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.” 

 

F2

 

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.

 

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.

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.

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. 

For a woman, being an economist in academia is not unlike any other workplace.

In an interview with PBS about gender and power in the economics profession, ReLab Director and economist Teresa Ghilarducci notes that women economists face not only sexual harassment and the undermining of their ability from male coworkers, but they also face more age discrimination.

Evidence can be found in the fact that women’s pay peaks at the early age of 45. After that, a woman’s compensation falls 9% from 45 to 55 and another 9% from 55 to 65. For men, earnings peak in their early to mid-fifties.

Ghilarducci asserts that sexual harassment is not about sex, but dominance. With more women earning higher-level degrees, competition increases. Sexual harassment and discrimination serve as tools to protect privileged status.

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.

This is a repost from Huffington Post.

Happy New Year - and happy new you! Time to take stock of your joints, your gut, and your wallet. The latter includes the biggest source of wealth most of us will ever have – Social Security. For a young family, the insurance value of Social Security is worth about $200,000. We pay for Social Security benefits by paying the FICA tax, which is 12.4% of earnings split evenly between the employer and the employee up to a 2018 cap of $128,400. Ninety-five percent of us will pay FICA all year long because our annual earnings fall below the cap.

However, it is because of this cap that the highest earners in America will stop paying the FICA tax before the end of the first week of January 2018. For example, the top-paid executive at Charter Communication (he makes $98 million a year and got a 500% raise last year) stopped paying by noon on January 1, right about when the ibuprofen kicked in to nurse New Year’s Eve hangovers. The CEO of CBS earned $68 million last year, a 22% raise from the year before, and will stop paying FICA tax by your first day back at work on January 2 (if you aren’t among the millions working on the New Year’s Day).

This game – ‘when do rich people stop paying for Social Security?’ – could go on forever. We can have fun with the calculations: who will finish paying by their first coffee break of the day? After brushing their teeth?

The earnings cap means that people earning the highest salaries (the top 1% is about 133,000 people earning an average of $2.5 million per year) pay into Social Security as if they only earn $128,400 per year. Their Social Security benefits are also calculated as if they make only that amount.

Every year, this cap means that over $2 trillion dollars of earnings escapes Social Security tax. This 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. According to the Economic Policy Institute, those earning the highest incomes would enjoy all the earnings gains of the last 40 years.

Of the many policy instruments available to help the middle and working class gain security by rewarding hard work, taxing earnings over the cap for Social Security is one way Congress can address the lopsided growth of income for the lucky few.

Social Security is in good shape and well funded. However, the program will only have enough money to pay ¾ of benefits in 2027 unless the system obtains about $300-$340 billion per year starting in 2028 or a cool trillion now, according to the nonpartisan Congressional Budget Office. To benchmark what $300 billion means, the President and Congressional Republicans passed an unpopular tax bill that cut federal revenue by over 4 times what Social Security needs – by 2028, 83% of the $1.5 trillion tax cut will go to the top 1% of taxpayers.  

Let’s review: Social Security needs $300 billion and $1.2 trillion of the benefits of the recent tax bill went to the top 1% of taxpayers.

Karen Smith at the nonpartisan Urban Institute argues that raising the earnings cap could ensure Social Security’s financial strength. Because raising the cap would mean only a few of the highest earners pay more, it is unlikely to inhibit overall economic activity. The richest people in America would not lose their social status or economic well being, though they and their employer will pay, on average, $300,000 more in Social Security taxes. They will still have the same power, influence, and goods and services. The biggest impact is that Social Security will be solvent.

We could also collect revenue for Social Security from income that is currently not counted as labor income. The richest 20 Americans – including four members of the Mars candy family members and three Waltons - likely earn at least 6% per year in dividends, interest, and capital gains on their wealth, or $45 billion. The lowest 21 million earners also earned $45 billion.

The top 20 richest people in the United States earned $22 billion per year each on inherited wealth and other non-labor sources of income. They did not pay any Social Security tax on that income. In contrast, the bottom 21 million earned $2,000 per year each on average and paid 6.4% of Social Security tax. However, if these billionaires paid Social Security tax on all their income, the Social Security system would instantly have 10% more revenue.

The Retirement Equity Lab at the New School for Social Research (where I am the director) has documented the retirement crisis in America. We need comprehensive pension reform, but private pension reform will not work unless we also shore up and expand Social Security. The first step is to right the wrong of lopsided earnings growth and raise the earnings cap. We should also tax some financial capital to strengthen and expand Social Security.

The vast majority of Americans of all ages, income levels, and political affiliations are opposed to Social Security benefit cuts in any form. Tax increases are the most popular way to fix Social Security among the American public. However, the tax increase will face significant opposition from the 5% or so of Americans whose incomes top that ceiling, as the tax hikes are much larger for the very highest earners.

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. Among respondents, 81% agreed that they don't mind paying taxes into Social Security "because it provides security and stability to millions." This includes majorities of every age group, income level, and political affiliation.

Solving the retirement crisis by shoring up pension income is the best policy idea for the new year. Eliminating the Social Security earnings cap is unlike the sugar and spending austerity resolutions you made: this policy is very little pain and all gain.