Squared Away Blog

Money Culture

November 11, 2014

In last Tuesday’s election, voters in Massachusetts and three cities – Oakland, California, and Montclair and Trenton, New Jersey – approved paid sick time initiatives that benefit working mothers in particular.

These election results come on the heels of a slew of similar initiatives approved in the past year covering all or certain groups of workers in California and in San Diego, Washington, DC; Eugene, Oregon; several New Jersey municipalities; and the Tacoma suburb of SeaTac, according to an inventory of sick time laws compiled by the advocacy group, A Better Balance.

Mandated paid sick time for employees is growing in popularity but is still unavailable to significant numbers of working mothers, who, the data show, are more often responsible for children’s health than fathers. This issue is one more thing that – like lower pay – can disadvantage single women struggling to secure their personal finances today or save for retirement in the future, especially low-income women.

Research by Usha Ranji, associate director of women’s health policy for the health care non-profit organization, the Kaiser Family Foundation, found that 39 percent of working moms are forced to miss work when a child is sick, because they don’t have back-up child care; of them, 60 percent do not get paid for that time  – a decade ago, fewer than half of this group were in this position. …Learn More

Research

November 6, 2014

Social Security’s old-age pensions were designed to replace more of the earnings of retired low-wage workers than of higher-wage workers.

But how is this progressivity affected by the federal income taxes paid by all workers and retirees?  A study by economists at the Center for Retirement Research, which sponsors this blog, analyzed this complex issue and found that income taxes have not had any real impact on the overall progressivity of the Social Security program.

To reach this conclusion, the researchers used the actual experiences of older American households contained in survey data linked to their lifetime earnings.  There were several different tax effects to consider.

First, the payroll tax that funds Social Security is shared by workers and employers, with differing effects.  Although the workers’ payroll tax is deducted from their paychecks, workers must still pay income taxes on that amount.

The payroll tax paid by employers, on the other hand, is transferred directly to the federal government, and no income tax is paid.  Although the amount transferred is effectively part of workers’ compensation, they do not have to pay income tax on this portion of their compensation.  This reduces the taxable income of all workers, but it is more valuable to higher income workers who pay higher tax rates: a one dollar employer contribution costs a taxpayer in the 35-percent bracket just 65 cents, compared with 90 cents for a lower-paid worker in the 10-percent bracket.

Many low-wage workers pay no income taxes or even receive an Earned Income Tax Credit.  But a negative tax rate – in the form of a credit for the lowest-wage workers – means they can’t benefit from the tax exemption implicit in employers’ contributions to Social Security on their behalf. …Learn More

Behavior

November 4, 2014

In a videotaped experiment testing her financial cognition, an elderly woman must prepare three utility bills for mailing. She’s seated at a table holding the bills, along with three filled-out checks, and three envelopes – each with one utility’s name on it.  After considerable effort and confusion – checks paired with the wrong bills; bills placed into the wrong envelopes and taken back out – she finally finishes her task.

New difficulty carrying out simple financial tasks or understanding financial concepts that were once familiar can be warning signs of cognitive impairment due to aging, early stage Alzheimer’s or other causes, said Daniel Marson, a neurology professor and director of the Alzheimer’s Disease Center at the University of Alabama, Birmingham.

Financial skills are “the canary in the coal mine from a functional standpoint,” he said. “When you are seeing new problems in the checkbook or arithmetic errors, those are signs of an emerging disability.”

Driving, for example, may not be affected as much early on, because it relies more heavily on motor memory. “You don’t have to think about making a right turn or signaling,” he said.

The chances of having Alzheimer’s disease are slim for most older Americans; only one in nine do. Forgetting to pay a bill is more often just a sign of a bad day, and the inability to balance a checkbook or understand investments is not a warning sign if the person was never able to do so. To gauge whether the cognitive ability of a loved one or client may be in decline, the benchmark should be what he or she was able to do financially in the past – and whether that’s changed over time.

At a recent symposium, “Financial Planning in the Shadows of Dementia,” Marson provided five financial warning signs, developed from his clinical work and research as a neuropsychologist. The warning signs are: …Learn More

Research

October 30, 2014

It would be nice to think that careful financial planning is behind the critical decision of when to start collecting Social Security benefits.

But psychological traits – perhaps impatience or one’s fear of losing money – can also affect whether an individual claims his benefits right at age 62 or waits a few years to increase his monthly income from Social Security.  A new study reveals another powerful influence that can jeopardize financial security: how a person’s dollar benefits might appear on the printed Social Security statement.

Business professors Suzanne Shu at UCLA and John Payne and Namika Sagara at Duke University tested this on people over age 40, controlling for psychological influences on the research subjects, such as their impatience, loss aversion, and expectations of how long they’ll live.

In the first experiment, some people were shown tables presenting their monthly Social Security benefits for each claiming age from 62 to 70 – this layout highlights the significant benefit increases that come with each year of delay.

A second set of subjects saw more complex tables displaying their total potential benefits accumulated over their entire time in retirement, which depends on both the age they first claimed and on how long they’ll live. This presentation emphasized a different aspect of the decision: the later someone claims and the longer he lives, the more money he’ll receive over many years. Die young, however, and the accumulated benefits are higher for those claiming at 62.

The experiment’s outcome was significant. The cumulative tables “make people want to claim earlier” – six months earlier than people shown the tables with monthly benefits – Shu said during a recent presentation. …Learn More

October 23, 2014

Our 401(k) retirement system requires most workers to save for the future. But it’s difficult to reach this increasingly important goal, because our emotions – overconfidence, pleasure, fear of loss – get in the way.

“We believe our own nonsense,” is how Daylian Cane, a professor in the Yale School of Management, explains financial behavior in a new public television program, “Thinking Money: The Psychology Behind our Best and Worst Financial Decisions.” The short video above is taken from the program.

Further clouding our judgment are a vast array of consumer products, and the stress produced by how easy it is to purchase them with a credit card swipe and how hard it is to pay off the cards.

“Thinking Money,” a production of Maryland Public Television, covers many topics covered by this blog, including help for people trying to overcome their emotional obstacles.

“Thinking Money” is scheduled to air in its entirety on public television stations around the country in coming weeks.  Click on “Learn More” for a list of broadcast dates in major cities. …Learn More

October 21, 2014

Sometimes research seems merely to confirm the obvious. One example is a new study showing that the cognitive decline that naturally comes with aging makes a senior more vulnerable to fraud.

This isn’t especially surprising, but it is important. Amid a shortage of solid research about fraud among the elderly, this study provides important insight into how and under what circumstances they are increasingly being taken to the cleaners by scammers.

In their study, Keith Gamble at DePaul University and researchers at the Rush University Medical Center used a survey of older Chicagoans known as the Rush Memory and Aging Project, which contains an unusual amount of information about aging, cognition, and financial fraud.

In addition to measuring changes over time in the cognitive functioning of its participating seniors – mostly women – the annual survey asks if they’ve ever been a victim of fraud.  It also includes six questions designed to get at their susceptibility to fraud – Do they have difficulty ending a phone call? – and two questions asking about their willingness to take undue financial risks.  In this case, the undue risk is whether they’d accept a bet with 50/50 odds that they could either double their annual income or lose 10 percent of that income.

Here are their findings: …Learn More

Money Culture

October 16, 2014

A new report by the FINRA Investor Education Foundation finds “a financially fragile renter population relative to homeowners.”

It’s hardly surprising that apartment dwellers who rent are worse off financially than homeowners. It takes money to buy a house.  But things got markedly worse for renters after the Great Recession. Millions of homeowners, foreclosed on by their lenders, were thrown back into the market for apartments, driving up rental rates and squeezing all renters.

A new FINRA Foundation report, “American Renters and Financial Fragility,” dramatizes the growing rift between the nation’s haves and have-nots through a comparison of owners and renters.

Click on “Learn More” below to see a FINRA Foundation chart contrasting the personal financial situation for renters versus homeowners, based on a 2012 survey.  The jobless rate has declined since then, but the rental market has only tightened. Rents have continually increased in recent years, reports Reis, a real estate tracking firm. And 85 percent of property managers nationwide reported they raised rents over the past year to capitalize on a decline in the number of vacant rental units, which continues in 2014, according to Rent.com. Housing costs in particular are becoming a burden for a growing numbers of older Americans. …Learn More