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Collins: Researcher sees financial security elusive for many

By Brian E. Clark
For WisBusiness.com

J. Michael Collins is a UW-Madison researcher who is not much interested in coming up with mathematical models to calculate the optimal portfolio choice between bonds and equities for people in their 50s.

He’d much rather be out in the field, talking with real people, doing surveys, running focus groups to figure how people manage -- and mismanage -- their money.

So Collins, who teaches personal finance, is in the right spot to run the university’s Center for Financial Security, a multi-disciplinary effort that straddles the fields of economics, sociology, psychology and education. He joined the program in 2008 after a stint at Cornell University.

“We are more interested in working with people and offering them options. We provide and evaluate programs so they can be improved as opposed to doing theoretical and mathematical things,” said Collins, whose program works with state and federal agencies, including the Social Security Administration.

“Our basic goal is to help provide information that is useful for consumers, policy makers and practitioners, people who are active in the financial markets,” he said.

The center’s efforts are timely because they focus on what Collins called “vulnerable populations.”

“You might think of them as people who are disadvantaged or come from low-income neighborhoods,” said Collins, who is a faculty affiliate with the Institute for Research on Poverty, the La Follette School of Public Affairs and Cooperative Extension.

“But the truth is anyone of us could become vulnerable. I just talked to someone who was from a pretty middle class background, but they had a child born with special needs. That is a very vulnerable place to be in.”

Workers who have been laid off from their jobs, received buyouts or cashed in their retirement accounts also are vulnerable to problems or financial mistakes, he said.

“No matter how you define it, more people are feeling more vulnerable than ever,” he said. “Combined with that, we’ve had a pretty historic shift in policy. We now have more emphasis on consumer finance than ever before in our history.”

He cited the tightened regulations on credit cards and the Dodd-Frank Act, which seeks to reform Wall Street and increase consumer protectionss; as well as recent changes in Wisconsin’s payday lending law.

“So we have a combination of economic conditions which make people more focused on these personal financial issues as well as policy changes which are often getting ahead of where the research is,” he said.

With the weakening of unions and the demise of many defined pension plans, Collins said many people are skating on thin financial ice when it comes to retirement. Currently, he noted, most private employers have shifted to 401(k) programs, with only 10 percent continuing to offer defined pensions.

Moreover, many middle income and working class people are faced with flat or declining incomes and are unable to put away money for retirement. Others are taking on debt to stay afloat.

“And while there are tax advantages to save for retirement, most of those are skewed for people in higher income brackets,” he said. “So the benefits for savings don’t necessarily make it an attractive option for people who are really tight economically.

“Meanwhile, we have talk in Washington of cutting Social Security benefits or doing nothing, which means the amount that people are paid will decline over time. So working class people who don’t have defined pensions and aren’t getting any kind of a match or aren't doing any kind of retirement saving could be in a particularly tough spot if that happens.”

Collins said the amount of money needed for retirement can be daunting. And that will cause some to keep working into their late 60s and beyond.

“It comes down to individuals,” he said. “But people are notorious about underestimating how much they need.

“One way to think about it is to figure out how much you are going to need to take out in retirement each year. In that first year of retirement, say you need $50,000. If you’ve gone to the Social Security calculator and you know you’ll be getting $20,000 there, you’ll have a $30,000 annual shortfall.

“If you multiply that by 25, you are talking about a fair bit of money you will need to have saved. You’ll need between $500,000 and $750,000.”

Collins said dollar figures that large can scare people off of saving.

“They might say 'forget it, I can’t do anything,'” he said.

“They could decide to cut some of their spending now to save more. Or accept that in retirement, they can’t have lifestyle they wanted and that they may have to live on a more austere budget. Or they realize that they will have to work far beyond their retirement age.”

Collins said many people surveyed for Social Security and in other studies say they are more concerned with putting food on the table and keeping their houses rather than saving for retirement several decades away.

“Yeah, we hear that a lot,” he said. “People say retirement is really important to me, but I will get to that tomorrow.”

He said is may not be realistic to think that the country’s economy is going to return to the robust days of the 1990s and early 2000s any time soon.

“If people think we are going to get back to that in the next year, there might be a long wait. So at some point, people have to realize that – and I don’t like the term ‘new norm,’ -- but it might be like this for a while.”

Collins said the recession and so-called jobless recovery could continue to depress Americans’ spending habits, while increasing savings and frugality in the future.

“That’s the big debate among people who study economic sociology and economic psychology,” he said.

“My parents and lots of other folks who lived through the Great Depression ... still save everything and have mistrust in banks and all these thrifty ways. It really changed their behavior over their lifetimes and there is evidence this (recession) is making people take these lessons to heart.

“It seems like younger people are much more aware that debt can get them into trouble and that they need to save more. I certainly see that around campus. Whether that sticks with people who have a chance to live it up again and then go back to their old ways remains to be seen."

He said sociologists are also studying whether kids of misers grow up to be misers or profligate spenders.

“Do we learn from the positive and negative that we see and emulate that or do we do something totally different?” he asked. “There are so many interesting issues in this area.”

Collins said one of the best things people can do is map out a budget, even if they don’t follow it that closely.

“It doesn’t matter what your income level is,” he said. “Seeing how much you have coming in and how much is going out is really critical. Once you do that, you can figure out if there is the potential to spend a little more or to save a little more."

Collins said studies show that between 40 and 50 percent of those surveyed report that they have a written budget. However, he noted, only half of them say they follow it.

But even if they just mentally keep it in their head, that’s a signal that they are more likely to save, maintain their credit accounts and less likely to bounce checks.

Though Collins said he does not have data on the stress that financial difficulties place on relationships, he said the anecdotal evidence is strong.

“People who do some couples and relationship work say that money is always among the top problems for both married couples and partners,” he said.

“We just did some work on why people use financial advisers when it’s not always clear that they are making them any richer. But they are helping deal with these kinds of spousal financial disputes. A third party can come in and help mediate and be the tie breaker.”

Collins said the center’s work with the Social Security Administration’s Financial Literacy Research Consortium focuses on when people decide to do some planning. The five-year effort is looking for what educators would call “teachable moments.”

“Obviously going into bankruptcy or foreclosure are two and we can help teach them how to not repeat that again,” he said.

Other points include tax refund time, marriage, the birth of child or kids entering school, he added.

“Those are times when people start to think about the future and planning ahead,” he said. “Parents of preschoolers are thinking about kids entering school system and saving for college as well. Even if they don’t care about planning for themselves, they might for their kids and start to take control."

Last year, he said the center conducted 26 focus groups across the country with people. The center is also involved in the Wisconsin Longitudinal Study, which has followed state high school graduates since 1957.

“They are now in their 70s and we have information about their whole life course and how they have made financial decisions and the kinds of events that have happened to them,” he said.

The center received $3 million from the Social Security Administration this year to a wide range of research. Currently 14 studies are now underway, but Collins estimated the center will undertake as many as 40 projects over the next four years.

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