This is a repost from Forbes.

Here is the best financial lesson I can offer: there are two sides to the interest rate – the getting side and the paying side. You want to be on the getting side.

How do you do this? Pay off your mortgage as soon as you can, and definitely pay it off before you retire. And don’t buy a home if you can’t afford to pay it off between five to 10 years.

Unfortunately, that’s not the norm. Thanks to the commonplace position of the 30-year mortgage, it is more popular despite the lower costs of shorter-term loans. The 30-year mortgage was originated during the Great Depression to help borrowers lower their monthly payments and avoid foreclosure. But now, Americans are more indebted to banks for mortgages than homeowners in other advanced market economies. In exchange, those paying longer obligate themselves to pay more than double over the lifetime of the debt.

On the other hand, the 30-year mortgage is very friendly to real estate brokers, home developers, and banks. Simply put, it allows them to sell more expensive houses. Bankers are gleeful to hand out mortgages that more than double their interest revenue.

Here’s an example of how the math works. In April 2018, a 30-year mortgage charges about 4.18% in interest, whereas a 15-year mortgage charges about 3.75%. If you borrow $100,000 for half the time, your total interest paid doesn’t just decrease by half. It falls from $75,626 to $30,900, or by 60%.

But why pay the bank $30,900 at all? Put it in your retirement account. This way, you earn the interest.

Here are answers to the objections I usually hear when I advise people to pay off their mortgage.

1. “The government lets me deduct the interest.”
Answer: If you are a high earner and pay an income tax rate of 39%, you pay the bank $1 and the government reduces your taxes by 39 cents. But the bank still gets your 61 cents! Do you like banks better than your favorite charity or yourself? And, as you get closer to paying off your loan, a larger share of each monthly mortgage payment goes to principal rather than interest. This decreases the amount deducted from taxes, making the deduction worth less.

2. “I want to use cheap mortgage money to make more money.”
Answer: Sure, businesses pay interest and leverage hoping to invest in ventures that pay a higher rate than the interest rate. That’s the plan – and the hope. Most businesses fail because hope doesn’t come through -the debt overwhelms them. Individual households have even less means or scope to handle leveraged risk.

3. “My house will appreciate more than the interest rate, especially after the tax deduction.”
Answer: Maybe, but you could also be paying tens of thousands to the bank and be underwater. Average house appreciation rates vary wildly, and a financial crisis can happen at any time, perhaps when you reach your 60s.

4. “If I use all my money to pay off my mortgage, I won’t have any money for emergencies and I will be cash-poor and house-rich.”
Answer: Don’t be cash poor. Have six months of salary in cash for emergencies. Max out on your retirement savings and pay off your mortgage. Paying off a 4% mortgage (even with a tax deduction of the average 28%) is like earning a risk-free rate of 2.88% (4% - 0.28% of 4% = 2. 88%). There aren’t many places on the planet where you can earn 2.88% risk free. No longer paying interest on your loan, paying it off can be like earning the equivalent risk-free return.

5. “I don’t want to store all my wealth in my house.”

Answer: Diversifying assets is always best practice. However, most families’ greatest asset is Social Security and Medicare (worth about $400,000 for an average couple), followed by home equity of about $110,000, and their retirement account with about $30,000 in stocks and bonds. Having a large chunk of your money tied up in your home might seem unwise, but not when you consider that you are also using the house for a necessary consumption. You need to live somewhere, and you can’t live in a stock or bond. Also, if your house appreciates in value, you can sell it or refinance. But if you don’t pay off your mortgage, you won’t have the equity.

6. “I haven’t contributed the maximum amount to my 401(k), IRA or other retirement accounts.”
Answer: I often hear this as a reason why people slow down their efforts to pay off their mortgage. While paying into your retirement account is a better use of your cash than paying off your mortgage, ideally you want to max out your retirement savings and accelerate your mortgage payments.

But retirement security is a big topic and anyone trying to secure their retirement needs more tactics than paying off their mortgage. Some tactics include changing spending plans and saving in retirement accounts and others include a more comprehensive national policy solution. For instance, everyone needs a retirement savings plan and to contribute to it from the beginning of their career. I have two small and easy-to-read books on how to have enough in retirement and how to change federal policy so we can rescue retirement with a Guaranteed Retirement Account.

[Pro-Tip: A good way to reduce interest payments is to make extra payments to pay off the principal. Decreasing your balance decreases your interest paid.]

7. “I have high interest credit card debt.”
Answer: Using cash to pay off high-fee credit card balances is another good reason to temporarily keep some mortgage balance. You want to use your cash to pay off high-interest loans. Paying the monthly minimum of $110 on a credit card balance of $5,000 with 15.99% interest rate will take 25 years to pay off. And the $5,000 will balloon to $12,000. Its even worse if you continue to use the card, adding more debt.

[Pro-Tip: Tear up your credit card, then pay off the balance as soon as possible. Do keep one – you can’t rent a car without one – but use it like cash and record every card expenditure in your checking account log.

Let’s be positive. Here are the reasons to pay off your mortgage:

1. Good retirement planning is about accumulating assets AND reducing spending. You will have less income in retirement, so eliminating your monthly mortgage can greatly increase the amount of money you can spend on fun activities and medical expenses that will surely increase. Ideally, you followed the advice in the first paragraph and didn’t buy a home with a mortgage longer than ten years.

2. Paying off your mortgage early transfers the money you would have paid the bank to your pocket.
It almost always makes sense to pay off your mortgage before you retire, but use a mortgage payoff calculator to convince yourself that it’s better to pay off your debts before retirement because new costs – like medical costs will soar.

OWAAG tile April 6 2018

The Bureau of Labor Statistics (BLS) today reported a 3.2% unemployment rate for workers age 55 and older in March, a rate unchanged since February.

For decades, economists have documented that the racial gap in unemployment rates is widest at the depth of a recession and narrowest right before the economy goes into recession. In short, that black workers are the first fired and last hired over the business cycle.

Older workers are no exception. We are now 9 years into an economic expansion - one of the longest ever - and the racial jobs gap for older workers is at record lows. However, we predict that when the downturn begins and unemployment increases, older black workers will be disproportionately laid off and, once again, experience higher rates of unemployment. 

In 2003, the aftermath of the recession, the black unemployment rate for older workers was 6.8%, 2.9 percentage points greater than the older white unemployment rate of 3.9%. By the time that expansion peaked in December 2007, signaling the start of the Great Recession, unemployment rates dropped to 4.2% for black older workers and 3.3% for white older workers, narrowing the racial jobs gap to 0.9 percentage points. When unemployment peaked again in 2011, black older workers’ unemployment rate grew to 10.1%, 3.6 percentage points higher than white older workers at 6.5% - the largest gap in the past 15 years. As of February 2018, almost 11 years since the last round of low unemployment rates, the racial unemployment gap has once again narrowed to a gap of just 1.1 percentage point.

Following this trend, when the economy takes another downturn, black older workers will most likely face more risk of losing their jobs and/or not finding new jobs at a higher rate than older white workers.

March OWAAG Graph

Economic growth shrinks the racial gap in unemployment for a number of reasons. When workers are scarce, employers relax hiring practices that have discriminatory effects. In recessions, the racial unemployment rate gap grows because older black workers lose their jobs faster than older white workers.

Discrimination in wages and employment persists in the U.S. economy beyond differences explained by white workers having more education than black workers. Blacks with a college education have the same unemployment rate as non college-educated whites.

Economic downturns and employment discrimination make it harder for older people to save for retirement. One solution to both unemployment and job discrimination is a federal job guarantee to ensure all citizens over 18 seeking employment have a job at non-poverty wages. Strengthening Social Security and creating Guaranteed Retirement Accounts (GRAs)- proposed universal individual accounts funded by employer and employee contributions and a refundable tax credit throughout a worker’s career - would help older workers, and older black workers in particular, off-ramp into an adequate retirement during a downturn.

This is a repost from Forbes.

The need to solve the retirement crisis is defying today’s political divisiveness by giving us a rare example of bipartisanship. In the last month, four experts of varying political stripes called for creation of mandatory retirement savings accounts to replace our failed “do-it-yourself” voluntary system. This includes economist Teresa Ghilarducci (an author here) and Rescuing Retirement co-author Tony James, president of private equity firm Blackstone; Jason Fichtner, a former Bush administration economist; and Third Way, a centrist Democratic think tank.

And while there are significant disagreements in the details, it is nothing less than a sign of the growing political will to take bold action to ensure our workers can retire and our retirees stay out of poverty.

Unfortunately, the shared call for mandatory retirement accounts neglects the foundation of retirement security, Social Security. The protection and expansionion of this program is a necessary starting point for securing and building retirement security. To be clear, we believe that bold proposals for individual retirement accounts – as necessary as they are – simply will not work without first strengthening Social Security.

Polls of the American public persistently report two results. First, that Social Security is highly popular, considered efficient and effective. And second, that over half of Americans don’t think they will have enough money in retirement. On both, the public is spot on. Without reform to bridge the gap between Social Security and private savings, when they reach age 65, 30 percent, or 21 million Americans ages 50-60, will be poor or near poor as retirees.

As economists, we believe it’s possible to fund both an expansion of Social Security and mandatory individual retirement accounts on top of Social Security.

To ensure all workers a secure retirement and the end of elderly poverty would require an additional $500 billion in retirement contributions from workers, employers, and the government. While less than 3 percent of GDP, $500 billion is not trivial. Rather, it is similar in magnitude to the 10-year cost of $5.5 trillion to fund the recent GOP tax cut.

How does this work? First, every worker would pay an additional 5.8 percent of pay towards their retirement security, or about 80 cents per hour. This breaks down into three parts.

First, 2.78 percent to secure Social Security (one way among many to provide needed revenue). This would ensure workers receive their full and promised Social Security benefits and provide retirees with an average of 36 percent of their pre-retirement income.

Second, an additional 0.02 percent would raise the special minimum benefit to bring almost every elder above the poverty line. The special minimum benefit places a floor under the benefits of lifetime low earners, but has eroded over time and now almost no new claimants qualify.

Third, 3 percent to fund mandatory individual savings accounts for retirement. Alone, this contribution is unlikely to permit all workers to maintain their living standards in retirement. However, it is designed to add on to retirees’ monthly Social Security benefit to ensure they can live well clear of poverty or near poverty. We could follow the lead of Australia’s mandatory retirement savings program, which started with a 3 percent required contribution and is now up to 12 percent. The program will also allow for those who want to contribute more to do so.

Accumulating retirement savings is just the beginning. How the money is invested matters, as does how savings are paid out to retirees as well as how retirement tax breaks are distributed to low-, middle-, and high-income workers. The Ghilarducci/James proposal for Guaranteed Retirement Accounts (GRAs) calls for pooled investments to ensure workers earn the highest risk-adjusted returns possible, guaranteed principal to make sure workers’ contributions aren’t eroded by market risk, and annuity pay-outs to ensure retirees don’t outlive their savings. And lastly, the GRA includes an inflation-adjusted flat tax credit to incentive savings and ensure contributions are cost-neutral for those with low incomes.

Bottom line: If young workers and their employers, with assistance from a government refundable tax credit, paid 5.8 percent more – 2.78 percent in Social Security, 0.02 percent for poverty alleviation, and 3 percent in an well-managed and invested retirement account - they would be secured from poverty and near poverty in retirement. Workers approaching retirement without adequate savings would have to increase their savings by considerably more that 3 percent. But these workers would be better off than they are today, with universal access to a low-cost savings retirement program. And the lesson of Australia is that the sooner the program starts, the sooner it matures.

This post was written with ReLab Research Director Anthony Webb and SCEPA Associate Director Bridget Fisher.

Slide 1 logo

This is a repost from Forbes.

When people ask me what I mean when I warn a retirement crisis is coming, I give them one number: 8.5 million. That’s how many older workers and their spouses will experience downward mobility in retirement if we do not act soon.

Who are the endangered 8.5 million? These are working people nearing retirement age (age 50-60) earning above $31,260 for couples or $23,340 for singles, which is twice the official federal poverty level, a common standard used to measure chronic deprivation.

But because of inadequate pensions and low Social Security benefits, they will be poor and near poor when they retire at age 62 (most people, except the highly educated, retire at about 62 or 63.) 8.5 million people will be downwardly mobile because they will experience a decline in their living standards from middle class to poor or near-poor status.

Downward mobility can have political consequences, fueling anger and desperation, and the rise of elders in poverty is a humanitarian crises.

You probably heard “blame the victim”-type explanations for why people don’t have enough retirement savings, including workers spend too much; they are too short sighted, and retire too early. However, our problem is not that humans are flawed, but that the flawed system is not built for the humans we have.

Historically, many families could count on workplace pension plans. But today, less than half of workers not have access to any kind of savings plans at work, not a 401(k), traditional pension, nothing. Even workers with coverage through an employer-sponsored 401(k) cannot adequately grow their savings due to market volatility and predatory fees and job changes and job changes and other life events. The system doesn’t match up with the real lives of workers, no wonder the median older workers only has $15,000 saved for retirement.

Working longer, alone, won’t allow older workers to bridge the gap. Delaying retirement as a solution depends on older workers being able to physically and mentally continue working and crucially employers willing to hire them. 

Our research found that, instead of technology making the workplace less physically and mentally demanding, technology has made speed-up more possible. Older workers, especially older women and black workers, face physically and mentally challenging on-the-job requirements: intense concentration, keen eyesight, and bending and stooping.

Headline elder unemployment rates at dizzyingly lows, about 3.2%. But hidden elder joblessness is workers much higher; over 3 million older workers trapped in hidden unemployment include those working part time, but want full time work, and those who want a job and who have stopped looking for full-time. The real unemployment rate is over 7 percent. An the labor market isn’t great. In the last quarter of 2017, 15% of older workers with college degrees were paid less than $15 an hour. And despite recent news article heralding the end of wage stagnation, wages for older working women are falling.

Mandatory add on accounts to Social Security, called Guaranteed Retirement Accounts (GRAs), paid for by contributions from employers and employees and targeted refundable tax credits give every worker an individual retirement account. This account is pooled with other workers’ investments, professionally-managed, with guaranteed principal. With a progressive, refundable tax credit for all workers, lower-income workers can save for retirement without pinching pennies.

Working longer, cutting back on little luxuries - these are not going to save middle class workers from falling into poverty in old age. The risk of being poor or near-poor is exactly that: a risk. To protect ourselves and each other from this risk, we need structural reform.

This is a repost from Forbes.

Now you are prepared to negotiate the best price for college—see my previous blog—you need to start negotiating. A Forbes article a while back described good tips. Here are my four: you need Power, Logic, Language and Leverage.

1. POWER Be psychologically ready with a back up plan to exit and choose another school. The road to bargaining power is the well-marked path out the door. Being able to exit is the definition of bargaining power – one who has the least to lose by walking away from the agreement has the most bargaining power. Know your number – walk away from a number that is higher than that number; you have already determined what you can afford.

2. LOGIC Once you get the offer, write a letter that explains your argument to lower the price by increasing the aid. Follow up with a phone call or  person appointment with a financial aid officer. Keep track of everyone you talk to so that you can come back to any prior discussions. You have to make your case, be prepared to explain why what they think you can afford is not what you can. Explain other children’s needs, insecure job situation, debts, expectation of medical expenses. Gather up all the supporting materials you need to negotiate the price you can afford. Your negotiating party needs to have a reason to agree with you. Ask for a deadline extension. Since you are confident and prepared you will be nice, courteous, and hopeful. No one likes mean people, and pressure won’t help here. Trust me I am a New Yorker and I think I know when pressure and impatience works.

3. LEVERAGE Important leverage is negotiating college aid – not loans. Your leverage is any other offers your child has received. Come with research in hand on the total cost of attendance for all the schools your child has been admitted to, back up your claims with copies of offer letters.

4. LANGUAGE Know how college pricing works so you can speak their language and know their levers. Just like on an airplane, everyone pays a different price for a seat. Colleges can price discriminate by lowering or raising the need-based or merit-based aid. You will have to back up arguments for need-based aid with payslips, medical bills, the whole 9 yards.

Parents and students often make the mistake of thinking prestigious colleges are the most expensive. Smart students who come from families that have less than about $120,000 annual income and accepted by a prestigious school will likely face a very small price – Princeton, Stanford, Yale and Harvard pay for low income students they have accepted.

This is a repost from Forbes.

After 25 years of teaching at the University of Notre Dame, the sweet seniors asked for a list of “vital books for new college graduates.” Top choice? Getting to Yes: Negotiating Agreement Without Giving In by: Roger Fisher, William Ury and Bruce Patton. But students should read Getting to Yes BEFORE college, more particularly as college acceptances and financial aid offers start rolling in. Like cars, houses and mattresses, college prices are negotiable. To get the best price you have to know how to prepare for negotiations and how to behave in negotiations. Part 1 is about preparing; tomorrow’s blog is about negotiating.

Four things you need to negotiate a lower cost of college:

1. Parents, know your number, backwards and forwards. That number is what you can afford to pay out of current consumption to pay for college. How much living on cheap noodles is going to pay for college. What you can pay is the amount you can afford without taking money out of your retirement plan or taking out more debt, including taking out a second mortgage. Don’t pay for college by taking out retirement savings -- your child benefits from your financial security. If you need to spend $80,000 a year in retirement, you'll need about $800,000 at age 65. You may need to deploy your detailed budget in negotiations. Prepare it now. Include your retirement savings requirements.

2. Students, know your number! Parents, don’t accept an aid offer stuffed with loans. I cannot emphasize enough how insidious student debt can be, though a modest amount can be helpful. After 37 years of teaching, I can see how it destroys young people’s careers and family life for decades.


You might get an offer that requires just $10,000 in loans per year! But if your student graduates -which is not guaranteed- in four years (again, many take five or six years), then she is expected to borrow $10,000 per year for four years. The total amount owed by graduation day is $43,190 (because interest accumulated). If your student earns $40,000 a year at graduation and can stretch their payments for ten years, they will spend almost 20% of net pay just on loans. Even a few thousand dollars matter. Help your student anchor on the number. You can also try this handy online calculator from Dinkytown.

3. Prestige doesn’t matter. Don’t assume the prestigious, expensive school is adding value to your student’s education. Research in the 1990s has held up – students accepted by Harvard and other prestigious schools and those who went to nonelite schools, like Colorado State, for instance – did just as well as the students who went to Harvard. In other words, the Ivies were good at selecting which students would do well in college. Gregg Easterbrook’s 2004 gem of an essay, Who Needs Harvard is still worth reading! Successful students create relationships with one or two professors, engage in some research, always attend class and copy their notes after class. That’s pretty much it – the recipe for success. Students add the value and the college provides the platform.  I have been teaching for 37 years and know that no college is a make or break for your student.

4.Colleges want to make a deal – the number of college-age students is shrinking as a percentage of the population and college enrollment rates have fallen by 1.3 percent between 2015 and 2016. Colleges are competing to fill their seats and dorms – and are willing to make concessions on tuition.

February 2018 Unemployment Report for Workers Over 55

owaag tile feb 2018


The Bureau of Labor Statistics (BLS) today reported a 3.2% unemployment rate for workers age 55 and older in February, an increase of 0.2 percentage points from January.

While low unemployment is finally leading to wage increases for some prime-age men, women and older workers are being left behind. In the last year, the gap between wage gains for prime-age men and older women was 8 percentage points, a loss of $4,000 a year for an older woman making $50,000 a year. click

As last month’s Federal Reserve's Monetary Policy Report observed, “While the aggregate labor market appears to be modestly tight at the moment, not all individuals have benefited equally from these developments.”

Between January 2017 and January 2018, hourly earnings (adjusted for inflation) of men ages 25-54 grew by 4.4%, the highest year-to-year increase since the recession ended in 2009. Wages of older men ages 55-62 increased by 2.8%, while prime-age women's wages were stagnant and older women’s wages fell by 3.6%. Mar 9 narrative image v5 updated

Stagnant wages for older workers and women increases wage gaps and make it harder to save for retirement. Stagnant wages are symptomatic of an “unfriendly” labor market. Older workers who lose their jobs face long periods of unemployment. If they find a new job, they typically face pay cuts of 20% or more.

Partly because traditional gender roles require women to interrupt their careers for unpaid care work and partly because of sex discrimination, women’s jobs are less secure, pay less, and are less conducive to accumulating retirement savings.

A stronger Social Security system and the creation of Guaranteed Retirement Accounts (GRAs) will allow all Americans a dignified retirement, including those affected by cumulative disadvantage in the labor market. GRAs are a proposal for universal individual accounts funded by employer and employee contributions and a refundable tax credit throughout a worker’s career.


*Arrows next to "Older Workers at a Glance" statistics reflect the change from the previous month's data for the U-3 and U-7 unemployment rate and the last quarter's data for the median real weekly earnings and low-paying jobs.