Finding a job is a fraught process, even in the best of times. Now, as our economy continues to rebound, hiring is ramping up and so are the number of tools companies have at their disposal to evaluate candidates. From familiar, long-used personality tests to new algorithms that aim to find the right long-term hire, we consider the new landscape job-seekers and managers must navigate with Howard Ross.
For nearly nine decades, the Kiplinger family has been dispensing economic forecasts and investment advice to millions of Americans seeking to manage their personal finances more astutely. But a changing journalism landscape has reshaped how readers gather information, and it’s put stalwart publications like Kiplinger’s Personal Finance under pressure to cope and adjust or perish. Kojo talks to Knight Kiplinger about the future of business media and personal finance in an age of economic uncertainty.
- Knight Kiplinger Editor in Chief, The Kiplinger Letter and Kiplinger's Personal Finance magazine
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. In 1947, W.M. Kiplinger published his first magazine dispensing down-to-earth news and advice on everything from paying a mortgage to saving for your family.
MR. KOJO NNAMDISix decades later, Kiplinger's Personal Finance magazine remains a newsstand stalwart even as a rapidly shifting media landscape has claimed dozens of its competitors. Just last month, Smart Money magazine folded, moving its content entirely online.
MR. KOJO NNAMDIIn an election year, both candidates claim to be better for voters' pocketbooks and with the federal deficit at record highs, interest rates at record lows, stagnant unemployment and the looming fiscal cliff, many voters will cast ballots based on what's best for their wallets.
MR. KOJO NNAMDISo who do you turn to to dissect the bottom line? Knight Kiplinger, the editor in chief of his grandfather's magazine, the company's newsletters and Kiplinger.com is here to parse financial fact from fiction this election year and to provide a little advice on your personal finances. Knight Kiplinger joins us in studio. He is the editor in chief of Kiplinger's Personal Finance magazine, The Kiplinger Letter and Kiplinger.com. Knight, good to see you again.
MR. KNIGHT KIPLINGERKojo, wonderful to be with you again.
NNAMDIThis is your magazine's 65th year and The Kiplinger Letter celebrates its 90th birthday next month. Before we dig into dollars and cents, I'd love for you to tell us how your grandfather broke into journalism coming from a family of carpenters and carriage-makers.
KIPLINGERMy grandfather apparently was fascinated by writing and gathering information, nosing into things and telling stories from a very early age. We had a neighborhood newspaper that he published at the age 11 or 12.
KIPLINGERHe was the first member of his family to go to college, to Ohio State University. And when he was a junior, Ohio State created a journalism major, which they hadn't previously had, and he and one other guy said, we'll be those first journalism majors, and got a job with the Associated Press after college.
KIPLINGERCovered politics in Columbus, Ohio, and then came to Washington and found that the AP wasn't doing much with economics and he was more fascinated with economics than politics. All the hot-shot star reporters wanted to write politics.
KIPLINGERHe said, okay, I'll write about economics and finances. The income tax was just a couple of years old. It was tiny. Nobody paid it because no one had to pay it. It wasn't avoidance. It was tiny at 1 percent or so.
KIPLINGERAnd the Federal Reserve was new and he wanted to write about trade policy and tax policy. And he did that for a few years then decided to go out on his own in 1920 and start a bureau of business intelligence reporting for individual clients and businesses, banks, businesses on retainer that wanted to know what was really going on in Washington and how it would affect them and the rest is history.
NNAMDISo this is before the first Great Depression?
KIPLINGERIt really was, yeah. He was doing this sort of journalism and intelligence gathering all through the 1920s. The Kiplinger Letter struggled through the 1920s. It actually took the crisis of the Great Depression to make Kiplinger content indispensable to the business readers of that day.
KIPLINGERAnd The Kiplinger Letter took off in circulation in the Great Depression and then after World War II, my grandfather had an original idea. He said, nobody is writing practical economics, personal economics for the American people.
KIPLINGERToday, personal finance content is ubiquitous. It's on TV and the radio. It's in men's magazines and women's magazines. It is everywhere. In 1947, it was nowhere and the Kiplinger magazine was the first magazine to bring these lofty economic issues down to the personal level for the benefit of the American family.
NNAMDIBut even though it is ubiquitous, many of us still have trouble understanding it so 800-433-8850 is the number to call. Do you feel like the media equips you with a strong enough understanding of finance and how best to adapt to today's economic challenges? Call us at 800-433-8850. Our guest is Knight Kiplinger. He is the editor in chief of Kiplinger's Personal Finance magazine, The Kiplinger Letter and Kiplinger.com
NNAMDIDo you have questions about personal finance, retirement or the ways economics and finance are likely to be affected by the looming election? 800-433-8850, you can go to our website kojoshow.org or send us a tweet @kojoshow. Did you feel pressured to follow in your father and grandfather's footsteps or does journalism just run in the Kiplinger DNA now?
KIPLINGERI think it's the later. I didn't feel any pressure. As a matter of fact, in college and graduate school, I studied international affairs, international economics. I thought I would work overseas in economic development for the Ford Foundation or USAID or a think tank or something like that.
KIPLINGERBut then I dropped out of graduate school in international affairs and what did I do? I got a job as a newspaper reporter.
NNAMDIYep, Associated Press, wasn't it?
KIPLINGERWell, actually, it was The Montgomery County Sentinel out in Rockville, which was a great training ground of wonderful journalists in that era. I was talking to Bob Woodward the other night at a testimonial for him and we were talking about how when I left the Sentinel he came in and took over my desk and my beat, covering Rockville's city government.
KIPLINGERAnd Bob stayed at the Sentinel longer than I did and he had only been at the Post six months when Watergate broke, but he cut his teeth at the Montgomery Sentinel.
NNAMDII'd like to get back to business journalism a little later, but first, let's dig into finances and the election. The financial wellbeing of the middle class has been at the top of both candidates' agendas this election cycle. Let's talk a little bit about how personal finances have changed for middle class earners over the past four years and how they might change under a Romney administration.
KIPLINGERI'd like to go back a little more than four years and talk about the first decade of the new millennium. I call it the 'noughts, the 00s. What else are you going to call it? And nought stands for double zero, goose egg, nada, and nought. So it was a good name for what others called the lost decade.
KIPLINGERThe first decade of the 2000s was very tough on the financial security of Americans. The decade opened with a bursting of a bubble. It opened with the bursting of the stock market bubble that had inflated in the late 1990s.
KIPLINGERThen we had the financial trauma and economic and psychological trauma of September 11th. And we had a severe recession in business following September 11th. So in the decade of the 2000s, for most Americans, it was a tough time. And then the decade closed with the bursting of a second bubble. That was the real estate, housing bubble in 2007 or so.
KIPLINGERSo over the course of an entire decade, median household income in America stagnated at about $50,000 per household. And I don't use household synonymous with family, there are a great many low-income, single person households in that calculation and that depresses the median.
KIPLINGERBut we went into the decade of the 2000s at about $50,000. We're still at about $50,000 so that was stagnation and then, of course, the collapse of the housing bubble wiped out seven trillion dollars of home equity. And too many people had been saving too little of their current income and using the appreciation of their homes as a surrogate for the fresh savings that they should have been making from their earnings.
KIPLINGERSo it was a very tough decade and, of course, a recession based on a financial crisis is always going to be more painful and longer to come out of than a garden-variety industrial recession of over-capacity and slack and that sort of thing. So it's really been a very tough 12 years or so for the American people.
KIPLINGERMassive job losses, we haven't yet quite earned back half of the nine million jobs that were wiped out in the Great Recession, the bursting of the housing bubble and the financial bubble and all of that. We're back to the same level of total employment from four years ago.
KIPLINGERBut we have not earned back, oh, barely half, of the nine million jobs that were lost at the end of the previous administration and the early part of this administration.
NNAMDIYou seem to be suggesting that the question in vogue, are we better off now than we were four years ago, may not necessarily be the right question to ask or that we should be phrasing it differently?
KIPLINGERMost people aren't better off and whether you ascribe responsibility to an administration, any administration or not is a matter of personal preference. I happen to think that historically we assign too much credit and too much blame to the holder of the White House at that time.
KIPLINGERWashington doesn't pull all the strings in the U.S. economy and even in Washington, the president is a relatively minor player in the economy compared to, say to the U.S. Congress. You know, here, we are talking to an audience in the Washington metro area and I should point out that Washington is an atypical freak financially in America.
KIPLINGERWashington had a great decade in the 2000s. Washington fared very well over the last four years. Stimulus money was spent wildly, disproportionately in the Washington metro area. It has been calculated that on a per-capita basis, the Washington area benefited from three times the stimulus spending of the rest of America.
KIPLINGERStimulus money was poured into the most affluent metro area in America that had a much lower unemployment rate during the Great Recession than the national peak of 10 percent or today's peak of 6 percent. So Washington is atypical. It is the most affluent, prosperous, highly educated large metro area in America.
KIPLINGERIt has the highest income hurdle for being in the top 1 percent of any of the top ten metro areas in America. Many people in the Washington area who would be in the top 1 percent of income any place else in America are not in their home metro area. It takes $527,000 of household income in this metro area to make the top 1 percent.
KIPLINGERSo this is a spoiled metro area, spoiled by lavish federal spending on federal procurement, defense contractors, heath care contractors, all sorts but nationally it has been a very difficult the last dozen years for most Americans.
NNAMDIWe're talking with Knight Kiplinger. He is editor in chief of Kiplinger's Personal Finance magazine, The Kiplinger Letter and Kiplinger.com. Going to the phones it is 800-433-8850. We'll start with Tracy in Annapolis, Md. Tracy you're on the air. Go ahead, please.
TRACYHi, I'd just like for your guest to address the fiscal cliff that is reported so dramatically and how one can position oneself to be in a safe market. In the past, I've pulled out of investments thinking that the market was going to bottom out and was advised that was really not the thing to do.
TRACYAnd the second question of my questions is if you could address how we could bring education into the secondary school level so that students know how to be fiscally responsible and they don't jump at every credit card offer that is mailed to them while they're in college and use it irresponsibly?
NNAMDIThe second part is about financial education for kids in school, but the first is about the fiscal cliff. So far there's been no agreement and little to no work in Congress to avoid the $900 billion dollar and across-the-board spending cuts that will go into effect on December 31st. We've got three months to go and Congress has left town until after the elections. How do you think this story is going to end? Will we, on December 31, tumble over this fiscal cliff?
KIPLINGERKojo, it looks as if a deal will not be cut in a lame duck session. It's looking to us at Kiplinger -- and this is the province of the Kiplinger Letter where we do our political and economic forecasting -- it looks to us as if this work will be put off until the new congress in January. The government will use a variety of tricks to get past the various end-of-the-year deadlines and there are a variety of things the Treasury can do.
KIPLINGERWe do not see a deal on taxes and spending in the lame duck but in 2013. It is likely that whoever is elected will be dealing with a very intractable federal budget that will require both more revenue and deep spending cuts. Each party thinks that we can move towards fiscal stability, move towards a balanced budget either with existing revenue and lots of spending cuts or much more revenue and relatively few spending cuts. They're both mistaken. They are both conning the American people.
KIPLINGERFiscal stability over the next decade or so will require both more revenue -- not necessarily higher tax rates but they probably will go up -- but more revenue whether from trimmed credits and deductions on both businesses and individuals or from higher tax rates, most likely some of both, and deep spending cuts. You can't get where we need to go by focusing only on spending cuts or only on higher tax. It'll be a combination of the two.
NNAMDIWell, if and when we do fall over the fiscal cliff after December 31 we're only looking at the spending cut side of the discussion. How is that likely to affect the personal finances of the average American?
KIPLINGERIt kind of depends on where they are. Spending cuts in the next decade will fall pretty heavily on the Washington Metro area, which as I mentioned earlier has been blessed by very lavish federal spending on private contractors, on direct employment, on all of the people in the Washington area who sup at the federal trough and that is lobbyists and lawyers and trade associations of all sorts and not just direct federal employees.
KIPLINGERSo I think Washington will experience some of what the rest of America lives with normally but which Washington has been insulated from. Our caller had a question about how we can reorganize our personal finances to deal with this and a question about the precariousness of the stock market, how financial markets will respond to the likely continued display of dysfunction in Washington, D.C. My advice would be don't do anything different from what you should be doing anyway.
KIPLINGEROur caller said -- seemed to suggest that she had pulled out of the stock markets in previous times of crisis. I remind people that from the dark days of early 2009 when the Dow bottomed out at about 6500 -- the Dow is now at twice that level today -- it is very hard not to follow the lemmings over the cliff. It is very hard to be contrarian.
KIPLINGERIn the dark days of 2008 and 2009 at Kiplinger we told our readers the foundations of future fortunes are made in the darkest hours of bare markets. You should be buying at Dow 75 and Dow 7. And of course it went down to 65 and a lot of people said, Knight why am I still following your advice? The market is still going down. And I said, this is not investment advice for the next six months or the next year. And people who bought in those dark days have doubled their money in the last three years.
KIPLINGERNow I'm not a market timing guy. I just meant stay the course. Continue those automatic monthly deposits to your IRAs and 401Ks and your brokerage accounts. Put your savings on autopilot and stay the course. Don't look at your 401K statement every month, but likewise don't put your head in the sand and stop learning and reading.
NNAMDIPeople have, in some cases, stopped paying enough attention to financial news. And for the second part of Tracy's question having to do with education, Tracy, we will get to that when we come back from this short break because there's another caller who is interested in that issue. But, Tracy, thank you very much for your call. The number's 800-433-8850. If the phone lines are busy you can shoot us an email to email@example.com. How do you get investment advice? Do you surf the web, read a magazine, talk to a professional? You can also send us a Tweet at kojoshow. I'm Kojo Nnamdi.
NNAMDIOur guest is Knight Kiplinger. He is the editor in chief of Kiplinger's Personal Finance magazine, the Kiplinger Letter and Kiplinger.com. If you have questions or comments for Knight Kiplinger call us at 800-433-8850. The second part of our last caller's question had to do with education. And, Knight, I'd like to take a couple of calls because there are at least two people who would like to address this issue. I will start with Debra in Leesburg, Va. Debra, you're on the hair. Go ahead, please.
DEBRAHi, Kojo. You know, we as parents almost always want our children's lives to be better than ours. And we -- my husband and I both graduated from college but in debt. And we told our daughter that we would help her in any way we can through four years of college if she would agree to taking some courses in personal finance. And she agreed enthusiastically and with two very fine universities but neither of them offered any courses in personal finance.
NNAMDIThank you very much for your call, Debra. I will move on now to Emily who is in Rockville, Md. Emily, you're on the air. Go ahead, please.
EMILYHi, Kojo. Thank you for taking my call. Can you hear me?
NNAMDIYes, we can.
EMILYI grew up in Montgomery County, Md. and I went to public school. I thought I got a great education but I didn't have really any education on personal finances except for a couple of months on very basic economics. And then I went on to college out of state and there was no, you know, core part of the curriculum on personal finance. And now I'm a college graduate and I feel like I'm not by any means alone in this problem I have that I'm starting from scratch learning about credit scores, 401Ks. Maybe it's not -- credit scores are not something I should avoid as I thought before, you know, getting into debt is bad, you know. Not having a credit score is bad.
EMILYSo I was wondering if the -- if your guest could, you know, talk about maybe the possibility of incorporating financial literacy, just the basic, into the requirements for education.
NNAMDIEmily -- Emily, you are not alone. Thank you for your call. Finally on this issue, Dennis in McLane, Va. I think has an even more straightforward question. Dennis, your turn.
DENNISThank you, Kojo. My question is actually in grade school or high school, I'd like to have your guest address two questions. Number one, what can we do that we're not doing? And the second question is, are there any other countries in the world that are doing more than we are in this whole area? And I'll take your answer offline. Thank you.
NNAMDIEducating financial literacy, whether we're talking about the elementary school level or the college level, Knight Kiplinger.
KIPLINGERThese are very, very important questions well framed. It turns out there are school systems all over America -- and I wish I could cite some in the Washington Metro area -- that have recognized this critical need and they are not incorporating personal finance education into other curricula. Sometimes it's in civics, sometimes it's in what's left of the old home economics courses. Sometimes the high school has a life skills course about applying for a job, getting credit, getting a car loan, savings accounts, things like that.
KIPLINGERIt turns out this need is finally being recognized all over America and it's cropping up in high school curricula. Years ago at Kiplinger we created curriculum content for every grade level. And back then it was very, very difficult to get this curriculum adopted. It had to be adopted by an entire state. And a principal or a home ec teach or a civics teacher who wanted to put this into the curriculum couldn't do it individually. Even a principal couldn't do it and it had to be approved by an entire state.
KIPLINGERWe eventually exited that business because it was so difficult dealing with the educational bureaucracies. It is much better today. Now there's more local option on the part of teachers and principals to put this into the classroom. Some do it very informally. And I think the best place for it is in a broad life skills class where the kids are learning about the responsibilities of parenthood and marriage, applying for a job, the value of continuing an education and getting skills. And that's where personal finance belongs and it's willfully lacking.
KIPLINGERPeople graduate summa cum laude from top universities and they don't know the first thing about comparing mortgages, life insurance, asset allocation within a retirement savings plan. And this is why the personal finance press today is still so important to the process. At Kiplinger and other personal finance organizations we view ourselves as educators filling this goal and this is -- this gap and it's what we're doing in our issues every month.
NNAMDIDo you believe that maybe outside of the personal finance press, the media at large have been doing us a disservice in the way it covers the economy?
KIPLINGERI think the economic coverage is often more heat than light. It's often cast in an adversarial framework. People are trying to prove a point, score political points. And every now and then there's a presidential candidates gaff that actually stimulates a very good debate. And the Romney gaff, how he characterized the 47 percent of Americans who didn't pay any personal income tax actually stimulated a very constructive, useful debate. And now a lot of people know more about the profile of federal tax payments, who pays what, than they had previously. Too bad it took a gaff to get us there but it got peoples' attention.
NNAMDIA recent report by the Consumer Federation of America showed that the average middle class family lost about 28 percent of its financial assets between 2007 and 2010 and now has $27,300, which includes retirement, savings and checking accounts. How do we rate that data with the fact that President Obama has presided over one of the strongest stock markets in many decades?
KIPLINGERWell, there was a strong stock market from a very depressed level, yes. From that Dow 6500 level in early 2009 it has more than doubled. Stock prices are based on one thing. They're based on the earnings of the corporations that issue those shares. So when corporate earnings are fairly strong as they have been for several years coming out of the deep recession, that'll be reflected in stock prices. The multiple of those earnings that people are willing to pay for a share of that company is based on enthusiasm for stock ownership and optimism and sentiment. Sometimes people are willing to pay a very low percentage of those corporate earnings, sometimes much more.
KIPLINGERAmericans lost an enormous amount of net worth in home equity that declined. And that's slowly coming back in some regions, very little in others. In the 1990s and in the 2000s Americans relied too much on the appreciation of assets they already owned. And that appreciation became a surrogate, a substitute for saving more of their current income. Saving is not how much your assets grew last year. That's luck or inflation or something beyond your control in many cases. What you can control is how much of your current income you set aside.
KIPLINGERAmericans used to save 10, 15 percent of their gross income. Now as a nation we're saving barely 4 or 5 percent. There was a period during the housing bubble when we were saving collectively as a people zero of our current earnings because we said, well look how much my house is going up in value. Or in the late '90s, look how much my stock portfolio is rising. I don't have to save as much from my current income. These markets are doing it for me. They're making me look rich. Making me look smart.
KIPLINGERThere is no substitute for current savings from current income going automatically into your retirement accounts or wherever you park your money. And then how to deploy those savings, how to invest them to grow, that's another issue, but you got to start with the savings.
NNAMDIOn therefore to Beth in Washington, D.C. Beth, you're on the air. Go ahead, please.
BETHHi there. Thank you for taking my call. I am a consultant and so I'm putting a lot of money into a retirement account because I'm not going to be having a pension. And I started doing this recently and I'm doing it through Ameriprise. There's a Franklin Templeton account that they're putting the money into. And I recently saw that President Obama was putting a lot of his money into a Vanguard index fund account. And I'm wondering how my type of retirement account compares to an index fund account and whether it makes sense to move my current money into an index fund account.
KIPLINGERThat's a great question and I get it a lot. You are in actively managed mutual funds. There's a money manager who is buying and selling assets, selecting the assets to own. There are some money managers who have done very well over the years and actively managed accounts and outperformed the broad indexes, the S&P 500, the 500 or so largest companies in America, total index funds that own a sliver of 5 or 6,000 publicly traded companies in America.
KIPLINGERAt Kiplinger we follow actively managed funds and try to direct our readers to the best of them, but we are also very partial to index investing. With index investing you're buying a broad array of assets. You have the lowest management fees and administration fees and sales fees that you can possibly get in index funds. And that's why we and other personal finance people like index funds so much. Vanguard has incredibly low asset management fees so more of your money is working hard for you.
KIPLINGERThe funds you own are probably so called load funds that have somewhat higher management fees, sometimes a marketing fee that goes to your investment manager. Nothing wrong with that but a fund with higher expenses has to do relatively better for you than a fund with low expenses. So whether you buy a traditional index fund or whether you buy an exchange traded fund, a sold called ETF, which is a basket of assets that you buy on a stock exchange, that's also a low cost way to invest.
KIPLINGERThere's a lot to recommend index investing and you should talk about it with your financial advisor. And you should read in the personal finance press stories at Kiplinger about the pros and cons of these two ways to invest.
NNAMDIBeth, thank you very much for your call.
NNAMDIWe move on to Stephanie in Washington, D.C. Stephanie, your turn.
STEPHANIEThank you. Thanks for taking the call. I'm an older American and drawing down on my 401K and I want to know if the advice -- the investment advice you gave pertains to those of us in my situation.
KIPLINGERWell, the rate at which you draw down your savings depends on your life expectancy and how long you want to make your money last. You probably want to reduce volatility in the assets you own. Generally older Americans should own much lower percentages of stocks, which tend to be more volatile. They should own higher percentages of fixed income assets, bonds, that sort of thing.
KIPLINGERAt Kiplinger we've just started a new newsletter called Investing for Income because many of our older readers are very dissatisfied with the very low interest rates today on CDs and money market funds and treasury bonds. And they want to boost their current income in retirement without taking undo risk and we're directing them towards a variety of higher yielding instruments, assets that will do this. Real estate investment trusts and energy limited partnerships and certain so called junk bonds which are scarily named but in some cases are relatively safe, higher-yielding bonds. We should call them high-yield bonds rather than junk but the market calls them junk so we will too.
KIPLINGERSo you want to avoid the volatility, big swoons in market prices when there's a geopolitical crisis. If Israel attacks Iran and oil prices spike we can expect that the stock market is not going to take that news very well and we expect a significant in the stock market. But we believe that if you are well allocated in a way that's appropriate to your age, more conservatively for older people, little more adventurously for younger people, you can ride out those geopolitical events and benefit from corrections in the market to buy lower.
NNAMDIStephanie, thank you very much for your call. We're going to take a short break. When we come back we'll continue our conversation Knight Kiplinger and take your calls at 800-433-8850. You can send email to firstname.lastname@example.org. How have your finances been faring over the past decades or four years? Do you think they'd better under a Republican administration? 800-433-8850, I'm Kojo Nnamdi.
NNAMDIOur guest is Knight Kiplinger, he is the editor-in-chief of Kiplinger's Personal Finance magazine, The Kiplinger Letter and kiplinger.com. Knight Kiplinger both candidates have said they won't raise taxes to help close the trillion dollar budget gap but this is an election year so I'll ask you to prognosticate about what the reality could be for our taxes under either candidate?
KIPLINGERRegardless of who wins, taxes are going up in America because the present revenue available to the federal to run everything it does is not sufficient. More revenue is needed and deep spending cuts are necessary. It is likely that the top tax rate of 35 percent will go up to a previous level of about 40 percent, perhaps not on the $250,000 and up earners. Perhaps they will skip over that level and add a new bracket with a higher tax rate significantly north of $250,000.
KIPLINGER$500,000, a million, something of that sort. A lot of people say we have flattened the progressivity of our tax code too much with $250,000 being the top rate presently 35 percent. We might jump over that. What about the 15 percent rate on dividends and capital gains? What we might do is add some progressivity to the capital gains as well, leave the rate at 15 percent for people of modest means who have a profit on an asset they've owned for 18 months or a few years.
KIPLINGERLeave it at 15 or even 10 at the lower rate but move a top rate for very wealthy people, top capital gains rate up to 20, 25 percent. Put some progressivity into it. We are going to trim some popular tax deductions. Everybody asks me about mortgage interests. We're not going to abolish the mortgage interest deduction but look at it this way, how generous is it now? You can deduct the interest on mortgage debt up to $1.1 million on two homes.
KIPLINGERNow, if the purpose of the mortgage interest deduction is to stimulate home ownership among a broad spectrum of the American people you can accomplish that goal by limiting the deductibility of the mortgage interests to one home and maybe a half of million dollars of mortgage debt. Now, there are a lot of people in Washington who max out on that mortgage interest deduction. They're deducting interest on 1.1 million on two homes.
KIPLINGERBut there's a lot of money being left on the table. That's an example of how we can scale back the overly generous level of certain personal tax deductions and of course business tax deductions. Many people would like to see a much simpler tax code than we have today. The federal tax code today has 3.8 million words. A tax code of 3.8 million words, we could simplify that. We could scale back or eliminate an enormous number of overly complex tax breaks for business and individuals and people would be paying something closer to the rate on the chart and, you know, it's not as if people are not paying enough taxes right now.
KIPLINGERThe highest income, Quintile, in America pay an effective tax rate, an average tax rate of about 30 percent. All this discussion about Warren Buffett and Mitt Romney, that's a smokescreen, a diversion. Upper-income people pay a lot of taxes right now, an average tax rate as I say of about 30 percent higher than lower Quintile people. But simplifying the tax code and putting a lot of CPAs and tax attorneys out of business would wonderful for the America economy. We should lower the corporate income tax rate, America's corporate of 35 percent is the highest in the world and it's just an expense of doing business like labor and materials and rent and things of that sort.
KIPLINGERIf we simplify the tax code, scale back a lot of overly complex credits and deductions we could lower the corporate tax rate to more like our competitors in the world in the neighborhood of 20 percent. That would be worth doing.
NNAMDIWe got this post on our website. "I just heard his comment about both parties pulling the wool over voters' eyes on the fiscal cliff and deficit reduction. I'm just curious, if he advocates a balanced approach, increase in revenue and cuts in spending, isn't he really advocating the president's position? President Obama wants to have $1.00 in revenue increase for every $2.00 in spending cuts. Isn't that more than fair? And if not through taxes then how? Does he want to use the Tea Party plan of selling of national resources? Can he acknowledge that as he advises individuals to invest during the recession, that the government should follow the same strategy through investing in educational and physical infrastructure?"
KIPLINGERYou know, I'm setting aside what both of the candidates are saying including the president. I'm calling anybody a liar. Many voters do not trust the president and his party to have the guts, the tough love mentality to cut spending enough. Politicians get elected by saying yes, they don't get elected by saying no. They get elected by overpromising people more benefits and not presenting the bill for those benefits.
KIPLINGERThere are people who think that the Republicans would cut spending too deeply and cut taxes too deeply and there are people who mistrust the Democrats to cut spending enough. I think it's going to be a delicate balance of revenue enhancement, I love that Washington phrase, and pretty deep but gradual spending cuts.
KIPLINGERDeep spending cuts made too quickly would put the economy into a tailspin because government spending is simulative, it's supporting of the economy when private demand is slack. But over the next decade we've got to gradually dial back federal spending and find new sources of revenue, probably from simplification of the tax code rather than significantly higher marginal rates.
KIPLINGERHere's Bill in Catonsville, Md. Bill, your turn, go ahead please.
BILLThank you. Mr. Kiplinger, I'd hoped you could comment on the Thomas Sowell Assertion, "that riskier mortgage lending practices imposed by government were what set the stage for the financial disasters that followed," and that's a quote.
KIPLINGERI love it when people site Thomas Sowell. He was my freshmen year economics professor as a young assistant professor at Cornell.
KIPLINGEROne of the smartest men I know, he is absolutely right that Washington, especially Democrats in Congress leaned hard on Fanny Mae and the FHA and Freddy Mack to loosen the credit standards to make it possible for people of very modest means, some of them in precarious financial shape, to qualify for a mortgage. The mortgage mess has so many mid-wives and parents and step-parents I can't count them all.
KIPLINGERChicanery in mortgage brokerage, outright fraud, convincing people of modest education to go into no money down, interest only, no doc liars loans they couldn't afford, shame on them. Wall Street securitized a lot of junk and told us that it was good quality assets, shame on them. Likewise, there were members of Congress who over encouraged homeownership and leaned hard on federal housing officials to loosen standards that were perfectly reasonable for qualifying for a mortgage. And a little bit of shame on them too.
NNAMDIWhen we look at those financial products that were you talking about that arguably taint our economy, even people within the field are not very good at explaining how those products work.
KIPLINGERIt's true. At Kiplinger's Personal Finance we have always been partial to plain vanilla mortgages. We don't even like short ARMS especially in an environment in which interest rates are likely to rise over the next few years. A lot of ARMS being written now 5, 7 year ARMS are going to adjust seven years from now to significantly higher rate that some people may not be able to afford.
KIPLINGERWe love plain vanilla 30 year fixed mortgages or even more, 15 year fixed mortgages where you're building your equity much faster and retiring that loan twice as fast. You're going to have a higher monthly payment but you're going to pay off that mortgage much faster. Exotic mortgages should not have been offered to people especially no money down, interest only, balloon notes, the so-called liar's loans not requiring verification of income. It was a shameful period in American financial history and there's blood on many hands.
NNAMDIPart of the reason we wanted to talk with you about investment tools is that Kiplinger's has a new software program that helps one to figure out when the best time is to collect social security and it is not necessarily when one turns 62. What is this tool all about?
KIPLINGERThat's a great question, Kojo. Everyday 10,000 Baby Boomers are turning 62. Yesterday, today, tomorrow, 10,000 a day. A lot of them grabbing that first social security check at their earliest opportunity when they turn 62, 40 percent as a matter of fact, are opting for that payment. The problem is the payment is 25 percent lower than if they wait until 66.
KIPLINGERNow, I understand a lot of those people might be in difficult financial circumstances, they feel they need the money right now or maybe they're in ill health and they figure four years of a lower benefit will be better than waiting to 66 for that larger benefit. Actually if you can wait past 66 you're going to get an eight percent lift in your monthly benefit, between 66 and 70, eight percent every year.
KIPLINGERSo a lot of people should wait until their full retirement age. A lot of people of means, they've been very responsible, they've saved a lot, say well, I'm going to wait all the way to 70. It turns out it takes a computer calculation, not the back of an...
NNAMDIKnight used the software himself.
KIPLINGERI did, my wife and I filled out this very simple questionnaire in Kiplinger's Social Security Solutions. We were both planning to wait until 70 to get the highest possible benefit. It turns out, my wife should start at 66 about two years from now. I should apply but suspend, register at 66 but say don't send me the check yet. I'll wait another four years until 70. And this software program was a real eye-opener for us.
KIPLINGERMost people shouldn't start the benefit too young but a lot of people would be leaving a great deal of money on the table if they start the benefit too late as well. you can put in your likely life expectancy based on your family history and your current health, whether your single or married or widowed, it's a very interesting thing and it's called Kiplinger's Social Security Solution and it's been a real eye-opener for a lot of people and we're talking about a swing of 50 or 100 or $150,000 in total lifetime benefits from social security.
NNAMDIOnto Libby, we don't have a lot of time left but Libby's been waiting for a while. Libby, thank you very much for your call. Go ahead please.
LIBBYYes, good morning. I'm 66, have been on social security disability since 2002, which was recently converted to regular social security and I do not get enough income on a monthly basis to take care of all of my responsibilities.
LIBBYSo my two choices have been to sell assets, which is a taxable amount or to draw down on my home equity line of credit, which leaves essentially a lien against my house but gives me nontaxable money and also provides a little bit of a tax benefit. I was wondering what your position is for somebody who just doesn't get enough earnings to do what they have to do? Which direction they should go for getting the extra money?
KIPLINGERYou know, you're raising the question that I get a lot about so-called reverse mortgages. A lot of older people have significant equity in their homes and bless their hearts, they were responsible during the housing bubble, they didn't succumb to the temptation to draw all that out and go to Las Vegas or put an addition on their house or whatever people did with the home equity they withdrew. So they have substantial equity.
KIPLINGERI like reverse mortgages, a reverse mortgage gives you a regular income stream and, yes, it has to be paid back to the lender when your house has sold. Now, that could either be when you move someday from that house and sell it or if it's sold by your estate after you are gone.
KIPLINGERYes, it's a lien against your house, it has to be repaid but I hate to see people with a genuine financial need living uncomfortably while sitting on significant equity in their homes that they could be drawing down with a reverse mortgage on a regular basis. Now, the knock on reverse mortgages for a number of years is that they were very expensive, the transactions cost were...
NNAMDIWe only have about 40 seconds left.
KIPLINGER...but I like the reverse mortgage concept.
LIBBYIs reverse mortgage better than traditional home equity line of credit that you apply for on your own?
KIPLINGERYou can use either one. With a home equity line you could take out a lump sum, you could invest that and then live off the proceeds of a lump sum. That requires discipline and self-control on your part. It sounds like you could manage that.
NNAMDIAnd Libby, thank you very much for your call and good luck to you. Knight Kiplinger, thank you so much for joining us.
KIPLINGERThank you, Kojo.
NNAMDIKnight Kiplinger is the editor-in-chief of Kiplinger's Personal Finance magazine, "The Kiplinger Letter" and kiplinger.com and thank you all for listening. I'm Kojo Nnamdi.
NNAMDIComing up tomorrow on "The Kojo Nnamdi Show," the strange and sometimes creepy world of tech. Police use apps to track protestors, a map moves the Washington Monument and virtual pumpkin carving comes online. The "Computer Guys and Gal" brave another "Tech Tuesday." Then at 1:00 digging up dirt and facing death threats, one of India's best known journalists on challenges ahead for the world's largest democracy. "The Kojo Nnamdi Show," noon until 2:00 tomorrow on WAMU 88.5 and streaming at kojoshow.org.
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