Beyond Home Mortgages

by Wilhelmina A. Leigh, Ph.D.
remarks given at the Howard University Fourth Annual African American Economic Summit

Legislation in the 1930s established the nation’s housing goal as decent, safe, sanitary housing that is affordable for all.  Over the decades since the declaration of this goal, however, the nation’s housing policy problem has remained how to narrow the gap between household incomes and housing costs.  This gap, in fact, increased between 1960 and 2008 (before the subprime mortgage market collapsed) for both renters and owners.  Other methods than those heavily relied on to date should be considered and funded to help address this enduring housing problem and achieve our national goal.

The tool kit of options to narrow the gap between household income and housing costs contains three types of approaches. If we choose the first approach, we accept both household incomes and housing costs as fixed and use various financing mechanisms to bridge the gap between them.  These mechanisms include mortgage loans made by financial institutions and mortgage market products developed and sold in the secondary market by Fannie Mae, and Freddie Mac. The subprime mortgage market collapse and The Great Recession have shown us the worst case outcome associated with these activities.  The second approach involves accepting the cost of housing as fixed and increasing household incomes as a way to narrow the gap.  This approach is most often applied via the tax system with deductions and credits that increase income in ways that benefit the wealthy more than the poor.  The third approach requires us to accept that household incomes are fixed and involves modifying the cost of housing production as a way to decrease its cost.  Examples of programs that use this third approach include Habitat for Humanity and the Nehemiah housing program (currently operating in New York City).  If we target this core housing problem by bringing to scale tools that reduce the cost of housing by reducing its production costs, we will be able to assist more households to become homeowners in a sustainable and affordable manner.

In this “zero-sum” era, how can we afford to take this approach to scale?  We can do so if we reduce the amount of tax revenue that the federal government chooses not to collect via the mortgage interest deduction on the federal personal income tax form.  Collecting as federal revenue some of the $100.9 billion in tax expenditures (estimated for FY 2013) from this deduction and using it to expand programs that close the gap between household income and housing costs in a sustainable manner should be high on our nation’s “to do” list.

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

In Social Security…We Trust

by Wilhelmina A. Leigh, Ph.D.

On April 23, 2012, the Social Security Board of Trustees released its 2012 annual report on the financial health of the Social Security Trust Funds (formally the Old-Age and Survivors Insurance and the Disability Insurance (or OASDI) Trust Funds).  Like previous annual reports, this one contains estimates of revenues and expenditures of the Trust Funds for the current year and projections of the same for 75 years into the future.  Also like previous reports, its findings lead many to conclude that Social Security won’t be there for them when they need it.  This doesn’t have to be the case.

Many who conclude that Social Security will not be there for them support their view by citing the Report’s projection that the Trust Funds will be exhausted in 2033. They ignore the additional information that even if the current surplus in the Trust Funds no longer exists, the revenue collected by the program each year thereafter in FICA (Federal Insurance Contributions Act) taxes is projected to cover 75 percent of scheduled benefits and administrative costs.  They also ignore the fact that between now and 2033, the United States Congress has 21 years in which to act to ensure the solvency of Social Security system.

It would serve us all well if members of Congress were to act sooner rather than later to retrofit the Social Security system to close the 75-year shortfall, currently projected to be 2.67 percent of taxable payroll (that is, all earnings subject to Social Security contributions).  It is indeed possible to not only eliminate the shortfall but also simultaneously add features that would bolster program support for the many people for whom Social Security benefits—averaging annually only $12,870 in 2010—are the major, or only, source of income. The report of the Commission to Modernize Social Security features many suggestions for achieving these dual objectives.

Rather than an invocation to doom and gloom about the fortunes of the Social Security system, the 2012 Trustees report should be a call to those who care about it to insist that we act while its green light is on, rather than waiting for the yellow light or red light before acting.  Crossing the street on the green light—in other words, in 2012, when the Trust Funds have a projected annual surplus of $57.3 billion—is the prudent thing to do.  Crossing on yellow or red—when Trust Fund reserves are nearly or totally depleted—will involve avoidable and harmful fiscal risks.

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

Fairness Within the Economic Recovery

by Wilhelmina A. Leigh, Ph.D.

June of this year will mark the third anniversary of the official end of The Great Recession, the month when the downturn bottomed out and the economy started to grow again.

With the recovery, as during the recession, however, disparities by race/ethnicity have persisted in economic outcomes such as employment, and will continue to do so unless determined efforts are made to reduce or eliminate them, and the impacts of these efforts are closely monitored.

The economic recovery is currently gaining steam.  During the fourth quarter of 2011, real U.S. gross domestic product, or GDP (the output of goods and services produced by labor and property located in the United States), increased at an annual rate of 3.0 percent.  This rate of growth was faster than at any point during the last year and a half and nearly equals the average annual growth rate of GDP over the last 60 years of 3.25 percent.  In addition, unemployment rates have declined even for groups such as African Americans, who were not seeing much of a decline earlier in the recovery.  In the wake of the recent recession, the unemployment rate for the nation peaked in October 2009 (at 10 percent), while the rate for African Americans did not reach its peak until August 2011 (at 16.7 percent).  In February 2012, the unemployment rate for African Americans was 14.1 percent, while the national rate was 8.3 percent.

How can we channel the economic recovery to more completely benefit all Americans?  One way is to monitor existing and new federal, state and local programs and policies for the extent to which they can and do foster economic equity among racial/ethnic groups. An analysis by PolicyLink of proposals in the 2013 Obama budget highlights programs that are promising in this regard. For example, the Partnership for Sustainable Communities—an interagency collaboration among the Department of Housing and Urban Development, Department of Transportation, and Environmental Protection Agency—would redevelop communities to reduce barriers for low-income households to access jobs, schools and affordable housing.  The Pathways Back to Work Fund, another 2013 budget proposal, would provide funding for subsidized employment and work-based training for low-income youth, the long-term unemployed and low-income adults. Among the wish list of programs that presidents’ budgets too often become, initiatives such as these should, first, be supported and then, once enacted, be monitored for their effectiveness.

Racial/ethnic economic disparities will not be lessened or eliminated without conscious action.  We justify not addressing these longstanding disparities during recessions because we lack resources to do so.  We cannot justify the failure to act during periods of economic growth. Thus, we should insist that such action is evident during the coming recovery.  As Alan Krueger, chairman of the President’s Council of Economic Advisers noted recently, “Restoring a greater degree of fairness to the U.S. job market would be good for businesses, good for the economy and good for the country.”

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

In the Interest of Social Security

by Wilhelmina Leigh, Ph.D.

In its deliberations to develop a plan to reduce the federal deficit by more than a trillion dollars over the next decade, the Joint Select Committee on Deficit Reduction considered a proposal to calculate cost-of-living adjustments (COLAs) in all government programs using the “chained” CPI-U (Consumer Price Index-Urban), rather than the CPI-U.  Implementing this proposal would dramatically reduce Social Security benefits for recipients.  Although reducing federal program benefits by changing the COLA computation is indeed one way to reduce the deficit, reducing benefits is not the only way to eliminate the 75-year projected shortfall (of 2.2 percent of taxable payroll) for the Social Security system.  The shortfall can be closed by holding benefit levels harmless and, instead, increasing revenue directed to the system.  A recent report of the Commission to Modernize Social Security (Plan for A New Future: The Impact of Social Security Reform on People of Color) offers recommendations for doing just that.

According to a brief by the National Academy of Social Insurance, over the first ten years after implementation of the chained CPI-U, two-thirds of the deficit reduction achieved would come from cuts in benefits that would be borne by elderly and disabled Americans.  The remaining third would come from revenue increases associated with adjustments to tax brackets and other parameters of the tax code.  After the first decade, deficit reduction due to revenue gains is projected to decrease, while benefit cuts are expected to remain indefinitely.  Reductions in Social Security benefits would be especially problematic for African Americans, among whom benefits (averaging only $1,035 per month for retirees in 2009) are the sole source of income for 40 percent of retiree households ages 65 and older.

The Commission to Modernize Social Security focused on proposals that would both eliminate the projected shortfall and increase benefits for selected vulnerable populations, rather than on proposals that would reduce benefits. Two of the proposals in its report—eliminating the $106,800 cap on wages taxed for Social Security, and extending Social Security coverage to all state and local government employees—would jointly generate enough revenue to eliminate the projected shortfall.  These two proposals along with a gradual increase in the payroll tax rate of one percentage point and taxing contributions to salary reduction plans (such as flexible spending accounts) would generate enough revenue to not only cover the shortfall but also fund benefit increases for the oldest recipients, students, caregivers, and widowed spouses.

It is in the nation’s interest to reduce its deficit.  It is also in the nation’s interest to provide a tune-up to the Social Security system so it will remain solvent over the next 75 years.  Achieving the first goal by reducing the modest benefits that provide a lifeline to so many Social Security recipients of color, however, is not the right way to go.

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

Ask Someone Who Isn’t Working …

by Wilhelmina A. Leigh, Ph.D.

“If you think the system is working, ask someone who isn’t.”  Acting on this bumper-sticker advice by surveying people who are not working reveals not only their anguish and depression about being unemployed, but also their belief that the labor market system, and particularly government employment services, are broken and must be fixed.   The American Jobs Act of 2011, recent legislation developed by the Obama administration, offers ways to fix this system.

Unemployed workers surveyed in both 2008 (Peter D. Hart Research Associates, Inc., for the National Employment Law Project) and 2009 (Knowledge Networks for the John J. Heldrich Center for Workforce Development at Rutgers University) agreed that the public workforce system is broken.  In addition, the system has been found to contribute to longstanding racial/ethnic disparities in the labor market, such as those reflected in the September 2011 unemployment rates among African Americans (16.0 percent), Hispanics (11.3 percent), and whites (8.0 percent). A 2005 Joint Center study entitled A Mixed Record found that the public workforce system had just that kind of record in providing jobs for African Americans and Hispanics.  By every performance measure associated with Workforce Investment Act (WIA) programs (the centerpiece of the public workforce system), adult programs were found to be less successful for blacks and Hispanics than for whites and Asians.  Another study finding—that black and Hispanic WIA adult populations were less likely than whites to receive WIA training services—may help explain these differentials.  The WIA Dislocated Worker program, on the other hand, was equally successful for blacks, Hispanics and whites.

Elements of the American Jobs Act of 2011 could create a more even-handed public workforce system.  The Act explicitly prohibits discrimination by employers and employment agencies on the basis of an individual’s status as unemployed (Title III, Subtitle D, “Fair Employment Opportunity Act of 2011”).  If rigorously enforced, this Act could narrow the persistent unemployment rate gaps between people of color and whites.  Along with the “stick” of prohibiting discrimination on the basis of employment status, another provision (Title III, Subtitle B) would offer a “carrot” to employers to hire the long-term unemployed.  Employers who hire individuals who have been unemployed at least six months would be eligible for a maximum tax credit of $4,000.

Yes, people who are not working think the public workforce system is not working, either.  In addition, people of color who are not working achieve mixed outcomes from this system.  Features of the American Jobs Act of 2011—specifically, its mandate not to discriminate against the unemployed and its incentive to hire the long-term unemployed—could go a long way toward resolving these problems.

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

And What About Tax Expenditures in Deficit Reduction?

by Wilhelmina A. Leigh, Ph.D.

The Budget Control Act of 2011 (P.L. 112-25), signed into law on August 2, 2011, mandates that a Joint Select Committee on Deficit Reduction be constituted (with 12 members of Congress) to identify ways to cut $1.5 trillion from the federal budget over the next 10 fiscal years (2012-2021).  The available options for achieving this goal are reducing spending, increasing taxes, and reducing tax expenditures.  While it is usually straightforward to determine who will bear the brunt of proposals to cut spending or raise taxes, it is more difficult to make this determination with proposals to reduce tax expenditures.

Tax expenditures are the deductions, exemptions, or credits allowed via the U.S. tax code to subsidize certain politically and socially desirable activities.  These expenditures primarily benefit individuals with higher incomes.  However, choosing to reduce the federal budget by paring the most costly tax expenditures is likely to have undesired consequences for lower-income populations and for African Americans and Latinos, two groups who are disproportionately low-income.

The two most costly tax expenditures are the exclusion from taxation of employer contributions for medical insurance premiums and for medical care and the deductibility from individual income of mortgage interest paid on owner-occupied homes.  According to the Office of Management and Budget, between fiscal years 2011 and 2015, these tax expenditures are projected to account for $1.7 trillion in forgone revenue—$1.05 trillion from the exclusion of medical premiums and $0.64 trillion from the deduction of mortgage interest.  

Removing or reducing the tax advantage of employer-sponsored medical insurance could reduce the likelihood that workers have health insurance. According to the Kaiser Commission on Medicaid and the Uninsured, in 2009, two of every five among the 40 million workers with annual income less than $20,000 had employer-sponsored coverage, in contrast to 86 percent of the 60.2 million workers with incomes of $40,000 or more.  Thus, though employers’ responses to changes in this feature of the tax code would affect a greater number of higher-income workers, 16 million low-wage workers could be affected as well.

Limiting the ability to deduct home mortgage interest payments from taxable income could reduce the incentive to own a home, the major form of wealth among U.S. households.  A recent study by the Pew Research Center found that in 2009, among white households, home equity constituted 38 percent of net worth (defined as assets minus liabilities/debts).  Home equity accounted for greater shares of wealth among African American households (56 percent) and Latino households (55 percent), even after accounting for losses due to the Great Recession.  Thus, reducing the incentive to own a home could disproportionately reduce the wealth of African Americans and Latinos.

Like the path to deficit buildup, the path to deficit reduction will be long and winding.  As we embark on this path, we should be alert to the possible consequences of all proposals for persons at lower income levels.

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

Can a Two-Legged Stool Stand?

by Wilhelmina A. Leigh, Ph.D.
originally published in The Florida Courier

For today’s working adults, retirement is more likely to be based on the safety-net level of benefits from Social Security, supplemented with personal savings and investment.

The catch is, however, that too many African-Americans are saving too little for retirement.  The fact that 70 percent of African-American workers had saved less than $25,000 for retirement, according to a 2007 survey by the Employment Benefit Research Institute, suggests there will be little “gold” in our golden years.

The ‘stool’

Traditionally, retirement income has come from three sources – Social Security, employer pensions, and personal savings and investment –a three-legged stool.  The ongoing, gradual disappearance of employer-sponsored defined benefit pensions (that provide a monthly payout based on years worked and salary level) and their replacement by employer-sponsored defined contribution retirement plans (that provide retirement income based on the amount of employee contributions while working) suggests, however, that the retirement income stool will soon have only two legs.  One leg will be Social Security, and the other will be personal savings and investment – both through an employer and independent of employment.

Nearly two of every five African-Americans in a 2009 Joint Center poll indicated that they expected Social Security to be a major source of income during their retirement.  This expected major source of retirement income, however, provided average monthly retirement benefits at the end of 2009 of only $1,120 for African-American males and $960.50 for African-American females.  These monthly average benefits generate an annual income of $10,458 – slightly greater than the federal poverty threshold for persons 65 years and older.

Problems coming

Over the next 75 years, if no modifications are made to the Social Security program, payments will fall below their already modest levels.  Because FICA taxes paid into the Social Security system by workers in a given year are expended that same year to fulfill obligations to current beneficiaries, the retiring of the large Baby Boomers born between 1946 and 1964; increased life expectancy of the “older” old; and declining birth rates – threaten the solvency of Social Security.

Employer pensions and retirement plans do not look especially promising for African-Americans, who are more likely to be unemployed and underemployed than other racial/ethnic groups – a fact that has been unchanged for many decades.

When employed, African-Americans are hit hard by the shrinking availability of employer-sponsored retirement plans. Though more than half (56 percent) of Black workers ages 25-59 were offered retirement plans or pensions by their employers in 2009; less than half (45 percent) actually enrolled in them.  In addition, low-income earners – among whom African-Americans are overrepresented – are less likely than high-income earners to be offered employer retirement plans.

African-American workers constitute 20 percent of the low-income labor force –individuals whose earnings are less than the federal poverty level even though they are employed for 27 or more weeks per year – in contrast to the 11 percent they make up of the workforce at all income levels. Personal saving and investment independent of employment (for example, Individual Retirement Accounts) become the major source of income to supplement Social Security retirement benefits.

Income is critical

A key issue is having the disposable income to save.  A 2009 Joint Center poll found that 53 percent of African-Americans at all income levels – and 65 percent with income of $35,000 or less – wanted to save but did not have enough money to.  This same poll found that African-Americans are less likely than Whites to have invested in IRAs (28 percent vs. 47 percent), in stocks or mutual funds (27 percent vs. 49 percent), or in bonds (17 percent vs. 27 percent).

Raising our current retirement income status from only 30 percent who have saved $25,000 or more for their retirement should become a priority for African-Americans.  Otherwise, our definition of retirement may become confined to working either full-time or part-time until the day we die – or eking out an existence on Social Security benefits alone.

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.

21st Century “Retirement 101”

by Wilhelmina A. Leigh, Ph.D.

It’s not your parents’ retirement—especially if your parents retired with a pension and a gold watch after 25 years on the job.  For today’s working adults, it’s more likely to be a retirement based on the safety-net-level of benefits from Social Security, supplemented with personal savings and investment.  The catch is, however, that too many African Americans are saving too little to be comfortable during their retirement years under this model.

Average monthly Social Security retirement benefits for African-American males ($1,120) and African-American females ($960.50) provide an annual income only modestly above the federal poverty threshold for persons 65 years and older ($10,458). The additional fact that 70 percent of African Americans have saved less than $25,000 for retirement suggests there will be little “gold” in our golden years.

Personal savings and investment can take place both via employer retirement plans and independent of employment.  Saving through employer pensions and retirement plans does not look especially promising for African-American workers, however, due to their chronic unemployment and underemployment and to the shrinking availability of employer retirement plans in general.  Only 59 percent of all workers and 56 percent of black workers ages 25-59 were offered employer retirement plans or pensions in 2009, with half or less (50 percent of all workers and 45 percent of black workers) who received offers actually enrolling in the available plans.

Thus, for many, saving and investing for retirement independent of employment (for example, in Individual Retirement Accounts, or IRAs) becomes the major source of funds to supplement Social Security retirement benefits.  A key issue for African Americans, though, is having disposable income to save.  A 2009 Joint Center poll found that 53 percent of African Americans at all income levels—and 65 percent with income of $35,000 or less— “wanted to save but did not have enough money to.”

Raising our current retirement income status from only 30 percent who have saved $25,000 or more for retirement should become a priority for African Americans.  Otherwise, our definition of retirement may become confined to working (either full-time or part-time) until the day we die, or eking out an existence on Social Security benefits alone.

Sources:

• Social Security retirement benefits of African-American males and females (December 2009)
• Federal poverty level (2010)
• Percent of African Americans saving for retirement (2007)
• Percent of African Americans offered pensions (2009)
• Joint Center poll (2009)

Wilhelmina A. Leigh is Senior Research Associate of the Economic Security Initiative of the Civic Engagement and Governance Institute at the Joint Center for Political and Economic Studies. More information on Dr. Leigh and her work can be found at the Joint Center website.