BLOG
His father warned him, but Josh thought nobody could fool him. As reported by a Better Business Bureau study, when Josh Reiss, 20, got an offer to join an internship program he applied for, he was eager to get going on it. The company sent him a $7,000 check and instructed him to buy a computer, software, and assorted other items, then send the remainder back to the company that “hired” him. Dad said it looked “fishy,” but Josh knew best. He used his debit card to wire $6,000 back to the company. Of course, the company’s check was fake, as Josh’s credit union informed him when they processed it. Now Josh owes the credit union $6,000 because he had nowhere near that amount in his account. His father warned him not to buy anything or pay the company anything until he got confirmation that the company’s check was good. But Josh knew he was too smart to be fooled. They consider themselves savvy consumers, well-educated, and immune to trickery, but they are the age group most susceptible to scams. Millennials are at the top of the list of people who get fooled by fraudsters, reports the Better Business Bureau study. Who’d have thought? Accepted wisdom and the news media say or imply that the most susceptible to scams are seniors, but the data say they come in last for probability of getting ripped off. The Better Business Bureau survey found that 83,2 percent of 18-24-year-olds and 81.1 percent of 25-34-year-olds are most at risk for losing money to a crook. People 65 and older are only 73,4 percent, still not good, but lower than younger people just entering the “real world.” Even so, you’d think by the time someone reaches his or her 30s, they’d have learned to be just a little more cautious about whom they do business with. In the words of Danny O’Keefe in “Good Time Charlie’s Got the Blues,” “You’re not a kid at 33.” What is it that makes this demographic more susceptible to getting ripped off by scammers? It’s the very quality that gives them a leg up in their careers; they think they can’t lose. It’s something called “optimism bias” or “invulnerability illusion” explains Kendra Cherry in “Understanding the Optimism Bias” on verywellmind.com. It “leads us to believe that we are less likely to suffer from misfortune and more likely to attain success than reality would suggest. Nothing new there. In 1980, ND Weinstein wrote in an article in Personal Social Psychology that most college students believed they were immune from ever having a drinking problem or getting divorced and that they were destined for positive outcomes such as owning a home and living into old age. Young people’s attitudes apparently haven’t changed much. And in that respect, it’s a good thing because they are ready to go out and take on the world. Too bad they don’t temper their optimism with more critical thinking, but they never have, it seems. Consumer Reports in June of 2018 suggested that five traits can make someone “an easy mark.” One is an eagerness for bargains. Always looking for a “good deal”; they’ll enter contests and drawings, thus giving their information to scammers; open all their mail, including sales materials and charity appeals; and answer their phones thus jacking up their susceptibility. Two, studies found that fraud victims get sucked in by statements from con artists maybe saying a deal is only good for the next 12 hours or claiming people are earning 10 percent a year on an investment. That’s a sales technique as old as sales itself. Give the prospect a deadline after which the deal is off. Millennials more often than not don’t have the savvy or critical thinking ability to spot the technique as suspicious and worth careful consideration. Three, they lack a defense strategy, jumping right into making a decision rather than giving themselves time to check out the person giving the sales pitch and the company. They also don’t sign up for the “do not call” list and engage scammers on the phone. Hurried decisions often end up as bad decisions. Four, they are willing to take risks. Because they believe they are invulnerable, they buy into a risky investment or product. No research, just belief they know better than the more “cynical” and “negative” of us. Fifth, they find themselves in the midst of a personal crisis with jobs, family, finances, and other worries. That doubles the odds of getting scammed, reports a 2013 Federal Trade Commission study. Coping with life can use up “cognitive capacity” that otherwise would spot a scam. It’s called the Swiss Cheese brain. As I wrote in a February 2009 column, “Prolonged stress kills brains cells, creating ‘holes’ where living, functioning brain cells used to be and rational thought can cascade right through. Logical thought processes can, in people who have endured months of high stress, be seriously sidetracked into an almost total disconnect with reality.” What do they tell themselves, most likely subconsciously, when they come across the “deal of a lifetime” or something “too good to pass up”? “I can’t possibly get screwed,” “I have to trust somebody,” and “they seemed so honest” feed their brains with motivation to buy. One of my favorites, “It was such a good deal, and they were giving away laptops.” Sure it was and sure they were. Yes, 18-34-year-olds are most vulnerable to being fooled by scammers. But, their ingenuousness is also what makes them successful; they believe they can “do it,” whatever “it” is. Eventually, as they age and life catches up with them, they will become more cautious and less prone to fraud. But right now, they are our renters and employees and can get themselves in financial difficulties because of their ingenuousness and optimism bias. By Robert L. Cain
Millions of Americans face financial difficulties because they just “don’t get it,” their financial health on a knife’s edge. On a basic five-question financial literacy quiz, 80 percent couldn’t answer four of the five questions correctly. The world runs on money, but they don’t “get” how money works. Because of their ignorance, their illiteracy, they sheepishly admit to losing an average of $1634 a year reports the Financial Educators Council. These are 18 to 34 year olds, Millennials, who on the literacy quiz got wrong such questions as “Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?” They didn’t even ask them to do the math, just if it would be more or less than $102. Or even a “super tough” one “Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?” “Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing. Financial literacy is the foundation of your relationship with money, and it is a lifelong journey of learning,” defines Investopedia. Investopedia also warns, “The lack of financial literacy can lead to a number of pitfalls, such as accumulating unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This in turn can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.” Gflec.com reports the following facts. One in four Millennials, 24 percent, are financially fragile. Half could not come up with $2,000 if they encountered an unexpected financial issue. Thirty percent overdrew their checking accounts. They keep the payday loan companies and pawn shops in business since the half of them that have only a high school education use either or both sources of alternative financial services even including the 39 percent who have bank accounts and the 35 percent who have credit cards (presumably at their credit limits.) Financial literacy helps answer such questions as how many credit cards someone should have, is borrowing for college worth it, should I buy or lease a car, should I rent or buy a place to live, and how much can I afford to pay for a mortgage or rent? Financial illiteracy can doom someone to poor or even disastrous economic decisions. They simply don’t know how to figure out what makes most financial sense. It continues its decline. All age groups find themselves worse off than 12 years ago, but Millennials saw the sharpest drop in financial knowledge. Just between 2009 and 2018, they saw an eight-percentage point drop in the literacy from 42 percent to 34 percent. For the math averse and financially illiterate, that’s a 19 percent drop in literacy. But their parents’ generation, even though their literacy slipped, 51 percent could still answer four of the five questions correctly. A National Financial Capability Study (NFCS), reports the TIAA Institute, shows that Millennials tend to rely heavily on debt, engage frequently in expensive short- and long-term money management, and display shockingly low levels of financial literacy while student loan burden and expensive financial decision making increased significantly from 2009 to 2018 among young adults. These data bode poorly for the financial well-being of the country. After all, in a few years, the Millennials will be in charge. Today, they are mostly our employees and renters. They will be the bosses, the company owners, the teachers, the government workers, and filling every slot in the economy. The older generations will be retired and depending on the Millennials to get it right. It doesn’t look promising. This illiteracy pervades the entire country, border to border, coast to coast, north to Alaska, and across the ocean to Hawaii. WalletHub analyzed financial-education programs and consumer habits using 17 metrics that included high school financial literacy programs and the share of adults with rainy-day savings to learn the extent of illiteracy around the country. Even the most financially literate state, according to wallethub.com, Virginia, comes in at only 68.25 percent financially literate slightly over two-thirds. The most financially illiterate state, Alaska came in at 53.39 percent financially literate, followed closely by Mississippi (54.2), South Dakota (54.76), Oklahoma (55.57), Louisiana and Arkansas (54.15), New Mexico (54.57), West Virginia (56.4), and District of Columbia (56.54 percent). The District of Columbia figure brings up several obvious questions. All the people in states bumping on the bottom of financial literacy are ripe for scammers. The financially illiterate simply can’t see through the scammers’ flimflam. As we might expect, their amount of education correlated with the financial literacy. Those with only some high school show a financial literacy rate below 50 percent while those with graduate degrees come in at about 80 percent. On a knife’s edge, one step ahead of financial disaster, their economic wellbeing can all blow up at any time with late or unpaid rent, auto repossession, collections, and bankruptcy. It affects not just them but all those around them and with whom they do business including employers and landlords. By Robert L. Cain
A Nationwide Insurance study found that 31 is the average age people begin saving for retirement. But will they ever be able to retire? Are most people in a position, or will they ever be in a position, to amass enough savings to retire? Saving for retirement is not even an option for many people. There’s little or no money left at the end of the month to sock away anything for savings. Yes, the statistics we’ll look at are discouraging, but there’s a flip side that is encouraging we’ll look at in a minute. Let’s look at the discouraging statistics first. One study by LIMRA, a “worldwide research, consulting, and professional development organization” reports that 61 percent of employees say debt has “negatively affected their retirement savings.” The average 25-34 year old employee earns about $3500 a month reports the Census Bureau. That’s before taxes and other deductions. But just using that gross income figure, let’s look at where the money goes. Average rent for a two-bedroom apartment is $1207 a month nationwide. Of course, it’s more or less some places, but that is average, just as is income. Then there are car payments. A monthly car payment for a used car averages $391 a month. Want a new car? Bump that up to $554. That’s for one person. A two-person household might add a second car for another $391 a month. And that’s just the car payment. Add gas, maintenance, other transportation and it’s another $336. Then there are the student loans. Those average $400 a month per person and take around 20 years to pay off. So if someone finishes college with a bachelor’s degree at 22, the student loan will eat up $400 a month until he or she is about 42. Grad school loans extend that repayment time and amount, assuming they aren’t paid off early. That’s if the loan isn’t put in forbearance for a time, which would obviously add to the time before it pays off. And there’s food, and that’s another $1,000 or so. Right now, we’re at $3334 in expenses, only $116 before the $3500 is all gone for the month. But we haven’t touched credit card debt. The average monthly minimum credit card payment is $58, bringing us to about $3392. The biggest knock after that is health care. The “2018 Milliman Medical Index” from May 2018 reports that the cost is just over $6,000 a year for two people, double for a family of four, but even one person will pay $250 a month, and that’s even with the “most common employer-sponsored health plan.” So now the entire $3500 is wiped out and then some. Mind you, we haven’t touched child care, lunches, or dinners out. Child care will eat up $200 a week per child, or $800 a month. If it’s a couple with a child and two incomes, it’s possible, but another huge expense to deal with. But won’t that all get better as those 31 year olds get older and they try to sock away some savings when they move up to better-paying jobs? Not necessarily. A LinkedIn survey of 1019 working professionals in September 2019 found that “41 percent of millennials—and 30 percent of all adults—found it difficult to move up in their fields because boomers are waiting longer to retire.” Because many baby boomers, those 54 to 74, aren’t retiring, there’s no vacancy for the higher paying jobs. The Bureau of Labor Statistics reports that 20.6 percent of Americans 65 and older are either working or looking for work, up from 12.4 percent in November 1999, 20 year ago. In fact, it’s the largest percentage since November 1960. Why aren’t they retiring? Transamerica Center for Retirement Studies reports that more than half of all workers in the US plan to keep working past 65 or just forget about retiring entirely. After all, with their improved health, they won’t be forced into retirement and with their hammered 401(k)s from the Great Recession, their savings may be in non-retirement shape. According to the Federal Reserve’s Study of Consumer Finances the median retirement account for people 55 to 64 who have a retirement account is $120,000. If we include those without a retirement account, median savings are just $17,000. Yes, they have to keep working. A Moody’s study found that older workers failing to retire has held back wage growth. The more workers 65 and older in a company, the more slowly wages increased and in fact the lower wages over all. Those people who begin saving for retirement at 31 still have at least 36 years before they can retire, longer than they have been alive. Considering their debt, which 2/3 of employees say negatively affects their lifestyle, and with the opportunity to move up in their jobs hindered by older workers not retiring, they could be on the lower rungs of the income ladder for 20 years, in their 40s and early 50s before they earn enough to think about sufficient retirement savings. That means millennials and even many Gen Xers may be in no position to retire at 67 or even 70. They simply won’t have accumulated enough savings to live the retired life they imagine. But some people will have the savings because they are careful savers. Here’s the encouraging part. The Nationwide Insurance study reports that 56 percent of people have less than $100,00 in savings. But that means 44 percent have more than $100,000 in savings. The study further reports that 22 percent of employees say they are unprepared for retirement, but that leaves 78 percent, more than three-quarters, who are prepared. These are people who have found a way to put money away by whatever means. These are the people who take advantage of matched savings from the companies where they work, either for retirement or other savings. As of 2020, they can contribute up to $19,500. These are people who budget carefully and believe in paying themselves first. It’s hard to say what techniques they use because every person’s situation is different. Whatever it is, it works for them and shows them to be responsible money managers. Close to half of Americans are finding a way to save for retirement, and that is encouraging. The other half may not be in as good a position to retire even after working 40 years. Are those who save financially responsible? Probably. Are those who can’t save irresponsible? Not necessarily, they are just trying to get by. By Robert L. Cain
“Wage growth has hit a wall,” economist Joseph Song, wrote in a report for Bank of America. Analysts had expected 4 percent growth but were taken aback at 3 percent and sometimes lower depending on an employee’s position. Overall, raises ended up just over 3 percent in August 2018, down from 3.4 percent in February on their way down further. But manufacturing wages have increased by only 2 percent, more about that and what it means in a minute. Why have wage increases showed? Economists blame three things among others, the trade war with China, a slowing economy, weak productivity growth, and low inflation. But two more things are often ignored, surplus workers and high corporate debt. Surplus workers? But the official unemployment rate is at an historic low 3.6 percent. That’s misleading. The Bureau of Labor Statistics provides another figure they call U-6 that is rarely reported. That includes “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons.” That also includes people who have given up finding work for whatever reason but would work if the opportunity presented itself. The unemployment figure when those people are included is 7 percent. The official unemployment rate is called U-3 by the Bureau of Labor Statistics, and that includes “Total unemployed, as a percent of the civilian work force.” Who’s included in the work force? Only those with any kind of job, part time included, and those actively looking for work. But there’s more. The labor pool has increased with 63.3 percent of Americans working or looking for work in October, the highest since 2013. That larger multitude of available workers lets businesses be more parsimonious in their wage increases. The last two times the “official,” U-3, unemployment rate was at 7 percent were in 2008 during the recession, when it was on its way up to 10 percent in 2010 and then in 2012 when it was on its way down from recession highs. Then, there’s the pool of 4.4 million just part time workers who would like to be full-time workers. They mean employers don’t need to raise wages much because they are available to be made full-time at maybe current wages. Add to that the 4.9 million, officially counted or not, who want a job but can’t find one and there is a pool of workers just wanting a full-time job and ready to work for current wages. Interestingly enough, while all non-supervisory workers’ wages have increased an average of 3.5 percent, supervisors wages slowed considerably to 1.8 percent in October. The reason for that is that their pay includes bonuses for meeting sales targets, reports Joseph Song. A “sputtering economy” and lower corporate revenue because of uncertain foreign trade revenue are sometimes the cause. Not selling means lower profits in addition to lower pay. Add to that lower productivity. Productivity drives wages up or down. The tax cuts helped productivity because companies bought new equipment thus increasing the amount workers could do, raising wages. However, since early 2018, investment in equipment has slowed to a trickle as companies hunker down fearing a slower economy, slowing wage increases. Factory employment amounts to only 8.4 percent of the workforce, but it has an imposing effect on the pay of all US workers because manufacturing workers tend to earn higher salaries than other workers do, says Joseph LaVorgna of the research firm Natixis. As mentioned at the beginning, their wages are up only 2 percent, thus dampening wage increases across the board. Inflation drives wage increases, too, but inflation has been mostly absent. The Consumer Price Index has been falling, or increasing at a slower rate, and stands at 1.8 percent in October. Supposedly that’s partly due to online shopping, and expectations of lower price increases because of a “globally connected economy,” says Sophia Koropeckyj of Moody’s Analytics. More inflation of course means higher prices and so employers have to compensate workers so they can buy things at higher prices. But low inflation means there’s little pressure to increase wages. What does all this mean? Different economists think different scenarios. But here’s another wrinkle to consider. Corporate debt has skyrocketed to a never before seen $10 trillion. Even though some of this country’s best-known companies have borrowed considerable amounts, most of the borrowing this year has been by weaker, BBB Bond-rated companies. They have borrowed money for “financial risk taking,” such as payouts to investors and dealmaking on Wall Street rather than new plants and equipment, reports the International Monetary Fund. That means the borrowed money won’t produce any income much less profits. And they’re borrowing at rates that only the top companies could get a few years ago because the Federal Reserve lowered interest rates. These borderline companies thought let’s grab some of that with little interest but not use it to make more money and increase profits. Disturbing thinking. Emre Tiftik, a debt specialist with the industry association Institute of International Finance is concerned. He said, “we are sitting on the top of an unexploded bomb, and we really don’t know what will trigger the explosion.” The economy keeps growing, but not particularly fast, only 2.1 percent annual rate, virtually the same as the average since the end of the recession in 2009. The unexploded bomb could go off if there’s an unexpected shock such as a breakdown of US-China trade talks, a Persian Gulf military conflict, an oil shortage, or something we just haven’t thought of yet. Out the window would go economists’ rosy outlooks. Gregory Venizelos, a credit strategist for AXA Investment Managers in London said “You can definitely think of an Armageddon scenario.” And last year the Federal Reserve warned about the rapid increase in risky corporate debt. Everything may be all right, but red warning signs and klaxons are there. Slower wage increases, surplus workers, weak productivity, slower sales and bonuses, and $10 trillion in corporate debt are disturbing.
Kelvin Lyles had been busy. When police raided his home in Atlanta in December 2015, they found “information for over 300 synthetic identities, fake driver’s licenses, a fake social security card, and numerous credit cards held in the names of individuals other than Lyles,” reported the US Attorney’s office. Police said that “Lyles attempted $435,862.10 in fraudulent credit card transactions and succeeded in obtaining approximately $350,000.” Lyles is now spending three years and 10 months in federal prison for wire fraud. He had used synthetic identities to establish credit histories involving false Social Security numbers with credit reporting agencies. He had created synthetic identities to obtain credit cards in the names of people who did not exist, then used online credit processing to charge transactions to credit cards with all the ill-gotten funds going directly to him. The news release from the US Attorney’s office doesn’t mention whether Lyles rented an apartment with a phony identity, but he probably didn’t apply for work since his criminal activity was so lucrative that he didn’t need a job. But if he had applied somewhere, the rental or business owner would have had a difficult time finding out that who Lyles claimed to be was fraudulent. Unfortunately, Kelvin Lyles case is rare, not rare that his crime is unusual, but rare that he got caught and prosecuted. Synthetic identity fraud is a growing criminal activity and rarely results in a prosecution much less a conviction simply because the crooks are hard to find. “It’s almost like a ghost is committing these crimes,” said prosecutor Warren Kato with the Los Angeles County District Attorney’s Office. Synthetic Identity fraud has become the largest kind of identity fraud accounting for some 80-85 percent of identity fraud, reports ID Analytics. Because it’s a danger to anyone who checks the qualifications of applicants, it’s up to us to protect ourselves. With synthetic identities, it’s hard to know if the person who is applying is actually the person he or she claims to be. Synthetic people are hard to pin down, but you can do it with careful screening, by believing only what you can confirm. We’ll look at how in a minute. There are obvious reasons why someone would use a fake identity. One is credit so bad he or she would be sent packing when trying to rent a Barbie playhouse, but there are far more nefarious reasons. One is sex offenders. They are required to register and report their addresses forever, putting a damper on the possibility of their renting an apartment or getting a job. But if they hide their identities, if they become another person entirely, they have a “new life,” so to speak. Then there are the violent criminals, people you almost assuredly don’t want living in any place you own or working in your business. New identity, presto! They can live where they want or maybe even get a job. The General Account Office reports, “Synthetic identity fraud (SIF) is a crime in which perpetrators combine real and/or fictitious information, such as Social Security numbers (SSN) and names, to create identities with which they may defraud financial institutions, government agencies, or individuals.” Here’s how these crooks create synthetic identities. Credit Profile/Privacy Numbers (CPN): They are called Credit Privacy Numbers (CPN), or Secondary Credit Numbers (SCN), creating “File Segregation” that begins a new credit identity. The companies that sell them promise new credit lines attached to a new credit report based on the Credit Privacy Number. The lowest price to create a new self I found on the internet is $250 and up to $1500 for the full package of a “guaranteed 790 FICO score within 30 days and two new credit lines of up to $25,000 each.” Sounds great, doesn’t it? It isn’t. These companies give their customers a new number that looks very much like a Social Security Number, and in fact may be a real one, just not theirs. One way they do it is by going online and getting an Employer Identification Number (EIN) from the IRS. It is nine digits long, just like a Social Security Number. Trouble is, in order to obtain an EIN, the IRS wants a Social Security Number that belongs to the person applying for the EIN. Use a bogus one, and it’s a felony. Another way is by finding the Social Security Numbers of children with no credit history, long-term prison inmates, or dead people and selling it to the their customer as a CPN. The General Accounting Office indicates that over 1 million children have their identity stolen each year and are 50 times more likely than adults to be a victim of SIF than adults The third way is by “issuing” a Social Security Number that hasn’t been issued, and in fact may never be issued. The Social Security Administration lists the ranges. They might be any numbers that include -83-, second number set, because the SSA doesn’t issue any of those until all the numbers from -01- to -82- are issued. In addition, area numbers, the first three, run from 001-772. Areas 666 and 734-749 are unused by the Social Security Administration. Identity manipulation or compilation: slightly different from the CPN, they modify data slightly to create a new identity that is not recognized by a credit bureau. They may use an existing Social Security Number, such as one from a dead person or a child, who has no credit record, and add a new address and such. They create a new credit record by applying for a credit card. Because there is no record, they get turned down, but the fact that they applied creates a credit record. Then they apply for another credit card. This time there’s a credit record and they may get a credit card with a $250 or $500 limit. They use it and pay it off as agreed. That creates a better credit record, albeit a phony one. They apply for more and more credit, each time getting higher credit limits. Before long, there’s a whole new person, but, of course, a synthetic one. The more industrious among them will go so far as to start a shell company to facilitate the creation and maintenance of credit files associated with synthetic identities. The shell company gets a merchant account so it can process credit card charges. The criminal reports transactions charged through the shell company, and in the process, creates a credit history for a synthetic identity. The credit reporting agency might catch on and cancel the account, but the crook just creates another shell company to take its place. Now they wait. When they have enough credit built up, they “bust out,” running up huge balances and getting cash. Then they vanish. How to catch them If you are an employer or landlord and checking the credit of an applicant, you may see some red flags run up when you look at a credit report. The first thing to always check is the Social Security Number itself. By doing a “Social Search,” available from a screening company, you can see first, the name or names the number belongs to and second, if it has even been issued at all. If a number has not yet been issued or is an EIN, it will come back as “no record found.” That’s a red flag too large to ignore and entitles you to immediately reject the applicant, assuming he or she wrote the supposed Social Security Number correctly. Another indication might be a credit file that is just a few months old and you’re looking at a 40-year-old person. Hmmm? Then there’s picture ID. It’s difficult to get a driver’s license without proper ID such as a birth certificate, and the license will have the person’s picture, name, address, and birth date on it. Who was the license issued to and what’s the address on the license? Will it always work? No, nothing always works. After all, Kelvin Lyles had phony licenses. Doubt everything. Verify everything. Check everything by using a screening checklist. The Federal Trade Commission reports that businesses lose $50 billion a year because of Synthetic Identity Fraud, and it is growing. Don’t let it grow in your business. When Kelvin Lyles gets out of prison, where will he live? Will some rental owner rent to him? Will he apply for a job using a synthetic identity? Check carefully.