Sunday, January 23, 2011

When 2% is a Big Deal

Have you increased your retirement savings by 2% of your income yet? What are you waiting for?

Effective with the first check of 2011, employers are withholding 2% less in FICA taxes from your paycheck. Depending on your state and local tax brackets, this is adding 2.5-3.5% to your take-home pay. Since it's essentially free money, why not increase your deposits into your 401(k) or IRA?

Here's the logic: With the exception of some lower-income people who will need to spend this windfall on luxuries like food and shelter, we were getting along just fine with FICA, also known as Social Security, at 6%. We now have an unexpected and temporary tax cut dropping FICA to 4%. If you spend the extra money, you've got nothing to show for it, but if you save it, especially in a painless and automatic 401(k) deposit, it goes to work for you right away and reinforces the savings habit. And who of us is truly saving enough for retirement? I'm putting almost 20% of my gross income into retirement accounts and I know for a fact it won't be enough. So go to your payroll administrator, which might even be as easy as logging on to a website, and ratchet up your contributions by 2%. It will be especially gratifying if you're turning a goose egg (0%) to a 2, but just as important to turn a 16 to an 18 or anything in between.

Now that you've increased your retirement savings and aren't going to waste that FICA tax cut (technically a one-year holiday), let me tell you a little about why it happened and why you need to protect that 2%.

Early in the 2000s, conservative congresses and White House gave low- and moderate-income people (you and me) itty-bitty tax cuts and gave huge-ass tax cuts to wealthy Americans. In order to sell these tax cuts, which added something like $8 trillion to the US national debt, congress made them temporary, expiring on December 31, 2010. They expected a republican congress and White House to exist at that time to extend the cuts, but the elections of 2006 and 2008 worked out for the benefit of the US populace, and the taxes for the rich were about to head back up to where they were during the red-hot economy of the late 1990s where everybody was fat and happy.

"Not so fast," said the senate republicans. They had just enough power, even being in the minority, to block all kinds of necessary legislation and were just sleazy enough to do it. They said that if the rich didn't keep their large tax breaks, the rest of us wouldn't get to keep our itty-bitty ones. We all know that income tax cuts aren't stimulative but in a recession, every bit counts. Taking a few hundred dollars a year away from a low income person would have ripple effects and would prolong the recession by months, maybe a year or more. The White House and congressional Democrats worked out a compromise. And a dangerous compromise at that.

The compromise was to extend the humongous tax cuts for the wealthy and give all wage earners a one-year 2% cut to FICA taxes. Where an income tax cut isn't stimulative, a payroll tax cut (FICA is a payroll tax, not income tax) is extremely stimulative due to the regressive nature of payroll taxes (regressive means they hit poor people harder because the taxes are a bigger percentage of a poor person's income than they are for a rich person). This 2% FICA holiday will be stimulative because the poor people who really need a few extra bucks will spend it. So far so good.

The conservatives, for reasons I will never understand, want to kill Social Security. They've been trying for almost two generations and will continue as long as people keep voting them into office (hint-hint: vote wisely). Despite what you've heard, there is no Social Security crisis. The Social Security Administration is sitting on a huge pile of cash and will have enough money pay out benefits until 2040 or thereabouts. At that point, they start spending a little more than they take in and will run out by 2080 or so, unless something is done. And the simplest, most pain-free thing to do is to raise the wage cap. Right now, if you make more than $106,000 a year, you only pay FICA on that first $106,000. If congress raises the cap, say to $200,000, Social Security will be able to pay out all benefits as currently scheduled indefinitely. Yes, I just said FOREVER.

Republicans want to kill Social Security. Under the guise of a compromise to help the rich, they decided to force a crisis. By reducing the amount of FICA taxes we pay, no matter how wonderful it sounds, it will drop Social Security's revenue for this year by 33% (6% down to 4% is a drop of one-third). That lowering of revenue, even for just a year, will make that 2040 benchmark arrive just a little sooner. And it will allow intellectually dishonest people to calculate new figures to make it look like a crisis where there is none. Which will allow conservative congresscritters to propose privatizing Social Security to address this nonexistent crisis. Oh, they'll call privatizing something else, but they want everyone's retirement savings to be in the stock market.

Why privatize? At its core, because it allows Wall Street firms to skim money off the top. Every mutual fund pays advisers something for running the fund. Most funds are in the 1-2% range, but some are much higher. Every dollar that they take, even if they are earning it by running the fund well, is money out of your pocket. And since the idea of investing is to get compound interest, it's not just a few hundred dollars a year for each taxpayer that they pilfer, it's tens of thousands over a lifetime. The conservatives will say privatizing Social Security is to make things better for you, but the real reason is to transfer trillions of dollars of assets to big banks and investment firms who will make hundreds of billions off of them. Period.

You can now see what you're up against. Remember that 2% that started this post? Put it into a retirement account. When the elected officials who are only looking out for your best interest are done, you'll be glad you did.

Thursday, January 6, 2011

Refinancing Semi-Debacle

If I'd known how exciting it would be to refinance my mortgage, I would have blogged about it on a blow-by-blow basis. Before I tell you about today's nonsense, here are some lowlights.

I started the process in October, with advertised rates around 4.25%. I checked with my lender at the time to see if they have an adjustment program, as many lenders do, since their choice is to write down the loan or lose it entirely. They didn't reply to my inquiry but they took a third option. Two weeks after I contacted them, I got a letter telling me that my loan had been sold, effective December 1.

Fine, I've already chosen to refinance with the place where I have my checking account. The letter from the old lender says to make my December payment to the new servicer and provides an account number and mailing address. My credit union says they can't close by December 1, so I mail a payment.

Two weeks after I mail the payment, I get a letter from the new servicer telling me that due to the sale, I don't have to make a payment in December and no interest will accrue for the month. I find that both impossible to believe (what bank is going to foreswear interest) and aggravating, because the next day I receive a letter saying that my payment - the one I don't owe - was short by a penny. Where the old lender must have rounded down at some point in the amortization calculation, the new servicer rounded up. Fine. I am officially past due by $0.01.

Meanwhile, the credit union is trying to get a payoff statement from the new servicer, but they can't because the people who didn't want me to make a December payment but decided it was too small when I did claim that I'm not in their system. The credit union finally got the payoff the Monday after Christmas. We were scheduled to close tomorrow.

Somewhere in all this, the Federal Reserve decides that US interest rates are too low and begin some quantitative easing. I don't know what quantitative easing is, it could be qualitative wheezing for all I know, but it certainly raised interest rates in a hurry. I locked in north of 4.5%, about half a point higher than I would have had a month earlier. That's about $40 a month or $15,000 over the life of the mortgage. Curse you, Ben Bernanke!

Which brings us to today's adventure. A few hours after I confirm the appointment for tomorrow, my loan officer e-mails me that we have to delay closing for a week. They reviewed documentation, as they are wont to do, and discovered that the homeowners association fees have gone up since I filed the application. True enough, prices rise and are commonly adjusted in January. Here's where it gets insane: they have to wait seven days after notifying me of a change to association fees which I've known about since before Thanksgiving! The change in association fees doesn't affect my mortgage balance, interest rate or anything, and aren't even escrowed, but we still have to wait seven days.

And some more insanity. We have to wait an official sounding seven days but they were allowed to notify me by e-mail. No forms to fill out, nothing to sign, no way for anyone to prove that it was actually me replying to the e-mail, yet we still have to wait seven days.

Like I said, if I'd known that the refinance process would have been this painful/entertaining, I would have blogged about it sooner. I hope the next post about it is an end-of-process celebration. If not, enjoy my misery. Please - I'm paying a lot for it, both in time, money and frustration. Someone better enjoy it.

Note1: During the writing of this post, I was interrupted by a telemarketer call from the new servicer.

Note 2: The names of the moneygrubbing corporations ("old lender" and "new servicer") are being withheld until I'm sure they can no longer do me any fiscal harm. The name of my neighborhood credit union is being withheld for basic privacy and identity theft reasons.