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“Those who spend too much will eventually be owned by those who are thrifty.”
– Sir John Templeton
The Sun Sets On Industrial Age Employment
Some commentary on current events, from a long-term perspective:
On July 17, 2009, US Bureau of Labor Statistics reported the national unemployment rate as 9.7%, the highest since 1983. In several states, unemployment is well over 10%, and is even as high as 20% in some metropolitan regions. This is a major employment upheaval, one that significantly impacts the financial lives of a large segment of the populace.
If the future is consistent with past history, many of those currently unemployed will eventually find their way back into the workplace when the economy rebounds. But those who return to work will find their employment landscape fundamentally and permanently changed, because it is quite likely this “Great Recession” officially marks the end of lifetime employment.
Lifetime employment was one of the crowning distinctions of the modern Industrial Age. Beginning in the post-war 1940s, it was characterized by steady employment, guaranteed pensions, and employer-provided benefits. As a result, millions of blue-collar American households ascended to middle-class affluence; they bought homes in the suburbs, sent their kids to college and after 40 years of service, retired to a life of relative security and ease. At the same time, the white-collar professional and management class grew as well. Every now and then some observer might moan about the dehumanizing aspects of factory work or cubicle life in the corporate maze, but throughout history, there’s never been a socio-economic model that delivered so many financial benefits to so many people on such a stable basis.
However, in a world where the only constant is change, Industrial Age lifetime employment could not last forever. The power technologies that fueled the Industrial Revolution (steam, electricity and the internal combustion engine) laid the foundation for the micro-technologies of the personal computer and the Internet, ushering in the Information Age. And while government policymakers may strain mightily to preserve the “old world” of lifetime corporate employment, every indication is that changes are not only on the horizon, but already here. Even American automobile manufactures finally recognized it. Unless you are working in government (including education) or the military, lifetime financial security, courtesy of your employer, is a thing of the past.
Self Employed in the Information Age
Going forward (if you haven’t experienced it already), these changes will have huge implications for your individual finances. In the emerging Information economy, workers will find it to their advantage to think and act as if they were self-employed. For some, this means adopting some different paradigms and acquiring some different financial habits.
Fluctuating Income, Multiple Sources
First and foremost, the nature of your work and income may change. You are less likely to remain in one industry, with one employer, doing one job, receiving one paycheck. Instead, work is more likely to resemble a series of long-term but temporary assignments with several employers (sometimes at the same time), with periods of unemployment and self-employment. This is particularly true for younger workers. As Maureen Sharib, an employment “sourcer” from TechTrak, put in a July 14, 2007 commentary:
“Today, there are 149 million people in our nation’s workforce. Every year, approximately 50 million people leave their jobs. And approximately 50 million find new jobs. That means one-third of our workforce turns over each year because of new opportunities. And the average American has had nine jobs by the time he or she is 34 years old because of new opportunities.”
Not only are tomorrow’s workers more likely to experience regular employment changes, they will also encounter different forms of payment. While government prefers making as many workers as possible W-2 employees because income taxes are withheld by the employer, the just-in-time, low-overhead pressures of the Information economy make it financially desirable for companies to limit their full-time employees and consider out-sourcing or contracting. For many, this could mean the end of regular paychecks.
Combine frequent job changes with non-W-2 compensation and the inevitable result is irregular cash flow, one of the major characteristics of self-employment. Successful self-employment requires strategies to manage these fluctuations and still pay the bills.
Portable, Personal Benefits Packages
As you move, you must either maintain or perpetually re-establish your benefits package. When the “company man” was the default career path, the trip included employer-provided benefits. That scenario is no longer on the table for most workers.
Even in holdover Industrial Age jobs, the cost of providing benefits has skyrocketed (particularly for health care), so most employers require employees to share in the costs. Alternately, employers reconfigure their work force so that fewer employees are eligible for any benefits. The structure of Information Age employment puts the responsibility for benefits more directly on the worker.
If offered, group disability and life insurance protection may be an inexpensive way to obtain income protection, but these options are usually limited to active employees – if you terminate employment, you can’t take the coverage with you (you may be able to convert life coverage to an individual policy, but the costs are no longer at group rates). This leaves you either hoping your new (and often temporary) employer will offer similar benefits, or hoping you are healthy enough to qualify for similar benefits on an individual basis. The older you get, the more problematic this arrangement becomes.
In the long run, securing a personally-owned package of portable (and permanent) benefits may be a better option, particularly for disability and life insurance, where premiums and coverages for individual policies can be guaranteed to remain the same for specified time periods. In addition, healthy individuals who obtain permanent coverage at a young age may realize some long-term savings because younger, healthy individuals usually subsidize the costs of insuring older, less healthy people in group policies.
Your Own Financial Management Systems
Not only must your benefits package be portable, but so must your financial management systems. All employers are subject to regulation regarding taxes and withholding for the employees on their payrolls. This includes the requirements to pay the employer’s portion of FICA and Medicare taxes, plus withholding on income paid to employees. However, when workers are paid by the job or under 1099 conditions, the responsibility for these taxes falls on the worker, not the employer. This increases the possibility that you may have to make quarterly estimated tax payments, at both the state and federal levels. (Even if you receive a W-2, you may be considered a “non-statutory employee,” in which case the employer will not manage your withholding requirements.)
This means your tax return will probably require more than a 1040-EZ form. It also means you’ll want to keep records for deductible expenses, as well as earnings.
Additionally, employers typically handle automatic deductions for qualified retirement plans, like 401(k)s, and often facilitate direct-deposit transactions, making it easy to execute long-term saving objectives. But if you’re not eligible to participate in a company’s plan, where will you put retirement savings – and how will you deposit the money? These issues must be addressed by your financial management system.
You are the Pension Fund Manager
Beyond finding the financial vehicle and making the deposits, you are responsible for creating your own pension income from these savings. Unlike the Industrial Era job, there are no formulas based on average salary and years of service to determine your retirement benefit. Instead, it’s up to you to answer questions like: How much funding will be required? When will you be able to receive payments? How big will they be? In addition to figuring out how to best accumulate the funds, you must also become your own actuary and determine how they will be distributed.
If You Can’t Handle Self-Employment, Will the Government Bail You Out?
Consider the brief listing above of additional assignments: Insurance, Accounting, Retirement Planning. For the typical employee at the end of the Industrial Age, all these assignments were handled “in-house:” It was group benefits, a W-2, and a pension. Now, the trend is that these are being replaced by the individual. Not surprisingly, it appears many individuals are not up to the challenge of functioning as self-employed independent contractors. Statistical evidence seems to indicate that too many people are under-insured against the difficulties of life, and under-funded for retirement.
This collective poor performance has compelled government officials to seek legislative fixes, using taxation and regulation to guarantee minimum levels of financial well-being. The legislative push for national health care is the most prominent example of current government initiatives, but in the past year, other items have been considered as well, including an idea to establish mandatory all-inclusive Government Retirement Accounts (GRAs) as replacements for company-sponsored 401(k)s.
Some might think that broadly-available government programs for insurance and retirement might serve as suitable replacements for Industrial Age company benefits, sparing individuals the challenges of self-employment. But anytime government enacts policies that seem to restrict or resist market forces (such as out-sourcing, globalization and the Internet), there are usually unintended consequences.
For example, economists have regularly documented that minimum-wage laws typically lead to either a decline in employment or inflation. While those who are currently working at low-wage jobs do make more money, employers often consider hiring fewer workers or raise their prices to accommodate their increased labor costs.
What might be the unintended consequences in some of these government proposals? Suppose the law requires companies over a certain size to provide health insurance or be hit with a fine. Depending on the cost, one practical response might be to shrink the company (or perhaps divide it), to fall below the threshold. After careful analysis, another option might be to pay the fine, but not provide insurance. Even if the company conforms to the proposal, the insurance coverage may not be a plan that matches the individual’s medical needs.
Because no one knows how the national health care issue will play out, the above comments are pure speculation. Perhaps politicians can actually craft a utopian solution that delivers far beyond our wildest dreams. But the pragmatic response, considering history, is to assume that government initiatives will not restore Industrial Age benefits to the Information Age economy. Better to think and act as a self-employed individual than hope for nationalized group benefits.
(Even with mandated nationalized programs, you still end up functioning as an individual. Think of Social Security. When it comes time to apply for benefits, you aren’t part of a union, or some other select pool of beneficiaries. You don’t have a Human Resources advocate to guide you through your options – you’ll go through the bureaucratic maze on your own, or hire expert assistance – just like a self-employed person would.)
You Might Be Self-Employed, But You Don’t Have to Do Everything Yourself
30 years ago, a successful self-employed individual understood the necessity of a team of financial advisors. Finding someone to keep books, secure insurance, oversee investments, prepare returns, was part of the cost of doing business. This hasn’t changed. If you’re self-employed, you will almost certainly benefit from expert assistance.
One of the fortunate side effects of the Information Age is the expanded access to expert services and technologies. When computers occupied entire floors in corporate offices, only big businesses could deliver the benefits of advanced technologies. Now, a personal computer and an Internet connection can bring all sorts of expertise right to your doorstep. And the technology far surpasses anything that was produced by a 1970s main-frame program.
It is understandable that some people choose to hold onto the past as long as possible; they will do everything possible to preserve the status quo. But contrary to efforts by politicians to “preserve” or “create” more Industrial Age jobs, the free-market trend is toward a new era, and a different paradigm. Specialized self-employment comes with a new set of challenges, but also better ways to overcome them.
Here’s a simple checklist. As a self-employed individual, how well have you…
- Made allowances for fluctuations in
- Established good management systems?
- Secured your insurance benefits?
- Prepared a spending plan for retirement?
YOU ARE SELF-EMPLOYED. BE YOUR OWN BOSS.