• Manage your family finances. Don’t make policies that presume everyone can

    olen_jacketI recently completed a long video interview with Helaine Olen, whose fascinating new book Pound Foolish excoriates the personal finance industry.  More on that interview in due course.

    I’m fascinated by the ways that families respond to financial crises, the way that families save—or don’t save–for retirement, college, or unexpected medical bills. The source of my fascination is clear enough. In 2004, Veronica and I unexpectedly assumed responsibility for her disabled brother Vincent. He faced complex medical and social service challenges. We’ve chronicled this story elsewhere.

    His arrival crushed our grand financial plans, too. We never had much money. I had dawdled finishing my dissertation. Then we lived on my assistant professor’s salary while Veronica managed our home and cared for our children while attending graduate school. We had just bought our first home in the summer of 2003. Vincent’s arrival was a scary time, not least from a financial perspective.

    Nine years later, he is doing well. Our household economy survived, too. We adjusted our life to fit a simpler single-earner model than we were expecting. No snazzy cars, no fancy vacations or private schools. We own a modest home. We made things work. Every year since 2004, we’ve put aside 25% of our income. I’m here-to-tell-you that spending less, methodically following basic principles of household finance, making sensible, diversified investments really can change your life.

    I’m proud of what we accomplished. Yet looking back on these nine years, I realize that many readers couldn’t expect follow the same path. We were helped at so many points by simple luck, the security provided by an upper-middle-class income, and the generosity of social insurance programs that quietly protect us without our even noticing.

    Luck

    We benefitted from lucky accidents of timing. We benefitted even more from things that didn’t happen—or at least didn’t happen at the worst moments. Our family crisis hit right after I was awarded tenure. Had things happened a few years before, Vincent’s arrival would have derailed my career the same way it derailed Veronica’s. There were other things, too. My mother-in-law left a modest home outside Oneonta, NY. It sat unsold, a financial albatross, for a year. Fortunately, we managed to sell it just before the market crashed.

    Oh yeah. We didn’t divorce. That’s not cause for complacency or self-righteousness, either. Loving marriages easily crack in a crisis, or shortly thereafter. Maybe one partner loses a job and spouses disagree about where to go next. Maybe your marriage doesn’t survive general stress, disappointment, or changes in family roles.  Divorce is expensive. It can also make people crazy right when they face big financial and life decisions.

    A good, secure job

    When I noted our good luck, you might have expected the obligatory: “And no one else got sick.” Actually, Veronica did get sick. She landed in a cardiac ICU with a scary heart infection several years ago. That brought more than $50,000 in medical bills. Fortunately, our insurance covered almost everything with little hassle. The full cost (to the university and to us) of that nice tax-subsidized family policy: $17,000/yr.  Tenured full professors can afford that kind of insurance. Most Americans can’t.

    My job has helped in other ways. Veronica could focus on caring for her brother, knowing that my paycheck was secure. Historically low interest rates allowed us to cheaply refinance our mortgage, twice. Our less-affluent, underwater neighbors can’t do that.

    We also availed ourselves of various tax-advantaged savings vehicles. We max out our 401(k) account. We also rely on an alphabet soup of other tax-favored options: SEP- and Roth IRAs, 529s, and ESAs. I now have a 457(b)–whatever that is.  All of these accounts have blossomed during the worst-socialist-ever-Obama stock market boom. Since Inauguration Day 2009, our untaxed capital gains on our daughters’ college accounts amount to one full year of college tuition each.

    These active-savings incentives are hard to justify in policy terms. They soak up billions in tax expenditures, which mainly benefit affluent people. There is surprisingly little evidence that these increase overall national savings. Hey, this is America. I’ll grab these opportunities.

    Don’t forget public insurance

    We also benefitted from Social Security, Medicare, and Medicaid. As a “disabled adult child,” Vincent receives an inflation-protected monthly Social Security benefit of about $1,100. Those checks were a Godsend in his first months with us, when he required supports ranging from medical help to hospital parking fees to a sturdy recliner that could support his 340-pound frame.

    Much ink is spilled regarding Medicaid’s shortcomings. A lot of the pointed criticism comes from conservatives opposed to universal coverage. We’ve seen quite enough of Medicaid’s gaps and shortcomings. American social insurance isn’t always smooth or pretty. We’re still so grateful for the services Vincent receives. The steady stream of five-figure bills gets paid. Essential services are provided. Without this support, Vincent’s care would have wiped us out. He might well have ended up in the back ward of some institution someplace.

    The necessity and the limitations of smart personal finance

    I’ve noted these personal financial realities for reasons that come back to Helaine Olen’s book. My family has saved well. You should try to do the same. But don’t expect people can replicate our experience across the income and education distribution.  It’s easy to blame people for their poor choices, poor job skills, or lack of investment acumen. And when you’ve gotten past terrible financial challenges, as we hope that we have, it’s easy to be a bit self-righteous, too.

    So much  willful naiveté pervades the world of personal finance. So many commentators and researchers express an ultimately misguided hope that effective financial management by individuals will accomplish more than it actually can.

    For reasons Olen relates, millions of people won’t save for their retirement. They just won’t. Yeah, these failures partly reflect mistakes, impatience, and naiveté. People will under-contribute to (and screw up) their 401(k) accounts. Seniors, desperately afraid of outliving their savings, will fall for rip-off variable annuities sold over a free dinner in the local steakhouse. People will follow deeply dubious advice from self-interested financial advisors and television personal finance gurus.

    I’m all-in for policies that reduce the stupidity, that promote financial literacy and encourage smart choices, policies that give people a helpful nudge to save along the way. This won’t be enough. People’s failure to save goes beyond individual miscalculation. It reflects punishing realities of our national economy. People get sick and lose jobs. The bottom half of the income distribution has been hammered by low wage growth since the 1970s.

    Until these economic realities change, personal finance will be a mug’s game for millions of families. And until these economic realities change, people like me should pay higher taxes to support stronger insurance structures that protect people in illness, disability, and retirement.

    That’s the right thing to do. It’s the smart thing to do, too. I’m-here-to-tell-you: You never know when your own family might need the help.

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    • Such a useful post. So many people berate those less fortunate with a “well I did it why can’t you” not recognizing, as you have here, the privileges they have had.

    • Some people seem to be so fixated on the idea that everyone should be financially responsible, a smart consumer, etc., that they start indirectly glorifying the current system. This is familiar where it comes to cash-outlay social programs, but I met someone a few Thanksgivings ago (not a self-identified Republican or conservative) who extended it to not wanting to improve the health care.delivery system as a whole.

      She described how much difficulty she had had getting care for her condition, which I believe was disabling. I talked up all the concepts and means by which the ACA was trying to help this situation, hopefully enabling all or most doctors to provide excellent or at least acceptable care. Amazingly, she hated this idea, saying (highly paraphrased) “but people need to look for and find the right doctor, and be experts themselves in their own conditions so they can be the decisionmakers.” She seemed to think such my ideas implemented would be a defeat for personal responsibility in general.

      In esprit d’escalier, I should have said something like “learning about doctors and conditions, planning everything and being careful will always put you in a better position than the baseline, but I don’t see why we should accept a situation where people who are too busy with other things, or uneducated, or don’t have much or any choice between providers, are actively harmed by just letting everything happen to them.” I didn’t manage that.

    • Great column, Harold!

    • Even with the same income, families can vary tremendously in financial resources, depending on whether they have richer family who can lend them money or poorer family, needing loans.

      Do you inherit a modest house, or a bunch of funeral bills? Do you get help with your down payment or find your brother cleaned our your purse or wrecked your car?

      • And it’s worth mentioning that wealth (including housing assets and financial wealth like 401ks) is very, very unequally distributed. More so than income. A couple of links:

        http://www.motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

        http://economix.blogs.nytimes.com/2011/03/30/inequality-is-most-extreme-in-wealth-not-income/

        Families with wealth have something to fall back on. The author alludes to having benefitted from family wealth. When my wife and I had recently graduated and were underemployed, we hit up the bank of mom and dad a few times, as we were running a deficit. And Mitt and Ann Romney alluded to living off some stock they had inherited when they were in college.

        But a lot of families don’t have wealth they can fall back on, and a lot of families have a negative net worth (i.e. they owe more than their accumulated wealth in debt). Furthermore, if you are poor, even if you do everything exactly perfectly, it is hard to accumulate wealth, because it costs more to be poor (you might need to max out a credit card or take a payday loan to cover a month when you have a cash flow problem, for example).

    • Great comments

    • How much more tax could you afford to pay, and still do the things you are (rightf) proud of being able to do?

      Bearing in mind that (going on some reasonable assumptions about your income as a professor) we would have to raise your taxes by somewhere between 50% and 100% to have the government break even – never mind bulking up the welfare state – do you think we should raise your taxes to solve the deficits, even if that doesn’t mean more social programs? Even if it means less?

      (I understand, and to a great extent share, your preference for how a welfare state ought to look – I’m not asking the whats-yer-utopia question, but rather, what constrained choice do you prefer, or hate least, here and now.)

      • Robert,
        I don’t know exactly how my taxes could go. If tax rates were returned to Clinton-era levels and if the Social Security tax earnings cap were raised to $175,000, my life would not change in any of its essentials. And we would have notably more secure financing of social insurance programs,

        • Tax rates bumping up a few percentage points wouldn’t do the job, though – yours would need to go up in the double digits (see below). I specified keeping the present welfare state, but paying its bills. Right now, the Federal apparatus needs to increase revenue by 31% or so to break even. (Or we could cut programs and leave taxes where they are, but that is politically even more difficult than raising taxes.)

          Glassdoor.com doesn’t get all personal with your data, but gives a salary band of 90k to 225k to full professors at your (damn fine) institution. For 2013, that puts you in either the 25 or 28 percent marginal bracket; we’d need it to be 37 or 38 percent for you and all your high-earning kind to be paying our nut every year. Somewhere between 10 and 12 percent of your gross income, that is. Since you save 25% of your income, you’d have to halve that admirable performance. That seems like a substantive, though not apocalyptic, change to your essentials – particularly given that you credit the excellent performance of your savings-based investments at improving your overall financial picture.

          (The Clinton era effective marginal rates, by the way, floated but averaged maybe 29 or 30 percent for respectable earners like yourself during his term. You really wouldn’t be paying all that much more should you stumble into a temporal vortex back to the 1990s.) Taking off the payroll cap would be a bite, but not a 31% bite – but raising that cap is even more politically impossible than raising regular tax rates. You can blame FDR for that.)

        • OK with me to return to the Clinton era tax rates if we return to the Clinton era levels of government spending. I noticed that those who pay less today among lower income Americans due to the Bush tax rates weren’t all that interested in giving up their lower effective tax rates when we were discussing the fiscal cliff.

          Bottom line, count me in for the entire tax code under Clinton, and the spending levels too, and perhaps throw in the GDP growth rate a year or two before he left office!

    • A lot of the “all we need is high-deductible HSA-consumer oriented plans” talk as an alternative to Obamacare worries me because it relies on personal financial management skills. That mysterious invisible hand that fixes things pertains to crowds, not to individuals. Assuming people will manage their resources prudently is not a given.