Economic Trends
By Gene Koretz
Less Gold in the Golden Years?
Remember the personal savings rate? When it tanked in the 1990s, many economists decided its decline didn't matter because household financial assets were soaring. The rising stock market, they claimed, was painlessly doing the retirement saving for free-spending baby boomers.
Fast-forward to 2002. Collapsing stock prices have sapped household net worth. For many Americans, the dream of a carefree retirement has evaporated. And economists are eyeing the anemic savings rate with renewed concern.
Even without Wall Street's woes, it's becoming clear that a majority of middle-aged folks may face greater financial pressures in retirement than their parents did. Many upper- and middle-class workers were mauled by the market decline, but the retirement prospects of far more families have been hurt by changes in the Social Security and private pension systems. (In 1998, the bottom 90% of households accounted for just 18% of stock market wealth.)
Back in 1983, Congress lowered future Social Security benefits by increasing the "full retirement age" at which people would become eligible for full Social Security checks, which had been 65. However, the legislation mandated that the increase would take effect only with people born in 1938 and after--that is, folks approaching retirement today. Thus, if you were born in 1938, your full retirement age is 65 years and two months, and the age for full benefits will keep rising over the next two decades until it reaches 67 for people born in 1960 or later.
This process translates into growing benefit cuts for people who choose not to defer retirement. Next year, for example, people who apply for Social Security when they turn 65 will receive 1.1% less than they would have gotten under the old formula. By 2008, such applicants will get 6.2% less, and the cuts will hit 12% when the full retirement age reaches 67. Meanwhile, those who opt to collect reduced benefits early, at age 62, will suffer a larger cut.
The fact that these cuts were enacted to bolster Social Security's financial health doesn't lessen their impact on older folks' budgets. Today's seniors may be the wealthiest in history, but two-thirds of those over 65 still rely on their Social Security checks for at least half of their income. Moreover, while retirement ages have edged up in recent years, the average is still under 65.
Meanwhile, the rapid growth of 401(k) defined-contribution pension plans in place of traditional defined-benefit plans seems to have helped fewer families than commonly believed. While 401(k) assets exploded in the 1980s and 1990s (and have since imploded), the increase was concentrated among more affluent families. Economist Edward N. Wolff of New York University estimates that the real pension wealth of two-thirds of households headed by someone 47 to 64 was no higher in 1998 than in 1983.
One reason may be that lower-wage workers tend to contribute less of their pay to 401(k)s than higher-income workers--and often liquidate them early. Although two-thirds of 401(k) assets are rolled over into new plans when workers leave an employer, notes economist Alicia H. Munnell of Boston College's Center for Retirement Research, two-thirds of workers with 401(k) accounts cash them in when changing jobs.
The market collapse underscores the need for policymakers to find more ways to encourage thrift, and the savings rate has finally begun to rise. But it will have to rise a lot more if the baby boomers are to realize their retirement dreams.
A New CEO Is No Savior
In recent years, more investors and corporate boards have bought the notion that an effective cure for lagging company performance is to get rid of the CEO and bring in a highly regarded replacement. As a study to be presented at the Academy of Management's annual meeting this month indicates, however, it was never quite that easy.
In the study, Margarethe F. Wiersema of the University of California at Irvine analyzed CEO successions in a group of 500 major companies in 1996 and 1997. Of the 83 that made changes at the top, 37% involved dismissals. But such drastic action generally failed to foster a quick recovery in company fortunes. Using a number of performance measures, Wier-sema found no evidence that companies did better in the two years following CEO dismissals. Indeed, judging by stock prices, they usually did much worse.
Wiersema concludes that corporate woes leading to a CEO dismissal usually take many years to correct. Boards that seek a "savior" CEO were probably too deferential to the past CEO. And a turnaround may prove elusive unless board members start exercising oversight over the new chief.
When a Tax Hike Is Good News
That some taxpayers might welcome new taxes seems an economically dubious notion. Yet that is precisely what Jonathan Gruber and Sendhil Mullainathan of Massachusetts Institute of Technology found in a study of smokers' reaction to cigarette taxes.
Most smokers say they want to quit but find it hard to do so. Since studies show that rising tobacco prices do induce some folks to stop, the two economists figured their ultimate reaction to tax hikes might actually be positive.
To find out, they analyzed U.S. and Canadian survey data of people's ratings of their own happiness to see if they were affected by growing state and provincial cigarette taxes. In fact, they did find that well-being in groups prone to smoke rose significantly in the wake of tobacco tax hikes--but not beer or alcohol tax rises. "The tax hikes," says Gruber, "apparently made many smokers happier by helping them to stop or reduce their smoking."
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Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
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