Guess what happens when working poor invest in 401k’s

[Paratus]

From the WSJ article





The first time that jumps out is the time difference between the two groups. Mortgage rates have been declining since the 80s by around 0.25 to 0.375 per year and in particular the average 30 year fixed mortgage rate in 2010 was 4.69 and 4.45 in 2011 (source: http://www.freddiemac.com/pmms/pmms30.html ). Now that 0.24 decrease doesn't sound like much but it would allow a person making $55,000/year buy $5,000 more expensive home with no increase in monthly payment. So the falling interest rates could explain all of the increase in mortgage debt.

For the consumer debt, If they aren't taking on more credit-card debt, second mortgages or installment loans, then there is only two big categories left, student loans and auto loans. Assuming the age profile of the hires doesn't change much from year to year, then the auto-enrolled group was born on average a year later than control group. This would implied that they went college a year later. The average debt of a students graduating from four-year colleges that has loans has increased by roughly a $1000/year and the percentage of students with loans has steady increased over the last 25 years. (source: https://ticas.org/files/pub/Debt_Facts_and_Sources.pdf) Auto loans, like the mortgages above, have also seen their interest rates drop, but because of the much short terms(3-6 years) this can only a explain a couple hundred bucks.

Now the article does state "After adjusting for differences in the economic cycle and in characteristics of the two employee groups, including education and salary levels", maybe the author did some corrections for these factors. The article implies that the study stripped difference the stock market performance for the 401K gain. But I have hard time coming up with a way to strip out the interest rate differences.

I believe this is the study, but I haven't read through yet.
https://scholar.harvard.edu/laibson/publications/borrowing-save-impact-automatic-enrollment-debt

Thanks for the complete summary!

 

[Sonikku]

Poor people get the shaft. News at 11.

 

[umbrella39]

My experience with larger companies that 50% match up to 6% is pretty common (3% matching). Over 3% is pretty rare.

Michael

When I worked for the University of Michigan they had 2 to 1 matching and boy those were the days. I can't imagine they still do this. My current employer is 50%...

 

[Jhhnn]

Poor people get the shaft. News at 11.

If God didn't want rich Republicans fucking them he wouldn't have made it so easy.

 

[IronWing]

When I worked for the University of Michigan they had 2 to 1 matching and boy those were the days. I can't imagine they still do this. My current employer is 50%...

Yep, I worked for a university for a few years. 2:1 match up to 5% (I put in 5%, they put in 10%) FTW! I had a coworker who would not sign up. She said, "they'll just steal the money from me." Even when we explained that she could cash out the 401k every month if she wanted to and that even with the tax penalty she would come out ahead, she just saw that her paycheck would be lower and that was all that mattered to her. Her hubby was loaded so it wasn't like she was living paycheck to paycheck.

 

[Brainonska511]

Yep, I worked for a university for a few years. 2:1 match up to 5% (I put in 5%, they put in 10%) FTW! I had a coworker who would not sign up. She said, "they'll just steal the money from me." Even when we explained that she could cash out the 401k every month if she wanted to and that even with the tax penalty she would come out ahead, she just saw that her paycheck would be lower and that was all that mattered to her. Her hubby was loaded so it wasn't like she was living paycheck to paycheck.

When I worked at a university as a postdoc, it was 5% automatically to my 403b, then 1:1 matching up to another 5% (thus a total of 10% from the university if I put at least 5% in). And it was fully vested immediately.

My current 401k is kind of shitty: 3 year vesting schedule and 2% overall match. At least I have a low cost S&P500 fund I can choose in Fidelity for it.

 

[crashtech]

Aren't 401k's exempt from bankruptcy? Might not be the worst strategy, heh.

 

[JSt0rm]

my job for half a decade, from around 2011 to 2016, was in the administration of 401k plans so i am quite familiar with this subject.

the auto enrollment in 401ks has absolutely nothing to do with individual spending.

what is relevant is that the average American spends more when the economy is doing well which is completely absent from the OP.

So does our new government.