You Tell People To Save– Why Don’t They Do It?

This is a repost from Forbes

Show your kid, your client, yourself this little diagram, and sing the “Saving Song” of the righteous:

“Start saving now, my sweet, a 5% saving rate in your 20s is the same as 22% in your 50s.” 




Why doesn’t advice to save consistently work? Why do most people have no or inadequate retirement accounts (with an average balance of $15,000)? One explanation for low savings is flawed humans:  obsessive consumption and hyperbolic discounting. Sure, from the moment we wake up in the morning until we go to bed at night, we’re part of a machine designed to separate us from our money, including our poor, dopamine-loving brains addicted to the rush of spending and unrewarded for deferred gratification.  Why the surge of dopamine when we spend?

Neuroscientists and anthropologists explain spending is fundamental to human activity – we strut, primp, and display to keep or elevate our social position. Author Wednesday Martin made enemies of her former neighbors in New York’s Upper East Side when she compared the consumption habits of neighbors to bonobos – a type of monkey. Academic Thorstein Veblen in the 1930s described conspicuous consumption – the white suit wasn’t just comfortable it signaled you are privileged – you didn’t have to come near dirt. Karl Marx described the fetishism of commodities. Economists Juliet Schor and Robert Frank focused on the harm of overspending.

Spending and its enabler, credit, are deeply ingrained in American life and commerce, and the focus on faulty human behavior is prominent. Advice on how to trim your budget and slash spending is everywhere. It’s click bait. “Ten Things You Could Do Now to Slash Your Monthly Savings.” There’s so much, in fact, that after clicking on all the advice, you could easily believe it’s your fault you don’t have a pension.

None of that science is false, but overconsumption doesn’t answer why Americans lack retirement savings. Pleasure from spending is real, but our government and financial institutions have shifted. They are better at loaning us money and overcharging for investing than rewarding us for saving. Social Security is eroding not because people are living longer, but because of lack of political will to raise the FICA tax.

Here is the truth. In our society, you are on your own.  It’s your responsibility to save. But it’s not your fault if you don’t have a decent pension. While the math does work -- if you save 5% of your income starting in your 20’s, when you are 60, you will have the same amount saved had you started saving 22% of your income at 50 years of age. So my advice is twofold: save as soon as you start working and don’t spend more than you earn (an unsolicited third - eat less, mostly plants.)

But just as our car-dependent society and the availability of cheap, sugary and fatty foods contribute to the obesity crisis, so the financial environment contributes to the retirement security crisis. It isn’t our human flaws that cause us to have less retirement savings than we need. Rather, the fault lies with the flawed, ‘do-it-yourself,’ voluntary 401(k) and IRA system combined with student and credit card debt. Also, toss in low wages -- higher income folks have more discretionary income than the middle class, spending 30% on housing and 11% on food and lower-income workers a full 41% on housing and 16% on food. Where does the low-income worker cut?  Cutting 10% of 16% by bypassing on avocado toast or latte won’t produce a pension.

Bottom line: Although without fixing Social Security AND creating pensions for all you are on your own and though it won’t matter, you must avoid the overspending. But, hear me, hyper-consumerism is not the cause of inadequate retirement savings – it’s the failed retirement system.


40% of Older Americans Will Experience Downward Mobility

ReLab's new report, "40% of Older Workers and Their Spouses Will Experience Downward Mobility in Retirement," finds that inadequate retirement accounts will cause 8.5 million middle-class older workers and their spouses to be downwardly mobile in retirement, falling into poverty or near poverty in their old age.

Top 5 Cities Where Older Workers' Wages Fell and Younger Workers' Wages Soared

January 2018 Unemployment Report for Workers Over 55

President Trump in his State of the Union address highlighted the country’s falling unemployment and rising wages. Today's Bureau of Labor Statistics' report of a 3.0% unemployment rate for workers age 55 and older in January, a decrease of 0.3 percentage points from December, does not contradict the President’s view. However, while the headline unemployment rate is at an historic low and hourly wages did nudge up, these national numbers hide drastic geographic differences in the labor market. We find that cities with dynamic labor markets for prime-age workers are not necessarily welcoming to older workers.

January Jobs Report

The trend for national wage growth for full-time prime-age and older workers, adjusted for inflation, though volatile year-to-year, is essentially flat in the years following recovery. But in some cities, older workers’ wages fell while prime-age workers’ wages skyrocketed. For example, in San Francisco, prime-age workers’ wages grew by 19%, whereas older workers’ wages fell by 15%. 

In the five cities where the wage growth gap between older and prime-age workers was largest - San Francisco, Omaha, Charlotte, Salt Lake City, and Little Rock - older workers' wages declined, while prime-age workers’ wages grew faster than average. One explanation might be that dynamic cities are fueled by tech, finance and healthcare - industries that often exclude older workers.

Encouraging people to work longer is hollow advice to those without adequate retirement savings, especially in areas where older workers’ wages are declining.

While President Trump ignored the systemic lack of retirement savings in his speech this week, we cannot abandon older workers to the whims of the labor market. The creation of GRAs (Guaranteed Retirement Accounts) is necessary to preserve older workers’ ability to retire when their skills are no longer in demand. GRAs provide retirement savings accounts to all workers as a supplement to an expanded Social Security program. With the GRA, even those unable to work at older ages will have an adequate income in retirement.

Don’t Stop Saving: Trump’s State of Union Gloats are Temporary

This is a repost from Forbes.

President Trump‘s record-long State of the Union address offered two short points relevant to ordinary people‘s finances, including retirement accounts and after-tax income. President Trump said, “The stock market has smashed one record after another, gaining $8 trillion in value. That is great news for Americans’ 401(k), retirement, pension, and college savings accounts.”  He also said, “A typical family of four making $75,000 will see their tax bill reduced by $2,000 — slashing their tax bill in half.”

Since both phenomena are temporary, I worry people will treat them as permanent changes - to their detriment. People will pull money from their 401(k), stop saving, and spend more.

People lost more than they thought in the last recession. Stable older workers with 401(k)s – those who did everything right – lost 25% of the value of their retirement accounts after one year. On average, four months after the September 2008 crash, retirement accounts lost 37% of their value. The recession devastated older workers approaching retirement because their accounts never had a chance to recover.

Most of the Republican cuts to personal income tax go to the top 1%.  But it is true that many will see a temporary tax cut starting February 2018, as Trump stated. However, the individual tax cuts are temporary, while the corporate tax cuts are permanent.

The takeaways? First, do not fall prey to the temptation to take money out of 401(k) accounts. Don’t forget the morbid joke about the Great Recession - that it turned Americans’ 401(k)s into 201(k)s. Second, resist the idea that a short-term decrease in taxes allows for more spending.

Third, keep saving and brace yourself for the next recession. 

With Hidden Unemployed, 3.2 Million Older Workers Trapped in Unemployment

December 2017 Unemployment Report for Workers Over 55

The Bureau of Labor Statistics reported an unemployment rate of 3.3% for workers age 55 and older for the month of December, an increase of 0.2 percentage points from November. While this headline unemployment rate is still at historic lows, it only counts as unemployed those who actively sought employment in the last month.

When you add in the “hidden unemployed,” those who want and are available to work or are involuntarily working part time, the rate increases to 8.2%. This broader measure, ReLab’s U-7 calculation, increases BLS’s headline U-3 calculation of 1.2 million to 3.2 million unemployed or under-employed older workers.  

This reserve army of hidden unemployed and under-employed older workers creates slack in the labor market, reduces workers’ bargaining power, and depresses wages and benefits. With 14% of older workers in low-paying jobs and 62% lacking retirement plan coverage, many find it difficult to save for retirement and to say no to a bad job. As Joan Robinson stated in her 1936 essay, “Disguised Unemployment,” only sustained economic growth will bring discouraged workers back into the labor force and low-paid workers into better jobs. Without good jobs, the only option of the official and hidden unemployed will be involuntary retirement and higher risk of downward mobility and old-age poverty.

But these jobs may still not offer retirement plan coverage. Congress should therefore enact Guaranteed Retirement Accounts (GRAs), which provide retirement savings accounts to all workers as a supplement to an expanded Social Security program. GRAs ensure workers save throughout their careers and insure against the risk of old-age poverty due to job loss.