% of Americans think the shutdown will hurt the economy, and 71% want Congress to reopen the government while negotiations keep going.  Trump sees the same polls we do. So his holding fast suggests he gains something else besides the wall by not settling. He and the Senate Republicans who are backing the President might be gaining a long-term advantage as the shutdown becomes an extension of historic pressure by Republicans to, in their own words and actions, weaken support for government.  

Exhibit B: In 1990, the then-leader of the Republican party Newt Gingrich urged Republicans in Congress to be "divisive, combative, and disruptive."  Political scientist Thomas Mann describes the Gringrich-led process:  “Gradually, it went from legislating, to the weaponization of legislating, to the permanent campaign, to the permanent war." 

The Trump Administration is the logical heir to this double-decade effort by his party to weaken government's effectiveness.  The administration has not nominated senior-level staff for government agencies to go through normal Congressional confirmation processes.  Trump often prefers to put temporary appointees into the jobs or leave key offices unfilled.

Bottom line: A lasting effect of this government shutdown and the ongoing government slowdown is further eroding respect for the federal government’s reliability. For example, the Republican party has always sought to weaken Social Security. Last year the administration accelerated shuttering Social Security offices (just when demographics mean service demand is up), reducing service and responsiveness. Mark Miller summarizes the historical erosion of Social Security services in a November New York Times article.  And the erosion continues--when SSA workers come back to work they won't get any raises.

The President and Republican leaders in the Senate may perceive the shutdown helps them win the long game against government and the destabilizing and shrinking of the economy is worth it.  But we all are paying a recession - like cost from the shutdown.

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Employers may be saying one thing and doing another, the consulting firm Willis Towers Watson found in a new survey of employers. Over 80% of employers say that managing their employees’ retirements is an important business issue, but only 25% say they do it effectively. This contradiction means to me that firms are not doing much about retirement security. Everyone knows good pensions and retiree healthcare induce orderly retirements, but 35% of workers nearing retirement (aged 55 to 64) have no retirement plan other than Social Security and most have no retiree health plans.

Being pushed out of employment might soon be on the rise for older workers. A new Prudential Insurance study reveals to employers that if they don't push older workers who may be past their time to leave, lingering could be expensive. Every year an older worker stays on the job, the higher is the risk that seniority-based salaries and health benefits will cost more than the value-added of the older employee. The Prudential study reckons that an average older worker hanging onto their job could be a deadweight of over $50,000 loss to a firm.

There is also evidence that older workers staying on the job could clog up promotion pipelines for younger workers. The Willis Towers Watson survey reveals employers are noticing: 37% of employers say lingering older workers could clog up promotion ladders and hurt younger workers. And 40% of employers are worried that older workers take a large bite out of their company’s salary and healthcare budget because older workers cost more than younger workers.

If employers feel that older workers are too expensive—and are also hurting the younger workers firms might be grooming—these feelings are bad news for older workers who not only want to keep their jobs but also hope their jobs will improve. According to an AARP study, older workers want to transition to part-time work (73% want that) and 44% want to work in a new field with interesting and challenging work in such popular areas as sports, hospitality and education. But according to the Willis Towers Watson survey, only 30% of employers are letting workers change positions, like moving down from management to consultant. Only 27% of employers are allowing part-time work.

I am sorry to say that, despite what older workers want, it doesn’t look promising that they will find employers welcoming them with open arms and ready to accommodate.

Bottom line: Evidence shows that businesses may not prefer older workers and, worryingly, employers are not doing much to smooth their employees’ transition to retirement. This asymmetry spells trouble for older workers. When business gets lean—VerizonAT&T, GMBlackRockSears and J.C. Penney are all laying off workers—evidence suggests that older workers may be the first to be laid off without the glide path they wanted.

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Here I am in Atlanta, at the annual American Economics Association convention, with thousands of other economists.  We seem to be encased in a concrete conference center, walking between hotel meetings rooms and food courts on skybridges isolated from the street. I haven’t been outside in days.  I think I saw Ben Bernanke in the hotel gym rocking the treadmill while I worked out in my new free t-shirt advertising a software program.

New research at the AEA convention suggests that better retirement policies for older workers could also help younger workers advance in their careers. How can younger workers improve their bargaining power on the job? Make sure a large group of substitutes or competitors on the job--older workers--can just say no to further work and retire with dignity.  It is a win-win.

I'm here of course to learn about new economic research on retirement and aging, and in one of these meeting rooms I heard a paper entitled, “Is it Bad to be Green in a Greying Firm?,” written by Peter Berg, Marissa Eckrote, Mary Hamman, Daniela Hochfellner and Matthew M. Piszczek, and sponsored by the Sloan Foundation’s Future of Work and Working Longer Project.  The research suggests bad effects on younger workers if older workers stay on the job. Their data comes from Germany – a nation with comprehensive data on firms and workers— and it shows that firms may use older workers as substitutes for younger workers.  As older people delay retirement, the less experienced younger workers may not be promoted. This research could mean that while many U.S. older workers delay retirement partly because of their eroding pension security, younger workers could suffer wage loss and wage repression.

We should pay attention to how older workers are treated for three reasons:

  • 10,000 boomers are turning 65 every day;
  • out of the 11.4 million jobs expected to be added to the U.S. economy by 2026, 6.4 million will be filled by workers over 55;
  • ­ALL, I repeat, all, of the net increase in employment since 2000 -- about 17 million jobs -- was among workers aged 55 and older (calculated from the Current Population Survey).

The aging American workforce combined with older workers’ lack of retirement readiness may shape employment patterns and the strength of all workers’ bargaining power for all American workers, old and young. To be direct: the loss of bargaining power among older workers -- because many must say “yes” to any wages, hours, and working conditions offered up -- is bound to affect the rest of the labor market.

Another force besides inadequate pensions also may be exerting downward pressure on older workers’ bargaining power. My research center at The New School for Social Research, the Retirement Equity Lab found that older workers do not have the connection to their employers they once had. A strong long-term relationship with an employer may help ease retirement exit in many ways.  You are likely to have a pension, some transition health care, and the ability to do phased retirement with an employer you have been with for a long time. You have some leverage when you have a long-term relationship with an employer, because the firm has plans for expected retirements.

But changes in job tenure over the last 30 years have reduced older workers’ bargaining power, especially for older men. In 1987, the median number of years older prime-aged men (45-54) have been with their current employer was 12.7 years. In 2018, their median job tenure fell 36% to 8.1 years. For older workers age 55-64, men’s job tenure fell 16% during the same time period (16.8 years to 14.1 years), a drop that would have been higher if many older male workers who lost jobs did not leave the labor market.

Economists Alicia Munnell and Steven Sass report that older men’s decreased job tenure reduces their salaries and access to benefits such as retirement coverage. An older worker who changes jobs will likely have to take savings out of their 401(k) plan before retirement and find a new job that pays on average 25% less.

It is likely that our inadequate retirement savings system makes older workers less likely to be able to bargain for better wages, hours, working conditions, and benefits. And our broken retirement system also results in a growing number of indigent elderly. If workers currently aged 50-60 retire at age 62, 8.5 million  people are projected to fall into poverty.

The New School for Social Research

The fear of poverty makes a bad job look good.

How do we help older workers get bargaining power on the job? Older workers need to be able to walk away from a bad job. We need to ensure older workers can afford to retire through the expansion of Social Security and meaningful, comprehensive advanced-funded pensions.

To help fix our broken retirement system, Blackstone’s executive vice president Tony James and I have proposed the creation of Guaranteed Retirement Accounts (GRAs).  GRAs would provide all workers with universal, secure retirement accounts funded by employer and employee contributions throughout a worker’s career, paired with a refundable tax credit. Simply increasing unionization for all workers would also help address the retirement crisis.

This is a repost from Forbes. 
 
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Happy New Year - and happy new you! If you are taking stock of your wealth know that for the most of us Social Security will be worth more than any other asset we own. And you will probably pay Social Security taxes all year -- most of us do. But some very high income people will stop sometime during New Year’s Day. Who are these people who don’t pay all year long--or in the extreme, who pay their total annual Social Security taxes in less than one day? If they paid more, Social Security would be financially stronger.  

Social Security is Important and Popular

Some background: a 65-year old expected to live 20 years who receives $1300 per month (inflation indexed) from Social Security has a present value Social Security wealth of approximately $350,000 (assuming a conservative return and modest inflation; see Dana Anspach's efficient calculations).  In comparison, the median retirement account balance for an older worker is about $60,000 and the median home equity for people age 65 and over is approximately $120,000.

No wonder the vast majority of Americans of all ages, income levels, and political affiliations oppose Social Security benefit cuts in any form. A National Academy of Social Insurance survey reports that 77% of Americans feel it is critical to preserve Social Security benefits for future generations, even if it means raising taxes.

Social System Is Primarily Short of Funds Because of Unexpected Income Inequality and Sky-High Health Premiums, Not Longevity Increases

Social Security is in good shape and well-funded. However, the program will only have enough money to pay 77% of benefits in 2034 unless the system obtains the equilvalent of about one trillion dollars  Sounds like a lot of money?  Coincidentally, the amount needed is less than the $1.889 trillion of lost revenue (from 2018- 2027)  due to the tax cuts enacted in 2017 that reduced taxes for the wealthiest Americans and the corporate tax rate from 35 to 21%. The fix to Social Security comes from addressing the source of the revenue shortfall, not cutting benefits.

Boomers living longer is not causing the Social Security system to face a revenue shortfall in 2035.  Social Security actuaries can count. They have been anticipating baby boomers’ retirement as longevity increased as a slow-moving, observable and predictable phenomenon.

Social Security taxes aren’t sufficient to pay full benefits mainly because of extreme earnings inequality and diverting wage increases to pay ever-increasing health insurance premiums since back in 1983 when the Social Security tax was last raised by Congress and the President. According to Urban Institute economists Karen Smith and Eric Toder, the inequality of wage income and taxable wages escaping as health insurance premiums are the most salient and unexpected reasons for the shortfall. The Economic Policy Institute has found that most labor earnings growth since 1979 has gone to the top earners; the top 1 percent wages grew 138 percent since 1979, while wages for the bottom 90 percent grew only 15 percent.

The basics of the Social Security system reveals why the unprecedented lopsided growth in earnings is the main reason behind the system’s shortfall. Social Security benefits are paid by the FICA tax, which is 12.4% of pay (split evenly between the employer and the employee) up to a cap. In 2018, the cap was $128,400 (the cap will rise to $132,900 in 2019). Ninety-four percent of American workers pay FICA tax all year long because our annual earnings fall below the cap and 6% stop paying sometime during the year when their earnings reaches $132,900.

But for some very, very wealthy people their earnings will reach the cap hours after midnight strikes on New Year’s Eve. Who are these people who don’t pay all year long--or in the extreme, who pay all of their total annual Social Security taxes after only one day?

People don’t post their salaries, so we don’t know who is the highest salaried  person in America. We know the richest man in the world is Jeff Bezos, but the system doesn’t tax wealth, it taxes wages and salaries. (Social Security could tax wealth, but it never has.) Public companies post the salaries and bonuses for its executives and Brian Duperreault of AIG -- the insurance company bailed out in the 2008 financial crisis -- earns $44 million in salary.  That means he stops paying Social Security tax by about 3 minutes into January 2.

In 2017, over 165 million workers paid a total of $836 billion into the Social Security system. I don’t know the names of all the 1143 people in 2017 who earned over $20 million although 205 employees earned over $50 million each, with an average salary of $97 million.  But these extremely wealthy people only paid Social Security taxes on the first $128,400 they earned in 2018. On average, those 205  people at the top will stop paying Social Security tax 12 working hours into 2019, about the time you may be reading this blog.

Every year, the earnings cap means that over $2.3 trillion dollars of earnings--wages and salaries, not capital income-- of an economy-wide $6.7 trillion in taxable earnings escapes Social Security tax.  That's over one-third of total earnings.  This escape happens not by design, but by accident. According to Kathleen Romig of the Center for Budget and Policy Priorities, in 1983, Social Security reformers never imagined we would see such a rapid increase in earnings above the cap, nor did they imagine that the bottom 94% of earnings would experience wage stagnation during the 1990s and 2000s.  Otherwise, they might well have raised the earnings cap, putting more revenue into the system.

How To Fix Social Security

The American Academy of Actuaries Social Security game makes it easy to assess like an expert -- choose revenue and/or benefit cuts to balance the program's long run budget. Since we are approaching an overall retirement crisis as boomers continue to retire and the 401(k) system is inadequate for many workers, it makes no sense to cut Social Security benefits. Revenue increases are the practical solution and two ways to raise revenue can fix the shortfall completely. If we eliminate the earnings cap and assess FICA on currently tax-deductible health care premiums, Social Security is fully solvent for  75 years. Higher income workers will pay more but there is no evidence that increasing revenue to the system is unpopular.  Because raising the cap would mean only a few of the highest earners pay more, it is unlikely to inhibit overall economic activity or cause any meaningful economic harm.

Keep in mind that in 1994, a bipartisan group of politicians eliminated the Medicare earnings cap. Since then, everyone pays Medicare taxes all year long. And since 2016, higher earners pay a surcharge. The Medicare tax is only 2.45 percent (combined employer and employee tax - the worker effectively pays the employers’ portion).

We could also collect revenue for Social Security from income that is currently not counted as labor income. Forbes staff writer Noah Kirsch reports the three richest Americans —Bill Gates, Warren Buffett and Jeff Bezos—together hold more wealth than 160 million American households. Taxing unearned income -- income received passively from interest and dividends etc. would be a big change in the system, maybe for the better, but that is for another debate.

If we did nothing to the basic bones of the system and only taxed earnings not wealth and raised the cap (and benefits were not increased), 88% of the short fall would be solved.   Or we could not touch the earnings cap, but increase the FICA tax from 12.4% to 15.23%.  The employee and employer would each pay 7.615% instead of 6.4% to close the entire gap. Really, take a pause. If we raised the FICA and elminated the cap Social Security shortfall would be solved and we would have moved a long way to fixing the next coming retirement crisis.

Even conservative commentators – the Washington Examiner -- urge a close look at removing the cap. Eliminating the Social Security earnings cap is unlike the sugar and spending and fitness resolutions you made New Years Day--  raising the cap is a policy with very little pain and all gain.

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The ongoing government shutdown that began on December 21 is affecting many programs, but it doesn't affect mandatory, entitlement, nondiscretionary spending including all tax breaks, Medicare and Social Security.

That's a good thing for the elderly and for the economy, since over half of seniors depend on Social Security for most of their income and Social Security constitutes over 90% of household income for one-fifth of seniors. That financial dependence is essential when considering the Social Security program's financial and political stability.

Although checks are being sent, the partial shutdown is hurting seniors in other ways.  Sixty-seven million seniors depend on many other government programs besides Social Security. For example, the Department of Agriculture may run out of money for food stamps (Supplemental Nutritional Assistance Program) which means 4.8 million people over 60 will not get full food assistance.

Further, the breakdown in Washington still hurts Social Security.  The unreliability of the federal budget process may weaken public support for the Social Security system. More concretely, the agency’s current fiscal 2019 budget, adopted just two days before the Oct. 1 start of the fiscal year, reduced funding for beneficiary services and administration from their 2018 level.  That’s on top of the fact that, customer service was already suffering from years of administrative budget cutbacks, even as the number of Social Security beneficiaries has been growing with the retirement of the Baby Boomers. (Author’s note: the original version of this article, relying on contingency plans posted by the White House Office of Management and Budget, incorrectly suggested that some Social Security services have been further curtailed and some agency workers furloughed during the partial shutdown.)  

The Far Flung Economic Costs of An Unreliable U.S.  Government

President Trump is owning the shutdown, tying it to his insistence that Congress fund a wall on the border.  But the "Trump shutdown" is in part a reflection of a larger, ongoing problem in Washington. The regular budget process has not worked since 1997 (the last time all annual appropriations bills were passed on schedule.)  In its place, temporary and short-term spending authorizations--continuing resolutions--have become the norm, causing uncertainty and imposing direct costs on federal contractors (many are small companies), employees and communities that depend on reliable federal spending.

An unreliable U.S. federal government indirectly imposes costs on the world economy. For all its faults the United States and the dollar was seen as a stable entity – over 30 countries (IMF report Table 5)  peg their currency to the dollar.  The Financial Times reports that the partial government shutdowns and erratic Presidential statements are important factors destabilizing the U.S. economy and  financial markets. A substantial share of older workers and seniors depend on financial markets for their retirement income and the last thing they need is financial uncertainty and volatility.  Regrettably, I foresee a great deal of financial instability for older Americans driven in part by our broken budget process.

Despite the costs and disruption, no further negotiations are scheduled.  The shutdown will become the first order of business when the new Congress begins its session on January 3.

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The stock market is in bear territory the night before Christmas, dropping 19.7% in 3 months from a peak during the day on September 20.  And many blame the President’s slipshod economic management.

Financial markets matter more than ever. Twenty-four million American workers are approaching retirement age, and many will have to retire before their time when the recession hits. Just over a third have no financial assets, so for once not having a 401(k) or IRA may be a relief. But 15.6 million American workers, age 55-64,  have real skin in the game – they had on average $92,000 in retirement assets in 2017.  If it were all in stocks each older American lost an average of over $18,000 this quarter.

Folks are panicking as their retirement income and prospects for work look grimmer than they have in 9 years. Account balances shrink at the same time job prospects shrivel and older workers are often FIFO  – first in and first out – and more vulnerable to recessions. Only near retirees relying on a defined benefit pension plan and Social Security don’t have to follow the S&P500 -- their income is guaranteed.

Other assets, such as bonds, don’t promise much relief – the financial markets and real estate may slump for a while.  However, market volatility is not a culprit; market corrections are expected and even necessary. Erratic government policy is the culprit. The clumsy government shutdown and awkward, ill-advised and seeming impulsive statements from  Treasury Secretary Stephen Mnuchin should not be expected and and they are unecessary.

This week the executive branch hit the wallet hard. First, the government shut down as President Trump insisted Congress fund the Mexican border wall and turned down a budget deal. This caused federal budget authorization to expire, shutting down non-essential government services (the White House Christmas tree closed, and now is open only with private money). The shutdown is forcing many federal employees—including border patrol agents—to work without pay.  As of Christmas Eve no further negotiations are planned.

Second, Treasury Secretary Steve Mnuchin caused a minor panic that helped drive the S&P 500 index down by 2.7% today. He probably didn't mean to. Apparently he actually was trying to calm the markets.  Mnuchin announced he spoke to the CEOs of the six largest banks and reassured us the banks had adequate liquidity.   But since no one had been worrying about liquidity, markets either assumed that the Treasury had some disturbing inside information or that Mnuchin was acting under orders from President Trump. The motive might have been to support Trump's constant tweeting against the Fed and its chairman Jerome Powell (who Trump appointed). It is as if the Treasury, reassuring us we are secure from white rabbit attacks, caused more fear of white rabbits than ever before.

Tim Duy, the economist behind the Fed Watch blog,  agrees with Trump’s discomfort with the Fed’s interest rate hikes.  But he worries about the President and his impulsive policy declarations, writing,  "My guess is that Mnuchin was under pressure from Trump to 'do something' and this half-baked attempt to calm markets is the result.”  Duy added "it is widely believed that Mnuchin’s actions were so poorly conceived that they can’t be taken seriously. But they were so poorly conceived that they imply a worrisome lack of competence for economic policymaking as a whole, and that creates uncertainty that undermines investor confidence."

This week the executive branch’s incompetence has caused million of workers to uneccessarily lose thousands of dollars.