Mike Kueber's Blog

October 16, 2014

The role of personal responsibility in America’s unequal distribution of wealth

In response a Facebook friend endorsing Bernie Sander’s attack on the Walton wealth (Walmart) and the resulting poverty at the bottom, I suggested as follows:

  • And the bottom 25% of American families have a negative net worth. I agree that something has to be done to keep all wealth from going to the top 10% (an annual wealth tax to supplement or replace the estate tax), but the bottom 25% need to be more personally responsible.

Not surprisingly, my response generated some emotional stories about personal hard luck, to which I responded:

  • Some of life is a crapshoot; some of it is bad decisions. I’m all for creating more opportunity for those who are so motivated, but for 75 million Americans to save nothing sounds like a lot of bad decisions.

Surprisingly, one commenter seemed to think I should propose a solution, as though personal responsibility was not one:

  • Mike, for you to make the statement, “…but the bottom 25% need to be more personally responsible”, baffles me! What kind of propositions, that those 25%, do you suppose would work? Enlighten me please!

When I didn’t immediately respond to the request (I had gone to the gym), my Facebook host jumped in:

  • I think he baled (sic) once we got by his stereotypes and anecdotal examples and asked for empirical evidence to support his generalizations.

And one of his partners-in-crime seconded the motion:

  • They usually do!

When I returned from the gym, I reentered the fray:

  • Excuse me, Terry, I didn’t bail and I’m not the one who gave anecdotal examples of victims who have not been able to save any money. My point is that 75 million people have been living beyond their means. The savings rate in America at one point dropped to zero, and I believe many people in tough times stubbornly refused to reduce their standard of living and instead chose to maintain their standard of living by going into debt. I believe the majority of that 25% could have saved something if they had the willpower to defer gratification and control their impulses. Re: empirical evidence – I don’t know what would confirm or refute that.

After a few more comments, my Facebook friend tried to put a wrap on this discussion:

  • You truly do need to walk a mile in another man’s shoes. I have seen many a middle class principled conservative change their tune when they suffer sudden job loss or catastrophic illness. You act as if austerity and poverty are choices. Any social study will tell you that geographical location and parental status are the true determinants of what a person’s economic status. For example, the starting point for Mitt Romney’s children economically is a lot smoother and shorter than that of a child born to a black single mother in Detroit. Poverty is a very complex issue that is deep rooted and not conducive to stereotypes and generalizations. It’s funny that conservatives try to blame social ills on those who have the least and are defenseless against. Marie Antoinette failed to realize that until it got to the boiling point. Even companies are now realizing the economic perils of wage stagnation and wealth inequality, which is not because of a lack of labor but by corporate exploitation. I know that you won’t but I suggest that you read The American Way of Poverty by Sasha Abramsky. It will both shock but educate you on the morass that is poverty.

I tried to put a wrap on it, too:

  • OK, I accepted your challenge by putting a hold on the Abramsky book in my branch of the SA library. Based on some of the comments to your posting, it appears your use of the word anecdotal escaped understanding by some people. Obviously, there are thousands of “anecdotal” situations where a person couldn’t qualify for health insurance and then had a medical catastrophe that bankrupted them. But there are thousands of other situations where a person choses a big car payment instead of buying health insurance or refuses to downsize from their 3000-sq.ft. house after losing their job. Bottom line – (1) structural problems should be addressed by raising taxes on the wealthy and affluent, but don’t demonize them just because they are economically successful in the system that our democracy has established, and (2) personal responsibility (i.e., looking to improve yourself instead of blaming others for your problem) needs to be encouraged and perhaps the Abramsky book will provide some suggestions because the current war on poverty since LBJ has been an abysmal failure.

Although I disagree with most of the comments, I do look forward to reading the Abramsky book. It is a bit glib on my part to argue in favor of personal responsibility without thinking through the means to achieve that. Government austerity alone will perhaps not suffice. Indeed, increased taxes on wealth and affluence and increased spending on opportunity (pre-K and college) might increase morale and lead to more personal responsibility.




April 14, 2014

Sunday Book Review #132 – Complete Guide to Money by Dave Ramsey

Filed under: Book reviews,Finances — Mike Kueber @ 8:31 pm
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Dave Ramsey is a radio talk show host and probably the best-known financial guru in America. His book Complete Guide to Money (2011) serves as the handbook to his Financial Peace University, a biblically-based video seminar given to thousands of people each year. In the book’s introductory chapter and its Afterword, plus several times in between, Ramsey asserts that “personal finance is only 20% head knowledge. The other 80% is behavior. This book gives you the head knowledge, but no book alone can do much to change behavior.”

I disagree with Ramsey on both counts. The book is woefully weak with respect to head knowledge, with many half-baked ideas and bromides that can’t withstand scrutiny. A discerning, disciplined reader would be much better off reading Scott Burn, a nationally-known financial columnist who actually understands financial math.

But the book is strong with respect to changing behavior. Wikipedia characterizes Ramsey as a motivational speaker, and the book obviously was drafted to motivate conduct that an undiscerning, undisciplined person might be able to adopt.

The book is filled with Ramsey’s insights:

  • Differences between a man and his wife add spice to life, but the couple need to have an understanding on religion, in-laws, parenting, and money.
  • Parents need to teach their kids to work (money comes from work, not other people), save, spend, and give.
  • Whenever someone asks for financial help, consider whether this will truly help or will it be giving a drunk a drink.
  • By developing a budget and agreeing to live according to it, a couple can automatically remove those continual money fights that plague many marriages.
  • Too often, young adults want to fast-track themselves into the standard of living that their parents spent 20 years achieving, and they do this by accumulating debt.
  • When in the process of paying off all debts, pay off the smaller balances first, not the balances with the higher interest rates, because it is important to achieve quick wins to sustain behavior modification. (Crazy!)
  • Paying off debt should take priority over saving for retirement, even with a 401k with an employer match. (Crazy!)
  • You should always – always – roll your company-sponsored retirement plan into an IRA when you leave the company.” Ramsey suggests this because a regular IRA gives more options, but he fails to consider that some company plans (mine) have much lower expense ratios than even the best IRAs, like Vanguard’s.  (Crazy!)
  • A 401k should be rolled into a Roth IRA if you have saved more than $700k and you have adequate existing liquidity to pay the taxes. (Crazy because most other financial agree that deciding between Roth and non-Roth is subjective, not automatic.)
  • The Pinnacle is the point in your life when your savings and investments make more money for you in a year than your salary does. I remember a time when my co-workers and I, later in our careers, would get monthly 401k statements that exceeded our wages, and once we might have even received a quarterly statement that exceeded our wages, but none of us ever pulled that off for an entire year. An interesting concept, nonetheless.
  • Never use prepaid tuition. (Crazy because Ramsey assumes that tuition inflation is no greater than the COLA when in fact it has far exceeded the COLA for decades.)
  • Avoid mobile homes and timeshares because neither can ever be sold on the secondary market.  (Crazy.)
  • Never do a reverse mortgage because it merely gives a person who has paid off debt the chance to go back into debt. (Crazy because selling off you equity does not place you in debt.)

Bottom line – as a guide to modifying the behavior of people who are heretofore unsuccessful in dealing with their personal finances, this book probably works. But it is not appropriate for successful people wanting to fine-tune their financial game.

March 30, 2014

Repair or replace

Filed under: Business,Finances — Mike Kueber @ 7:18 am

I grew up in an era (the 50s and 60s) when products were unreliable and cost a lot and our standard of living was relatively low. The confluence of these factors resulted in a thriving repair industry. It made sense to put a lot of time into fixing something.

Those days are gone. Today, products are relatively cheap and amazingly reliable, and the reasonable labor rate for a repairman (around $100 an hour) makes it prohibitively expensive to repair products like phones, refrigerators, TVs, washers & driers, and laptops. About the only repair business that remains thriving is the auto business, and that brings me to my sad story.

In December, my son Jimmy came back from Ohio with his 2001 gas-guzzling F150. The truck had been in Ohio for more than a year and was in sad shape. There was a slow leak in a tire, the check-engine and ABS lights were on, the steering wheel rested at 2 o’clock, the driver’s leather seat was almost like rags, the driver’s step had been broken off, the CD player had been stolen, and the inspection and registration stickers were expired.

After Jimmy left for Austria in January, I considered selling the vehicle, but decided no one would want to buy an uninspected vehicle with check-engine and ABS lights on and a slow tire leak. So my first order of business was to get those problems fixed.

  • First step – get the slow tire leak repaired at Discount Tires. Unfortunately, they couldn’t repair the tire because there was a nail that was too near the sidewall. Therefore, I had to replace the nearly new tire with another that cost more than $200. Although I hadn’t purchased insurance on the tire, Discount Tire gave me some sort of tread allowance that reduced the cost to a mere $170.
  • Step two – inspection. Before taking it in for an inspection, I replaced the windshield wipers because Jimmy had told me that they were bad. (This is easier said than done.) Then I took the vehicle to a repair shop on Bandera Road that one of my best friends swore was competent and honest. Well, the manager/owner honestly told me that the truck was a mess (spark plugs with 180,000 miles on them will do that) – brake problems, engine computer problems ($600 new, $300 used), plus the seal in the differential was leaking and needed to be replaced. $1,300 later I had my inspection sticker. Plus, they threw in a coupon for a free oil-change.
  • Step three – get a new CD player. First, I went to a couple of stores and got quotes for a simple CD player. Jimmy’s expensive touch screen had been stolen three times, and now was the time to stop that insanity. One independent shop wanted $200 for a non-Sony and a franchise shop (Mother’s) wanted $200 for a Sony. I decided to go with Mother’s, but then noticed that there was another Mother’s franchise closer to my place, and when I called them I learned that they would put in a Sony for $170. Obviously, that’s where I went, and this chapter ended nicely.
  • Step four – get the steering aligned. I had asked the first shop to fix the steering wheel, but they didn’t have alignment capabilities and said I would have to take it to an alignment shop. I called Midas and Brake Check on IH-10 and both assured me that a steering wheel could be aligned with a simple front-wheel alignment – cost $60 at one place and $55 at the other. Then I recalled that I had seen a sign near the Bandera shop advertising an alignment for less than $50, and I decided to take it there because I suspected that a shop in a middle-class neighborhood would be less likely to try to find additional work requirements. Boy, was that a mistake. Ten minutes after the Bandera shop started working on my vehicle, the repairman called me back to show me all the damage to the various wheel-support components. He said it would cost me $1100 to enable me to drive home without the wheel falling off and $2,400 to fix everything. After I pressed him to distinguish between the safety issues and defect issues, he was able to eliminate some overlapping labor and reduce the cost to $1980 if all the work were done at once. When I asked for his best price, sensing it was negotiable, he reduced it to $1,900. I paused for a moment (I should have paused for at least one day), and told him that he could have the job for $1,800. He immediately snapped up my offer, and I immediately thought that was too quick. The repairs were supposed to be completed that day, but due to some hidden problems and some severely rusted out parts, the repairs weren’t completed until the end of the next day. As a freebee, the shop threw in fixing the door step by moving a step from a rear door to replace the broken one on the front door. They also gave me a coupon for a free oil-change. In hindsight, I should have taken my truck back to the first shop to get a 2nd bid. Even though they don’t do alignments, they could have done all of the work except for the alignment and their labor rate was only $70 or $80 compared to $90 at the second shop. More importantly, competitive bids bring out the best in every business and are the best way to avoid unnecessary repairs.

As I was driving home with Jimmy’s truck, I started thinking that a poolside friend said he knew someone who would repair the leather seat for $200 a side, and at that point, the truck would be all set. But I started noticing it was warm in the truck, so I turned on the A/C, but the air wasn’t really cold. So I turned on Max A/C, and the air still wasn’t cold.

Uff da, when is it going to end.

March 6, 2014

The richest people in the world and the national debt

Filed under: Economics,Finances — Mike Kueber @ 11:32 am
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Earlier this week, Forbes magazine released its always-interesting list of billionaires.  This year the list was headed again by Bill Gates, who for a few years had been supplanted by Mexico’s Carlos Slim.  Gates’s wealth, despite all of his charitable giving, increased to $76 billion.

Digging a little deeper into the list, we learn that the politically infamous Koch brothers, with $40 billion each, actually have more combined wealth than Gates.  But if we started counting family wealth, the Kochs are dwarfed by the four children of Sam Walton, who have a combined wealth of $139.9 billion.  And contrary to the conventional wisdom, two-thirds of the individuals on the Forbes list are self-made, while the others either inherited their wealth or had a lot of wealth to start with.

The most illuminating statistic about the list is that the combined wealth of all 1,645 of the world’s billionaires increased to $6.4 trillion in 2013, an amount that might seem unfathomable until you consider that President Obama has increased America’s national debt by $6.451 trillion by October of last year to $17 trillion.  Wow!  All of the wealth from all of the world’s billionaires would cover less than half of America’s debt.

There is sage comment about socialists and liberals doing well until they run out of other people’s money to spend.  Well, it seems that deficit spending has enabled them to circumvent that rule.  America is spending money that not even the richest people have.

Economic apologists for progressive spending often suggest that a moderate amount of deficit spending does no harm and is actually good for the economy.  Surely that sentiment has to be placed in George Orwell’s category of ideas that are “so stupid that only intellectuals believe them.

February 10, 2012

The Zuckerberg Tax

Filed under: Economics,Finances,Investing,Issues,Law/justice,Politics — Mike Kueber @ 4:14 am
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A recent op-ed piece in the NY Times recommended that America adopt a “marked to market” tax – something it called the Zuckerberg Tax in honor of Facebook founder Mark Zuckerberg.  Essentially the tax would require the wealthiest Americans to pay taxes on their capital gains every year, regardless of whether they actually sold their assets – i.e., individuals would be taxed on their paper gains. 

That makes sense to me.  Individuals who are getting super-rich should not be able to avoid contributing toward the provision of government services by holding onto their capital assets.  The column reported that Apple’s Steven Jobs never sold any of his Apple stock, and thus never paid capital-gains taxes on his billions of dollars of capital gains.

Even more troubling is the report in the column regarding the tax treatment of capital gains that are never realized before the owner dies and passes them to heirs.  According to the column, neither the estate nor the heir pay capital gains at the time the capital is transferred, and inexplicably instead of requiring the heir to assume the deceased’s cost basis for the assets, the heir’s basis becomes the market value of the assets at the time of the transfer. 

For example, Steve Jobs buys ten million shares of Apple for $10 a share, and then holds them until his death, when they are worth $300 a share.  Thus, he never realized any capital gains and didn’t pay a penny of taxes.  His wife then receives the shares through the Jobs’ will, and she holds them for another year before selling them for either $290 a share or $310 a share.

If she sells them for $290 a share, she will receive $2.9 billion from an initial investment of $100 million, yet she can actually declare a $100 million loss and offset that loss against other capital gains.  If she sells them for $310 a share, she will receive $3.1 billion, but will have to declare capital gains of only $100 million, on which she will pay capital-gains tax of 15% or $15 million.  That’s an incredibly low tax rate (.5%) on the $3 billion in capital gains that she and her husband experienced.

The Zuckerberg Tax seems like a good idea, even though it will have tough sledding.  There is no reason, however, for failing to assess the capital-gains tax when property is transferred by someone’s death.

December 30, 2011

Wikipedia and tax mediation for a frugal retiree

During college or law school, I was taught that there is a critical difference between tax avoidance and tax evasion – avoidance is legal and OK; evasion is illegal and not OK.  Wikipedia, however, seems to have blurred that distinction in the last sentence of the following definitions:

  • Tax avoidance is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax avoidance. The term has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance which exploits loopholes in the law. The United States Supreme Court has stated that “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.”  Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Both tax avoidance and evasion can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state’s tax system.

If I may digress from my taxing subject for a minute, this morning I heard Doug Gottlieb, a substitute host on Mike & Mike’s sports talk show on ESPN2 rely on Wikipedia for the historical origins of the marathon and then gratuitously slam Wikipedia by saying that, because the info came from Wikipedia, it might be right and it might be wrong.  What an ugly thing to say!  Although Wikipedia may not have all of the overlapping validations of most reference sources, I have found it to be highly reliable and exceptionally well written.  The paragraph above on tax avoidance is typical.  That was a cheap shot, Doug, unless you are prepared to give us examples of you being misled by Wikipedia.

Back to my subject of “tax mitigation,” a lot of retirees with a moderate amount of assets don’t realize that the U.S. tax code allows them to earn a relatively sizable amount of income without paying any taxes.  Here is how:

  • The personal exemption and standard deduction for a single person combine to about $10,000 so that amount of income is tax free.
  • The Bush tax cuts allow people in the 10% or 15% tax bracket to pay $0 on capital gains.  For a single person, the 15% bracket changes to 25% with income of $35,000.

Thus, according to my calculations, an individual can earn income of $10,000 and take out capital gains of $35,000 and still pay no taxes.  If you need more than $45,000 a year to live on, you simply consume some of the assets that resulted in the capital gains.  Sweet!

Although I think the Bush tax cuts should be eliminated for everyone, not just the rich, I endorse Mitt Romney’s suggestion that the capital gains tax should be eliminated for everyone except the rich.  Providing an incentive for wage-earners (the proletariat) to become asset-owners (the bourgeoisie) would be a good thing.

October 27, 2011

The Gone Fishin’ Portfolio

Filed under: Finances,Investing — Mike Kueber @ 11:03 am
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Alexander Green is the author “Beyond Wealth, the road map to a rich life,” a book that I plan to review this Sunday.  The book focuses on the acquisition of spiritual wealth as opposed to material wealth.

Green’s claim to fame, however, is the acquisition of material wealth.  He had a successful career as an investment advisor for The Oxford Club, and then capped that career in 2008 by writing a bestselling investing book titled, The Gone Fishin’ Portfolio.

Green named his recommended portfolio “Gone Fishin’” because it enables his clients to allocate their nest eggs into ten designated mutual funds at the beginning of the year and then they can go fishing for the rest of the year.  The only recommended maintenance is an annual re-allocation back to the following recommended amounts:

  • Total Stock Market Index (VTSMX) – 15%
  • Small-Cap Index (NAESX) – 15%
  • European Stock Index (VEURX) – 10%
  • Pacific Stock Index (VPACX) – 10%
  • Emerging Markets Index (VEIEX) – 10%
  • Short-term Bond Index (VFSTX) – 10%
  • High-Yield Corporates Fund (VWEHX) – 10%
  • Inflation-Protected Securities Fund (VIPSX) – 10%
  • REIT Index (VGSIX) – 5%
  • Precious Metals Fund (VGPMX) – 5%

I have a close friend who swears by this portfolio, especially since the portfolio has outperformed the S&P 500 every year since 2003.  I conceded to him that the portfolio looked thoughtful and reasonable, but I doubted there was anything magical about it.  Rather, I suspected that it had been developed, after-the-fact, to out-perform the
S&P from 2003 to 2007, and I had no confidence that it would continue to out-perform the S&P going forward.  In fact, I predicted to him that the portfolio would start losing to the S&P as soon as American stocks started out-performing foreign stocks.

Boy, was I wrong.  According to the current Gone Fishin’ Portfolio website, the portfolio outperformed the S&P 500 index in 2010 for the eighth straight year:

  • “Admittedly, 2010 year was a bit of a squeaker.   The S&P 500 returned 15.1%.  And, according to official figures released by the Vanguard Group, our Gone Fishin’
    Portfolio returned 16.1%.  This doesn’t begin to tell the tale, however. The Gone Fishin’ Portfolio is far less risky than being fully invested in stocks.  We have 10% invested in high-grade corporate bonds, 10% invested in inflation-adjusted Treasuries and 10% invested in high-yield bonds.  Each of these asset classes underperformed the S&P last year.  But they provided some ballast.  Investors who were fully invested in stocks got a very bumpy ride in 2010.  Our journey was less thrilling.  (You probably slept better as a result.)  And the stellar performance of our small-cap stock fund (up 27.7%), REIT fund (up 28.3%) and gold fund (up 37.5%) allowed us to beat the broad market again.”

By contrast, even though I avoided the 30% in ballast in cash and bonds, I was hammered by 40% in International stocks.  The year 2011 has been even worse because my
25% in small caps is getting hammered, too.

As soon as I win back some of my International losses, I plan to move my entire portfolio to Green’s suggestion, and then go fishin’.

October 9, 2011

Sunday Book Review #48 – Rich Dad Poor Dad

Filed under: Book reviews,Business,Finances — Mike Kueber @ 12:36 am
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My review of Rich Dad Poor Dad (RDPD) is not my typical book review.  I generally review brand-new books, but this book by Robert Kiyosaki (with Sharon Lechter) was first published in 1997.  The book’s basic concept is as time-tested as any – i.e., a self-made millionaire explains how normal Joes can become millionaires, too.

Kiyosaki became a millionaire by methodically investing in real estate and small businesses.  He retired at the age of 47 before starting a lucrative business of motivational writing and speaking.

I had never heard of Kiyosaki, but my conservative drinking buddy has a knack for stumbling across most get-rich-quick schemes on the internet, and for months my buddy has been saying that I would love RDPD because, next to politics and sports, personal finance is just about my favorite subject.  I kept declining to read the book because I had too many others on my waiting list, so last week my friend simply sent the book home with me, and that left me no choice.  Instead of having the book clutter up my to-do stack of books for months, I decided to polish it off.  Only 195 pages – no problemo.

The title of the book comes from the author’s two financial role models – (a) his poor dad a/k/a his real dad or his educated dad, and (b) his rich dad a/k/a his best friend Mike’s dad or his uneducated dad.  The author’s dad was a teacher with advanced degrees who ultimately ran Hawaii’s education department.  Mike’s dad was a successful entrepreneur with an eighth-grade education who lived down the street.  Because Mike’s dad had a reputation in the neighborhood for being an entrepreneur extraordinaire, and because the author and Mike at the age of nine were highly desirous of making some spending money, they made a deal in the mid-1950s for the rich dad to teach and the kids to learn how to become rich.

This training/teaching took place over decades.  By 1990, Mike had taken over Rich Dad’s businesses and grew them even more, eventually becoming a billionaire.  By contrast, the author by 1994 had decided to slow down and retire from business.  Among the most important lessons that they learned:

  1. The poor and middle class work for money, while the rich have money work for them.  Although there are many layers to this statement, the principle one is that to become rich, you need to quit working for others and start working for yourselves.  Although you will probably start with a salaried position, all of your efforts should be directed toward generating an income flow outside of your job.  (Paradoxically, banks are more comfortable in making loans to individuals with a large salary and minimal other-income flow.)
  2. The American education system does a horrible job in teaching individuals to be financially literate.  Instead it teaches them to be good employees – i.e., get a formal education, find a stable employer, and work hard.
  3. Traditional financial literacy focuses too much on an individual’s net worth, whereas it should focus on the critical difference between assets that are expensive to maintain (e.g., house, car) vs. assets that produce income (e.g., rental income, stock dividends).
  4. Most individuals are stuck in a rat race because they focus too much on their salaries and, when they earn a salary increases, they feel entitled to spend the money on consumer products instead of buying income-producing assets that will make them less dependent on their salaries.
  5. Financial intelligence comprises four skills – financial literacy (the ability to read numbers/accounting), investment strategies, the market (supply & demand), and the law (tax, accounting, real estate, etc.)
  6. Three management skills to succeed in business – cash flow, systems, and people.
  7. Five obstacles to becoming financially independent – fear, cynicism, laziness, bad habits, and arrogance.
  8. Don’t skimp on hiring experts.  You can’t know everything, so hire specialists who have your best interests in mind.

Most websites are critical of the book, arguing that it contains too many platitudes and too few insights.

As I mentioned above, Kiyosaki has become a motivational speaker, and I happened to read that today’s San Antonio paper included a notice that there will be several free workshops in the San Antonio-Austin area later in the month.  According to some websites, the two-hour workshops are a sham because the speaker is not Kiyosaki, and the main objective is to sign up attendees for a more expensive follow-up workshop.

Without endorsing the workshops, I believe the book provides invaluable insights that can help wage-slaves get off the treadmill and the rat race.  The book is not meant for everyone, but for those individuals who think they might have an entrepreneurial gene, it could be just what they needed.

September 2, 2011

Student loans and bankruptcy

Filed under: Economics,Finances,Issues,Law/justice,Politics — Mike Kueber @ 5:24 am
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As a conservative who believes that personal responsibility is a key component of the American way of life, I favored the new law in 2005 that prevented individuals from welshing on their non-government school loans by filing for bankruptcy.  (Government school loans were already exempt from bankruptcy discharge in 2005.)  Welshing on a school loan is like getting a home-improvement loan and making the improvements before filing for bankruptcy and keeping the improvements.  It’s not right.

But we also have a problem in America with for-profit schools that persuade desperate kids to attend uber-expensive programs that fail to provide them with marketable skills.  Often this schooling is funded by federal-loan programs, and the government is trying to remedy this by denying loans to students at schools that have a bad record of getting their students graduated, employed, and repaying their loans.  There is a concern, however, that private student-loan companies, like the for-profit schools, are acting in a predatory fashion against the students and something needs to be done to protect them.

A recent editorial in the NY Times reports on legislation in Congress that would allow school loans from private companies to be discharged in bankruptcy.  The rationale for the legislation is to protect students from predatory lenders, much like the predatory lenders who played a big role in the financial crisis of 2008-9.  The thinking is that the risk of discharge in bankruptcy will cause lenders to be less willing to finance education that is unlikely to produce marketable skills.  The problem with this thinking is that private lenders will be less willing to provide loans, and that will result in disadvantaged kids being less able to attend for-profit schools.

This is a close question.  Although this legislation moves us in the direction of a nanny state, I am persuaded that it strikes the right balance between the rights of the private school-loan companies and the students at for-profit schools.  Bankruptcy law will still prevent students from cavalierly reneging on their debt, but the private company should not be allowed to hound a former student forever over a youthful indiscretion.

August 21, 2011

Scott Burns gives a Social Security tutorial

Filed under: Economics,Finances,Issues,Politics — Mike Kueber @ 12:42 pm
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Scott Burns is a nationally syndicated financial columnist, and for many years I have read his column in the San Antonio Express-News.  Each Saturday he responds to financial questions from readers, most of whom are from Texas, so I assume his column is most popular here.

In Burns’ column this week, the first question was submitted by Austin resident G.R., who wanted to talk about Social Security.  G.R. began by noting that Social Security is not a retirement plan, but rather is social insurance to prevent the elderly from becoming destitute, and then asked how the solvency of Social Security would be affected if we instituted a 1% tax on all income above the current income cap of $105,000.

Burns used the question to address some misunderstandings about Social Security:

  • While it’s true that there is an earned-income cap of $106,500, a person who makes more than that doesn’t get a free ride under Social Security because their benefit is based on their income that was taxed by Social Security (i.e., $106,500), not on their entire income.  Thus, these people have to save more of their income to avoid a dramatic drop in income when they retire.  (Although this is an interesting point, I don’t think it defeats the argument that high earners are getting off easy.  See the 3rd dot point.)
  • Although the income cap has been increasing, it has not been increasing enough.  In the past, 90% of income was taxed by Social Security.  Currently only 86% of income is taxed by Social Security.  The Simpson-Bowles commission recommended adjusting the income cap so that America returns to the 90% figure, and Scott Burns endorses the idea.  (Adoption of Simpson-Bowles would have been great for America; unfortunately, Paul Ryan and the House Republicans allowed “perfect to be the enemy of good” and defeated it.)
  • The Social Security tax of 12.4% is actually not a flat tax, but rather is sharply progressive because the benefits are calculated so that those with income up to $9,000 receive benefits that amount to 90% of their income, while any income between $9,000 and $64,000 is credited at 32% and income between $64,000 and $106,800 is credited at only 15%.  This math corresponds with an earlier article in the Express-News by Oscar Garcia asserting that workers with “average earnings” can expect retirement benefits that replace about 40 percent
    of their average lifetime earnings.”  By way of contrast, high-paid workers near the top of the income cap can expect a benefit of only 27.7% of earnings, even though they contributed at the same rate.  (This is fascinating information. It supports G.R.’s point that Social Security is not a retirement plan, but rather is social insurance or quasi-welfare.)
  • The Medicare tax of 2.9%, which is not subject to the earned-income cap of $106,800, is even more progressive than the Social Security tax because all people, regardless of how much or how little they contribute, receive the identical benefit – i.e., full Medicare coverage.  A person who makes $10 million would pay in 1000 times as much as a person who makes $10k, but their respective benefit would be identical.  Burns notes that, despite this progressivity, “In terms of our national future, Social Security is a sideshow.  The big problem is Medicare.”  (Indeed.  Imagine how progressive Medicare would be if they start means-testing it, as has been suggested by some.)  Medicare is not a simple actuarial problem, like Social Security is.  Currently, Medicare provides essentially unlimited coverage, and America’s health-care industry is doing its best to provide unlimited care.  Rationing will be an essential component to resolving this problem.)

Through the years, I have found Scott Burns to be an interesting thinker who provides useful and accurate information, and his column is time well-spent for anyone wanting to improve their financial management.

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