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20 January 2010

Eccentricity, Crazy Cat Ladies And A Little Perspective On How Someone Can End Up Financially Vulnerable


I'm steering away from my blog goals for a moment to digress into a topic that is a bit more reflective than informative so please bear with me on this one.


old_lady1.jpgLast night I was having a drink with a friend of mine, who happens to be a wee bit younger than I, so the perspective was interesting to take in.  As we were talking, he stated that I was eccentric. Of course I was taken aback as the image that flooded my imagination was a crazy wire-haired woman with hot pink pants and a cigar.  But apparently, and I am only guessing, he had something else in mind. 


While the word, itself, derives from the Latin for "out of the center" and can be dated back as far as 1630, it has a different connotation than that of its Latin roots.  Depending on the dictionary you reference, it can mean a person who has an unusual, peculiar, or odd personality, set of beliefs, or behavior pattern or deviating from conventional or accepted usage OR conduct especially in odd or whimsical ways.  According to Wikipedia, "In popular usage, eccentricity refers to unusual or odd behavior on the part of an individual. This behavior would typically be perceived as unusual or unnecessary, without being demonstrably maladaptive."  
eccentric.jpg

After reading these definitions, I was relieved that I was at least not considered maladaptive.  But it began to make me wonder how one, who thinks they are very grounded, could be perceived as eccentric.  If applying the puritanical definition, then yes being outside of the center might be accurate, but societal perception is that eccentricity is just plain weird and not fully accepted as a norm.  


Having momentarily contemplated this, it conjured up notions of perception.  When one person meets another in a finite period of time, they have no perception on how that person ended up where they are, who they were before, or who they might become.  It's a bit shortsighted and self-determinative (and please take no offense) to presume that you can judge a person by the instant perception you have of them. Similarly, and this might be a bad analogy, if I described a substance that was slightly liquid, brown, and runny you could conjure up an image of mud while another will envision Godiva chocolate. If you knew where it came from or what it was going to turn into, your instant determination might be different.  


d-e_d-1980-720.jpgKeeping in mind, what I describe is different from the concept of the book Blink whose premise is that a person's instant perception is generally always correct and if this instinct is tapped into, a great deal of time can be saved trying to figure people out.  Blink's theory only applies to instant perception of a person's core, not their lifestyle, I.e. whether a person is evil, kind, etc.  But when people make determinations (and I use this word rather than "judgments") about other people's worth they have a tendency to put them in boxes according to their own perceptions and experiences. This is a bit unfair not just to the recipient of the determination but to the offeror of it as well. Ergo I am eccentric. 


I ramble about this, not as a defense to the comment, of which I took little offense, but to make a point about people in this country generally and their perceptions.  The United States is supposed to be the land of opportunity. It's where people come to make their dreams come true.  However, many an immigrant I've spoken to is disillusioned with the American dream as they find life here much more difficult than where they originated from.  Similarly, many Americans who were told they could have it all, that is until the economy crashed and the credit card industry went bonkers, have found themselves in more debt than they can manage.  In response to this, I have heard many people in this country berate others for their irresponsibility or laziness.  


johnwestwoodlookinghisbestbeforethe.jpgI find these opinions, like my friend's statement, interesting.  There is a Native American saying that you can't judge a man until you have walked a mile in his shoes (a shame that Custer wasn't more perceptive while he was annihilating the Native Americans as he might have actually learned something or set the country on a much wiser path).  I have always found this to be true to an extent.  I mean, hell, there are those who are just plan lazy for no good reason. But, I think most people really try to do well for themselves, to the best of their ability.


If people took a few minutes to look deep within themselves, I think most would find that they are projecting their own fears onto others.  How many people have not had tough times? How many people have not had to question what they are doing with their lives?  How many people have not felt vulnerable or foolish at one point in time?


ad081167b0887560be0fb9a75101af2c.jpgJust because I have cats, which I got custody of in the divorce, or I live in the suburbs, which was my ex's wish, doesn't mean that I am eccentric or a crazy cat lady. The same way, that just because someone is working as a cashier or has a ton of debt doesn't mean they are lazy or irresponsible.  Sometimes you end up where up are based on circumstances and depending on who you are, this can be either temporary or not.  What one person sees as crazy, the other will see as brilliant.  Perception can be a strange thing but if processed with an open mind can lead to greater objectivity and be an amazing learning tool.  


In fairness to my friend once the chronology was explained, I think his perception changed.

18 January 2010

Is The United States Ready For Retirement? Lessons From The Rest Of The World

Overview of United States Pension System & It's Effectiveness


The United States’ retirement system relies on both public social security benefits and private employee retirement plans.  The issue is that social security alone is generally not enough to survive on and the employee pension plans are mostly based on voluntary employee contributions by way of salary reductions. In many cases an individual’s employee pension contributions coupled with the social security benefit they will receive will not be enough to sustain them through their final years.


A report to the President of the United States by the Corporate Pension Funds And Other Private Retirement And Welfare Programs Committee in 1965 addressed the need for pension plan regulation.  Such report was the foundation for the enactment of Employee Retirement Income Security Act of 1974 (ERISA).  In discussing social security the Committee report states:


“The public program [social security] will continue to be the Nation's basic instrument for assuring reasonably adequate retirement income to workers, their widows and dependents.  This will require a continuing review of the public program to assure that the earnings base and the benefit formula keep pace with changes in wages and result in benefit levels that are reasonable in relation to general living standards.”[1]


However, the committee also stated that
“[p]rivate pension plans should continue as a major element in the Nation's total retirement security program. Their strength rests on the supplementation they can provide to the basic public system. Continuing attention will be necessary to assure that the combined benefits available through Old-Age, Survivors and Disability Insurance (OASDI) and supplementary private pensions, for those receiving them, are reasonably related to wage levels and living standards in the economy.” [2]


In their recognition that private pension plans are necessary to supplement social security benefits, and therefore need to be regulated, the committee acknowledges that social security is lacking as a sole source of retirement income.  This has been the case since social security benefits were introduced.  As a result, employee pension plans increased popularity in the 1940s and provided an additional, necessary avenue for retirement savings.


At that time, these benefits mainly constituted employer-funded defined benefit plans and later some traditional defined contribution plans, such as employer-funded profit-sharing plans and money purchase plans which required no participation or decision-making by the employee.  The employer funded the plan and the employee upon retirement received a disbursement.  The only decision of the employee was when to receive the disbursement.


In the early 1980s, defined contribution plans, such as 401(k)s, became popular and were viewed mainly as supplements to the employer-funded defined benefit plans. [3]  However, in recent years there has been a trend of employers moving away from the offering of defined benefit plans and towards the offering of 401(k) contribution plans solely.  In 1985 there were 112,200 companies, 90 of which were Fortune 100 companies, offering defined plans.  This figure reduced to 29,600, 29 of which were fortune 100 companies in 2008.[4]  Of those employees who participated in pension plans, 61.6% invested in benefit plans in 1983 as opposed to just 19.2% investing in 401(k)s at the same time.  However, in 2004 only 13.9% invested in benefit plans and 62.7% in 401(k) plans.[5]


The issue with employers completely replacing pension plans with 401(k) contribution plans is that they require an employee to voluntarily participate and make decisions regarding the level of salary reduction they want to elect and how they want the funds invested.  Many employees are either not interested or financially savvy enough to take full control over their retirement planning under this scheme.  Additionally, the defined contribution plans have not been updated to address the fact that they are no longer just a supplemental plan but are now intended to be the primary source of income for employees at retirement. 


Shifting retirement investment decisions to the employee is not succeeding.  Of the companies that are now offering defined contribution plans, only about 49% of their employees are eligible to participate and only about 33.1% of those actually do.[6]   When qualifying employees were asked why they were not participating there were several explanations offered including a lack of understanding on how the plans work or how to invest the money. Also, 17% didn’t participate because they stated that they could not afford to have their income reduced.[7]  If this trend continues, millions of Americans will retire with under-funded pension plans or none at all and be forced to rely solely on social security.


These under-funded retirement plans will only increase the issue of “old-age” poverty in the United States.  The U.S. population currently has a life expectancy at birth of 78 years[8] and there are over 37.3 million individuals aged 65 and older.[9]  This figure is drastically different from 1940, just five years after the Social Security Act was enacted.  In 1940 the life expectancy at birth was 59.9 with 9 million individuals over the age of 65.[10]   While the life expectancy in years after 65 has not dramatically changed, the number of those reaching that point has.[11] Additionally, the workforce consisting of men over the age of 65 has decreased from 46% in 1950 to 16.7% in 2006 leaving a greater number of men over the age of 65 relying on retirement benefits.[12]


Incomes of persons in the United States age 65 and older demonstrate this.  In 2004 over 39% reported that 90% of their income source was from Social Security benefits, which constitutes an average of 30% of the income they earned while working. [13]  The percentage living with annual incomes below poverty level ($10,400) was 9.8%, annual incomes of less than 150% above poverty level ($15,600) was 22.7%, and annual incomes of less than 200% above poverty level ($20,800) was 36.2%. [14]  While these percentages have drastically improved since 1950, there are still over 3.6 million people over the age of 65 that are living at or below poverty level.  This is over one third of the entire population aged 65 and older that existed in 1950. 


There are several reasons why 401(k)s are not succeeding in preparing employees for retirement. The first is that participation is voluntary.  This means an employee must actively choose to participate in the plan.  Then, they have the discretion in how much to contribute.  Because the contribution reduces the employee’s gross salary proportionately, many employees do not contribute the maximum annual amount permitted.  If the employee does contribute, they are also responsible for making the investment decisions on their contribution.  Many do not diversify enough to realize the full potential of the contribution.  In 2004 only 47.4% of plan participants had diversified portfolios.  In contrast, 31.6% of the plan participants had no equity investments in their portfolio and 21% had 100% of their portfolio invested in equities.  Therefore over half of plan participants are not investing wisely.  Since a 40(k) plan is associated with employment, instead of rolling the contribution over to an IRA, over 45% of the participants “cash-out” if they change jobs.  This constituted 18% of the 401(k) assets invested.[15] 


This data demonstrates that Americans are not utilizing the pension plan options available to them in order to effectively prepare for retirement. Based on a median salary of $60,000, employees age 55-64 should have, on average, $314,600 if they have made the maximum contribution to their 401(k)s. However, in 2004 the average contribution for this group was only $60,000.[16]  This equates to one year’s salary. Coupled with social security, a retiree will be fortunate to stretch their financial resources for 2 years until they are for to rely solely on social security.


United States Reform Based On International Models 


In order for a country to adequately and successfully provide for the elderly, they each must individually assess their needs and current financial structure.  This is true for the United States as well.  Learning from the Chilean model and their processes in decision making would be a prudent approach for the United States; adopting it as India and Nigeria did would not.  In one example, the United States capital markets are too well established globally for privatization of social security to have any impact on the gross domestic product ("GDP"). 


Strictly adopting the three-pillar structure suggested by the World Bank might not be a complete success either as the Organisation for Economic Co-operation and Development ("OECD") research demonstrates.  The United States would need to determine the advantages of implementing each pillar as well as the costs and disadvantages.  Perhaps the best approach would be to hybridize the pillar approach. In doing so, the United States might consider 1) converting social security into a means based program which would provide benefits up to or slightly above poverty range to all who are 65 or older, independent of work history, which would almost eliminate old-aged poverty, and 2) mandate 401(k) contributions so that they become an effective instrument in retirement preparation.  


If these changes were implemented, the 401(k) system would more resemble the benefits plans that accounted for the majority of the pension plans before the 1980s, it would update the 401(k) plans so that they were no longer structured as a supplemental plan, and it would take the decision-making out of the hands of the workforce which is proving to be unsuccessful.  These measures, collectively, would provide more confidence that the workforce will have the assets they need to retire comfortably as well as alleviate poverty in the age group.


Conclusion
There is no easy answer to how the pension system in the United States can be reformed in order to protect its elderly from living their final years in poverty.  However, learning from the mistakes and successes of other countries’ reform is a good start.  Reform is necessary but not quite as simple as adopting another country’s system just because it worked for them.  Probably the best course of action would be to wait and see how these countries fair in the current economic crisis and utilize the elements of their systems that have not only proven successful but are also reasonable for the United States given its needs and resources.  One matter is unquestionable though; the United States does need to reform its pension system or the poverty level of the elderly in the country will rise as the under-funders of their 401(k)s reach retirement. 

[1] Staff Of Corporate Pension Funds And Other Private Retirement And Welfare Programs Committee, 89th Cong., Report To The President On Private Retirement Plans By U.S. President's Committee On Corporate Pension Funds And Other Private
Retirement And Welfare Programs (Comm. Print January 15, 1965)
[2] Id.
[3] Munnell, Alicia H. & Sunden, Annika, 401(K) Plans Are Still Coming Up Short, Center For Retirement Research, Boston College, No. 43 (March 2006).
[4] Copeland, Craig, Retirement Plan Participation and Retirees’ Perception of Their Standard Of Living, Employee Benefit Research Institute, No. 289, (January 2006).
[5] Munnell, Id.
[6] Whitman, Debra and Purcell, Patrick, Topics in Aging: Income and Poverty Among Older Americans in 2004, CRS Report for Congress (November 7, 2005).
[7] Copeland, Id.
[8] World Bank Indicators of United States life expectancy at birth based on 2008 statistics. http://datafinder.worldbank.org/indicators, December 15, 2009.
[9] Based on 2006 statistics. National Center for Health Statistics Health, United States, 2008 With Chartbook Hyattsville, MD: 2009, Vol. 56, No. 9, December 28, 2007.
[10] Figures are for the male population in the United States and are not separated by race or geographic location. Id.
[11] In 1940 the Average Remaining Life Expectancy for Those Surviving to Age 65 was 13.7 years which increased to 17.45 years in 1990. http://www.socialsecurity.gov/history/lifeexpect.html  December 15, 2009.
[12] Copeland, Supra. Note that the statistics in 1950 only monitored male work force.
[13] Whitman, Supra.
[14] U.S Census Bureau 2008, CPS 2009 Annual Social and Economic Supplement http://www.censusac.gov/hhes/www/cpstables/032009/pov/new01_000.htm (2009)
[15] Munnell, Supra.
[16] Id.

05 January 2010

Why Did The Senate Fail to Expedite Much Needed Relief on Credit Card Reform?

The economic crisis unveiled the debauchery of the financial industry in the United States and should have provided sufficient evidence that making money always trumps any level of social responsibility in the financial world.  Given this, it should have been evident to Congress that passing the CARD Act of 2009  (Full title of the Act is the Credit Card Accountability Responsibility and Disclosure Act of 2009, H.R. 627) which was signed by the President on May 22, 2009, and not making it effective until nine months in the future, would have created a frenzy among the credit card companies to get away with as much as they could before the law became effective.  Why this was not anticipated is beyond reason.

On November 4, 2009, in response to continued and increased iniquity by the credit card companies, the House voted to expedite the Act’s effective date to December 1, 2009 (S. 1833: Expedited CARD Reform for Consumers Act of 2009). Unfortunately, the Senate stalled such expedition and activity on the proposed amendment stopped at the Senate committee level in October (the last activity in the Senate was on October 24, 2009).  Granted the House has the luxury of a more expeditious process than the Senate, but when the proposed effective date is December 1, 2009 the proposal should have been prioritized by the Senate to move things along expeditiously (as was the intent; to expedite).


The Act is intended to protect U.S credit card holders by “ending the days of unfair rate hikes and hidden fees.” The White House Press Secretary released a fact sheet of the Act which restricts credit card company practices in the following ways:
  • it restricts interest rate increases during the first year
  • It prevents interest rate increases on existing balances except for three instances
  • Longer amounts of notice are required in order to raise rates on future purchases
  • Keeps payment terms the same... meaning credit card companies can't change the terms on you
  • Places limits on the fees and penalty interests that companies can charge consumers
  • Companies must consider the consumer's ability to pay before allowing limit increases or issuing a new card
  • Requiring companies to set reasonable due dates
  • Preventing companies from targeting young consumers
  • Stopping deceptive advertising for credit reports
  • Setting Gift Card Protection 
While these protections are a breath of fresh air for anyone who is trying to dig their way out of debt for one reason or another, the wait is as excruciating as waiting for a rescue team to dig you out of an avalanche.   As the months have passed, credit card companies have continued to suffocate consumers by reducing credit limits to the current balance of the card forcing the cards to go over their limits once the interest is added, thereby generating an over the limit fee, they have increased interest rates to 29.99%, they have increased minimum monthly payments requirements, and the list goes on.

Now, many will argue that these measures could have been avoided if individuals had managed their money more responsibly; I agree and disagree. There are those who could have avoided falling prey to the credit card companies by planning better or spending less. But, there are also those who are unemployed, some have been for over a year.  So, when there is no income, other than unemployment insurance, which is not enough for most people to live on, people have no choice but to cozy up to grocery shopping, fueling their cars, paying medical bills, and buying clothes for their children with those credit cards that have been so generous in the past.  They knew what the terms were; they knew what to expect.  That was until the Act was passed with a nine-month leeway giving the credit card companies one last chance to scramble before they were permanently restricted from making their own rules like they were living in the wild west. 

The birth of this abuse occurred in 1978 when the Supreme Court in Marquette vs. First Omaha Service Corp., ruled that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States, including states with restrictive interest caps.  As a result, Citibank moved to South Dakota. Why? Because they have no usury limits on credit cards (See SL 1982, ch 341, § 1; SL 1987, ch 360, § 4; SL 1994, ch 351, § 147).  The other credit card companies began to catch on and do the same. Other states, in order to compete for the credit card companies’ business, relaxed their usury laws without regard to the possible implications on the citizens of their states.

It is nice (and I use this word intentionally) that after the federal government, the Supreme Court of the United States, the state legislatures, and the credit card companies with total disregard for the consumer, collectively ensured that the credit card companies would make money, that they now cannot find it in their schedules to expedite the halting of this abuse thereby creating some relief in an otherwise dismal economy.

My thoughts are that in the midst of an economic crisis that is borderline comparable to the Great Depression, it is appalling to me that a law was passed in response to the credit card companies’ abuses, and the credit card companies rather than have some decorum of social responsibility by reflecting on their behavior, have actually become even more disgusting and avaricious in their practices. I am also gravely disappointed that the Senate did not take the time to look up the definition of  “expedite” so that they could have provided some much needed relief to its constituents.  During these tough economic times I would have hoped the credit card companies would have worked with customers, and not taken further advantage of them and if not, that the Senate would have found the time to force them to.  It's not fair, and that's not good business practice from either.

The questions I would like to leave you with is: How could the credit card companies have given such an overwhelming amount of credit to consumers, changed the rules midstream  and then be so shocked that people can’t afford to pay their bills? Additionally, why could the Senate have not taken the time to stop this and provide some much needed relief? Even the best financial planning could not have prepared many of us for this.