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Ask the Experts: Policy Changes for a Brighter Retirement

John Kiernan — Tue, 18 Jun 2013 15:15:58 +0000

Posted by: John Kiernan

We’ve all heard there’s something of a perfect storm brewing on the retirement front, what with the U.S. population aging rapidly, Congress preoccupied with partisan politics, and the Great Recession wreaking havoc on our net worth. But do those of us who aren’t facing imminent retirement really care?

Probably not, especially in a non-election year. We simply have too many other, more immediate (and perhaps less boring) issues to deal with – from how to find a job in a down economy to vacation affordability to whether or not Robert Griffin III will start Week 1.

Assessing the Current State of Financial Planning

That should come as no surprise either, given our overall lack of financial literacy and apparent aversion to strategic planning. For example, only two in five adults keep a budget and more than a quarter of us don’t pay our bills on time, according to the National Foundation for Credit Counseling. How, then, can we even begin to worry about retirement?

To be fair, most of us could stand for a bit of improvement in a variety of different aspects of money management. Just consider the fact that we emerged from the recession with plastic in hand, racking up more than $82 billion in credit card debt over the past two years and putting ourselves on pace to add nearly $47 billion more this year. But, as a number of leading financial planning experts recently told CardHub, procrastination and a lack of specific spending/saving plans are the enemies of a secure retirement.

Social Security in Jeopardy

A sizable segment of folks – 38%, according to a 2011 Yahoo Finance poll – merely “plan” to live off Social Security in retirement. And therein lies the rub. Social Security is running out of money. In 2010 the program operated at a deficit for the first time in decades, and while it was able to leverage trust funds to meet its $49 billion shortfall, Social Security’s reserves are due to run out by 2033 (or even sooner, depending on whom you ask).

Social Security is funded primarily through payroll taxes, and while there were roughly 16 workers paying for each retiree’s benefits in 1950, that number shrank to 3.3 workers per retiree in 2010 and is expected to fall to a 2.4 – 1 ratio by 2025, according to government statistics. In other words, the math doesn’t quite add up for future generations. We aren’t saving enough on our own, the government is cash-strapped, and many folks won’t even fully realize their predicament until they find themselves continuing to work into their 70s or 80s, rather than on a beach somewhere.

The good news is that while the average person may worry very little about the fate of federal retirement benefits, there are a number of very smart people who get paid to do so. We at CardHub reached out to a number of them for ideas about the types of policy changes Congress can implement in order to improve our retirement outlook.

So, check out what the following experts had to say and maybe even drop a line to one of your representatives if you like any of their ideas.

Keith Fevurly – Professor of Finance at the Metropolitan State University of Denver
Andrew Samwick – Professor of Economics at Dartmouth College
Ron Rhoades – Chair of the Financial Planning Program at the Alfred State SUNY College of Technology
Karen Holden – Professor Emeritus of Public Affairs and Consumer Science at the University of Wisconsin-Madison
Steven Weisman – Senior Lecturer of Law, Taxation, and Financial Planning at Bentley University
Theodore Anagnoson – Professor Emeritus of Political Science at California State University, Los Angeles and a Visiting Professor at UC, Santa Barbara
Douglas Hershey – Director of Oklahoma State University’s Retirement Planning Lab
Eileen St. Pierre – Author of “The Everyday Financial Planner” website
Ellen Bruce – Director of the University of Massachusetts Boston’s Gerontology Institute
David Littell – Codirector of the New York Life Center for Retirement Income at The American College of Financial Services
Alan Gustman – Professor of Economics at Dartmouth College
Norman Stein – Professor of Law at Drexel University
Jon Moen – Chair of the Department of Economics at The University of Mississippi
Laurence Kotlikoff – Professor of Economics at Boston University
Jeffrey Brown – Director of the Center for Business & Public Policy at the University of Illinois
James Swan – Professor of Applied Gerontology at the University of North Texas

Expert Opinions: Policy Changes for a Brighter Financial Forecast

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“If I could make one policy change to improve the retirement outlook, it would be to increase the amounts that may be contributed and deducted to both traditional deductible and Roth IRAs. I would also remove the AGI [Adjusted Gross Income] limits for deducting traditional IRA contributions.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“We have succeeded in forcing employees to move from a defined benefit plan to defined contribution plans (where the employee bears the risk of investment performance). What we have done a lousy job of is in educating employees about what they should be investing in for retirement planning purposes. This situation has only been made worse by the laws implemented to protect the employer/sponsor of retirement plans from any liability for investment performance. I am not saying we should hold employers liable only that we should be doing more to educate employees (at the employer level) about investments and investment choices offered under the plan.”

- Keith Fevurly, Professor of Finance at the Metropolitan State University of Denver

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“I would change the Social Security benefit formula, in an actuarially fair manner, so that initial benefits were lower but benefits grew with age in real terms. Elderly poverty is concentrated among older households and, in particular, widows. Without spending more or less on average, we could do more to keep elderly out of poverty in their retirement years.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“It is not complicated. To consume more in retirement, consume less while working or retire later. People should be thinking about which of those options suits them better and looking for ways to save and ways to extend the productive part of their working lives.”

- Andrew Samwick, Professor of Economics at Dartmouth College

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“I would have the DOL [Department of Labor] issue, and then quickly finalize, its new ‘Definition of Fiduciary’ rule, which will finally apply fiduciary status to all providers of investment advice to retirement plan sponsors, retirement plan participants, and IRA account owners. This will be a ‘game-changer.’

Why? Fiduciaries’ compensation must be reasonable, and they must ensure that the total fees and costs paid by investors are reasonable. This will likely reduce the average total fees and costs paid by investors by 1% a year. Academic research reveals a direct correlation – higher fees and costs associated with investments result in lower returns, on average, over time. For a person accumulating funds for a future retirement, with annual contributions over 40 years, just a 1% difference in fees is likely to lead to a 21% increase in the amount of the retirement nest egg accumulated. In addition, during retirement the nest egg will last a lot longer.

There will be some disruption in the financial services industry should this occur. A transition period for financial advisors will be needed. But the industry will adjust, and investors both big and small will be able to access financial advice when they desire, for reasonable fees.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“Auto-escalation of retirement plan contributions needs to be adopted by all retirement plans. Currently about 50% of retirement plans have same. This important feature dramatically assists workers in increasing their savings rate.

The ability to take loans from qualified retirement plans needs to be restricted. Far too many retirement plan participants take loans from accounts to finance non-essential financial needs. Often plan participants take out loans several times a year – i.e., as soon as funds accumulate in the account, they take a loan out. Loans should only be permitted upon proof of adverse circumstances – similar to the tests needed to take an early distribution for purposes of disability, but with added reasons (such as interruption in employment, etc.).

As to other government actions, the federal government should explore a mandated contribution to retirement accounts by every worker – perhaps 8% or more of wages – similar to programs existing in some other countries. With the decline of defined benefit plans, workers need to step up the plate and save a lot more. Many advisors suggest savings rates of 11% to 18% during all working years (assuming the worker starts savings early); however, some savings occurs through equity accumulation in a home (i.e., paying down principal on a mortgage); so a mandate of more than 8% might not be feasible.”

- Ron Rhoades, Chair of the Financial Planning Program at the Alfred State SUNY College of Technology

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“Universal health care coverage. Lack of retiree health insurance, which is diminishing in incidence, and medical debt is an increasing deterrent to retirement and retirement well-being. Medicare provides universal coverage at age 65, but medical care costs or the concern about potential costs reduces the ability to save for retirement including in tax-deferred accounts that would be inaccessible to cover medical care costs.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“See my answer above! The budget should not be the focus, but policies that increase economic growth. Jobs are clearly critical for retirement savings–one can’t save without a well-paying job. In terms of single-retirement specific policies would be increasing the flexibility allowed in retirement plans. Mandated default participation, allowed distributions that permit partial annuitization of accumulations.”

- Karen Holden, Professor Emeritus of Public Affairs and Consumer Science at the University of Wisconsin-Madison

What does the future hold for retirement planning and policy?

“It is unlikely that government will provide for greater retirement benefits. What they may do, however, is provide greater incentives, as they have in the past for people to use IRAs and 401(k)s to provide for themselves. Financially educated investors will be able to use these incentives to their benefit.

My prognosis for the future is that there will be a great market in financial education and for advisors to help people meet these compelling needs.”

- Steven Weisman, Senior Lecturer of Law, Taxation, and Financial Planning at Bentley University

What does the future hold for retirement planning and policy?

“We should alter retirement policy, but the likelihood of starting any new society-wide program is low with the present distribution of Republicans and Democrats. The idea I like the most is a supplemental savings plan that would be required for everyone, with the saver being able to choose various savings levels ranging from $100 or $200 a month on up. The managers of the plan, who could be in the private sector, would manage the plan according to people’s life expectancy, and while the return would not be spectacular as you might get with an IRA bought in 2009 and invested exclusively in growth stocks, it would be a good way to supplement Social Security, increasingly what half or more of the population are heavily dependent on in retirement, and that is with an average Social Security monthly benefit of around $1,200.”

- Theodore Anagnoson – Professor Emeritus of Political Science at California State University, Los Angeles and a Visiting Professor at UC, Santa Barbara

What does the future hold for retirement planning and policy?

“The problem of financial security for retirees isn’t one that will come suddenly; rather, it is a storm that has been brewing on the horizon for a number of decades. We’ve already seen some policy changes in the Social Security program and efforts to forge legislation designed to stimulate savings practices. Undoubtedly, more efforts in these directions will only be helpful. But there is no policy-based silver bullet that will solve the problems of future generations of retirees. Individual responsibility for amassing personal savings is (and will always be) key, and sound investing strategies will be central to individuals achieving their long-range financial goals. …

My feeling is that we haven’t done enough in previous decades to ensure that working adults have the necessary tools to invest wisely for the future. Here in the U.S., over the past couple of decades the burden of responsibility for managing one’s retirement finances has been shifted squarely onto the shoulders of the worker. But there hasn’t been a corresponding emphasis on educating individuals to understand to how navigate the pitfalls and opportunities associated with long-term investing. The prognosis for future generations could be bright, but any such scenario would involve starting to educate Americans about planning and saving at a very early age. Indeed, psychological studies have shown that attitudes toward planning and saving are malleable, and lessons learned in childhood have a measurable impact on financial responsibility decades down the road.”

- Douglas Hershey, Director of Oklahoma State University’s Retirement Planning Lab

What does the future hold for retirement planning and policy?

“As a financial educator, I am not surprised to see this [retirement security] problem happen. You just can’t expect regular people to take over planning for retirement when their parents’ employers used to do it for them via a pension. One major step forward in retirement policy was using life cycle or target date funds as the default investment in defined contribution plans. While some may argue that many of these funds expose investors to too much equity risk (particularly those nearing retirement as we saw during the recession), at least these portfolios are growing and beating inflation (as opposed to the prior default investment – money market funds). Many retirement plan providers offer automatic portfolio re-balancing but investors need to be educated on how this process works. I would like to see retirement plan participation mandatory just like paying Social Security taxes.

Another problem waiting to happen is how to withdraw money in retirement. I would like to see plan providers be required to offer an annuity option. I know there are some who don’t like annuities because of the fees and surrender charges, but in principle this option would make drawing down retirement portfolios a lot simpler for the general public. …

I’m more worried about future generations. Young people just don’t see the need to save for retirement. Job opportunities that lead to upward mobility and increased salaries that enable them save are getting harder to find.

I try to show them the power of compounding. Many of the younger generations don’t remember how the markets did before the recession – they just remember how the stock market tanked when the housing market collapsed. So I show them using numbers that if they start saving early, they will not have to take on as much risk as someone, say a Gen Xer, who starting saving much later. But they will have a larger retirement portfolio than the Gen Xer simply because of the time factor. The trick is finding a creative way to get this message across. Putting the numbers on a PPT slide just is not going to be enough anymore.”

- Eileen St. Pierre, Author of “The Everyday Financial Planner” website and a former Personal Finance State Specialist at Oklahoma State University

What does the future hold for retirement planning and policy?

“Most studies … indicate that we have a problem with future generations being prepared for retirement including the early baby boomers. The problem is one of increasing numbers of retirees living in hardship because they do not have enough income and/or wealth to maintain a reasonable life style. I say “increasing number of retirees” because even today many retirees have a hard time paying all their bills, especially if they have long-term care needs.

[We therefore need to]: 1) Shore up Social Security so that it can pay the same benefits into the future. (e.g. benefits are not cut for current or future beneficiaries); and 2) Expand employer-based pension benefits (e.g. encourage employers to establish plans that don’t require a match, encourage 401(k) money be rolled over to the next plan or an IRA, discourage use of retirement money prior to retirement). Future generations will work longer which will help increase their retirement security.”

- Ellen Bruce, Director of the University of Massachusetts Boston’s Gerontology Institute

What does the future hold for retirement planning and policy?

“Retirement plan coverage is a key component of retirement readiness, and only 54% of workers are covered by a retirement plan. The percentage is higher for public employers and larger employers and much lower for small employers.

One answer is to make retirement plans, specifically plans that provide for lifetime income available universally available. There are a number of proposals for a universally available defined benefit plan that works through payroll deduction and possibly employer contributions

One regulatory proposal that is actually on the horizon is a requirement to show on defined contribution plan (including 401(k)) benefit statements both the account balance and how much income can be provided from the account balance. This would be a good way to show retirees how far their money will go in retirement. …

It’s certainly hard to see planning for retirement getting any easier for future generations. We have to work both with individuals to educate them on the simple steps they need to take to prepare, as well as on policy issues—shoring up the funding issues facing Social Security, Medicare and Medicaid, looking for ways to allow more universal retirement plan coverage.”

- David Littell, Codirector of the New York Life Center for Retirement Income at The American College of Financial Services

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“Mandate that all DC pensions offer a fair annuity as a default option.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“Make the hard decision to adjust benefits and taxes to fully fund Social Security, both reducing benefits in light of increasing life expectancy and financial reality and increasing taxes. I would limit the tax and benefit changes so that Social Security remained an insurance scheme with a redistributive bent rather than an income based transfer. Medicare is even harder to place on firm financial footing, but that must be done very soon.”

What, if anything, will actually happen in the next 5-10 years?

“We are getting closer to an obvious financial train wreck. But it is not clear there is political will to solve these problems. In the absence of action, in a few years we will be borrowing to finance Social Security (the bonds owned by Social Security require higher taxes or increased borrowing to fund them). Too bad in the last couple of years we didn’t treat the Great Recession by balancing Social Security and Medicare finances through adjustments to be realized in a few years, while allowing the current budget to go into greater deficit. That way the long run deficit problem would have been addressed, while short run fiscal policy would have been expansionary.”

- Alan Gustman, Professor of Economics at Dartmouth College

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“Have a system similar to that in other countries, where people have a portion of their compensation set aside for retirement (with the employer and employee each making contributions); where the contributions are pooled in professionally managed accounts; and where benefits are paid as an annuity (and only as an annuity, preferably indexed to increases in the cost of living) to the employee and spouse (or domestic partner). Or you could simply improve Social Security.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“Much stronger age-discrimination rules since many older people will have to remain as part of the workforce for a longer period of time. (Revising retirement plans as I suggested will help only marginally those who are now approaching retirement.) And if monetary policy is going to keep interest rates artificially low, the government must have some type of ameliorating policy to ensure that older individuals can invest safely and have a reasonable rate of return, with protection against inflation risk. This will not be inexpensive, but it can be done and should be done. But of course it isn’t being talked about and won’t be done.

Making the new health law work and taking other steps to reduce health care costs is also important–reducing health care costs in the aggregate helps everyone.

And one of the most governmental undertakings is trying to create meaningful fiduciary standards for those who give investment advice; right now, conflicts of interest can result in bad investment advice, costing retirees billions while enriching the people who are giving the poor advice. The idea that people who give investment advice to people saving for retirement or living in retirement–many of whom are utterly dependent on that advice and have no good way to evaluate whether the advice is good, whether it is conflicted, who don’t understand the importance of fees or risk or diversification or asset allocation–can have these incredible conflicts of interest is absurd. But this will be hard: parts of the investment industry want to remain subject to the weakest type of regulation and they are employing teams of lobbyists to fight back. And the good guys here have probably less than 1% of the financial resources that the industry commands. But no battle under current retirement law is more important at the moment.”

What, if anything, will actually happen in the next 5-10 years?

“In my most optimistic mood, I say things improving a bit at the margins. But in my most hopeful mood, I see a world in which social security benefits are adequate and in which the private retirement system which provides reasonable benefits to all retired Americans rather than large benefit to a few. In my least hopeful mood, well I don’t want to talk about that.”

- Norman Stein, Drexel University

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“Make saving for retirement tax free.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“Allow part-time work with no Social Security penalty for older workers (65 and older, for example). As most jobs no longer require physical stamina as in factory work of the past, complete withdrawal from the labor force is not obvious in the future.”

What, if anything, will actually happen in the next 5-10 years?

“I doubt much will change in the next 5-10 years, apart from slightly higher SS taxes.”

- Jon Moen, Ole Miss

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“I would adopt the Purple Social Security Plan. This will fix Social Security, which is 32 percent underfunded, giving today’s workers a transparent, reliable, safe, and fully funded retirement saving system.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“Our country is completely broke. A $222 trillion gap separates the present value of all projected government expenditures (including servicing the outstanding debt) and all projected government receipts. This fiscal gap grew by $11 trillion between 2011 and 2012. We need to radically reform our fiscal institutions and banking system to return to fiscal solvency and prevent another financial collapse. No one will be secure, either during their working years or their retirement years, if Uncle Sam is desperately broke, looking for what he can take in taxes, either direct ones or hidden ones arising from inflation.”

What, if anything, will actually happen in the next 5-10 years?

“Unless we start facing our problems like grownups via the Purple Plans or something similar, inflation will start taking off, interest rates will skyrocket, the bond market will crash, official deficits will explode, and we’ll continue to head down the path of Argentina. If you look around the world, countries with responsible governments, be they Canada, Australia, New Zealand, Chile, etc. come up with adult policies and secure their futures. In our country, we have a Social Security system that is 32 percent underfinanced, a Medicare system that is going broke, a Medicaid system that is going broke, a new health exchange system that will go broke, an employer-based healthcare system that is draining tax revenues and driving us broke, a tax system that could not be more arcane or poorly designed, a banking system that’s unsafe at any speed, environmental policy that’s a moral disgrace, and an education system that doesn’t deserve the title. So there is a lot that needs to be fixed and fixing these things will protect everyone from a terrible working life as well as a terrible retirement.”

- Laurence Kotlikoff, Boston University

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“I know you are only asking for one policy change, but I think we need three. First, we need to expand access to retirement plans to a greater share of the population – although I am a fan of employer-based retirement plans, there are too many people working for employers who do not provide savings opportunities. We either need to get more employers to offer them, or we need something like the ‘automatic IRA’ to provide such opportunities. Second, we should increase the ‘default savings rate’ for automatic enrollment in plans so that people are saving a higher fraction of their income. Third, we need to provide more opportunities to convert accumulated wealth into retirement income (e.g., annuities).”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“We need to change the entire conversation – including policy, products, communication, etc. – away from one that focuses on wealth accumulation as the end goal, and instead focuses on having a secure source of retirement income. This simple idea has many implications, such as:

Revising minimum distribution rules so that they encourage sustainable lifetime income provision
Getting annuities into 401(k) plans
Communicating in terms of monthly income rather than account balances
And much more.

And, yes, we also need to restore Social Security to sound fiscal footing, which is going to require political leadership and will.”

What, if anything, will actually happen in the next 5-10 years?

“I am actually optimistic that the industry is moving in a direction that will put retirement income front and center. I am less optimistic that we will reform Social Security, as the current political environment is currently too dysfunctional.”

- Jeffrey Brown, University of Illinois

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“Believe it or not, I would significantly LOWER the age of eligibility for Social Security. The issue is that there is not an average American, certainly not an average older American. Many of us continue to work after age 65, but people differ, and some need to retire earlier. Of course, to financially sustain this we would need to do what needs doing anyway for Social Security: eliminate the income cap for FICA taxes. And that WOULD improve the retirement outlook for all.

The ill-conceived ‘reform’ during the Reagan administration whereby the eligibility age is being raised to 67 (the reason I had to wait to age 66 to file for and start deferring my own Social Security) was supposed to fix the financial outlook for Social Security for the foreseeable future. What was not foreseen was the changes in the income structure of this country, with its shift of income upward in recent decades. That upward shift exempted more and more income from FICA taxes because the income flowed to those with incomes already at above the income cap. That needs to be fixed anyway; but eliminating the cap could allow the lowering of the age for benefits – e.g., at minimum back to 65 for full benefits and to 60 for early retirement (after all, the same year that Medicare passed, the Older Americans Act was passed, setting its age of eligibility to age 60).”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?

“Some of it is old hat – e.g., re-expand home- and community-based services. Improve housing services for the severely impaired, coordinating with programs like Money Follows the Person and Home by Choice that attempt to get some nursing facility residents back to living in the community. Increase funding (which has instead been severely cut, especially under the sequester) for a vast array of aging services, particularly home- and community-based care, Meals on Wheels and so on. Expand funding for programs, including higher-education programs, that educate and train those who will serve the elderly. Revisit the idea of allowing those aged 55-64 to pay a premium to enroll in Medicare.”

What, if anything, will actually happen in the next 5-10 years?

“Judging by the past 5 years, nothing. Or things will get worse. Part of the issue is that of successful Tea Party and other Libertarian attacks on the prior limited social contracts that existed in this country with regard to the aged, the disabled, the poor, and for that matter wage workers and the middle class generally.”

- James Swan, University of North Texas

Ask the Experts: If I Could Make One Change to the Tax Code, I Would…

John Kiernan — Wed, 12 Jun 2013 20:34:05 +0000

Posted by: John Kiernan

In this edition of our “Ask the Experts” series, we at Card Hub surveyed authorities on tax policy from around the country about how they would choose to alter the tax code in an ideal world.

With tax season in full swing, the economy still floundering, and the federal government’s budget mess yet unresolved, it seems that no one is immune to money woes these days. That’s not likely to change anytime soon either, what with Congress acting like kids on a cross-country road trip and the economic recovery doing its best impression of the University of Maryland mascot.

We can still dream, though, can’t we? You bet. In fact, it’s actually apropos of the season. Not only is it common for those of us who live in the Northeast to begin fantasizing about warm weather and vacation time right about now, but everyone’s favorite baseball team still has a shot at the World Series and a Cinderella has yet to be crowned in college basketball. Heck, Harvard won an NCAA tournament game; we must be dreaming.

So, we asked tax experts from around the country to suspend belief for a moment and imagine a world without lobbyists, polling numbers, reelection concerns, and red tape. If they could make one change to the tax code in such a landscape, with the ultimate goal of improving our economic well-being, what would it be?

The following graph illustrates the general breakdown of their responses, and you can check out each individual’s answer below that. Don’t forget to weigh in with your own ideas in the comments section at the bottom of the page either!


Type	Popularity
Eliminate Complexity\|10 Stricter Rules for Corporations\|6 Raise Capital Gains Tax\|4 Incentives to Spur Development\|5 Increase Burden on Wealthy\|2 Change Refund/Credit Disbursement\|2

Grace Allison – Qualified Tax Expert for the University of New Mexico School of Law’s Business & Tax Clinic

“In my view, the ideas set forth in the Simpson-Bowles Report, Moment of Truth, provide an excellent framework for tax reform.

Eliminating the web of itemized deductions would go a long way towards tax simplification, for example. It is important to recognize, however, that implementing a Simpson-Bowles approach will be politically difficult: the American people have not been well educated on the issues at stake. The public does not understand the degree of sacrifice that will be necessary to reduce the budget deficit. (Simpson-Bowles, although positing lower individual income tax rates, results in a higher effective tax burden).

Importantly, I do not believe that fiscal sacrifice requires us to throw the working poor ‘under the train’ by eliminating the refundable Earned Income and Child Care credits, as some have suggested. In the Simpson-Bowles plan, those credits, or a substantially equivalent alternative, would be retained. In a similar vein, both the housing and philanthropic sectors have already expressed their objections to the Simpson-Bowles proposal for a 12% credit to replace the mortgage interest and charitable deductions. I am not a housing expert, so will not comment on the mortgage interest deduction. However, my considerable personal experience tells me that the philanthropy of the affluent – who give the most, and therefore benefit the most from the charitable deduction – is not primarily tax motivated. For this reason, I think a 12% credit for charitable giving is reasonable.”

Scott Schumacher – Director of the Graduate Program in Taxation at the University of Washington School of Law

“I would reform the international corporate tax regime to discourage corporations from parking profits offshore. With the growing importance of intangibles and things like cloud computing, the ability to defer tax on worldwide income is a major problem (see, e.g., Apple, Google, etc.). While I have not thought through the matter in great detail, Jeffrey Kadet’s recent article in the Economist is an interesting starting point for the discussion.”

Brad Borden – Professor at Brooklyn Law School

“As far as tax policy changes that would most likely benefit the economy are concerned, I think Congress needs to take more action to ensure that the wealthy pay a fair share of their income in taxes. As many people have commented, the wealthy are able to take advantage of loopholes to report less tax and pay a smaller tax rate on their lower taxable income.

To solve the problem, Congress should take steps to eliminate loopholes that allow wealthy to exclude items of income, tax certain deductions, and pay a lower tax rate. Such an equitable tax system will help ensure that the government has sufficient resources to provide necessary services and that the middle and low income households have sufficient resources to cover basic needs.”

John Spry – Associate Professor of Business Economics at the University of St. Thomas Opus School of Business

“[I would] lower rates and broaden tax bases, while eliminating the double taxation of income that is taxed when you work and taxed again when you save.

This is standard economic advice, but except for rare events like the 1986 Tax Reform Act, politicians tend to prefer higher tax rates while retaining the ability to hand out lots of tax preferences.”

John Everett – Professor of Accounting at the Virginia Commonwealth University School of Business

“I think there’s still room for increasing taxes on the high side. Just from an economic standpoint, it’s better for the economy for people to spend than not to spend. And those in the lower tax brackets are the ones that spend the most on consumption and other items which helps lead to an increase in demand which causes employers to increase supply and hire more employees – the typical Keynesian cycle, whereas those who are saving their money and sitting on the sidelines aren’t doing a lot to help the economy. I was disappointed to see that that 39.6% bracket kicks in at such a high level, but it was a reasonable compromise. At least they didn’t change the rates in the lower brackets, which I think was a good thing. It leads to a little more certainty. But the more cash you can put in people’s pockets at the lower end, the better I believe.”

Barbara Weltman – Author of “J.K. Lasser’s Tax Deductions for Small Business”

“In my view, three things are needed:

Permanence: Changing tax rules create uncertainly, which makes it impossible to plan ahead.

A single tax: Currently, for example, a small business owner may have to figure all of the following taxes: Income tax, alternative minimum tax, self-employment tax, additional Medicare tax on earned income, and additional Medicare tax on net investment income.

Lower tax: Every dollar a taxpayer sends to Washington is one less dollar available for spending, saving, paying for college, etc.”

Francine Lipman – William S. Boyd Professor of Law at the University of Nevada, Las Vegas School of Law

“Many working families today get the Refundable Earned Income Tax Credit, which is a significant credit that can be up to almost $6,100, based upon your income level, your wages, your earned income, and your family size. That credit is a significant refund, especially when you couple it with the Child Tax Credit. Unfortunately, families are getting this refund right around this time of year, which is a huge refund that they could really use throughout the year. So, if we could better construct the tax system such that rather than getting this very large lump-sum refund, which especially does not help these families because they have to maybe borrow, use credit cards to finance things during the year and then pay them off with the refund. That’s not good for them and it’s not good for the economy because if they had it in each paycheck, they would probably spend it vs. borrowing and getting themselves into not good financial circumstances and then waiting for the refund down the road.

In addition, where I am in Las Vegas, these very, very large refunds attract unscrupulous tax preparers because they want a piece of that, too. So you have everybody and their neighbor saying they can prepare a tax return and not doing it accurately to get a piece of that refund, and it really creates a nightmare for these arguably innocent victims – families who just want to get their tax returns prepared and their refunds. If it could come through their paycheck weekly or monthly through some sort of reverse withholding, I think that would be better for tax payers and better for our economy.”

Allison Christians – H. Heward Stikeman Chair in Tax Law at McGill University

“[I’d] adopt broad corporate tax transparency rules for public companies so that we can know whether and when companies pay their fair share of taxes. Probability: maybe 10% in the short term but growing and maybe 75% in the long term, following trend in US and Europe.”

Theodore Seto – William M. Rains Fellow at Loyola Law School, Los Angeles

“In the long run I think that it’s fairly important that we have a roughly balanced budget, by which I mean simply that our outflows don’t exceed our inflows. In the short run, it may be warranted to run a temporary deficit to provide an economic stimulus. There is a concern that if we balance the budget too abruptly, particularly in light of the fact that we’ve just had a major recession, we could throw the country back into recession.

Now, whether we should do this through tax increases or spending cuts is actually a much more complicated question than either party really articulates in the public debate. A significant portion of federal spending actually occurs in the form of what are called ‘tax expenditures.’ These are tax breaks given for particular kinds of activities. They run through the tax code, but conceptually they are just as much expenditures as the federal government sending you a check. The problem is that the way these are accounted for is different from direct spending. The direct spending is counted as spending; getting rid of tax expenditure is counted as a tax increase. The real problem that it creates is that these become especially favored expenditure programs for two reasons. One is they are generally perimeter parts of the internal revenue code, and that means that they survive unless Congress changes them, which is different from ordinary spending which has to be authorized annually by Congres. The second part is that inertia is on their side. Inertia is very much on their side.

There is a further problem with tax expenditures that is more subtle and very poorly understood, and that is that the tax expenditure budget published by the government does not fully take into account what’s called the time-value of money. This is simply the value of deferring your taxes. So, if you’ve got a major corporation that can put off paying let’s say $10 billion in taxes for 10 years, that kind of deferral is worth a lot of money. There are many provisions in the code which make such deferrals possible and they are not fully captured in the tax expenditure budget. As a result, when we talk about limiting tax expenditures as a way of balancing the federal budget, we typically are insulating that kind of specially-favored tax subsidy from change. For example, many of the subsidies for the oil and gas industries fall into that category. If you actually look into the tax expenditure budget, you won’t find much there under oil and gas and the reason is that they’re hidden.”

Douglas Shackelford – Associate Dean of MBA@UNC and Meade H. Willis Distinguished Professor of Taxation at the University of North Carolina, Chapel Hill’s Kenan-Flagler Business School

“[I would] eliminate the exemption for employer-provided health care insurance, [although that has a] very low chance of passage.”

David Neighbors – CPA, Partner at the accounting & consulting firm Gallina

“I believe tax policy that would could benefit the economy most would be raising today’s low capital gains tax rates. My belief is this would provide economic efficiency and fairness, while helping reduce deficits. The large tax preferences that capital gains enjoy over ‘ordinary’ income, such as salary and wages, add to budget deficits, widen income inequality, and do little if anything to promote economic growth.

The tax code now strongly favors capital gains — increases in the value of assets, such as stocks and real estate — over ordinary income. Not only is the capital gains tax rate far below the top tax rate on ordinary income, but taxpayers can delay paying taxes until they realize their capital gains (usually when they sell assets).”

Karl Fava – CPA, Business Financial Consultants, Inc.

“One of the best policy changes, as follows, would stimulate the economy:

There has been the long held ‘pillar’ that low capital gain rates stimulate the economy. The largest holding of capital assets are within household of the highest net worth. The argument has always been people would not invest their money if capital gain rates are high. This is ludicrous. Investors are looking to save taxes but their investment decisions are made on risk and rates of returns. If tax rates are constant on two separate investments then the tax is not part of the investment decision only risk and rate of return. An investor is not going to put their money under the mattress. If they do not want the low rates of return from a bank account they may accept higher risk of the stock market but also on the expectation of higher returns. The decision to seek a higher rate of return is not tax motivated it ‘rate of return’ motivated. If ordinary income rates were lowered for wage earners and capital gain rates were increased for investors this could be done in a way that would be revenue neutral but would provide a dramatic uptick in the economy. Wage earners are more apt to spend extra dollars coming home pay check by pay check. Obviously more spending will stimulate the economy as we saw last year with the lower social security tax that created higher tax home pay. A high net worth household is not going to spend into the economy dollars saved from lower capital gain rates.

I believe in low tax rates and am lucky that I am always falling into the highest tax bracket. Saying that, I benefit from low capital gain rates so I am not suggesting this as a finger pointer. I am suggesting this as it would work. Sadly this reform will never take place as capital gain tax rates have always had a favored place in the tax code for high income, high net worth taxpayers. It’s too bad that too much of the tax code is built for select groups within the economy.”

Raquel Alexander – Associate Professor of Accounting in the Williams School of Commerce, Economics and Politics at Washington & Lee University

“We need tax policy that encourages development of alternative energy sources and new technologies to spur economic growth. There are only three ways to fix our deficit: 1) increase taxes, 2) reduce spending and 3) grow GDP. Growing GDP is the least painful of these three choices and it is something members of both parties can agree on. Tax policy that rewards investment in research and development of new technologies, especially around alternative energies, will help us grow GDP.”

William Kulsrud – CPA, Associate Professor of Accounting in the Kelley School of Business at IUPUI

“Quit using the tax law to achieve some social or economic objective other than raise revenues. The array of provisions to incent this or accomplish that is mindboggling. And no one knows what the unintended consequences are.

As a practical matter, Congress is hanging too many ornaments on this Christmas tree and it’s about to collapse under its own weight. I’ve been teaching and writing about federal income taxes for almost 40 years and the law is just too complicated for the man on the street. For others, no one knows when the alternative minimum tax will strike. We currently have two systems: the regular tax and the AMT. Does that make any sense? If you want real tax reform do what several have suggested: eliminate withholding. When people start writing those big checks on April 15, you would see real reform and real change. Only then will people understand what they are really paying.”

David MacKusick – JD, CPA, Assistant Professor in the College of Business at Ashford University

“I believe that reducing the tax compliance burden on small businesses would be a tremendous benefit to the economy. Small businesses are the drivers of the economy and have historically produced the majority of new jobs, yet compliance with all types of government regulation is disproportionately burdensome to small businesses and tax compliance is no exception. Estimates of how much higher the cost of tax compliance is for small businesses compared to large businesses vary between 35% and 65%, but there is no dispute that the burden is significantly disproportionate to the detriment of small businesses. A discussion draft containing proposals to simplify tax compliance for small businesses released earlier this month by House Ways and Means Committee Chairman Dave Camp is a step in the right direction, and an indication that the issue is on the front burner in Washington. But whether small businesses will see meaningful relief from the tax compliance burden any time soon is anyone’s guess.”

James Hardin – Chair of the Accounting Department at the University of South Alabama

“Probably the most effective change to U.S. tax policy to boost the economy is to eliminate the ‘repatriation’ tax. U.S. companies are reported to hold over a half trillion dollars overseas because bringing that money back to the U.S. would cause it to be taxed at a corporation’s marginal tax rate which is typically 35% for a large corporation. An important change to get that money into the U.S. economy is to only tax revenues where they are earned. That is, revenue earned in a foreign country by a foreign subsidiary can come to the U.S. tax free.”

Charles Enis – Associate Professor of Accounting in the Pennsylvania State University’s Smeal College of Business

“In the tax code there is the provision called the Accumulated Earnings Tax, the AET. It is a tax that the IRS assesses against corporations that retain too much of the profits and do not pay out sufficient dividends. However, there are so many loopholes and ways to get around that that are built into the law that the AET has absolutely very little impact at all and it’s rarely ever used. And so if Congress was to strengthen the Accumulated Earnings Tax, I think you would have a lot of these corporations that had a lot of cash hoards – and these are generally overseas – if these companies were forced to take that money and distribute it to the share-holders so that the share-holders would be able to have some disposable income, that would stimulate the economy.

Another item that I think might help in the economy, probably not so much now since the housing crisis has pretty much subsided a bit, but I would think that if a person sells their personal residence for a loss there’s no tax deductions at all for that. So people are walking away from their homes and things like that. I think that there are two factors there: I think that people should be allowed a certain capital loss deduction that is capped at a certain amount, so that would make them more willing to go and take a loss on their home, and also I think that somebody that walks away from their home should not receive much relief from the provisions of the code that deal with cancellation of indebtedness. I think if you want to go and have your debt cancellation tax-free, then I think you should be able to stay in the home and start paying something in the mortgage. The idea here is that just walking away and abandoning the homes really does harm to the urban areas. It causes blight and a lot of homes are in disrepair, and I think that is just bad for the various communities.”

Kenneth Milani – Professor of Accountancy in the University of Notre Dame’s Mendoza College of Business

“The letters ‘CPA’ are the short version of a longer response:

Consistency would be welcomed by the business community since the helter-skelter movement of rules, regulations and rates tends to create confusion and in, some cases, a let’s-wait-on-the-sidelines [approach] until Congress figures what they are going to do tax-wise.

Predictability is another feature the business community would welcome. With so many proposals being touted by a variety of proponents, the lack of predictability develops a sense of “who knows what’s going to happen?” and the related non-action by the business community while Congress decides which route, if any, to take.

Added incentives to invest. Capital spending is a strong driver of economic growth. When spending on machinery & equipment and other long-lasting items stagnates, that ripples through the economy.

During the Clinton years and part of the G.W. Bush years, the above factors were more-or-less present. That began to change during Bush’s final term and has continued due to the continual wrangling that is a characteristic of the current Congress. So what are the chances of the CPA proposal occurring? The Chicago Cubs (my favorite baseball team) have a better chance of winning the 2013 World Series than the proposal described above.”

Stephanie Hoffer – an associate professor of tax policy and international tax law in The Ohio State University’s Mortitz College of Law.

“In my opinion, there is no quick tax fix for an economic downturn and attempts to legislate one are misguided. With that said, there are a number of things that I would change in our current Internal Revenue Code for the long term. Since I am only able to choose one, I will focus on debt investment in businesses.

Our current tax system provides preferential treatment to foreign investors who loan money to United States businesses, but its treatment of equity investment by foreigners is not as favorable. In other words, a foreign person pays less tax to the United States if he loans money to a United States business than if he receives dividends from stock of that business (assuming that no applicable tax treaty changes this result). This is one way in which the tax code encourages our businesses to leverage themselves. In addition, businesses are able to deduct interest that they pay to their lenders. This is a second way in which our tax code encourages businesses to borrow rather than seek equity investment.

Of course, there are non-tax reasons for borrowing as well, and for some businesses, a heavy debt load is impossible to avoid. Still, I can think of no reason why the government should encourage borrowing for borrowing’s sake. United States businesses’ heavy reliance on creditors means that businesses are at risk whenever credit markets become tight. Credit markets contract periodically not only due to normal progression of the business cycle but also because the federal government’s regulation of lending and debt-related securities has been ineffective for some groups of borrowers. When these borrowers default on their loans en masse, the credit market contracts, leaving debt-reliant businesses in a bad position.

So, to conclude, if I could change only one thing in the Internal Revenue Code and my only goal was stabilization of the economy, I would equalize the treatment of debt and equity investments in business. Will this change ever take place? Not likely. Most current businesses have structured their capital with an eye toward the debt preference, and there likely would be significant opposition from institutional lenders and perhaps foreign governments.”

Jay Soled – Professor of Accounting and Information Systems in the Rutgers University Business School

“I would eliminate the difference between capital gains and ordinary income. And I’ll tell you why: half the complexity of the code could be eliminated, and to me there is no real theoretical justification for the rate differential. People have money, and they’re going to go where the greatest returns are. If tax rates are the same between interest dividends and capital gains rates, they’ll just go wherever they get the best returns. This way we can raise a tremendous amount of revenue, lower overall tax rates, and this way it won’t be biased in favor of stocks. There’s no reason to have that kind of bias. … From 1986 to 1990, before Bush 1 raised the ordinary income tax rate, the country did very well with the same rates for capital gains and ordinary income.”

Beverly Moran – Tax Law Professor at Vanderbilt Law School

“I would eliminate the difference in rates between capital gains and ordinary income.”

Frank Doti – William P. Foley II Chair in Corporate Law and Taxation at the Chapman University School of Law

“I think tax reform is going to come. Even as a long-time practitioner – a lawyer and CPA – I want to see simplification. Everybody wants to see simplification; all my colleagues do. However, simplification is going to be taking something that is so absolutely craziness – just so complex, so detailed it’s ridiculous – that what you’ll end up with if it is in fact simplified is still a complex tax code. And that is because certain types of deductions and parts of the tax law that have been around almost from the beginning, in my opinion, won’t be touched.

In other words, I’m saying the mortgage interest deduction and the real estate tax deduction, that’ll stay. And a lot of other parts of the tax code – the business deduction – they won’t touch small or even any big businesses in terms of being able to allow any appropriate deductions related to that business. That’s complex, complex accounting that won’t be touched. The things that I think should be fixed and hopefully will are the Alternative Minimum Tax, the AMT, which is nonsense. It’s ridiculous; it’s lost its usefulness – very complex. Get rid of it. That’s number one. Number two: all of the various thresholds that if your income is above a certain amount you can’t take advantage of whatever it might be – IRA deductions, charitable deductions, itemized deductions – all the numbers are different for each of the different laws. Even a brainiac that has an incredible memory could never remember all of the various numbers. … It’s nonsense, absolute nonsense. That’s where the tax law can be fixed.

The basic structure of income and deductions that has been around for 100 years is pretty damn good. We have an income tax system that I think does its job. It soaks the rich and doesn’t affect the low-income [consumers]. Overall, it’s good but it needs to be cleaned up. And I think that’s going to happen. And when that happens – I think at the same time – Congress is going to realize, “Ok, let’s beef up the budget to the IRS so they can get more money to help the budget deficit. So, again, if this is going to happen and when is a tough call because of the craziness in Congress between the Republican House and Democratic-controlled Senate.”

Clemens Sialm – Associate Professor of Finance at the University of Texas

“To improve the long-term growth prospects of the economy I would replace the corporate income tax with an environmental tax. Eliminating the corporate income tax will decrease significant distortions in the corporate sector, such as an incentive to increase leverage and to avoid taxes by shifting operations to lower-tax foreign jurisdictions. Introducing an environmental tax will enable the government to raise revenues while maintaining environmental objectives. These tax reforms would support sustainable economic growth.”

Rodney Mock – Associate Professor of Accounting in California Polytechnic State University’s Orfalea College of Business

“I would significantly broaden the tax base by eliminating or curtailing various tax benefit items so that everyone has some ‘skin in the game’ for a more accountable government while at the same time I would lower the overall effective tax rate on all those currently paying into the system.”

Gerald Moran – Professor at Florida Coastal School of Law

“ Repeal the estate taxes while eliminating step-up in basis.”

Daniel Matthews – Professor of Tax Law at the Thomas M. Cooley Law School

“The short answer is that the U.S. corporate tax rate should be cut substantially. Currently, the U.S. corporate tax rate is 35% (state corporate taxes push the rate to about 39%). If I’m not mistaken, that’s the highest of any developed country in the world. Even high tax France is lower (34.4%). Japan cut its corporate rate last year to a rate lower than the U.S.

U.S. multinationals engage in tax planning so that their “offshore” profits are not taxed in the U.S. until repatriated to the U.S. Because U.S. rates are so high, U.S. multinationals have a very strong incentive to keep these profits offshore and reinvest the profits overseas. According to some estimates, these offshore profits are about $1.4 trillion. Apple has been receiving a lot of negative press in the past few weeks because Apple reportedly has over $100 billion in offshore profits that haven’t been taxed in the U.S. As you may know, Tim Cook, Apple’s CEO, recently testified before a congressional subcommittee that the corporate rate would have to be reduced substantially before Apple repatriates its offshore profits.

In short, if corporate rates were reduced substantially (or eliminated altogether), much of the $1.4 trillion in offshore profits would make its way back to the U.S. and be reinvested in the U.S. (e.g., more hiring of U.S. workers, more investment in R&D, facilities, equipment, etc.) That would improve the U.S. economy greatly.

In my opinion, Congress may pass a token cut to the corporate rate (5% or less) in the next few years. But I think the chances of Congress reducing the rates substantially (by 15% or more) is highly unlikely.”

Richard Mandel – Associate Professor of Tax Law at Babson College

“Assuming I’m not constrained by the political feasibility of my answer, I would drastically lower income tax rates and eliminate all tax deductions and tax credits. This would bring an end to the myriad ways in which tax policy distorts economic decisions and also eliminate the government’s use of tax policy to pick winners and losers and encourage and discourage various types of activities. Government is notoriously poor at making these choices; let individuals and the market make them.”

Ask the Experts: How to Maximize the Impact of Your Charitable Donations

John Kiernan — Tue, 11 Jun 2013 01:52:26 +0000

Posted by: John Kiernan

Despite the recent economic turmoil, Americans have continued to display an altruistic streak, donating billions of hard-earned dollars to noble causes each year. For instance, in 2011 – the most recent year for which data is available – roughly 88% of consumers bequeathed a combined $298.3 billion to charity, according to a Giving USA report. And while the cynics among us will chalk that up to the accompanying tax benefits, it doesn’t really matter as long as the money is being put to good use.

But that’s the crux of the issue: How can we make sure our charitable donations actually get to those who truly need the money, rather than executives’ pockets or, worse, fraudsters?

Charitable Giving in the Era of the Great Recession & Social Media

There has been no shortage of charitable impropriety in recent years, ranging from allegations of misdoing by celebrities like Wyclef Jean and Lamar Odom to scams tied to natural disasters like the recent tornadoes in Oklahoma and even terrorist attacks like the Boston Marathon bombings. In short, it seems that the modern, social media-driven charity landscape has created something of a double-edged sword for the benevolent among us – enabling people to respond quickly and en masse when needed, yet leaving us perhaps more susceptible to shady folks who want to make a quick buck off our good intentions.

The resulting importance of carefully targeted giving becomes even more apparent when you further consider just how many truly worthwhile causes there are out there as well as how little most of us can spare in the wake of the Great Recession. Not only does unemployment continue to hover around 7.6%, but the average household also has more than $6,500 in credit card debt and we’re on pace to add $46.7 billion to our overall tab in 2013, according to CardHub data. That would bring the total amount of new credit card debt incurred since 2011 to roughly $130 billion by year’s end.

We therefore turned to experts on charitable giving, fraud, and the economy for tips on how to maximize the impact of our giving in this day and age. You can check out what they had to say below.

Expert Opinions: Getting the Most Bang for Your Charitable Bucks

How can people make sure their charitable donations are actually used for charity?

“In one sense it’s like any other ‘purchase’ or spending a consumer might make . . . pay attention to the news for positive or negative coverage. More specifically however, consumers can use independent evaluator organizations such as Charity Navigator. This organization provides detailed information on a charity’s mission, scope, source of funding, administrative overhead (a key metric), financial solvency, and transparency. A high mark from this group is a good indication that money is primarily spent on the purpose for which it’s intended.”

- Charlene Davis, an Associate Professor of Business Administration at Trinity University who studies charitable giving and consumer behavior

“Generally, people tend to donate to organizations with which they feel closest or those they can identify with. In doing so, donors tend to be more familiar with what the organization does and what funds are used for, allowing them to gain a general sense of legitimacy of the organization.

However, when this personal assessment is not possible or more specific statistics are desired, particularly for larger organizations, donors can check one of several charity evaluations such as Charity Navigator or the Better Business Bureau Wise Giving Alliance. As with many consumer decisions, ‘go with your gut.’ If something seems suspicious or you’ve been solicited for a donation unexpectedly, check into the organization before making a donation.”

- Karen Winterich, an Assistant Professor of Marketing at the Pennsylvania State University who studies charitable giving and consumer decision-making

“Be proactive and vet charities before you make a donation. Check out their Financial Health, Accountability & Transparency and their Results Reporting. Don’t assume that just because it is a charity that it is efficient, ethical or effective.”

- Sandra Miniutti, Vice President of Marketing for Charity Navigator

“It is not easy to find the best charities. The usual measures of charities such as administrative ratios and the like are not reliable indicators of charitable effectiveness. They will tell you where they spend their money but not whether their spending has an impact. Best to research the individual charity, see whether they set appropriate and meaningful goals, and whether they report out to the public how well they are doing against these goals.”

- Kenneth Stern, Author of “With Charity For All: Why Charities are Failing and a Better Way to Give” & former CEO of National Public Radio

“Charities with revenues over $200,000 a year are required to file public financial reports (IRS Form 990), which are available on the Internet through organizations like Guidestar and also are generally available through state offices responsible for charitable regulation. The reports include disclosures about how much the charity pays in compensation, fundraising, etc. The leading charity “watchdog” groups may be a helpful resource for are also good resources for donors. They include Charitywatch.org, Charity Navigator, and the BBB’s Wise Giving Alliance.”

- Elizabeth Grant, President of the National Association of State Charities Officials

How big of a concern is fraud in the era of social giving?

“In an age of ‘instant’ message spread, reporting of fraud is more proximal to one’s giving and clearly inhibits giving patterns even when the charity that one is dealing with is established and has a good reputation. What constitutes fraud is important to keep in mind here as well. To donors it might include any range of activities, but if you are looking at instances where money is collected with one stated purpose and used for another or where a small amount of what is collected actually goes to the actual cause and benefits those recipients. Although a majority of fraud seems to be restricted to charities that are less established (for example some that are created to help in a specific set of circumstances and for a shorter time span — such as disaster relief) the public nature of giving and championing a cause can be chilled by the fear of backing a cause that turns out to be bogus or doesn’t pass public scrutiny.”

- Charlene Davis, Trinity University

“It’s definitely there and some regulations should be put into place, but for the average donor, fraud shouldn’t be a large enough concern to deter giving. Donors just need to be smart about their giving. Just a few minutes digging should usually help consumers identify whether an organization is legitimate or fraudulent. If you’re not familiar with a cause, check it out before donating. If you can’t verify it, give your money to a similar, but more reputable cause.”

- Karen Winterich, PSU

“Donors need to be skeptical of online appeals that are sent via social media or email. We always encourage donors to go to the charity’s legitimate website to make a donation and not to click through on any links.

Also of more recent concern is the development of crowdfunding sites. Although those services provide donors instant gratification, they generally lack any accountability & transparency. Donors have no assurances that the fund is legitimate or that their money will be used as the appeal describes. This is a very risky form of giving.”

- Sandra Miniutti, Charity Navigator

“Fraud is a real problem for American charities, for a number of reasons. First, there is a lot of market confusion. There are more than 59,000 charities with the word “veteran” in the title, for instance, so it becomes easy for a con artist to confuse donors. Second, there is little organized regulation of the field. There are less than 100 full time state regulators of charities, in comparison to the 1.1 million charities in this country. Donors need to be careful, especially when giving over the phone or over a social platform. Fraud and theft from charities is also a problem. Charities frequently under invest in financial systems, often making them easy prey for thieves. It’s a multi-billion dollar issue.”

- Kenneth Stern, Palisades Media Ventures

Takeaways

From the expert insights provided above, we can glean a few “best practices” when it comes to charitable giving in the modern landscape:

Before giving to a particular organization or cause, it’s important to do a bit of background research in order to evaluate legitimacy and determine how donations will be used.

There are a number of useful resources available to charitable givers, including organization-specific rankings and background information from Charity Watch, Charity Navigator, and the Better Business Bureau’s Wise Giving Alliance.

Large, established charitable organizations tend to be the safest bets because there is a multitude of publicly available information about them and examples of impropriety will be easy to find.

Pop-up charities, particularly those tied to current events, should be viewed with the most skepticism.

People can significantly decrease the odds of falling victim to a charity scam by simply not making donations over the phone, online, or in response to unprovoked requests.

Q1 2013 Credit Card Debt Study

Liana Arnold — Mon, 10 Jun 2013 21:20:33 +0000

Posted by: Liana Arnold

Net Result of Consumer Credit Card Debt Q1 2009 – Q1 2013


	Net Result in Debt Load	Relative to Same Period Last Year	Relative to Same Period Two Years Ago
2013 Q1\|-$32,494,229,206\|-7%\|-1% 2012\|$35,780,453,674\|-23%\|1503% 2012 Q4\|$40,121,879,688\|-9%\|55% 2012 Q3\|$13,038,414,632\|-19%\|130% 2012 Q2\|$17,587,180,535\|-9%\|81% 2012 Q1\|-$34,967,021,181\|7%\|-11% 2011\|$46,706,301,961\|1993%\|4525% 2011 Q4\|$43,899,579,754\|70%\|96% 2011 Q3\|$16,189,816,361\|185%\|35% 2011 Q2\|$19,306,926,002\|98%\|104% 2011 Q1\|-$32,690,020,157\|-16%\|-27% 2010\|$2,232,056,261\|311%\| 2010 Q4\|$25,897,752,905\|16%\| 2010 Q3\|$5,677,843,469\|-53%\| 2010 Q2\|$9,739,218,129\|3%\| 2010 Q1\|-$39,082,758,242\|-13%\| 2009\|-$1,055,611,654\|\| 2009 Q4\|$2,234,6590,105\|\| 2009 Q3\|$12,003,150,740\|\| 2009 Q2\|$9,450,170,641\|\| 2009 Q1\|-$44,855,523,141\|\|

Net Result in Debt Load – Green indicates that consumers decreased their debt relative to the previous quarter. Red indicates they increased their debt relative to the previous quarter.

Relative to Same Period – Green indicates that consumers either paid down more debt or accumulated less debt than they did in same quarter in 2012 and 2011. Red indicates that they either paid down less debt or accumulated more debt than they did in the same quarter in 2012 and 2011.

Consumer Credit Card Debt and Charge-off Data (in Billions):


	Outstanding Revolving Consumer Debt	Outstanding Credit Card Debt	Quarterly Credit Card Charge-Off Rate	Quarterly Credit Card Charge-Off in Dollars
2013 Q1\|$804.9\|$788.8\|3.83%\|$7.5 2012\|$845.8\|$828.8\|\|$32.5 2012 Q4\|$845.8\|$828.9\|3.85%\|$8.0 2012 Q3\|$813.0\|$796.7\|3.81%\|$7.6 2012 Q2\|$807.4\|$791.3\|4.23%\|$8.4 2012 Q1\|$798.0\|$782.1\|4.38%\|$8.6 2011\|$842.5\|$825.6\|\|$45.0 2011 Q4\|$842.5\|$825.6\|4.53%\|$9.4 2011 Q3\|$807.2\|$791.1\|5.63%\|$11.1 2011 Q2\|$802.0\|$786.0\|5.58%\|$11.0 2011 Q1\|$793.5\|$777.7\|6.96%\|$13.5 2010\|$840.7\|$823.9\|\|$77.2 2010 Q4\|$840.7\|$823.9\|7.7%\|$15.9 2010 Q3\|$830.5\|$813.8\|8.55%\|$17.4 2010 Q2\|$842.4\|$825.6\|10.97%\|$22.6 2010 Q1\|$855.6\|$838.5\|10.16%\|$21.3 2009\|$917.2\|$898.9\|\|$85.2 2009 Q4\|$917.2\|$898.8\|10.11%\|$22.7 2009 Q3\|$917.6\|$899.2\|10.1%\|$22.7 2009 Q2\|$9285\|$909.9\|9.77%\|$22.2 2009 Q1\|$941.5\|$922.7\|7.62%\|$17.6 2008 Q4\|$1,005.2\|$985.1\|\|


Quarter	Quarterly Credit Card Charge-Off in Dollars
2008 Q4\|0 2009 Q1\|17577385859 2009 Q2\|22224862641 2009 Q3\|22705319140 2009 Q4\|22718402106 2010 Q1\|21297109557 2010 Q2\|22641172929 2010 Q3\|17396017070 2010 Q4\|15859818706 2011 Q1\|13531376043 2011 Q2\|10964803403 2011 Q3\|11134211961 2011 Q4\|9350061954 2012 Q1\|8563794819 2012 Q2\|8368006935 2012 Q3\|7589046232 2012 Q4\|7978105089 2013 Q1\|7553206193


Quarter	Average Household Debt
2008 Q4\|8436 2009 Q1\|7894 2009 Q2\|7778 2009 Q3\|7680 2009 Q4\|7671 2010 Q1\|7150 2010 Q2\|7035 2010 Q3\|6929 2010 Q4\|7010 2011 Q1\|6603 2011 Q2\|6660 2011 Q3\|6690 2011 Q4\|6968 2012 Q1\|6587 2012 Q2\|6651 2012 Q3\|6684 2012 Q4\|6939 2013 Q1\|6591

2013

By the Numbers:

In Q1 2013, outstanding credit card debt decreased relative to Q4 2012: $40,047,435,400
In Q1 2013 the credit card charge-off rate in dollars was: $7,553,206,193
Net Result in Debt Load: -$32,494,229,207
decrease
Relative to Q1 2012: Q1 2013 showed a decrease that was 7% less than the decrease in the same quarter in 2012
Relative to Q1 2011: Q1 2013 showed a decrease that was 1% less than the decrease in the same quarter in 2011
Relative to Q1 2010: Q1 2013 showed a decrease that was 17% less than the decrease in the same quarter in 2009
Relative to Q1 2009: Q1 2013 showed a decrease that was 28% less than the decrease in the same quarter in 2009

Main Findings:

The $32.5 billion in existing credit card debt that U.S. consumers paid off during the first quarter of 2013 represents the smallest first quarter pay down in the past 4 years. We paid off 7% more of our credit card debt in Q1 2012, 1% more in Q1 2011, 17% more in Q1 2010, and 28% more in Q1 2009.
Q1 2013 marked the first time in a year that consumers did not improve their credit management relative to the corresponding quarter the year before.
The credit card default rate continues to drop and is now at its lowest point since the fourth quarter of 2006. Consumers unfortunately have not taken advantage of their improved ability to pay their bills on time to also pay down their debts.
The average household currently has $6,591 in credit card debt.

5 Tips for Managing Debt

Make a Budget (and Stick to It): It’s difficult to spend within reason or plan savings without knowing how your monthly spending compares to your take-home as well as what it is allotted to. That is why you should rank order your expenses – including debt payments, emergency fund contributions, and other savings – and trim the fat if necessary. And most importantly, once you develop your budget, make sure to stick to it or else you’ll have simply wasted your time.
Build an Emergency Fund: With a robust financial safety net, you’ll be less at the mercy of the economy and able to withstand a prolonged period of joblessness, should the need arise. Your goal should be to gradually save about a year’s worth of after-tax income through monthly contributions to an emergency account.
Try the Island Approach: The Island Approach is a credit card strategy that involves using different cards for different types of transactions, as if they are a chain of distinct yet interrelated islands. For example, you could transfer your existing debt to a 0% credit card in order to reduce your monthly payments as well as get out of debt sooner and subsidize your ongoing spending with a rewards card or two that offer high earning rates in your biggest expense categories. This will enable you to get the best possible collection of terms as well as gain a better perspective on your spending and payment habits since finance charges on your everyday spending cards will signal a need to cut back.
Use the Snowball Method to Strategically Pay Off Amounts Owed: In order to become debt free at the least possible cost, you should attribute the majority of your monthly debt payment to the balance with the highest interest rate while making the minimum payment required on the rest. Once your most expensive debt is paid off, repeat the process as necessary with the remaining balances.
Evaluate Your Job Situation: In some cases, all the budgeting and planning in the world won’t be enough to solve your debt problems. You may therefore need to evaluate whether there are higher-paying opportunities out there for people with your background or if you’ll need to acquire some new skills in order to make yourself more marketable. This might require making a bit of an investment in yourself, but as long as you get a worthwhile return it’s money well spent.

Please find previous studies here*:

* Some of the numbers may differ from study to study as a result of the Federal Reserve updating certain numbers for several months after first publishing them. For questions or more information regarding this study, please contact our media department.

Ask the Experts: Will We Ever Get to Retire?

John Kiernan — Mon, 10 Jun 2013 18:34:40 +0000

Posted by: John Kiernan

The economy may be rebounding, but the effects of the Great Recession will continue to be felt for years, particularly when it comes to retirement.

The retirement outlook is especially ominous for older generations who should theoretically have a line of sight for their exit from the workforce, as Generation-Xers (ages 38 – 47) lost 45% of their net worth during the downturn, while young Baby Boomers (ages 48 – 57) saw a 28% decline, according to a recent report from the Pew Charitable Trusts.

Retirement Outlook: Overcast with a Distinct Chance of Substantial Work

The report – titled Retirement Security Across Generations: Are Americans Prepared for Their Golden Years? – is based on a triennial survey of family finances which has been conducted by the Federal Reserve and the Panel Study of Income Dynamics since 1968. The survey tracks and compares financial assets, nonfinancial assets, and home equity to debt, and its most recent findings offer a resounding “No” to the aforementioned question that Pew posits at the outset of its report.

In other words, Americans are by and large prepared to work into their golden years, not enjoy them.

“The evidence strongly suggests that early boomers may be the last generation on track to exceed the wealth of the cohorts that came before them and to enjoy a secure retirement,” Pew concluded. “Gen-Xers are the least financially secure and the most likely to experience downward mobility in retirement. In their 30s/40s, the Gen-X cohort was behind where late boomers had been at the same age with respect to financial net worth, and they lost nearly half of their overall wealth in the recession.”

The Great Recession clearly is a big reason for our recent financial difficulties, but it’s only one piece of the puzzle and must not be viewed as a blanket justification for the uphill battle we now face, according to Richard Himelfarb, an associate professor of Political Science at Hofstra University. Himelfarb believes the recession magnified a shift in cultural values away from the dutiful saving habits of those who grew up in the shadow of the Great Depression to the spend it now (even if you don’t have it yet) attitudes of modern consumers. Apparently, we’d prefer to enjoy the American Dream lifestyle today and worry about tomorrow when it comes. But much like you could get caught without an umbrella if you don’t check the forecast, this strategy leaves us far less prepared to weather financial storms than our predecessors who readied themselves for that amorphous “rainy day,” knowing full well it might never come.

Perhaps that is why the Pew study also found a “lack of savings and wealth accumulation among Gen-Xers even before the economic downturn,” which led its authors to recommend that “as policymakers focus attention on Americans’ retirement security, particular consideration should be paid to helping the youngest cohorts change course and prepare for financial security over the long term.”

How Did We Get Here?

CardHub sought the opinions of leading retirement studies and public policy experts for additional insight into why the future is so bleak for aging generations as well as what, if anything, we can do to alter our fate. And as you can see below, we can’t ignore the role of shifting cultural values or poor financial literacy when it comes to the why.

The Question: Is the poor retirement outlook for Gen-Xers mainly attributable to the effects of recession or are there more substantial underlying issues in play as well? The Answers…

“Many people, not only Gen Xers, encountered declines in personal wealth during the Great Recession, which caused job losses, stagnant wages, a lack of upward job mobility, declining housing and stock market values, and a resultant increase in debt. However, I assume the lack of financial literacy also contributed to financial problems, as some did not understand the adjustable rate mortgages they obtained, failed to maintain adequate emergency/reserve funds and/or prioritize spending, chose to ‘live for today,’ etc.”

- Alan Sumutka – Associate Professor of Accounting at Rider University

“Gen Xers also have been hurt by the fact that they have carried much more debt than is fiscally sound to do. Some of it such as student loans is understandable, but getting mortgages and car loans more than they could handle should have taught them a lesson in the importance of money management.”

- Steven Weisman – Senior Lecturer of Law, Taxation, and Financial Planning at Bentley University

“The bottom line is that Gen X is ill-prepared for retirement. Large shares of households have saved too little to maintain their standard of living in retirement. The most recent data from National Retirement Risk Index at Boston College’s Center for Retirement Research puts the overall share of all households at risk at more than 50%. Numbers are larger for younger households.”

- Christian Weller – Director of the Graduate Program in Public Policy at the University of Massachusetts, Boston

“The lack of financial literacy is a factor in that more and more people in their working years have a 401K as their primary retirement instrument, and managing a 401K as you get older is extremely difficult for many people. On the other hand, not being ready for a big dip in the stock market, as many people were not in 2008, was also a factor. If I had to pick one over the other, I would opt with the stock market and the financial crisis/recession.”

- Theodore Anagnoson - Professor Emeritus of Political Science at California State University, Los Angeles and a Visiting Professor at UC, Santa Barbara

“There is no question that the recession has played a major role in the future financial outlook for Gen. Xers, but the underlying story runs much deeper than problems created by the recession. Other factors that stand to affect the financial security of the youngest cohort in the Pew investigation include their willingness to take on debt, the tendency to procrastinate when it comes to establishing a pattern of personal retirement savings, generally low levels of financial literacy, and (particularly for women) high levels of risk aversion when it comes to investing.”

- Douglas Hershey – Director of Oklahoma State University’s Retirement Planning Lab

“The recession certainly hasn’t helped, but this generation was in trouble before the recession hit. They have more debt than than the earlier cohorts so making debt payments takes priority over saving for retirement. Gen Xers are now at the age when they are starting to realize they are behind the eight ball. I don’t think a lot of them really understand basic retirement planning. More of them, as compared with the earlier cohorts, are being forced to take a bigger role in their retirement planning as employers shift away from pensions to defined contribution plans. When I talk to people (not just members of this generation), they really do not understand their retirement plans. It is very common for them to have never accessed their accounts online and updated their asset allocation percentages. They have no idea how their retirement funds are invested. So yes, I think lack of financial literacy is a problem. You can ask them to view a webinar or go through an online module (offered by many corporate 401k providers), but they really need to be taught the basics, preferably face-to-face.”

- Eileen St. Pierre, Author of “The Everyday Financial Planner” website and a former Personal Finance State Specialist at Oklahoma State University

“Most studies, as this one does, indicate that we have a problem with future generations being prepared for retirement including the early baby boomers. The problem is one of increasing numbers of retirees living in hardship because they do not have enough income and/or wealth to maintain a reasonable life style. I say “increasing number of retirees” because even today many retirees have a hard time paying all their bills, especially if they have long-term care needs.”

- Ellen Bruce, Director of the University of Massachusetts Boston’s Gerontology Institute

“There is some disagreement about the numbers. EBRI [the Employee Benefit Research Institute] actually shows the prospects of this group improving due to the prevalence of auto enrollment in 401(k) plans, meaning that more individuals are covered by retirement plans.

Retirement plan coverage is a key component of retirement readiness, and only 54 percent of workers are covered by a retirement plan. The percentage is higher for public employers and larger employers and much lower for small employers.”

- David Littell, Codirector of the New York Life Center for Retirement Income at The American College of Financial Services

“Gen. X’ers networth fell so much because most of them being young were aggressively invested (equities). Poor retirement outlook is a bit harsh analysis because their portfolios will recover, they have a 30-40years+ time horizon to do that if they didn’t react radically by perhaps overcompensating and moving their portfolios into safer fixed income assets, bonds, cash reserves, etc.”

- Sophia Anong, Assistant Professor of Personal Finance at the University of Georgia

“Based on our research, it seems that the recession has negatively affected this generation more than the others largely due two factors. One is being at a uniquely difficult stage in their financial lives when they’re facing the financial pressures of balancing saving for the future and paying down debt with the immediate obligations of mortgage payments and providing for your children. From our report:

67% of 30-44 yr olds own a home compared to only 31% of those under 30. When the housing market collapsed, Xers were more than twice as likely to own a home as Millennials but probably had less equity in their homes than Boomers.

65% have minor children, the most of any age group. Our previous stress report indicated that those with minor children reported significantly higher stress than those without. After all, studies have shown the cost of raising a child to average about $200k over their lifetime.

Second, this generation suffered from poor timing. They largely started investing and buying homes right before the financial crisis while Millennials were less likely to have much money in either the stock or real estate markets and older generations were buffered by decades of building up retirement savings and home equity. As a result, when the crisis hit, Generation Xers were impacted more.”

- Erik Carter, Resident Financial Planner at Financial Finesse & Lead Author of the Financial Finesse Generational Research Report

Takeaways – How Did We get Here?

At the end of the day, there are a few things we can say for sure about the retirement predicament that we’ve gotten ourselves into:

The Great Recession had a devastating effect on the average person’s net worth.

The lack of financial literacy in this country contributed to both the severity of the economic downturn and the bleak retirement outlook.

We weren’t managing our money responsibly from either an everyday spending or retirement planning perspective prior to the recession.

Our fate is not yet sealed. With increased education, values adjustments, and a bit of strategic planning, we can divert our course from a rocky retirement to a secure one.

What Can We Do About It?

Most of us need not be resigned to a lifetime of work, with no respite during our so-called glory years. There is still time to revamp our financial plans in order to secure a comfortable retirement, even if it might neither come as soon as we’d previously hoped nor offer quite the same type of lifestyle.

The question is how, and again we turned to leading retirement planning experts for advice.

“I do not think that the Great Recession has sealed the fate of Gen X. Born between 1966 and 1975, this generation, now aged 38-47, has about 18-28 years to improve their financial position, if they are willing to do so. The answer may be a (government) program which promotes a message of personal responsibility. In the 1996 best-seller, “The Millionaire Next Door,” PhDs Thomas Stanley and William Danko documented that the key to financial security in retirement is to live below one’s means during working years, i.e., to constantly save for retirement. Of course, this requires sacrificing today’s desires for future security, the choice that all generations have to make. And Gen X has been given a wonderful savings tool that has not been available to prior generations, i.e., the Roth 401(k) plan, which can produce enormous amounts of tax-free wealth. Simply, Gen Xer’s may have to work longer, spend less, and save more to insure a secure retirement, which is no different than other generations.”

- Alan Sumutka – Associate Professor of Accounting at Rider University

“Although the figures do look a bit bleak for Generation Xers, the optimist in me sees everything as an opportunity and while it certainly won’t be easy for Gen Xers, there are plenty of things they can do to make their retirement financially sound. The key, as you indicated is financial literacy. Many are not as financially literate as they need to be. At one time their parents and grandparents were the beneficiaries of defined benefit plans, which required no thinking, but have gone the way of the dinosaurs and have been replaced by the defined contribution plans. Now the only place for a Gen Xer to look for a helping hand is at the end of his or her own arm. But this Is not a bad thing. There are many valuable options available with 401(k)s including Roth 401(k)s. Financial literacy will be very important because there are many choices that will need to be made in regard to individual 401(k) accounts and as with any investment, what is important is not what you make, what is important is what you get to keep. Unnecessary fees can eat up earnings that should be compounding tax deferred or tax-free.

The recession certainly wreaked havoc on the savings of everyone, but it also provided an opportunity for savvy investors to take advantage of the recovery. Time can be a Gen Xer’s friend with a properly diversified portfolio with low fees growing over time.

It is unlikely that government will provide for greater retirement benefits. What they may do, however, is provide greater incentives, as they have in the past for people to use IRAs and 401(k)s to provide for themselves. Financially educated investors will be able to use these incentives to their benefit.

Gen Xers also have been hurt by the fact that they have carried much more debt than is fiscally sound to do. Some of it such as student loans is understandable, but getting mortgages and car loans more than they could handle should have taught them a lesson in the importance of money management.

My prognosis for the future is that there will be a great market in financial education and for advisors to help people meet these compelling needs.”

- Steven Weisman – Senior Lecturer of Law, Taxation, and Financial Planning at Bentley University

“Gen Xers need to save more than previous generations. They face a higher retirement age than the baby boomers and there is tremendous uncertainty over the future level of Medicare benefits. And, Gen Xers live longer, requiring more money outside of Social Security. There are fewer traditional defined benefit pensions, requiring again more money than in the past outside of Social Security for people to be prepared for rising inflation, stock market fluctuations and living for a really long time. And, health care costs for uninsured events like nursing homes are rising faster than overall inflation.

The greater need to save more is not matched with a greater ability to save more than was the case for baby boomers. Gen Xers struggle in the labor market with high unemployment and more importantly with rising long-term unemployment, even before the crisis. Employers are providing less and less assistance (fewer retirement savings plans and fewer employer matches in those plans). And, Gen Xers are struggling with saving and investing just as much as baby boomers. They often do not take full advantage of employer matches and mismanage the risks associated with saving (too little money outside of a home, no regular rebalancing of an investment portfolio during market ups and downs, borrowing against a home to finance consumption instead of other investments, carrying costly credit card balances even when they have sufficient cash to pay off those balances).”

- Christian Weller – Director of the Graduate Program in Public Policy at the University of Massachusetts, Boston

“The time to start saving more for retirement is now. Period. With a Gen. Xer who is in his or her 50s, it is not out of the question to consider saving $500 to $1,000 a month and to invest it with a 10-15 year time span (i.e. relatively aggressively). Many people have other funds that could be used earlier in retirement, and we have whole groups in society who intend to work, at least part time, into their 70s. With the housing market turning up a bit, there is also the possibility of more people selling their houses and moving to less expensive areas. When you think about it, there are alternatives, but of course, many do not wish to consider the obvious ones, as they involve disruptions to their lifestyles.

Save early. Save more. Save now. Don’t wait. Consider the plight of your parents and grandparents living on Social Security alone!

Even people with a defined benefit pension in the public sector need to think about supplemental savings that is more than nominal. The ideal time to start is in your 20s or 30s, but it is never too late.”

-Theodore Anagnoson - Professor Emeritus of Political Science at California State University, Los Angeles and a Visiting Professor at UC, Santa Barbara

“I’m not altogether pessimistic as to the financial fate of Gen. Xers, as a cohort. I think that when we talk about cohorts, it’s easy to lose sight of the fact that they are made up of individuals. Clearly, many individuals will experience negative outcomes after leaving the workforce, but many others are on target to meet their financial goals (replacement rate values in the case of the Pew report). It’s important to bear in mind that Gen. Xers still have 20-30 years before they will retire, which puts them in a good position to make the most of the time they have to amass a suitable nest-egg. Also, strategies such as catch-up savings and postponing one’s retirement date by a few years can also make a big impact on one’s future retirement standard of living.

My feeling is that we haven’t done enough in previous decades to ensure that working adults have the necessary tools to invest wisely for the future. Here in the U.S., over the past couple of decades the burden of responsibility for managing one’s retirement finances has been shifted squarely onto the shoulders of the worker. But there hasn’t been a corresponding emphasis on educating individuals to understand to how navigate the pitfalls and opportunities associated with long-term investing. The prognosis for future generations could be bright, but any such scenario would involve starting to educate Americans about planning and saving at a very early age. Indeed, psychological studies have shown that attitudes toward planning and saving are malleable, and lessons learned in childhood have a measurable impact on financial responsibility decades down the road.”

- Douglas Hershey – Director of Oklahoma State University’s Retirement Planning Lab

“I’m a Gen Xer so I’m not writing off my generation just yet. We have time to catch up, but we need to get serious about this retirement thing. The recession has made an impact on people in a positive way, helping them see the pitfalls of taking on too much debt. What remains to be seen is if this will result in permanent behavior change. We need to save as much as we can for retirement – aim for 20% of your income. Make sure you are capturing all the tax benefits of retirement saving and any benefits your employer offers such as matching a portion of your contributions. Make sure you take on enough risk to beat inflation and rising health care costs. Once you hit age 50, take advantage of catch-up contributions.

I’m more worried about future generations. Young people just don’t see the need to save for retirement. Job opportunities that lead to upward mobility and increased salaries that enable them save are getting harder to find.

I try to show them the power of compounding. Many of the younger generations don’t remember how the markets did before the recession – they just remember how the stock market tanked when the housing market collapsed. So I show them using numbers that if they start saving early, they will not have to take on as much risk as someone, say a Gen Xer, who starting saving much later. But they will have a larger retirement portfolio than the Gen Xer simply because of the time factor. The trick is finding a creative way to get this message across. Putting the numbers on a PPT slide just is not going to be enough anymore.”

- Eileen St. Pierre, Author of “The Everyday Financial Planner” website and a former Assistant Professor of Personal Finance at Oklahoma State University

“Generation Xer’s still have time to recover. First, this group is close enough for retirement that it’s important for them to go through a planning process. Fewer than half of workers have calculated how much they need to save for retirement—and this is a critical first step.

They also just need to build good habits, saving through payroll deduction or through automatic withdrawals from their checking accounts, making sure to save pension distributions that they receive when changing jobs and choosing investments based on an appropriate asset allocation for long-term investing and paying attention to minimizing fees.

They are also far enough from retirement that choosing a job with better retirement benefits, increasing their rate of savings, or doing a better job with investments can make a tremendous difference. When saving more they should be looking for ways to save on a tax preferential basis. Many people fail to take advantage of making allowable contributions to a Roth IRA, for example.”

- David Littell, Codirector of the New York Life Center for Retirement Income at The American College of Financial Services

Takeaways – What Can We Do About It?

Again, there is still time for most of the workforce to foster a secure retirement.

In order to do so, however, we need to rethink our spending, payment, and saving habits.

We also need to do a bit of homework when it comes to personal finance and retirement planning in order to minimize mistakes and prevent foreseeable problems down the road. This is especially true in light of the move from defined pension plans to 401K retirement accounts.

While many people prefer to put their heads down and work as hard as possible for as long as it takes to retire, actually taking the time to figure out how much money you need for retirement, when you’d like to retire, and therefore how much you must be saving per month will make the process far more efficient as well as give you a tangible goal to shoot for and benchmarks to gauge progress.

After all, it’s easy to get wrapped up in the here and now. If more people had specific retirement saving goals, U.S. consumers might not have opted racked up more than $82 billion in new credit card debt in the past two years alone.

While retirement policy reform is ultimately going to be necessary, we can’t let our ability to retire to depend on the potential availability of federal assistance. Rather, we should take it upon ourselves to make the best possible financial decisions every single day with the goal of amassing the financial reserves necessary to replace about 70% of our per-retirement annual income.

Ask The Experts: Evaluating the Financial Literacy Act for Students

John Kiernan — Fri, 07 Jun 2013 22:29:09 +0000

Posted by: John Kiernan

Financial literacy is more than a buzzword these days. In truth, it’s proven to be something of a pandemic, as habitually poor consumer borrowing, spending, and payment habits not only helped bring about the Great Recession, but are also jeopardizing the retirement plans of huge population segments as well as leaving new college graduates without the jobs necessary to pay off the mountains of debt they leave campus with. The question is what are we going to do about it?

If Sen. Kay Hagan (D-NC) has her druthers, Congress will pass the Financial Literacy for Students Act that she introduced in late April. The bill – which is currently on the docket for consideration by the Senate Committee on Health, Education, Labor, and Pensions – would create grant program for states that add financial literacy to their K-12 public school curricula and develop professional education programs for teachers.

Legislating Financial Literacy? Don’t Count On It

This isn’t the first time such legislation has been proposed to Congress, let alone by Hagan herself. The former banker and current head of the Senate Subcommittee on Children and Families previously introduced similar bills in 2009 and 2011, though neither made it out of committee. The odds aren’t great this time around either. According to GovTrack.us, the Financial Literacy for Students Act has only a 2% chance of getting out of committee and a 0% chance of actually being adopted based on the fact that only 12% of the bills that have been introduced in the Senate since 2011 have made it out of committee and only 2% were eventually enacted.

Sure, we all know that Congress is more frustrating than gridlock on a Friday afternoon these days, but even so the bill’s poor prognosis begs a couple of very important questions: 1) Isn’t voting against financial literacy basically tantamount to saying nay to puppies?; and 2) How is teaching the nation’s youth about saving money and not repeating our mistakes a political issue?

Politicians will undoubtedly find ways to justify their disapproval, whether it is substantive or driven by partisan interests, and one of the primary reasons given will likely be that public school subject matter should be the purview of each individual state, not the federal government.

There is indeed something to be said for that, especially since Sen. Hagan modeled this would-be federal program after a similar initiative she implemented when serving in the North Carolina Senate. While it has been successful for the Tar Heel State, who’s to say the same would be true in different environments?

Well, CardHub sought the opinions of experts in the fields of education, economic, and social policy for their opinions, and you can check them out below. Overall, it seems that while something must be done about financial literacy, this particular piece of legislation probably isn’t going to cut it.

Expert Opinions: Financial Literacy Act

“I don’t think the federal government needs to be involved in this and I’ll tell you why. Not only is the Federal Reserve very involved in financial literacy – and they are through many of their districts – the National Council for Economic Education and its state affiliates is as well. So I don’t think the federal government needs to be involved in it. It would really muck it up with a lot of bureaucracy. The states have enough bureaucracy themselves.

But I do want to say very strongly that I am passionate about financial literacy. It is so important and it is as basic as teaching a small child. I’ve done work with young kids explaining opportunity cost, but not using that fancy term. And then it’s as sophisticated as a friend of mine who’s an elder care attorney who helps people retiring. It covers the whole gamut. My own kids, one of them in particular, it’s astounding what she doesn’t know and I’m her mother. I kind of shake my head and go, ‘how did this happen?’ So, I completely support financial literacy education K-12 and beyond, but I don’t think it needs to be legislated at the federal level. Representative Hagan’s bill means well, absolutely, but I just don’t think it’s necessary.”

– Martha Rowland Blenman, Director of the University of Michigan – Dearborn’s Center for Economic and Entrepreneurial Education

“I’ve seen bills like this before, definitely, and a lot of the states have them. In my state [New Mexico], we have one that says that every high school must offer financial literacy, but that’s different than this bill because this is a funded bill. With ours, it turns out that schools don’t have resources and so what they offer is very limited and optional and students don’t take it, so it really doesn’t work. I think this [Financial Literacy Act] could be good.

I do not think financial literacy classes are any kind of substitute for substantive consumer regulation. Sometimes people think, well if we have this financial literacy bill we don’t have to protect consumers. Some scholars, some law professors will say, well I’m opposed to financial literacy [legislation] because I think people try to use it as a substitute for substantive regulation. I think that’s crazy. I think you can do both and that they have nothing to do with each other.”

- Nathalie Martin, Frederick M. Hart Chair in Consumer and Clinical Law at the University of New Mexico School of Law

“[The question] is basically a philosophical one about the role of government. If you think financial literacy is an important set of skills, and if you also think that states are unlikely to teach students financial literacy unless otherwise incentivized to do so, then it seems like a fine idea for the U.S. Department of Education to offer incentives to states to adopt financial literacy programs. I have no problem with the bill, though it wouldn’t be my highest priority.”

- Morgan Polikoff – Assistant Professor of Education at the University of Southern California

“There is a need, but there is a greater need for financial transparency. I think a far more direct route to the same goal are basic ‘cereal box’ disclosures on consumer loans of all stripes. …

Unless you just don’t want to spend the money (and I assume we are not talking about a lot), there seems little reason not to support this. I don’t think it will do any harm. I just think robustly funded schools and a robustly regulated financial sector would be a better route to the same goal.”

- Colin Gordon, Professor of History at the University of Iowa whose research focuses on public policy and political economy in the United States since 1920

“The Federal government has been expanding its influence further and further into state and local curriculum development. As we have seen in the common core, basic skills, literacy, head start, and a hundred other programs, federal interventions have produced mixed results at best. To start layering more issues like financial literacy on top when we still have not gotten the basics down seems counterproductive. How can a student understand budgeting or compound interest rates when they cannot do the basic math involved in accounting? How can they understand the fine print of a basic loan document when their reading skills are not up to par?

Education is an incredibly popular issue and politicians frequently use it to show leadership about an issue with which most voters are sympathetic. The problem in this case, however, is that there is no reason to believe that these federal monies will do anything to improve children’s financial literacy and it comes at a time when our national government is trying to make ends meet. The issue is important, but the federal government is not the appropriate actor.

The scale is simply too large and the number of places where it must succeed too diverse for a single approach to work. Even for large states, like California and New York, state-level curricula and incentives have resulted in results geared at maximizing the incentives (aka revenues) received over actually making sure the students learn.”

-Michael Shires, Associate Professor of Public Policy at Pepperdine University

Final Thoughts

While Sen. Hagan’s bill is likely to fail, we can only wait and see what happens in the hallowed halls of Congress in the days and weeks to come. But no matter what comes of this particular piece of legislation, we must not lose sight of the importance of financial literacy to our economic future. If we don’t give young people the tools to avoid future depressions or a declining quality of life, we will all have failed.

Ask The Experts: If I Could Make One Policy Change to Fix the Federal Deficit, I Would…

John Kiernan — Thu, 06 Jun 2013 20:00:07 +0000

Posted by: John Kiernan

One of the most pressing issues facing our nation these days is the federal government’s massive budget deficit. The deficit and its implications for the already prodigious national debt have been front and center in the national discourse as a $315 billion surplus in 2001 has gradually transformed into an $885 deficit in 2013 under the weight of tax cuts, healthcare policy changes, and spending tied to the War on Terror, Wall Street “bailouts,” the 2009 economic stimulus, and the oft-forgotten interest continuing to accrue on amounts already owed. With each looming debt ceiling, fiscal cliff, and sequester, the unfortunately partisan debate gains vigor, begging the question of whether we’ll find a solution before we run out of nifty nicknames for the various kick-the-can crises encouraged by our infighting and indecision.

There are plenty of proposed solutions out there – both practical and inane – coming from a variety of sources – from the Brookings Institute to Esquire Magazine’s Commission to Balance the Federal Budget. But evaluating the efficacy of a potential remedy, of course, necessitates making a proper diagnosis first.

So, what is the current state of the federal government’s debt and deficit?

Scoping the Problem

With so much talking-head, blogger-fueled misinformation and white noise out there concerning the budget deficit, it’s no surprise that most people either don’t know or don’t really care anymore what the latest facts are. For example, while 62% of Americans believe the deficit is growing this year and 28% think it will hold steady, according to a Bloomberg poll, only 6% were on the money in saying the gap is actually narrowing.

The annual divide between government spending and government revenue actually receded by $300 billion during President Obama’s first term. It currently stands at $845 billion for fiscal year 2013 and is expected to fall to $430 billion next year.

Nevertheless, the national debt (and no, I’m not referring to Washington Nationals SP Ross Detwiler’s Twitter handle) has continued to grow (actually, much like the 27-year-old lefthander, who’s turning into one of the best young pitchers in MLB). As a nation, we’re currently over $16.8 trillion in the hole – roughly 191% more than was owed in April of 2000, 116% more than in April 2005, and 7% more than this time last year, according to data from the Treasury Department.

Those figures are certainly staggering, but they seem even more worrisome when you consider the following:

$1.22 trillion: The amount of U.S. debt owned by China, according to Treasury data (~7% of total amounts owed).
$191.9 billion: The amount of interest that accrued on the national debt during the first six months of fiscal year 2013 (which began in October).
$3.85 billion: The average amount by which the national debt has grown each day since 2007.

Simply reducing the budget deficit isn’t going to cut it. Drastic measures must be taken to not only balance the budget, but also pay off much of what we already owe. After all, a revamped personal budget could help indebted consumers lead a financially sustainable lifestyle, but if they only ever send creditors minimum payments, they’ll never reach debt freedom.

But while you can use a credit card calculator to figure out what monthly payments you’ll need to make in order to reach zero balance by a certain time and even identify which credit card will save you the most on finance charges, things are a bit more complicated when it comes to the federal budget.

So, what can we do?

Proposing a Solution

As mentioned previously, there’s no shortage of espoused fixes to the country’s money problems. Some rely heavily on spending cuts, while others are more revenue-focused. Some come from reputable sources, others from amateurs. Which approach is “right” or “best” is obviously a matter of great debate.

In order to gain a bit of added insight into the matter as well as perhaps advance the overall discussion, we asked a number of experts for their take. More specifically, we posed the following question to professors of economics, public policy, and finance from many of the country’s leading institutions of higher learning:

If you could make one policy change to solve the federal government’s deficit problem, what would it be?

Here’s what they had to say about proposed solutions and the likelihood they’ll actually be adopted:

Policy Change: “Redesign Obamacare by removing corporate income tax deductibility of healthcare fringe benefits and forcing a national market for healthcare insurance.”

Likelihood: “Slim to none.”

– Dr. Bruce Yandle – Dean Emeritus of Clemson University’s College of Business & Behavioral Science, Distinguished Adjunct Professor of Economics at the Mercatus Center at George Mason University, and formerly Executive Director of the Federal Trade Commission and Senior Economist on the President’s Council on Wage and Price Stability.

Policy Change: “Well, no single measure could be more than a small piece of a package, so I interpret the question as, ‘of the things that could be meaningful parts of a package, which are the best policy in their own terms?’

The most obvious are having a real public option for health insurance within the exchanges, and getting rid of the carried-interest treatment of income. The latter could be incorporated in a much larger change – treating capital gains like other income. Or at least reducing the difference.

Other people of course have different policy preferences. Mine start from the fact that it really is true that income has skewed dramatically to the top 5 or 1 percent of the society in recent years, for no particularly good (or fair) reason.”

Likelihood: “Those two have a snowball’s chance in Florida, not hell. You would need to have the Democrats actually gain seats in the 2014 election based on a somewhat populist campaign. Doesn’t seem very likely.”

– Dr. Joseph White – Chair of the Department of Political Science & Director of the Center for Policy Studies at Case Western Reserve University

Policy Change: “I would cap Federal spending at 18% of GDP. Historically, regardless of whether tax rates are high or low, the Federal receipts (from all sources) total about 18% of GDP. In addition to balancing (on average) the budget, this change would alter how the Federal budget is negotiated. Currently, negotiations involve weighing the political benefit of additional spending against the political cost of either increased taxes or increased deficits. Under this plan, negotiations would involve weighing the political benefits of additional spending in one area against the political cost of reduced spending in another area.”

Likelihood: N/A

– Dr. Antony Davies – Associate Professor of Economics at Duquesne University

Policy Change: “I would add an amendment to the U.S. Constitution restraining the federal government’s ability to spend more than it takes in and making large deficits the exception rather than the rule.”

Likelihood: N/A

– David Primo – Associate Professor of Political Science and Business Administration & Director of Graduate Studies in Political Science at the University of Rochester

Policy Change:“Restructuring the individual income tax so it could grow with the economy (broaden the base, lose the deductions, etc.).”

Likelihood:“50% chance of a 50% improvement.”

– Sally Wallace – Chair for the Department of Economics at Georgia State University

Policy Change:“It is impossible to make just one policy change, because two are necessary: (1) entitlement reform that will reduce the rate of growth of federal spending and (2) tax reform that will produce more revenue.”

Likelihood: “I am moderately optimistic that a bipartisan compromise will be hammered out this year that will at least make a start on both. The reports of the Simpson Bowles Commission and the Domenici Rivlin Task Force are bipartisan blueprints that illustrate possible policies.”

– Dr. Alice Rivlin – Senior Economic Studies Fellow at the Brookings Institute; formerly a member of the President’s Debt Commission, founding director of the Congressional Budget Office, and Federal Reserve Vice Chair

Policy Change: “Return to counter-cyclical fiscal policy (surpluses during booms, deficits during recessions) instead of the pro-cyclical policy of the last ten years.”

Likelihood: N/A

–Jeffrey Frankel – James W. Harpel Professor of Capital Formation and Growth in Harvard University’s Kennedy School of Government

Policy Change: “There is no one change that is particularly important. The best approach to deficit reduction is always balanced and multi-pronged. Putting together a large number os smallish changes in revenue and expenditure can yield impressive deficit reductions. This was the approach used repeatedly and successfully in the 1980s through 1993.”

Likelihood: N/A

–John Gilmour – Paul R. Verkuil Term Distinguished Professor of Public Policy at The College of William & Mary

Policy Change: “The correct package would include (1) an increase of the revenue burden to what it was at the end of the Clinton Administration. (2) The passage of legislation to control health care expenditures — in both the private and the public sectors. (3) Passage of changes to Social Security program so that it is in balance over the 75 year time line. These changes should be phased in so that they will not thwart the recovery but would take effect over the long term. The Social Security problem is not nearly as serious as the health care sector problem. The US spends 18 percent of its GDP on health care. Those dollars are someone’s income and those folks will fight to the death to maintain their income.”

Likelihood: N/A

–John Ellwood – Professor of Public Policy at the University of California, Berkeley

Policy Change: Pick a budget process and stick to it, on time. And then, do it again next fiscal year, on time. And the next…even if sticking to the process means you don’t get everything your way, regardless of your position on the political spectrum. You get the idea!

The Federal budget process was already sufficiently byzantine to allow for all kinds of gamesmanship – yet, we haven’t shown that we can reliably follow even that process consistently and on time for years. Norms about budgeting at the federal level have decayed to the point where it is not clear that they exist. This erosion of the process itself worries me more than the size of the deficit at any given time. Disturbingly, we are beginning to look like a society that cannot predictably execute the routines of governing – and that does not engender faith in our economy. As long as ours seems to be in marginally better shape than others, we get by. Should we reach a point where that is no longer the case, the absence of commitment to do the work of government will be less of an embarrassing sideshow and more of an alarming main event. Budgeting is a foundational aspect of government, regardless of how minimal a state you prefer.

Likelihood: It doesn’t look good. My desired change, strictly speaking, is not a policy itself but rather a change in attitudes about the process of budgetary policymaking – and it has never been clear how to legislate changes in attitudes. I can only hope the ignominy of appearing to our citizens, and the world, as a nation that cannot manage its fiscal affairs in a routine, regularized fashion eventually changes the way our policymakers work with each other to carry out these basic functions.

–Meg Streams – Assistant Professor of Public Administration at Tennessee State University

Eying an Outcome

Whatever option(s) policymakers decide to pursue, it’s clear that our budget deficit issue isn’t going to get solved overnight. After all, if we can’t even agree on a budget for this fiscal year, how can we expect to implement the types of sweeping changes that are, by all accounts, necessary?

We can’t. The political climate has to change first. That will take time and a lot of work.

In the meantime, tell us what you think the government should do to correct the budget/debt mess? Just remember to keep the partisan politics to yourself and instead focus solely on constructive suggestions!

Ask the Experts: Should Small Business Owners Seek Venture Capital Financing?

Odysseas Papadimitriou — Mon, 03 Jun 2013 17:15:48 +0000

Posted by: Odysseas Papadimitriou

The Great Recession has reinvigorated America’s entrepreneurial spirit. As the job market soured during the housing market crisis and ensuing economic swoon, business creation rates soared to record heights. We averaged fewer than 29 new start-ups per 100,000 people each month from 2000 to 2007 – when the unemployment rate averaged 5.0% – and that number rose to 33 start-ups per month from 2008 to 2011 – when joblessness climbed as high as 9.6%, according to data from the Bureau of Labor Statistics as well as the Kauffman Foundation.

When jobs weren’t as abundant, we took it upon ourselves to create our own. That’s certainly admirable, but the fact of the matter is that starting a business is the easy part. What’s hard is not only staying in business, but also growing and becoming profitable. Of all the businesses founded in 2008, only 74.4% survived two years, and even fewer – 62.4% – made it three, according to the Bureau of Labor Statistics.

Whether a company lives or dies depends in large part on how it’s financed. There are a number of financing options available to small business owners, from credit cards and small business loans to friends and venture capitalists. But which is best?

Much depends on the nature of one’s company and the credit landscape, but venture capital financing has become quite sexy in recent years as banks have tightened underwriting standards and the Istagrams of the world have struck gold. But does that necessarily mean it’s wise for small business owners to go after VC money?

To Venture or Not to Venture?

We conducted a little survey of CEOs and professors of entrepreneurship about the pros and cons of dipping one’s small business feet into the venture capitalist pool. And here’s what they had to say on the matter.

Professors

Why an Entrepreneur Should Take VC Money: They should accept money from a VC if the entrepreneur and VC share the same strategic vision for the company, if the VC can bring more resources than funding, and if the terms are good (valuation, contractual terms, etc.), and if the firm needs the funding.

Why an Entrepreneur Shouldn’t Take VC Money: The VC model is somewhat outdated. Business accelerators are replacing VCs as a funding model, especially for early stage financing. I would recommend that an entrepreneur consider applying for funding and advice from a business accelerator first, and consider seeking investment from a VC second.

– Jon Eckhardt, Executive Director of the Weinert Center for Entrepreneurship at the University of Wisconsin School of Business.

Why an Entrepreneur Should Take VC Money: “It is all about ‘smart’ versus ‘dumb’ money. The key is accepting money from VC firms that can bring strategic partnerships, unique expertise and key management skills.”

Why an Entrepreneur Shouldn’t Take VC Money: “Loss of control. Diversion of original focus and intent of the venture (not always negative but often is in the founders minds). Necessity to give up significant ownership (often at a time when it is cheap).”

- Dr. Pat Dickson – Director of the Business and Enterprise Management degree program in the Schools of Business at Wake Forest University.

Why an Entrepreneur Should Take VC Money: “Fuels fast growth and upside potential; can bring mentors with tons of great advice; enables scale otherwise unachievable.”

Why an Entrepreneur Shouldn’t Take VC Money: “Most expensive type of capital; can bring mentors with tons of unwanted advice; rapid growth may not be desirable nor scaling possible; outside owners mean loss of control; few founders survive at the top of VC-funded growth firms.”

- Dr. Todd Watkins, Director of the Entrepreneurship and Microfinance programs in Lehigh University’s College of Business & Economics

Why an Entrepreneur Should Take VC Money: “Because the venture has a business model that takes a long time (at least a couple of years) to reach positive cash flow and that requires a large infusion of cash due to high capital and personnel budgets during early growth.”

Why an Entrepreneur Shouldn’t Take VC Money: “Entrepreneurs shouldn’t accept VC money just because they can! I have seen too many business models that are very promising that did not NEED VC money fail when they took the money even though they did not need it. They ended up flaming out while trying to grow too fast too quickly, while trying to satisfy the VC’s expectations.”

- Dr. Jeff Cornwall, Director of the Center for Entrepreneurship at Belmont University

Why an Entrepreneur Should Take VC Money: “Quite honestly I do not recommend that entrepreneurs go immediately to the venture community for seed or early stage funding. However, there are some circumstances where raising a large some of capital is required in order to compete in certain industries. There are also times where very large, audacious ideas require raising a substantial amount of capital in order to build the product and the business. Elon Musk’s Tesla Motors is an example. Some renewable energy companies, biotech and telecommunications companies may also require large sums of working capital as well. There are many instances (e.g., software apps) where the cost to build a ‘minimum viable product’ (MVP) is quite inexpensive and, at least at the start, should be done with minimal capital. … While it can bring signaling, hiring and strategy benefits, venture capital comes with it share of risks, dilution and loss of control.”

Why an Entrepreneur Shouldn’t Take VC Money: “Most simply don’t need it. Too many entrepreneurs view raising venture capital as an end in itself. They place too much emphasis on the signaling benefits of raising capital and think short-term rather than long-term about issues of control, dilution and strategic direction of the business. An abundance of capital tends to dull the mind. There is the tendency to hire too fast, pursue too many un-validated ideas, and spend on non-strategic elements of the business. Using one’s own capital first and essentially being capital constrained in the early going is not necessarily a bad thing. There is a natural need to focus more narrowly, develop and test hypothesis, harness resources intelligently before building the product. It is not too different from artists or musicians who do their best work when they have the least resources. Focus is critical in the early stages of company development.”

- Angelo Santinelli, Adjunct Professor of Entrepreneurship at Babson College

Why an Entrepreneur Should Take VC Money: “To scale more quickly and to access expertise that investors can provide in growing the company and getting it ready for an exit event such as a sale or IPO. If you want a small piece of a big pie, go VC.”

Why an Entrepreneur Shouldn’t Take VC Money: ” If you want to remain involved in growing a company you might not want to be subject to an exit event for the investors to harvest their returns. So, if you are more interested in building a company than in the financial returns that come with an exit, try not to take VC investment.

If you are a controlling person and don’t like authority, don’t take VC money, but be willing to live with the lesser investment in growing and scaling the company. However, be sure you have the discipline to do things that will get you cash flow.”

- Terry Blum, Director of Georgia Tech’s Institute for Leadership and Entrepreneurship

“We work primarily with student start-ups. These students, like many entrepreneurs utilize “family, friends and fools” for funding in the earliest stage(s) of their venture. This includes their own funds too. The next step is more likely to be an Angel Investor or sources like a Business Incubator or a Business Competition in their area. Once the concept is proven, it is determined to be a high growth-high tech venture and they have initial funding, then the entrepreneur may be poised to seek VC funding.”

- Julie Messing, Instructor and the Director of the Center for Entrepreneurship and Business Innovation at Kent State University

Why an Entrepreneur Should Take VC Money: “If your company is in a sector where VCs have had proven track records, such as IT or healthcare, VCs could potentially do a lot more for you than the money. They will make introductions to business partners, help you hire key personnel, and help you get more funding down the road. If you have very ambitious growth goals in a niche that is expected to grow exponentially in the near future, you are likely to want VC money to achieve your goal because winners will likely emerge quickly and be VC-funded in that niche.

Also, VCs will trust you the more experience you have had as an entrepreneur and they will treat you better. So if you want to be a serial entrepreneur and be in the game for a long time, at some point you need to take the plunge and establish yourself in the VC world.”

Why an Entrepreneur Shouldn’t Take VC Money: “If your company is too small or young, and/or need too little capital, chances are VCs will either be uninterested, or the terms it offers will be prohibitively dilutive. If you want to grow slowly and retain control of the company for a long time, VC may not be the best match for you and there’s nothing wrong with that at all.”

- Ayako Yasuda, Associate Professor of Management at the University of California, Davis

Why an Entrepreneur Should Take VC Money: “If they want to become an instant national company. But the trouble with that is if they can’t become one, they’ve basically lost their idea because the VCs will kick them out. So there is high risk attached to that, and they are kind of gambling on an all-or-nothing basis. The people outside Silicon Valley didn’t seem to have that gambler’s attitude.

I’ve been keeping a database of billion-dollar entrepreneurs for four years, and I have close to 90 of them. Most of the billion-dollar entrepreneurs in Silicon Valley used venture capital. Most of the billion-dollar entrepreneurs outside of Silicon Valley did not use venture capital.

Silicon valley VCs seem to have found the magic formula. Four percent of venture capitalists earn two-thirds of the IPO profits in the industry, and IPO profits are the highest profits. So about 50 VCs seem to know what they’re doing. The rest of them are all pretenders and living on fees, obviously. The 50 do well because they need home runs. They need the billion-dollar companies. They need the billion-dollar entrepreneurs, and those billion-dollar entrepreneurs exist only in Silicon Valley — the ones that have used venture capital. So it becomes one of those things where if you’re in Silicon valley you can find these billion-dollar entrepreneurs and billion-dollar potential and get a great return. If you’re not in Silicon valley, you know the question of what comes first – the chicken or the egg, in this case it’s well settled I think based on the data I’m seeing. It is not money that creates billion-dollar companies; it’s billion-dollar companies that attract capital. The entrepreneurs seem to have all gone to Silicon valley that can do these kinds of things.

The timing of when they [take VC money], that’s the other interesting part. All of [the billion-dollar entrepreneurs] started within 1-5 years of when an emerging industry started. And this has been true for the last 35 years. This is really the key issue. When an emerging industry starts, you have all kinds of new opportunities and they create new business ideas that can grow. Right now, for the last 12,13 years other than Internet 2.0 — which is the social networking — there haven’t been any major emerging industries that have created any home runs, which is why the VCs are basically sucking wind. If you look at their returns, they have been stinking to high heaven. … They proved that they can’t just create something in the middle of nothing. They need to have an industry to back them up.

Why Silicon Valley? That’s an interesting question because Silicon Valley, Minnesota and Boston were the three big centers of venture capital in the ’70s. By the last decade, Minnesota was nowhere and it is less than 1% right now; it’s miserable. Boston doesn’t seem to have done all that great, although if you talk to people in Boston they’ll give you staggered names. But in the overall scheme of things, I didn’t see too many VC-funded billion-dollar entrepreneurs in Boston. Silicon Valley has them all, and the reason for that is one that should be debated. But I think the key question is can anyone duplicate it, and to me it’s like, OK lets start a new company to duplicate Toyota. It’s not that simple and not that many people can do it. But hey, if you give me billions, what the hell I’ll risk your money and I’ll try it and pay me fees on top of that — which is what the Silicon valley game is. And whose money are they wasting? The pension fund money. And so this becomes a deeper question about how do we get this growth.”

- Dileep Rao, Clinical Professor of Entrepreneurship at Florida International University and a former venture capitalist

CEOs

“We’ve lived both sides. We bootstrapped for the first few years. When you need to make payroll – you cut through the BS and need to prove you can get clients to pay you money. It teaches you a toughness and discipline – even a ruthlessness – many early funded companies don’t have. You appreciate raising money is not “success” like a lot of people believe. Building a sustainable, profitable business is success.Now the flip side…

We ended up raising money because it is incredibly difficult to scale aggressively without the necessary resources. It also proves difficult to think long term/strategically about the business when you have short term financial pressures. We also saw competitors with clearly inferior products beating us because we just couldn’t match their speed to market and pr/marketing/sales efforts.”

- Eric Malawer, CEO of DeepMile Networks

“Unfortunately, I think too many founders raise too much money without realizing the implications it will have down the road. The amount you raise can create unnecessary limitations on outcomes and I don’t think founders realize that. True story — my startup Condaptive turned down both seed and A rounds. We wound up selling the company for about $35MM. If we had taken money both of those rounds, we’d have to have sold for more than double that amount to put the same money in the founders’ pockets.”

- Hemang Gadhia, CEO of Condaptive, Inc.

“Statistically, from any one entrepreneur’s reality, VC has a negligible role. One in 400 get funded, and at best, only one of those three embiggens. We keep talking about VC, however, because it’s so closely tied to the mythos of the entrepreneur. The term sheet is the entrepreneur’s sword in the stone. Who is the most worthy to create the next Excalibur app for glory and a G4? The VC and the fund investors are the winners. Every once in a while, they take Arthur with them, but they control the sword. Do the math, on the x of amount funded to the y of number of entrepreneurs, VC skews the normal distribution to the fat tail of big money flowing to a very precious few. When I talk to young entrepreneurs, I tell them to be Jabba. Know you business, and ensure everyone knows you are serious. Surround yourself in experts and trusted lieutenants, and be strong of will to resist all mind tricks.

VC is right for a handful of ideas. I wish I could invent the light saber. I would visit Sand Hill post haste. Sadly, the noise of VC is vastly louder than what 99.9% of entrepreneur should hear.”

- Doug Clark, CEO of Métier

“I have been on both sides of the table during my career. There are many obvious pluses to raising venture capital. I thought I would share a couple of perhaps lesser known pitfalls:

Warped incentives around exit strategy. This relates to the situation where one or more of the investment funds gets into a ‘swing for the fences’ mode because their portfolio is doing poorly and therefore, even with a good solid exit on your company, they will not achieve returns sufficient to raise another fund. In such a scenario, they have the incentive to push a company that is successfully chugging along to grow in unnatural ways — even when it’s clear to others the characteristics of your business are not likely to be compatible their growth plan. After all, an otherwise attractive exit (one that would make money for the founders and other investors) will be a drop in the bucket for the distressed portfolio. And because the partners in that poorly performing fund are in a position where they will receive no carried interest on the portfolio – absent achieving a moonshot return – they may view themselves as playing with house money.

More sophisticated poker players. With institutional investors (as opposed to individual backers), it can be harder to tell what they are really thinking. There are conversations with their partners and their LPs behind the scenes and wildcards, such as the process they go through to raise a fund from their LPs, that can affect the positions they take. Take, for example, the situation where the company has fallen somewhat short of its plan, needs to raise a follow on round and the existing investors seem to be taking a long time to circle commitments. This could be the result of extended diligence, distraction with other holdings in their portfolio, or any number of legitimate factors. Or it could be because the VC funds are running low on dry powder they have reserved for follow-on rounds and/or the partner on the deal is having a hard time selling his colleagues on re-upping. Or perhaps they have lost confidence in the company and are just trying to turn over additional cards on the chance that a surprising positive development happens. In this last case, what you perceive as fundraising activity might include an element of going through the motions for legal reasons. As a company’s dwindling cash brings it near the ‘zone of insolvency,’ the directors have an obligation to more strongly represent the interests of creditors and this can create liability if they don’t adequately fulfill the obligation. However, as long as there is apparently substantive conversation about raising the round (and therefore some reasonable probability that it will close), they have a defensible position (Note: I’m not a lawyer, so consult an expert on the implications of the zone of insolvency and related actions). I’ve heard of more than one situation where a venture-backed company was promised a cash infusion only to find the cavalry never arrived. This can make the wind-down process quite stressful for the team. Perhaps this is the source of the venture capital riddle: ‘How do you know that a company going out of business was venture backed? There are no skid marks at the edge of the cliff.’

Both of these scenarios illustrate some of the subplots that could be going on behind the scenes, perhaps entirely unbeknownst to the CEO or management team.”

- Chris Bolster, Co-Founder and Managing Partner of PublicRelay

Final Thoughts

There’s obviously no black or white answer when it comes to how wise it is for small business owners to work with venture capital firms (if there was, this article would have been a lot shorter!). But the prevailing thought seems to be that while VC financing does have its benefits in terms of connections and quick legitimacy, it also has significant drawbacks – such as loss of control and high costs – that outweigh the perks in most cases. Most of the aforementioned experts said they would approach the decision with that mindset if they were to launch a new business today.

Perhaps that’s for the best, considering the current state of the venture capital market. It’s shrinking. In Q1 2011, 49 firms raised $8.1 billion. In Q1 2013, 35 firms raised $4.1. There’s simply less pie to go around these days and a less competitive market to operate in (for start-ups of course, pie futures are optimistic).

Ask The Experts: What to Make of the IRS “Tea Party” Scandal

Ross Garner — Mon, 03 Jun 2013 07:18:07 +0000

Posted by: Ross Garner

Who knew what when? Whose heads should roll? Is Democracy itself in jeopardy? The recent turmoil surrounding the IRS’s Nonprofit Division has sparked no shortage of sensationalism or bravado-filled calls to action.

But is it possible that we’re failing to see the forest for the trees? Sure, an arm of the IRS used right-wing buzzwords to help identify organizations trying to take advantage of tax breaks meant to encourage advancements for the public good, rather than the causes supported by one particular political group or another. But might this “scandal” – which is all the rage in the current news cycle, yet sure to fade in time – speak more to the pervasive posturing in contemporary politics and the way the IRS is viewed than any sort of bias or conspiracy theory? There has been an explosion in the number of tea-party themed nonprofits in recent years, after all, and they’re not in the business of giving dolls to impoverished children or anything like that.

You might not come to the conclusion that this scandal is a bit overblown after reading the paper in the morning, but ask a few tax law experts and that’s the impression you’ll get. CardHub did just that because while our main focus is on how consumers manage credit, tax policy is something that affects all of our wallets. And if the IRS is up to something fishy when it comes to how political nonprofit organizations are characterized for tax purposes, who’s to say they’re not crossing lines in other areas as well?

Expert Opinions

Please find our experts’ takes on the following questions below:

Are the actions of the IRS’s Nonprofit Division examples of a partisan witch hunt that’s setting a disturbing precedent or a misguided attempt at efficiency?

What, if any, laws do these actions violate?

How will this affect people’s perception of government?

Can we expect the passage of reactionary legislation?

Are the actions of the IRS’s Nonprofit Division examples of a partisan witch hunt that’s setting a disturbing precedent or a misguided attempt at efficiency?

“I worked in the Office of Tax Policy at the U.S. treasury for two years and was always impressed with the dedication of the people at the IRS. Thus, while I acknowledge that facts may come out to show that this was a partisan hunt, until I have facts to show that, I approach it as a very misguided attempt at efficiency by civil servants who had a ‘tin ear’ as to how their attempt would be seen and heard.”

- Ellen Aprill, John E. Anderson Chair in Tax Law at Loyola Law School

“Like most folks, I abhor the IRS’s use of what appears to be political ideology in deciding who deserves c4 tax exempt status. Sadly, this is not the first time the IRS has allowed politics to creep into its mission. During the Bush (#2) Administration, for example, the IRS investigated Democratic-leaning c3 organizations such as the NAACP and All Saints Church in California, claiming without much justification that they were intervening in political campaigns. These sorts of things should not happen.

While on the subject of the IRS’s current monitoring of c4 organizations, it should not be forgotten that it seems fairly clear that many of the c4s are in fact breaking the law, and that, after Citizens’ United, many organizations are using c4s to engage in campaign activity while hiding their donors’ identities.

In short, this whole area is a mess. And the U.S. Congress, which has devolved into a quagmire, is unlikely to do anything productive about it.”

- Thomas Kelley, Professor of Law and Director of Clinical Programs at the University of North Carolina School of Law

“I don’t think that this was a political witch hunt, although that it is an easy conclusion based on the preliminary evidence. Rather, the report by the Treasury Inspector General for Tax Administration reveals significant ineptitude and lack of close oversight by IRS management with respect to such applications.

In reviewing the comments by Lois Lerner (Director, Exempt Organizations Division), it makes ample sense that similar applications should be grouped for purposes of consistent application of the law. However, proper management would have ensured that criteria other than just names would have guided such grouping and then additional requests for information were both proper and uniform. It is completely plausible that such lack of oversight resulted in certain IRS employees acting improperly. I don’t think the leap to a political witch hunt can be made after reviewing the TIGTA’s report.”

- Nicholas Mirkay, Professor of Law at the Creighton University School of Law

“Misguided attempt at efficiency.”

- Philip Hackney, Assistant Professor of Law at the Louisiana State University Law Center

“The Inspector General’s report strongly indicates that the IRS management and staff acted in good faith to enforce the existing laws and not out of intentional partisan bias. For example, the IG faults the IRS Determinations Unit for ‘giv[ing] the appearance that the IRS is not impartial in conducting its mission,’ for ‘not consider[ing] the public perception of using politically sensitive criteria when identifying these cases,’ and ‘lack[ing] knowledge of what activities are allowed by … tax-exempt organizations.’

The IG also found that senior management in DC quickly eliminated the problematic selection criteria on learning about it in the summer of 2011, although the Determinations Unit later altered the revised criteria in a problematic manner without clearing it with DC first in early 2012, an error that again DC management fixed after they learned of it. Finally, the IG found no evidence that anyone outside of the IRS influenced the choice of selection criteria.

For all of these reasons, as well as my knowledge of IRS operations in this area, I believe the IRS officials and employees were attempting in good faith to enforce the law and were not engaged in a partisan effort.”

- Lloyd Mayer, Associate Dean for Academic Affairs and Professor of Law at the University of Notre Dame Law School

“To begin with, I think the term scandal is somewhat overstated. … Congress, through the tax code, has charged the IRS with regulating the political activity of non-profit organizations, yet the IRS lacks the tools to do so effectively. The underlying law is a complete mess. Congress has known this for a long time and has not made significant efforts to address the underlying problems and the IRS lacks anything close to the resources that would be needed to meaningfully oversee what we might call political advocacy non-profits, or non-profit organizations that engage in political activities. The IRS is understaffed and lacks a variety of other resources that might be needed.

So, the IRS has for a long time been in effectively a lose-lose situation. The IRS is criticized for failing to monitor political activity by non-profits, yet the IRS is also criticized quite severely anytime IRS personnel try to effectively regulate political activity among non-profits.

Certainly in this case, there was not the wisest behavior in terms of the screening metrics used by the IRS employees in question. But again, that has to be understood with the background that this is a lose-lose situation and there’s no way the IRS can carry out the duties it’s been charged with by Congress effectively. …

Tea Party groups aren’t the first politically-oriented nonprofits to be subject to significant IRS scrutiny. The key, I think, behind the motives of the IRS personnel is that a very large number of Tea-Party related groups were formed all in a small time period. And the IRS division responsible for managing these nonprofits was given no increase of resources to deal with this large expansion of case load. And it’s pretty reasonable to assume that Tea Party groups are engaged in political advocacy in some form or another or are at least skirting the border of what the law allows. Now, lots of other groups are also skirting the border of what the law allows, but there wasn’t a sudden increase in the applications filed by these other groups.”

- David Gamage, Assistant Professor of Law at the University of California, Berkeley

“I think the scandal is rather overblown. There is a pretty clear pattern of abuse of the 501(c)(4) and similar forms by political groups, and the Tea Party is more or less a political organization. So I’m not especially offended that these groups were targeted. If on the other hand they were targeted selectively, that is, equivalent liberal groups were not similarly audited–or if the techniques used were overly aggressive or invasive–that is a different story. Some level of investigation is plainly justified to determine if this is true. But as for a major scandal that deserves the national attention it is receiving, I think that has more to do with a slow news cycle and the usual second-term blues than any inherent substance.”

- Michael Livingston, Professor of Tax Law with the Rutgers University School of Law

“According to the regulations, a 501(c)(4) ‘social welfare organization’ can’t have as its primary activity ‘direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.’ Most (maybe even all) of the IRS scrutiny of the Tea Party organizations seems defensible as an attempt to determine whether the organizations complied with that restriction. The problem is that the IRS did not seem to be giving a similar level of scrutiny to applicants from the other end of the political spectrum. Whether this difference was the result of ‘a partisan witch hunt,’ or a bureaucratic failure to recognize there were applicants from the other end of the political spectrum raising the same concern, I can only speculate.”

-Lawrence Zelenak, Professor of Tax Law at Duke Law School

What, if any, laws do these actions violate? What types of punishments can we expect to be levied against the IRS and its employees as a result?

“We certainly can expect personnel actions and apparently two employees have already been disciplined. Attorney General Holder is apparently looking to see if there have been any civil rights violations.”

- Ellen Aprill, Loyola Law School

“As you can read from other nonprofit law professors who have written or commented on this unfortunate situation (Professor Mayer from Notre Dame Law School), there needs to be Congressional action that addresses disclosure rules on a more uniform basis, without the arbitrary differences currently utilized between ‘types’ of tax-exempt organizations. Congress should also weigh in on whether 501(c)(4)s should be used for organizations that engage in political campaign activities – is that what Congress originally envisioned with respect to ‘social welfare’ when it enacted 501(c)(4)? Should organizations be able to exploit the disclosure differences between 501(c)(4)s and 527s if substantively their mission involves political campaign activities?”

- Nicholas Mirkay, Creighton University School of Law

“In terms of the actions described in the IG report it is hard for me to find a violation of law. There may be some vague notion of denial of civil rights, but I think that far-fetched for a criminal action. I expect that we will see more employees fired.”

- Philip Hackney, LSU Law Center

“Selection of groups for additional scrutiny based on their policy positions is almost certainly a violation of the First Amendment. The remedy for such a violation would be to redo the selection process using only neutral criteria and in an expedited fashion. It is not clear what, if any, penalties there might be for the IRS and its employees. If a group could prove that an IRS employee violated a clearly established constitutional right, the employee might be personally liable for the costs incurred by the group as a result of the additional scrutiny. Such liability is difficult to prove, however. Furthermore, the errors at issue here might be grounds for demotion or even termination of employment, although the latter would likely only be the case if it could be shown an employee actually engaged in intentional partisan bias. Senior IRS officials will also feel pressure to resign, as some in Congress have already called on them to do so.”

- Lloyd Mayer, Notre Dame Law School

How will this affect people’s perception of government? Will this “scandal” impact President Obama’s legacy? Who ultimately takes the fall for this?

“Although I think the ‘scandal’ overblown, I can perceptibly see it have a deleterious impact on people’s perception of government. It makes people much less likely to trust the government on many fronts and particularly less likely to trust the IRS. I expect it could cause an uptick in tax protesters, tax evaders, etc.

[It’s] too early to tell whether it impacts President Obama’s legacy. It will if Congress chooses to make sweeping changes to the IRS once more. If it does I would predict that the changes will be uniformly to the worst for the IRS. Steve Miller and Lois Lerner both take the fall for this. Maybe a few lower level employees [as well].”

- Philip Hackney, LSU Law Center

“I’m sure that in the short-term this will not improve people’s perception of the IRS as an intended non-partisan administrator of the federal revenue laws.”

- Nicholas Mirkay, Creighton University School of Law

“This scandal undoubtedly will cause many people, of all political persuasions, to be more suspicious of the motives and actions of government employees and officials. Some will believe that the White House and even President Obama had a role in how the IRS handled the applications, despite the lack of any evidence of their involvement. Others will understandably be concerned that these egregious errors illustrate that government employees have too much power and too little oversight, leading to problems even when they act in good faith. While one or more IRS senior officials may resign as a result of this scandal, the ultimate victim will be the already shaky public’s confidence in the ability of the federal government to govern well.”

- Lloyd Mayer, Notre Dame Law School

Can we expect the passage of reactionary legislation?

“What Congress and the President have endorsed is having the IRS and the Department of the Treasury issue new rules to clarify some of the ambiguity in the law that created the problem – [a tax-exempt nonprofit’s] primary activity cannot be political campaign intervention, but currently there is no guidance as to what ‘Primary Activity’ means, just a list of possible factors that the IRS can apply under appropriate facts and circumstance. It is my hope and that of others that this revelation will lead to reforms in the law that many have long endorses rather than reactionary legislation, but that hope may be a bit optimistic.”

- Ellen Aprill, Loyola Law School

“Absolutely, and it will be bad.”

- Philip Hackney, LSU Law Center

“Legislation is unlikely because how to regulate these social welfare organizations is highly controversial and views are split primarily along partisan lines. While it would be desirable for Congress to make the applicable rules more clear, to provide better guidance regarding disclosure of election-related political activity, and to consider shifting responsibility for enforcing such disclosure away from the IRS, it is unlikely Congress will take any of these steps even given this scandal.”

- Lloyd Mayer, Notre Dame Law School

Takeaways

The IRS lacks the resources necessary to effectively evaluate and monitor tax-exempt nonprofit organizations.

The law makes it difficult to determine whether or not a politically-active group qualifies for nonprofit status.

The number of Tea Party affiliated organizations applying for tax-exempt nonprofit status skyrocketed in recent years.

Nevertheless, IRS officials did indeed cut corners in an unfortunate manner.
The stance taken by many mainstream media outlets and politicians in the aftermath of the IRS Inspector General’s report is perhaps more worrisome than the actions taken by the Nonprofit Division.

While fundamental changes to the underlying tax laws are what we really need, this scandal will most likely result in cosmetic, reactionary rulemaking and the firing of a few.

The Best & Worst Cities to Work for a Small Business – 2013

John Kiernan — Mon, 03 Jun 2013 02:22:42 +0000

Posted by: John Kiernan

Continuing CardHub’s theme of small business-related releases in anticipation of National Small Business Week (June 17-21), this study sought to identify the cities that are the most and least friendly to employees of small companies.

There is no shortage of commentary on the best and worst cities to start a small business, after all, and with such companies employing about 47% of the private workforce in this country, paying more than 40% of the private payroll, and creating more than 60% of the new jobs added over the past 20 years, according to the U.S. Small Business Administration, it bears asking what opportunities exist for the roughly 14% of people who are currently either unemployed or underemployed, according to data from the Bureau of Labor Statistics.

More specifically, CardHub used 10 different metrics – ranging from net small business job growth and industry variety to hours worked and average wages for new hires – to evaluate the state of small business in the 30 largest metropolitan areas in the United States. We then ranked the cities based on their overall attractiveness for job seekers.

The following can be found below:

Overall Results
Other Main Findings
Commentary for Selected Metropolitan Areas
6 Tips for Landing a Small Business Job
Methodology

Overall Results


City	Overall Ranking
Denver, CO \| 1 Boston, MA \| 2 Minneapolis, MN \| 3 Seattle, WA \| 4 San Francisco, CA \| 5 Houston, TX \| 6 San Antonio, TX \| 7 Dallas, TX \| 8 Tampa, FL \| 9 Kansas City, MO \| 10 Miami, FL \| 11 Orlando, FL \| 12 St. Louis, MO \| 13 Cincinnati, OH \| 14 Portland, OR \| 15 New York, NY \| 16 Pittsburgh, PA \| 17 Cleveland, OH \| 18 Los Angeles, CA \| 19 Baltimore, MD \| 20 Atlanta, GA \| 21 Washington, DC \| 22 Phoenix, AZ \| 23 Chicago, Ill. \| 24 Las Vegas, NV \| 25 San Diego, CA \| 26 Philadelphia, PA \| 27 Sacramento, CA \| 28 Riverside, CA \| 29 Detroit, MI \| 30

City

Overall Ranking


Rank	City		Rank	City
1\|Denver\| \|16\|New York 2\|Boston\| \|17\|Pittsburgh 3\|Minneapolis\| \|18\|Cleveland 4\|Seattle\| \|19\|Los Angeles 5\|San Francisco\| \|20\|Baltimore 6\|Houston\| \|21\|Atlanta 7\|San Antonio\| \|22\|Washington, D.C. 8\|Dallas\| \|23\|Phoenix 9\|Tampa\| \|24\|Chicago 10\|Kansas City\| \|25\|Las Vegas 11\|Miami\| \|26\|San Diego 12\|Orlando\| \|27\|Philadelphia 13\|St. Louis\| \|28\|Sacramento 14\|Cincinnati\| \|29\|Riverside 15\|Portland\| \|30\|Detroit

Other Main Findings

The overall rankings display little correlation to geography, as the top 10 boasts 1 city from the Northeast, 1 from the Southeast, 2 from the Midwest, 3 from the Southwest, and 3 from the West. The bottom 10 includes 1 from the Northeast, 1 from the Southeast, 2 from the Midwest, 1 from the Southwest, and 4 from the West.

Miami, Denver, and New York have the most small businesses per capita. Las Vegas, San Antonio, and Riverside have the least.

Phoenix, Denver, and Riverside have the fastest growing small business communities, while Detroit, Chicago, and New York bring up the rear. It’s especially surprising that Riverside is on the positive side of this, as its one of the worst overall places to work for a small business these days, but the area shed so many jobs during the Great Recession that it’s bound to recoup at least some of them fairly quickly.

New hires make the most money in Washington, D.C., San Francisco, and New York – the three cities with the highest cost of living. They make the least in Riverside, Sacramento, St. Louis – all of which are in the bottom half for cost of living.

Los Angeles, Kansas City, and St. Louis have the most industry variety in their small businesses, while Baltimore, Miami, and Washington, D.C., have the least.

Commentary for Selected Metropolitan Areas

Top 5

Denver: It’s no surprise that Denver topped the list of the Best Cities to Work for a Small Business, as 97% of employers in Colorado are classified as small businesses and such companies comprise 90% of the Denver Metro Chamber of Commerce’s membership. The Mile High metropolitan area boasts nearly 30 businesses with fewer than 250 employees per 1,000 residents, a workforce that’s growing at the second fastest rate in the country, and the 5^th highest wages for new hires.

Boston: Boston ranks among the top 10 nationally in terms of the number of small businesses per capita, small business vitality, unemployment rate, disposable income, and hours worked. Such factors were enough to overcome a relatively high cost of living and garner Beantown the distinction of being the second best city to work for a small business in 2013.

Minneapolis: Companies with fewer than 50 employees comprise roughly half of the Minneapolis Chamber of Commerce’s membership, and the surrounding metropolitan area has nearly 27 companies with fewer than 250 employees per 1,000 residents. Minneapolis also boasts the least competition for jobs among the 30 major cities CardHub evaluated, its workforce spends relatively little time on the job, and the city ranks in the top 10 nationally in terms of small business vitality, industry variety, and stress.

Seattle: The birthplace of Starbucks and Nordstrom and a key West Coast hub for manufacturing, transportation and entrepreneurship, Seattle ranks as the 4^th best city for small business employees in 2013. This strong overall result comes on the strength of the Emerald City ranking 5^th nationally in terms of small businesses per capita, 2^nd for small business vitality, and in the top 10 for unemployment, new hire earnings, and industry variety.

San Francisco: San Francisco has long been recognized as a bastion for entrepreneurial spirit, and the Bay Area now boasts the 6^th most small businesses per capita, ranks 5^th in terms of both small business vitality and net small business job growth, and offers the 2^nd highest wages to new hires. The city also recently upped the ante in welcoming start-ups, establishing an Emerging Business Loan Fund which enables qualified businesses to “apply for a loan ranging from $50,000 to $1 million to cover operational, staffing, equipment, expansion, and real estate costs,” according to the California Economic Summit website.

Bottom 5

San Diego: San Diego – known largely for its scenery and military community – ranks in the bottom half nationally in terms of number of small businesses per capita, small business vitality, unemployment rate, hours worked, industry variety, and cost of living. While that was enough to secure it the dubious distinction of being the 5^th worst city for small business employees in 2013, San Diegans do have reason for optimism as the metropolitan area ranks 5^th nationally in terms of net small business job growth over the past four years.

Philadelphia: The City of Brotherly Love ranks in the bottom 10 nationally in terms of small business vitality, unemployment, stress, and cost of living. It also sits in the middle of the pack for small businesses per capita, small business job growth, new hire earnings, and industry variety. About the only thing the Philadelphia metro area has going for it is that its employees work the 4th fewest hours, on average, out of the 30 largest metropolitan areas in the United States.

Sacramento: Not only was Sacramento one of the cities hit hardest by the Great Recession, but it has also displayed one of the most lethargic economic recoveries. It therefore makes sense that this metropolitan area ranked in the bottom 10 nationally in terms of the number of small businesses per capita, small business vitality, unemployment, and new hire earnings. That, combined with below-average job growth and stress rankings, explains why Sacramento is among the worst cities to work for a small business in 2013.

Riverside: Much like Sacramento and many of California’s other major metropolitan areas, Riverside’s economy took a beating during the Great Recession and has yet to bounce back in earnest. More specifically, out of the 30 cities that CardHub evaluated, the Riverside metropolitan area ranks last in terms of number of small businesses per capita, small business vitality, and unemployment rate as well as in the bottom third for new hire earnings and hours spent at work.

Detroit: The Motor City was the epicenter for much of the economic strife during the Great Recession, and while bailouts breathed new life into the city’s automotive industry, Detroit’s small business community continues to be marred by low rankings in terms of small businesses per capita (22/30), small business vitality (28/30), net small business job growth (27/30), unemployment rate (29/30), new hire earnings (21/30), hours worked (24/30), and industry variety (26/30).

6 Tips for Landing a Small Business Job

Tailor Your Search, But Avoid Limiting Yourself: You obviously don’t want to cast too wide of a net, as that will simply increase the odds of missing a job you’d be perfect for as well as limit your ability to pay enough attention to each lead. However, it’s perhaps equally bad to put yourself in a box in terms of the types of jobs you’re willing to consider, the starting pay you require, and even the city in which you’ll live. So, try to leave your preconceptions behind and instead focus on the jobs for which your skills are appropriate (rather than what your degree is in), no matter where they may be.
Move Proactively If Necessary: The entrepreneurs who run successful small businesses (which is where you want to be) are busy folks who garner a lot of interest from local job applicants. They tend to give these candidates more consideration, as it’s simply easier to interview them and more likely they will accept a job if offered. So, if you’re not finding the type of job you want where you’re currently living, you should definitely at least consider moving to one of the highest ranked cities in this study.
Focus on the Future: Job seekers have a tendency to overly emphasize immediate compensation and the sheer availability of a job, any job. While there is obviously something to be said for being able to pay the bills in the short term, it’s also important to consider opportunities for growth within a given company, the likelihood of said company achieving long-term success, and the potential for skills development that could help you find other work in the future.
Customize Your Approach: It’s amazing how little care most job applicants put into their search. Many simply apply en masse, thinking this will give them the greatest odds of finding a job. In truth, however, they’re severely minimizing their chances of finding the right job. It’s therefore important to not only customize your cover letter and resume for each position that you have serious interest in, but also to research each respective company as well as its leadership and human resources staff in order to find commonalities and gain a sense of the type of employee their looking for.
Mind Your Online Footprint: As familiar as we’ve become with the Internet and social media, people still seem to forget that online information is accessible to everyone. Before applying for any jobs, it’s a good idea to adjust your privacy settings on all social media accounts as well as have explanations ready for any publically available information that might reflect poorly upon you.
Have a Positive Attitude: Not only is it important to stay positive in the face of rejection, but you also have to remember that employers are looking for people who fit their organizational culture and will be pleasant to work with every day. What’s more, an eagerness to learn can be enough to get you a serious look for jobs for which you might not have a perfect background.

Methodology
CardHub used the following metrics to evaluate each major metropolitan area’s small business friendliness:

Number of Businesses with Under 250 Employees Per Capita – (Weight = 1): The opportunity that job seekers have to find employment with a small business in a particular metropolitan area obviously depends, at least in part, on the sheer number of such business entities in operation there. The U.S. Small Business Administration defines a “small business” differently depending on the industry, and while the upper limit for certain industries is a private company with 500 employees, CardHub chose to use a smaller number that is more in line with what the average person considers a small business to be.
Industry Variety – (Weight = 0.5): This metric was used to evaluate the balance of each metropolitan area’s small business community in order to gauge the opportunities available to job seekers irrespective of career focus. After all, a given city might boast tech jobs aplenty, yet have little to offer folks interested in other fields.

Net Small Business Job Growth – (Weight = 0.5): This metric was used to indicate whether a given metropolitan area’s small business workforce is expanding or contracting. While a city with a large number of small business jobs might seem attractive on the surface, new opportunities could be few and far between if that number is consistently dwindling.

Small Business Vitality – (Weight = 1): This index tracks small business job growth relative to workforce and population trends.

Average Number of Hours Worked – (Weight = 0.5): It’s no secret that small business employees tend to pull long hours, but it’s also important to strike a healthy work-life balance. So, for this metric, lower numbers of hours worked were viewed favorably.

Average Monthly Earnings for New Hires – (Weight = 1): While there is indeed something to be said for the sheer availability of jobs in this economy, job seekers want to make sure what they make will pay the bills. This metric was used to rank metropolitan areas based on how much the average new hire earns per month.

Unemployment Rate – (Weight = 1): This metric was used to gauge the competition for available jobs in each metropolitan area.

Average Disposable Income – (Weight = 1): This metric takes local taxes into account to show how much money area workers have to spend after government takes its cut.

Cost of Living – (Weight = 1): This metric adjusts for regional price and wage differences, enabling direct comparison of how much spending power the average citizen has in each major metropolitan area.

Stress Index Ranking – (Weight = 0.5): Working for a small business can be very stressful given the often long hours, uncertain future, and pressure of a down economy. This is only magnified in areas known for their stressful lifestyles, so low scores in this index were viewed favorably for this study.

Using the most recent data available (see below for sources), we rank-ordered the 30 largest Metropolitan Statistical Areas (MSAs) in the United States, as determined by Census Bureau data, for each of the above metrics and then weighted each metric according to the breakdown above to develop the final rankings.

Sources: Data used to create these rankings is courtesy of the U.S. Census Bureau, the U.S. Bureau of Labor Statistics, the American Psychological Association, the Council for Community & Economic Research, and the American City Business Journals.

Card Hub

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Ask The Experts: What to Make of the IRS “Tea Party” Scandal

Are the actions of the IRS’s Nonprofit Division examples of a partisan witch hunt that’s setting a disturbing precedent or a misguided attempt at efficiency?

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The Best & Worst Cities to Work for a Small Business – 2013