Tip 8b: Impact of Mortgages on Longevity Risk

The Situation:
  Consider a person who took out a 30-year mortgage, 15 years prior to retirement.   The initial balance on the mortgage was $600,000 and the interest rate on the mortgage was 3.6 percent.

The person retires with $1,000,000 in her 401(k) plan but the retiree also has an outstanding mortgage of $378,975 and an ongoing monthly mortgage payment of $2,728.  

The retiree plans to spend $40,000 per year $3,333 per month to cover non-housing consumption in retirement. 

  • The total annual disbursement from a 401(k) plan for a person with a mortgage is $72,735.
  • The total annual disbursement from a 401(k) plan for a person without a mortgage is $40,000.

Question One:  What are the outstanding balances of the retirement plan after 15 years for a person with a mortgage and a person without a mortgage if the rate of return on investments in the retirement plan is 6.0 percent per year?


  • The outstanding 401(k) balance after 15 years for the person with a mortgage is $691,380.
  • The outstanding 401(k) balance after 15 years for the person without a mortgage is $1,484,698.

Question Two:  What are the 401(k) outstanding balances after 15 years if the person started retirement with $900,000 in 401(k) assets.


  • The person with the mortgage has a 401(k) balance of $445,971 after 15 years.
  • The person without a mortgage has a 401(k) balance of $1,239,290 after 15 years. 

Implications for longevity risk:

The existence of a mortgage payment substantially increases the depletion rate of the 401(k) plan. The mortgage payment cannot be avoided during market fluctuations.  The existence of a mortgage during a market downturn at the beginning of retirement can have an especially adverse impact on retirement wealth.

The discussion presented here does not explicitly consider taxes.

  • All traditional 401(k) assets are fully taxed as ordinary income.   
  • The person with higher spending due to a mortgage will have also have higher taxes.
  • This person may increase spending to have adequate non-housing consumption.

More on these issues will follow.

Technical Note:  Discussion of Financial Calculations

The most straight forward way to obtain the 401(k) balance is to set up a spreadsheet where the loan payment is subtracted from the balance each month and the balance minus the loan payment earns a monthly return.   

A second approach involves the use of the FV function.  

The arguments of the FV function are

  • Rate 0.06/12 or 0.005.
  • NPER 12*15 or 180.
  • PMT 6061.21 for person with a mortgage and $3,333.33 for person without the mortgage.
  • PV -1,000,000. Negative because PV is cash in and must be the opposite sign of the PMT function.

The FV function is set up to analyze loans, so be careful with the sign of answer.

Financial Tip 8a: Payoff the mortgage prior to retirement

Tip #8a: People with mortgage debt in retirement must often take large taxable distributions from their 401(k) plan regardless of the level of the stock market.  The elimination of all debt prior to retirement substantially reduces the likelihood a person will outlive their retirement savings.

General Discussion:  Many financial advisors believe it is appropriate for their clients to keep some debt in retirement.   They will advise their clients to take out a 30-year loan instead of a 15-year loan to increase contributions to a 401(k) plan and to take full advantage of the deductibility of mortgage interest. They also argue that people nearing retirement should make additional catch-up contributions to their 401(k) plan instead of increasing payments on their mortgage.

The decision to keep debt in retirement is a recipe for financial disaster, especially if the household is reliant on fully taxed distributions from a 401(k) plan and partially taxed Social Security benefits.  

Issue One: The person with debt will more rapidly deplete their 401(k) plan and will pay higher taxes in retirement.

Discussion:  A person taking out a 30-year $500,000 mortgage, 15 years prior to retirement has annual mortgage expenses of $26,609.  The person that used a 15-year mortgage enters retirement debt free.  See the example presented in Financial Tip #4 Guidelines for the choice between a 15-year and 30-year mortgage.  

The person with the mortgage debt must either reduce non-mortgage expenditures or distribute additional funds from their retirement account to maintain the same consumption as the person that paid off her entire mortgage prior to retirement. 

Large tax-deductible mortgages reduce payment of federal and state income taxes in working years but increase payment of federal state and income taxes in retirement.

  • Retirees without business expenses generally have lower itemized deductions than people in their prime earnings years, hence, the advantages from itemizing in retirement are often small.
  • An increase in the distribution of 401(k) funds to cover the mortgage is fully taxed as ordinary income. 
  • An increase in 401(k) distributions increases the amount of Social Security subject to income tax as discussed on this page offered by the Social Security Administration.  

Issue Two:  The person without debt is better able to maintain current consumption levels and preserve wealth during market downturns.

Discussion:   Typically, a person attempts to maintain a certain level of consumption perhaps 60 percent of pre-retirement income throughout retirement.  A person with a mortgage or a monthly rental payment is less able to reduce expenditures when the value of stocks in their 401(k) falls because the mortgage payment or the rent are not optional. 

Any reduction in disbursements from 401(K) plans, which are reduced in value due to a collapse in stock prices, would have to occur from a reduction in non-housing consumption.   

The largest financial exposures occur when the market falls by a substantial amount in the early years of retirement when the entire savings from working years is exposed to the market.  The market downturn in stocks in 2008 was somewhat offset by an increase in bond values.   This time around both stocks and traditional bonds appear to be in a bubble.   People may want to consider Series I or inflation bonds as discussed in  financial tip #7.

Still, the best way to prepare for a market downturn is to eliminate all debt prior to retirement. 

Concluding Remarks:  During working years, many households take on a large amount of mortgage debt to reduce current year tax obligations. Failure to eliminate all mortgage debt prior to retirement often leads to rapid depletion of 401(k) assets, higher income tax burdens in retirement and increased exposure to financial volatility.  

Financial Tip #7: Convert Traditional Retirement Assets to Roth Assets when Marginal Tax Rates are Low

Often people leaving the workforce raid their retirement plans to fund current consumption.  A departure from the workforce creates an opportunity for people to convert traditional retirement assets to Roth assets at low cost.  The low-cost conversion to Roth assets can substantially improve financial outcomes in retirement. Households are only able to make this low-cost conversion if they have a decent ratio of liquid assets to debts.


  • A previous post, Financial Tip #5, found that people leaving a firm with a high-cost 401(k) plan should roll over funds from the high-cost 401(K) to a low-cost IRA to increase wealth at retirement.   The rollover is often a prerequisite to converting traditional 401(k) assets to a Roth.
  • The tax code allows for the conversion of traditional IRAs to Roth IRAs. Distributions from a Roth account in retirement are not taxed and do not count towards the amount of Social Security subject to tax. The person converting previously untaxed funds in an IRA pays income tax on the converted funds in the year of a conversion.   The cost of converting traditional assets to Roth assets, the additional tax paid stemming from the conversion, is low when households have marginal tax rates.   
  • Marginal tax rates are lowest when a worker or a spouse leaves the workforce.  This can happen when a person returns to school, decides to care for a family member, becomes unemployed or retires.  
    • Conversion costs are $0 if AGI including the amount converted is less than the standard deduction ($12,950 for a single filer).
    • Conversion costs for single people filing an individual return are 10 percent of taxable income AGI minus the standard deduction for taxable income between $0s and $14,200.  Increases in taxable income up to $54,200 increase conversion costs by 12 percent, the marginal tax rate.
  • The potential gains from converting traditional retirement assets to Roth assets early in a career perhaps when returning to school are tremendous.   
  • A person leaving the workforce for school for a couple of years at around age 28 might convert $20,000 from a traditional IRA to a Roth at a cost of around $2,000.
  • The balance of the Roth account from this conversion after 30 years assuming a 6.0 percent return is $114,870. 
  • The direct tax savings from the conversion assuming a tax rate of 10 percent would be $11,487.  An indirect tax savings from the omission of tax on Social Security, assuming around $50,000 in Social Security payments spread over a couple of years, would be around another $5,000.  The conversion can be thought of as an investment of $2,000 leading to a return of around $16,000 in around 30 years.  The rate of return for an investment of $2,000 and a return of $16,000 in around 30 years is around 7.2%.
  • A person in a low tax bracket because she is young and single and returning to school and only working for the part of the year could be in a much higher tax bracket in retirement, especially if married and both spouses worked and claimed Social Security.  In many cases, the returns from converting a traditional IRA to a Roth will be much higher than the one reported by the simple example in the above bullet. A person living 100 percent on Roth distributions and Social Security could easily pay $0 in annual tax after accounting for the standard deduction.
  • A person returning to school full time with no reported earnings could convert an amount equal to the standard deduction to a Roth and pay no additional tax.  It would be irrational for a person with a 0 percent marginal tax rate to fail to make a conversion.
  • Workers leaving the workforce are often more concerned about meeting immediate needs than for planning for retirement.  However, conversion costs are small during a year a person leaves the workforce.
  • Workers leaving the workforce with debt or with 401(k) loans often distribute funds from their 401(k) plan, pay a penalty and tax, and are unable to rollover or convert funds to a Roth.
  • The five-year rule imposes tax and penalty on funds disbursed from a Roth IRA funded through a conversion from a traditional IRA within five years from January 1 of the year of the conversion.  A separate five-year waiting period is applied to each conversion.     The five-year rule applies for conversions after age 59 ½ even though all funds in Roth accounts funded by contributions can be withdrawn without penalty and tax at that age.  The purpose of the five-year rule for conversions and its implementation even after age 59 ½ is to prevent immediate access to funds in a traditional retirement account.  The five-year rule for conversions appears to apply to disbursements from both contributions and earnings for both pre-tax and after-tax IRAs. 

Concluding Remarks:   The cost of converting a traditional IRA to a Roth IRA, the additional tax paid on the amount of the conversion, is generally low in years where a person leaves the workforce.  The potential tax savings in retirement is considerable.

Several additional posts on IRA conversions are planned.  One post considers issues related to conversions of non-deductible IRAs in a procedure called a backdoor IRA.  A second post considers the advantages of converting pre-tax IRAs during retirement.

Financial Tip 6: Invest in Series I Savings Bonds Whenever Possible

Tip #6: Series I Savings Bonds should be included in every investor’s portfolio.  This asset purchased directly from the U.S. Treasury without fees is an effective hedge against inflation and higher interest rates.

Characteristics and rules governing Series I bonds:   The Series I bond, an accrual bond issued by the U.S. Treasury tied to inflation, is described here.  

Key Features of Series I Bonds:

  • Backed by the full faith of the U.S. Treasury
  • Cannot be redeemed until one year after issue.
  • Redemptions prior to five years from issue date forfeiture of one quarter of interest.
  • The composite interest rate changes every six months,
  • The interest rate is based on two components – a fixed rate and the inflation rate.   
  • The composite rate is guaranteed to not fall below zero.
  • The interest is taxed when the bond is redeemed.
  • Bond matures and stops paying interest after 30 years.
  • The Treasury limits annual purchases of the bonds to $15,000 per person with a limit of $10,000 on electronic purchases and $5,000 on paper purchases.  The paper Series I bonds can only be purchased through refunds from the IRS.

Reasons for Purchasing Series I Bonds:

  • Series I Bonds, unlike traditional bonds and bond ETFs, do not fall in value.
  • In the current low-interest rate high valuation environment, traditional bonds and stock prices are almost certain to decline in value.  
  • A retired person with I-Bonds outside of a 401(k) plan can respond to a market downturn by using proceeds from the redemption of I-bonds to fund current consumption rather than disburse funds from a 401(k) plan, which could be temporarily down in value.
  • The Series I Bond is a riskless asset.  Investors with this asset can reduce holdings of traditional bonds and cash and increase investments in equities.

Difference Between Series I Bonds and TIPS:

Treasury Inflation Protection Securities (TIPS also allow investors to protect returns when inflation and interest rates rise.

Key differences between TIPS and a Series I bond as explained here:

  • The TIPS value can fall in an era of deflation.  The Series I bond never falls in value.
  • The tax on interest from TIPS is paid annually and not deferred to redemption
  • TIPS bonds can be sold without forfeiture of any interest at any time.  The redemption of a Series I bond is not allowed until after a year from the purchase date and sales prior to five years from the purchase date involve a forfeiture of a 3 months of interest.  
  • All TIPS can be counted as a liquid asset.   Only Series I older than 5 years from issue should be considered liquid.
  • Up to $5.0 million in TIPS can be purchased in a single auction.  The annual limit on the purchase of Series I Bonds is $15,000.

Thoughts on Series I interest rates:

  • The current fixed interest rate on a Series I Bond is 0 percent.  The current composite fixed + inflation component on bonds purchased prior to May 2022 is 7.12%.  A delay in the purchase of a Series I bond until the second half of the year could result in a permanently higher fixed rate.  However, investors would lose an annualized return of 7.12% accruing in May. 
  • Bonds purchased years ago in a high interest rate environment have a higher current composite rate because the fixed component is higher.  People are currently aware of I-Bonds because of the elevated inflation rate.  The purchase of I-bonds also makes sense when inflation is low and interest rates are high because the investor will obtain both a higher fixed rate and increases in interest when inflation returns.

Concluding Thoughts:  Investors should purchase a Series I bond every year.  Investors who maximize receipt of the employer matching contributions to a 401(k) plan can then divert additional investments to a Roth IRA or a Series I Bond.  People without a 401(k) plan that allows matching contributions should contribute to a Roth, invest Roth contributions in equities, and divert some funds to the purchase of Series I bonds.

Financial Tip #3: New Entrants to the Workforce Must Prioritize Debt Reduction over Saving for Retirement

Tip #3: New entrants to the workforce, facing unprecedented levels of student debt, should prioritize debt reduction over saving for retirement.

Most students with substantial student debt should reduce or forego retirement savings until their debt levels become manageable.  Students entering the workforce with substantial debt could reasonably forego saving for retirement for the first three years of their career. Potential advantages of pursuing a debt reduction strategy and the creation of an emergency fund over saving for retirement include:

  • Reduced lifetime student loan interest payments
  • Improved credit rating and reduced lifetime borrowing costs
  • Reduced likelihood of raiding retirement plan and incurring penalties and tax
  • Increased house equity and reduced stress associated with debt

Discussion of advantages of rapid student loan reduction at the expense of saving for retirement:

  • The decision to initially forego saving for retirement and earmark all available funds towards repayment of student debt leads to a substantial reduction in lifetime payments on student debt.  Two examples of the magnitude of the reduction in lifetime student loan payments are presented below.
  • A student borrower starting her career with $30,000 in undergraduate loans could take out a 20-year student loan leading to a monthly payment of $198.82 and lifetime loan payments of $47,716.   Alternatively, this student borrower could forego contributions to her 401(k) plan, increase student loan payments by $565.4 per month and pay off her student loan in 61 months.   The new total student loan repayments are $33,837, a total savings of $13,879. 
  • A second borrower with three student loans — a $35,000 undergraduate loan at 5.05%, a $40,000 graduate loan at 6.66% and a $25,000 private student loan at 10.00% — choosing the standard 20-year maturity on all loans has a monthly payment of $775 and realizes total lifetime payments of $200,633. The modification of the private loan to a five-year term initially increases the monthly student loan to $1,065.  The total lifetime student loan debt payments for the person who repaid her private student loan in 5 years instead of 20 years and earmarks the reduced loan payment to further loan reduction is $146,271.  This is a total lifetime savings of $54,362. 
  • The student borrower who rapidly reduces or eliminates all student debt can increase savings for retirement once the monthly student debt payment falls or is eliminated. Furthermore, the rapid elimination of the high-interest-rate private student loan could facilitate refinancing of the remaining student debt at favorable terms.
  • The failure to maintain a good credit rating will lead to higher borrowing costs on all consumer loans and on mortgages in addition to higher lifetime student loan payments.  
  • Assumptions on the impact of credit quality on interest rates were obtained for credit cards from WalletHub, for car loans from  Nerd Wallet, for private student loans from Investopedia, and for mortgages from CNBC.  The differential between interest rates on people with good and bad were 9.8 points for credit card debt, 7.0 points car loans, 10.0 points for private student loans, and 1.6 points for mortgage debt.  The monthly cost of bad credit depends on the interest rate differential, the likely loan amount, and the maturity of the loan. The analysis presented here assumes a likely loan balance of $10,000 for credit cards, $15,000 for a car loan, $20,000 for a private student loan, and $300,000 for a mortgage.  The analysis also assumes the borrower only paid interest on credit card debt and loan maturities were 60 months for car loans, 240 months for private student loans, and 360 months for mortgages.  Based on these assumptions, the monthly cost of bad credit was $82 for credit cards, $49 for car loans, $124 for private student loans, and $277 for mortgages.
  • A person who fails to eliminate debt could end up with higher borrowing costs for their entire lifetime.
  • Increasingly, young adults are tapping 401(k) funds prior to retirement to meet current needs.  Often individuals who raid their 401(k) plan prior to retirement incur additional income tax and financial penalties.  A CNBC article reveals that nearly 60 percent of young workers have taken funds out of their 401(k) plan. A study by the Employment Benefit Research Institute (EBRI) reveals that 40 percent of terminated participants elect to prematurely withdraw 15 percent of plan assets. A poll of the Boston Research Group found 22 percent of people leaving their job cashed out their 401(k) plan intending to spend the funds.  New entrants to the workforce who prioritize the reduction of student debt over saving for retirement will be less like to raid their retirement plan and incur tax and financial penalties. 
  • Note from Tip #3 that people using Roth IRAs or Roth 401(k) plans are less likely to pay penalties and taxes on disbursements on retirement savings because the initial contribution to a Roth can be disbursed without penalty or tax.  People with debt should start saving for retirement through relatively small contributions to Roth accounts rather than large contributions to traditional plans.
  • Many people who fail to prioritize debt payments struggle with debt burdens for a lifetime and fail to realize a secure financial future. A CNBC portrayal of the financial status of millennials found many adults near the age of 40 were highly leveraged struggling to pay down student debt, using innovative ways to obtain a down payment on a home and barely able to meet monthly mortgage payments.  A 2019 Congressional Research Service Report found the percent of elderly with debt rose from 38% in 1989 to 61% in 2021.   The Urban Institute reported the percent of people 65 and over with a mortgage rose from 21% in 1989 to 41% in 2019.  A 2017 report by the Consumer Finance Protection Board found that the number of seniors with student debt increased from 700,000 to 2.8 million over the decade.  Many of these problems and financial stresses could have been avoided if the student borrower entering the workforce had initially focused on debt reduction and the creation of an emergency fund rather than saving for retirement.

These problems will worsen if borrowers don’t start focusing on debt reduction over saving for retirement because many in the new cohort of borrowers are starting their careers with higher debt levels.

Concluding Thoughts:  Many financial advisors stress saving for retirement over debt reduction.  Fidelity, a leading investment firm, says young adults should attempt to have 401(k) wealth equal to their annual income at age 30.  Workers without debt and with adequate liquidity for job-related expenses can and should contribute.   Their returns will compound overtime and they will have a head start on retirement.

The Fidelity savings objective is unrealistic for most student borrowers with debt. The current cohort of people entering the workforce has more debt than any previous cohort.  Average student debt for college graduates in 2019 was 26 percent higher in 2019 than 2009.  The decision by a new worker with student debt to go full speed ahead on retirement savings instead of creating an emergency fund and rapidly retire student debt can and often does lead to disaster.  The young adult choosing retirement saving over debt reduction pays more on debt servicing, invariably falls behind on other bills, pays higher costs on all future loans, and often raids their retirement plan paying taxes and penalties.   

Financial Tip #2: Maximize Use of Roth Accounts

Tip number 2:  Most households use traditional retirement accounts instead of Roth accounts.  The Tax Policy Center reports around 23% of taxpayers have a traditional IRA compared to around 12% of taxpayers with a Roth IRA.  According to CNBC, in 2016 around 70 percent of firms offered a Roth 401(k), but only 18% of workers used the Roth 401(k) option.  

More people should choose a Roth retirement plan over a traditional one.  People should use Roth accounts in the following circumstances.

  • Workers at firms not offering a retirement plan with a marginal tax rate less than 25% should use a Roth IRA instead of a deductible IRA.
  • Workers at firms offering both a traditional and Roth 401(k) should choose the Roth 401(k) if their marginal tax rate is less than 25%.
  • Workers with marginal tax rates less than 25% at firms with 401(k) plans without employee matching contributions should select a Roth IRA or Roth 401(k) over a traditional 401(k) plan.
  • Workers who maximize receipt of employer matching contributions should place additional contributions in a Roth IRA.
  • Spouses of workers with family AGI below the contribution limit for Roth contributions should contribute to a Roth IRA, if eligible.


  • Gains from 401(k) contributions are relatively small when employers don’t provide a matching contribution and a worker’s marginal tax rate is low.  
  • Workers with Roth accounts are less likely to withdraw and spend all funds prior to retirement than workers with traditional accounts because they can access the amount contributed without penalty or tax prior to age 59 ½. 
  • The tax saving from Roth disbursements in retirement are high both because disbursements after age 59 ½ are not taxed and the Roth disbursement does not increase the amount of Social Security subject to tax.
  • Workers at a firm that do not match employee contributions, around 49 percent of employers, should contribute to a Roth IRA instead of a 401(k) plan unless the worker has a high marginal tax rate.
  • One effective contribution strategy is to take full advantage of the employer match and contribute all additional funds to a Roth IRA. Two common 401(k) matching formulas are 50 percent of the dollar amount contributed by the employee up to 6.0 percent of the employee’s salary and 100 percent of contributions up to 3 percent of the employee’s salary. 
  • Most new employees at firms with a vesting requirement, a rule delaying full ownership of 401(k) matches, should contribute to a Roth IRA instead of a 401(k) plan.
  • Stay-home spouses of workers with income should choose a Roth IRA over a traditional one if they are eligible. In 2021, a single filer with MAGI less than $140,000 and a married joint return filer with MAGI less than $206,000 cannot contribute to a Roth IRA.  Workers with income above these contribution limits should contribute to a Roth IRA.  Other workers should use a backdoor IRA.

Readers should remember to open their Roth IRA early in life as explained in financial tip number one.

Electric Vehicles Versus Hybrid Vehicles

Biden Administration policies and tax incentives favoring electric vehicles over hybrid vehicles will backfire. The subsidies are too expensive, the demands on the electric grid too high, the dependence on foreign sources of lithium problematic, and the battery disposal problem unresolved.

Current environmental policy in the United States, both subsidies and regulations, favor the growth of electric vehicles over hybrid vehicles.  

Is this focus on EVs over hybrids misguided?  

Have policy makers underestimated economic and environmental costs associated with the use of EVs and the transition?  

Would subsidies for hybrid vehicle provide a quicker more economically efficient path to a clean energy future?

Background on Incentives and Regulations:

This IRS bulletin describes a new clean vehicle tax credit with a new tax credit, up to $7,500 per vehicle, for new clean EV vehicles purchased after 2023.  Certain vehicles including foreign built vehicles and vehicles with prices above a cap are ineligible.  Electric vehicles (EVs) are more likely to be eligible for the clean vehicle tax credit than plug in hybrid electric vehicles (PHEVs).  Car and Driver reports that 7 PHEVs are eligible for the clean tax credit compared to 15 EVs.  Hybrid vehicles without a plug in feature are not eligible for the clean tax credit even though they get excellent gas mileage.    

The infrastructure law included $5.0 billion in funds for states to build charging stations for EVs and an additional $2.5 billion for grants administered by communities.  These subsidies benefit plug-in vehicles but do not benefit non-plug-in hybrids.

California emission rules requires that all vehicles sold in the state by 2035 will be zero emission vehicles (ZEV).  ZEV vehicles include EVs and plug in hybrids but do not include non-plug-in hybrids.   The super ultra-low emission vehicles on this list will no longer be available for sale in California or on states with emission standards linked to the California standard.

Analysis of incentives and regulations:

The EPA strongly supports the transition to EVs despite evidence indicating benefits of EVS relative to hybrids are low and the adoption of EVs will be slower and more costly to the economy than the adoption of hybrid vehicles.

Some hybrid vehicles like the Prius have a fuel efficiency of over 50 miles per gallon and this article indicates the difference in EV and hybrid emissions is small. EV emissions are likely higher than hybrid emissions in states where the electricity is obtained from coal-powered plants.

The manufacture of EV batteries creates substantial emissions, which partially offset the lower tailpipe emissions.

Pollution from lithium mining has had devastating environmental impact on the developing countries that are the source of this material.

Currently, around 5 percent of EV batteries are recycled.  Unless recycling is increased there will be substantial health and environmental problems associated with battery disposal.

The limited range of EV batteries would result in multi-vehicle households using a traditional EV on longer trips, thereby, reducing the lifetime emission reductions from the purchase of EVs.

There are wide differences in opinion on the likely adoption rate of EVs.

Despite very large subsidies and favorable regulations described above, some recent evidence supports the view that EV adoption will be slower than anticipated.  This CNBC article found two reasons — concern about public charging and the EV range on long trips – for low EV sales.  Companies like Hertz have overstocked EVs given current demand.

A rapid adoption of EVs could lead to electricity outages if the grid is not improved and expanded.  Again, the environmental gains from the growth of EVs depends on the growth of clean energy sources, which is uncertain.   Failure to expand the electricity grid will slow the rate of EV adoption and increase cost of their use.

China is the major source of most materials used in EV batteries.  The growth in the adoption of EVs could increase the dependence of the United States on China.  An increase in the cost of materials like lithium used in EV batteries could slow the rate of EV adoption and increase costs.

It is highly possible that a smaller subsidy targeting hybrids and ULEVs over EVs will lead to a faster transition to cleaner vehicles than the current approach.

Concluding Remarks:  Most EV buyers and recipients of EV subsidies are relatively affluent.  I would guess that the average Tesla buyer is wealthier than the average Prius buyer.  The Prius buyer did not have to be bribed to reduce her carbon footprint.  I have a hard time justifying government subsidy for clean cars when some important health care subsidies phase out in 2024.  A likely scenario from current policy is large subsidies leading to increased debt, which provide only modest environmental benefits. 

Authors Note:  LinkedIn members should subscribe to Insightful Memos.  Many posts like this one on the difference between the cost of living and inflation can be found at Finance Memos.

Modifications to the Biden Student Debt Policy

A one-time discharge of student loan debt will not mitigate long term problems associated with excessive student debt. These proposals will reduce student debt burdens and encourage savings by young adults, a necessary prerequisite to Social Security reform.


previous post evaluated several of the Biden Administration’s domestic policy agendas, including the Administration’s proposals on health care and insurance, student debt and college costs, retirement savings, and the fiscal condition of Social Security.  

The evaluation of the Biden Administration’s student debt policies reached the following conclusions.

  • The one-time debt discharge proposed by the Biden Administration may not be upheld by the Supreme Court for a variety of reasons.
  • A one-time student debt discharge does not alter the trajectory towards higher student debt levels and higher college costs.
  • The payment shock from the termination of the COVID-era student loan payment freeze will reduce consumer spending and could facilitate a recession.
  • The Biden Administration proposal for expanded Income-Driven loans is complex and less effective than interest rate reductions.
  • Low levels of on-time graduation remain an important factor in high student debt burdens.
  • Many student borrowers leaving school prior to the completion of a degree have a difficult time repaying their student loans.
  • Proposals for increased assistance for students at two-year college are useful but could reduce access to four-year schools by qualified low-income students.

The objective of this post is to provide and explain potential economically efficient solutions to these problems.

Student Debt Proposals:

Proposal One:  Issue an executive order restarting post-covid student loan payments at a 0 percent interest rate for two years and seek legislation permanently establishing a 0 percent interest rate for the first two years after the initiation of repayment of student loans.

Analysis: The recently enacted debt limit deal includes a requirement restarting the covid-era moratorium on student loan payments.   The abrupt restart of student loan payments will reduce spending and saving for retirement by many households and could facilitate a recession.  A permanent 0 percent interest rate for students starting the repayment of student loans would substantially reduce problems associated with excessive student debt.

Proposed response to the restart of student loans:

  • As per the recent debt-limit agreement, student loan payments restart this year.
  • A new executive order sets the interest rate on student debt at 0 percent for two years.
  • Seek legislation making the two-year 0 percent interest rate on student loans permanent.

Advantages of a temporary emergency elimination of interest rates:

  • I expect the Biden Administration’s student debt discharge proposal will be overturned by the Supreme court.  A temporary elimination of interest charges to mitigate adverse impact of payment shock from the end of the covid emergency is more easily depicted as an emergency measure likely to survive legal challenges than the Biden Administration’s proposal.
  • The restart of student loan payments would increase receipts to the Treasury reducing the need to issue debt.  However, the restart of student loan payments will have a substantial adverse impact on young adults with student debt and the overall economy.  These adverse impacts including lower consumption, higher wage demands by some workers and a likely recession could be mitigated by temporarily setting the interest rate at 0 percent on all student loans.
  • Under the proposal the entire minimum payment would be applied to the reduction in principle and the Treasury would receive substantial revenue.

Advantages of a permanent elimination of interest for first two years of student loan repayments:

A permanent 0 percent interest rate for two years after the initiation of repayment would result in several economic benefits.

  • Delinquencies would fall at the beginning of careers when workers tend to have lower salaries.
  • A lower interest rate and quicker repayment of loans would allow young workers to increase household savings, a necessary prerequisite for many Social Security reform proposals under consideration.
  • Quicker repayment of student loans by young adults should eventually reduce the number of older adults with unpaid student loan balances in retirement
  • An initial interest rate of 0 percent would reduce demand for Income Driven Replacement (IDR) Loan programs, which will benefit both student borrowers and the Treasury.

Proposal Two: Modify the standard 10-year and 20-year federal student loan contract to eliminate all interest charges at the maturity of the loan.

Analysis:  The current system requires student borrowers to choose between a standard loan contract and an IDR loan contract as soon as they begin loan repayments.  Some people make the wrong choice.  Features of The IDR loan contract encourage some people to increase the amount they borrow. A simple modification to conventional loans would reduce demand for IDR loans and make taxpayers and many borrowers better off.

Proposed changes to standard loan contract:

  • Set interest rate on outstanding student loan balances to 0 percent when the loan reaches maturity date.
  • Treat unpaid student loan balances after the maturity of the student loan as a tax obligation spread over 3 to 5 years.

Advantages of proposed changes:

  • The interest rate of zero at the maturity of the loan provides some relief for people who have had difficulty repaying their loan. 
  • This change will reduce the number of people who have their Social Security checks garnished because of outstanding student loan obligations.
  • The proposal creates an incentive for borrowers to select a standard student loan contract instead of an income driven loan contract which can benefit the borrower.  IDR loans create financial uncertainty for borrowers and potential lenders and often prevent borrowers from qualifying for a mortgage.  IDR loan discharges are potentially costly to taxpayers.
  • Under the modified student loan contract, the borrower with a larger loan will always repay more than the borrower with the smaller loan over the lifetime of the loan.  By contrast, under the IDR program it is possible an increase in initial student loan debt does not increase the amount repaid over the life of the loan.

Proposal Three:  Modify IDR loan programs to provide for gradual partial discharges of student debt instead of a complete discharge of the remaining balance at the maturity of the loan.

Analysis: Current IDR loans promise a discharge of unpaid debt at the maturity of the loan, but loan discharges frequently do not occur on time because some borrowers fail to make required payments and some loan servicers fail to accurately report payments. IDR loans create an incentive for people to borrow more because in some instances the increase in the amount borrowed will not result in an increase in the amount repaid.  Both of these problems could be addressed by altering the IDR loan discharge provision. 

Proposed changes to IDR contracts:

  • Provide periodic partial discharges of student loans.
  • Discharge formula might involve 10 percent of previous 24 payments after receipt of 24 payments. 
  • Limit discharge at the maturity of the loan to 50 percent of the outstanding balance.
  • Undischarged loan balance will be restructured into a new short-term low interest rate loan.

Advantages of proposed changes to IDR contracts:

  • The quicker partial discharge gives borrowers an incentive to make payments on time to maximize debt relief.
  • The quicker partial discharge reveals potential problems with the recording of loan payments earlier.  Currently, payment problems are not revealed until maturity when the borrower apples for the complete loan discharge.
  • The limitation of the final discharge to 50 percent of the outstanding loan balance will cause borrowers with larger loans to have a higher debt at maturity than borrowers with lower debt.  This clause reduces the incentive for people to borrow more because monthly payments are determined by income rather than loan size and they anticipate the entire loan will eventually be discharged.
  • The incentive to reduce borrowing could also be achieved by taxing loan discharges.

Proposal Four:  Provide greater financial assistance to all first-year students with the goal of eliminating all student debt incurred during the first year of post-secondary school education.

Analysis:  Increasingly, some education after high school is necessary for career advancement.  Many student borrowers who leave school prior to the completion of the degree have great difficulty in repaying their loans.  Increased financial assistance for first-year students will increase access to higher educations for underserved groups and will assist people likely to have the most difficult repaying loans.

Proposed changes to first-year financial assistance programs:

  • Provide federal grants to institutions that agree to eliminate student debt incurred by first-year students.
  • All state and private institutions that agree to match the new federal/private funds are eligible for the new grants.
  • Participating institution are not allowed to provide federal student loans to first-year students.
  • Tax credits and/or deductions would be offered to taxpayers that contribute to funds providing matching resources for first-year students.
  • Benefit is available at both two-year and four-year institutions.
  • Additional benefits available for first year after transfer from a two-year to four-year college.


  • Program reduces payment problems and default rates by student borrowers that leave college early prior to the completion of their degree.  (Students leaving college without a degree after only one or two years of study tend to have an especially hard time repaying their student loan.)
  • Program will reduce typical college debt levels.
  • Absence of debt could allow a person to reenter school later in life when she is more prepared for higher education.
  • Proposed goal of a debt-free first year of post-secondary education is far less expensive than previous free college or debt-free colleges proposals. 
  • Program allows more highly qualified people to consider a four-year college. 
  • Prospect of additional assistance for transfer students could further reduce costs for students who start their post-secondary career at a two-year college and mitigate impact of credits lost through the transfer process.

Proposal Five:  Modify the bankruptcy code to allow for the discharge of private student debt in bankruptcy and to provide priority to federal student debt payments over all consumer loans in chapter 13 bankruptcy plans.

Analysis:  Student debt has always been difficult to discharge in bankruptcy.  The2005 Bankruptcy reform law discouraged Chapter 7 bankruptcy in favor of Chapter 13 and made it more difficult to discharge private student loans in bankruptcy.  Moreover, in most instances current law results in higher priority for consumer debt over all student loan debt in Chapter 13 bankruptcy plans.  Some student borrowers now leave chapter 13 bankruptcy plans with more student debt than when they entered.  More favorable treatment of student debt in bankruptcy could benefit both student borrowers and taxpayers.

 Proposed Changes:

  • Retain current rules governing access to Chapter 7 and Chapter 13 bankruptcy adopted in the 2004 Bankruptcy reform act.
  • Change bankruptcy code to make private student loan debt dischargeable in bankruptcy.
  • Provide priority to payments on federal student loan payments under chapter 13 bankruptcy plans.


  • Retention of means test for use of chapter 7 bankruptcy discourages bankruptcy filings for many people who might be able to pay off their debts without bankruptcy relief.
  • Private student loans with high interest rates is similar to credit card debt and other consumer loans and should be treated accordingly.
  • Helps people leaving chapter 13 bankruptcy obtain a fresh start.
  • Helps taxpayers by increasing and speeding up student debt payments.  
  • Helps the most vulnerable student borrowers.  Should reduce the number of older taxpayers having Social Security garnished because of unpaid student debt.
  • Creates an incentive for lender to better evaluate the ability of borrowers to repay private consumer loans and private student debt.

An assessment of President Biden’s domestic policy record

This memo evaluates the Biden Administration’s record on policies impacting health care, student debt, retirement savings, and Social Security. The analysis presented here supports the view that progress has been limited and change is needed.

Introduction:   The Biden Administration can point to several legislative achievements and executive orders. However, actual long-term permanent progress in several areas including expansion and improvements in health coverage, reduction of student debt and the cost of college, increased incentives for retirement savings, and efforts to stabilize the Social Security and Medicare Trust funds has been small.

Health Care:

  • The number of uninsured is higher than in 2016 and will increase due to the phase out of the COVID era Medicaid extension.
  • The improvement in the state-exchange health insurance premium tax credit, enacted during the Biden Administration, is scheduled to phase out in 2025.
  • The continued high reliance on employer-based insurance will result in a rapid increase in the number of uninsured once an economic downturn occurs.
  • The long-term trend towards households having to pay an increased share of out-of-pocket health care costs persists and has not been addressed.
  • The growing use of high-deductible health plans has forced more Americans to reduce retirement savings to fund health savings accounts.
  • Many Americans remain reliant on short-term health plans, which do not insure people with pre-existing conditions, do not assure access to health care for essential health benefits, and do not protect household from large financial losses.  The Biden Administration has not rolled back the Trump-era expansion of short-term health plans.
  • Many Americans with narrow-network health plans do not have sufficient access to specialists and top hospitals.

This memo reviews some of the limitations of the Biden Administration’s health care record and proposes some modifications.

Student Debt and College Costs:

  • The one-time debt discharge proposed by the Biden Administration may not be upheld by the Supreme Court for a variety of reasons.
  • A one-time student debt discharge does not alter the trajectory towards higher student debt levels and higher college costs.
  • The payment shock from the termination of the COVID-era student loan payment freeze will reduce consumer spending and could facilitate a recession.
  • Low levels of on-time graduation remain an important factor in high student debt burdens.
  • Many student borrowers leaving school prior to the completion of a degree have a difficult time repaying their student loans.
  • The Biden Administration proposal for expanded Income-Driven loans is complex and less effective than interest rate reductions.
  • Proposals for increased assistance for students at two-year college are useful but could reduce access to four-year schools by low-income students.

Go here for a discussion of Biden-era student debt proposals.

Retirement Savings:

  • Recently enacted improvements to 401(k) plans in the Secure Act 2.0 do little to assist people at firms that do not offer a 401(k) plan.  
  • It would be useful to create an automatic savings option for workers at firms without a 401(k)-plan similar to the automatic 401(k) savings option.
  • An extremely high percentage of young adults have disbursed funds from their retirement plans early in their career.
  • Incentives for people to disburse funds in a 401(k) plan prior to retirement remain high and pre-retirement 401(k) disbursements are unlikely to fall.
  • The recently enacted automatic contribution rule may steer some workers into 401(k) plans even if a Roth IRA or some other savings vehicle is a better option. 
  • Many 401(k) plans have limited investment options and high administrative fees. 

This essay  describes ideas on how to expand private retirement savings and deal with the impending short falls in the Social Security and Medicare trust funds.

Go here for more details on why IRAs should be expanded.

Recent legislation on private retirement savings described here appears to do more for the investment industry than for savers.

Social Security:

  • A high percent of workers nearing retirement with low levels of retirement savings will be highly dependent on Social Security during retirement.
  • Projected shortfalls in the Medicare and Social Security trust funds would lead to automatic benefit cuts in 2031 and 2033 respectively under current law.
  • No one in Congress is working on a bipartisan solution to the impending Social Security and Medicare trust fund shortfalls.

This memo describes the linkage between Social Security reform and efforts to expand private retirement savings.  Work summarizing different Social Security reform proposal will be available shortly.

Concluding Remarks:  The case for renominating Biden largely hinges on the view that the President is the best candidate to defeat former President Trump.  However, as discussed here I do not believe former President Trump will be the Republican nominee in 2024 and President Biden does not match up well against a younger Republican challenger, especially one willing to break away from parts of the Trump agenda.

The 2024 election should be about how we move forward as a nation.  A candidate should talk about how issues like how we can change insurance rules so people don’t lose their health insurance during job transitions, how we can lower student debt burdens for the people who are most likely to experience payment problems, how we can assist workers in saving more for their retirement and how we can improve the financial condition of entitlement trust funds prior to the implementation of automatic benefit cuts.  I have reached the conclusion that Governor Whitmer or Governor Inslee are better able to move the country forward on these issues than our current president.

Political Insights for the 2022 Midterms

I find writing this column every two years on or near election day cathartic. I have never seen this much hype and so many unforced errors on both sides. My resolution after clicking publish is to stay off cable news for a long time.

Some political insights – November 7, 2022

I find writing this column every two years on or near election day cathartic.  I have never seen this much hype and so many unforced errors on both sides.  My resolution after clicking publish is to stay off cable news for a long time.

Some insights:

The analysis on TV seems more motivated by campaign goals than data.  Republicans are talking up surprise victories in senate races in New Hampshire, Colorado, Washington, even though Senate races in North Carolina, Wisconsin, and Ohio are far closer. Republicans are exciting their voters to the poll.  Democrats are scaring their voters to the poll.   The Democrats may overperform in the Senate because they have good candidates in NC and OH and WI and NV are reasonably close.

Wisconsin should have been an easy pick up for the Democrats because the Republican candidate is a certifiable crazy. However, their 35-year-old nominee has not been able to address concerns about crime that were highlighted by unrest and vandalism in Kenosha.  

My methods when analyzing elections in Wisconsin is to compare them to races in the adjacent state of Iowa.  The states almost always vote for the same presidential candidate.  The 2016 poll numbers in Iowa suggested to me that Wisconsin could turn red and it did.  This year it is highly possible that the moderate Senate candidate in Iowa will overperform and the more liberal Democrat in Wisconsin will underperform, and the Democrats will lose both races. I expect Evers to win the governor’s race but could be wrong. 

The Democrats are highly dependent on the black vote and the party has nominated several black candidates in states that are overwhelmingly white.   The Democrat’s candidate for governor in Iowa, Deidre DeJear, an extremely young black woman with no experience in government had no opposition in the primary. She is 20 points behind and is not helping the Senate race.  The initial competition to Barnes. Demings, and Beasley was also non-existent or dropped out prior to the primary.  Republicans have tougher intra-squad games, which helps them in the regular season. 

Splits between the Senate and gubernatorial outcomes in several states including, PA, AZ, WI, OH are possible.  This should undercut Republican claims of rigged elections.

Voters in both parties are having buyers’ remorse in PA.  Fetterman should have been transparent about his health and Oz is not a smart wizard.  I personally could never vote for Oz and would vote for Fetterman if I lived in Pa.  However, an independent who sides with Republicans on some issues and wants robust discussion of debates could conclude that Fetterman, due to his health would be a rubberstamp.  The Democrats should have examined Fetterman’s health after the stroke, I believe in May prior to the primary and put in a pinch hitter.

Democrats may lose the House.  I hope it is close. Because centrist could unite and elect a centrist speaker.  Go here for a discussion of why the House is important.

Trump could be the big loser if Republicans underperform and if the most Trump-friendly candidates lose.

Concluding Thoughts:  The Democrats central message is you must vote for the Democrats because the Republicans don’t believe in democracy and a Republican victory will lead to dictatorship.  Well, if true, we have no choice and Democracy is already gone or on life support.

 Eventually, the Republicans will win a cycle.   If the Gambler’s Ruin Problem describes payouts dictatorship is inevitable. 

 Hard to see how Biden wins reelection in 2024 if Trump is gone and 2024 becomes a change election.  Trump may run to freeze the Democratic field.

Authors Note:  David Bernstein, a retired economist has written several papers advocating for innovative centrist policy solutions.

The kindle book Defying Magnets:  Centrist Policies in a Polarized World has essays on policies student debt, retirement savings and health care.

The paper A 2024 Health Care Proposal provides solutions to health care problems that are not currently under consideration.

The proposals in Alternatives to the Biden Student Debt Plan are less expensive to taxpayers than the Biden student loan proposals.  The reforms presented here provide better incentives and reductions for future students while the Biden debt-relief proposal offers a one-time improvement for current debtors.