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Harvard vs. plumbing school?

Harvard vs. plumbing school? You'd be surprised ROI on expensive colleges shockingly low; tuition, loans, taxes take toll

By Laurence Kotlikoff
March 9, 2011 7:08 am ET
The notion that education pays and that better education pays better is taken for granted by almost everyone. For college professors like me, this is a very convenient idea, providing a high and growing demand for our services.

Unfortunately, the facts seem to disagree. A recent study by economists Stacy Dale and Alan Krueger showed that going to more selective colleges and universities makes little difference to future income once one accounts for the underlying ability of the student. Their work confirms other studies that find no financial benefit to attending top-tier schools.

It's good to know that Harvard applicants can safely attend Boston University (my employer), and that "better" higher education doesn't pay better. But does higher education pay in the first place?

The answer seems obvious. On average, doctorate holders earn more than those with master degrees, who earn more than those with bachelor degrees, who earn more than high school graduates. How can education not pay?

The answer is that education isn't free. Top undergraduate programs are now charging students $50,000 a year to eat, sleep and, hopefully, attend class. But that's just the direct cost. Education's hidden cost is the time spent learning rather than earning.

Making School Pay

For education to pay it has to cover all its costs. It also has to make up for the progressive income tax, which taxes annual earnings, not lifetime earnings. If person A earns the same amount over her lifetime as person B, but does so in fewer years, A's annual earnings, in the years she works, will be higher than B's. This compressing of lifetime earnings into fewer years can potentially land person A in higher tax brackets during her working years.

Social Security's payroll tax cuts the other way. It's regressive, thanks to its ceiling on taxable income. Earnings bunching can lower lifetime payroll taxes provided the bunching pushes annual earnings above the ceiling, now at $106,800.

Social Security's benefits formula provides no reward for paying taxes early. This too helps those who stay in school and start their careers late. On the other hand, the formula doesn't credit earnings above the ceiling, which can penalize the better educated.

But what's the bottom line? Does education pay?

Not necessarily. Consider four equally talented 18 year- olds -- Joe, Jill, Sue, and Matt. Joe takes a pass on attending college. Instead, he decides to become a plumber.

Jill chooses medicine. She goes to an expensive private college for four years, an expensive medical school for four years, does a low-paying internship for two years followed by a low-paying residency for one year, and finally, 11 years after high school, gets a real job, as a general practitioner.

Teaching Education

Sue and Matt both get bachelor's degrees in education at the same expensive college Jill attends, but Matt spends an extra two years after college getting his masters.

All four of these hypothetical kids settle down in Ohio, remain single, and retire at 62. At age 50, the peak earnings year for all four, Joe, the plumber, makes $71,685 (in today's dollars). Sue, the teacher, makes $89,584. Matt, the teacher with the master degree, makes $103,250. And Jill, the doctor, makes $185,895. All figures and others used in this analysis are based on earnings data by age, state and occupation.

Earning Power

Who ends up with the higher lifetime spending power assuming Sue, Matt, and Jill had to borrow, at high prevailing interest rates, to pay tuition and cover living expenses while in school?

To answer this question, I used ESPlanner, my company's financial planning software. The program figures out, in two seconds, each kid's sustainable spending, taking account of educational costs, foregone earnings, annual federal and state income taxes, annual payroll taxes, Social Security benefits, and Medicare Part B premiums.

Jill, the doctor, has the highest living standard. She gets to spend $33,666 year in and year out from age 19 through 100 This is after paying all her taxes and Medicare Part B premiums. Age 100 is the maximum age to which the kids might live and, thus, must plan.

Come again? Only $33,666? That's a far cry from Jill's peak earnings of $185,895. Yes, but remember, Jill has only about 31 years of significant earnings to cover some 81 years of living. And when Jill works, she gets nailed by the taxman. At age 50, for example, Jill pays 36 percent of her earnings in federal and state income taxes and payroll taxes.

Finally, Jill has a bucket load of student loans to repay at an assumed 5 percent real interest rate, which exceeds the assumed 3 percent real return she can safely earn on her savings.

Plumber's Pay

To add insult to Jill's injury, Joe the plumber's sustainable spending is almost as high -- $33,243. All those grueling years of study, exams, late-night emergency calls, and Jill gets to spend a measly $423 more per year than a plumber.

What about Sue, the teacher? Sue has less spending power -- $27,608 -- than Joe.

And Matt, with his masters? His spending power is even lower than Sue's, at $26,503. Too bad he didn't run the numbers before sending in his graduate-school application.

These examples are a far cry from an exhaustive study of the returns on investing in higher education. And they treat higher education as purely a financial investment and ignore its tremendous personal and social non-pecuniary rewards. Still, the examples present a big red flag for those who pursue higher education solely for the money. And they raise a major question about government policy that promotes higher education as the sure path to economic success.

(Laurence Kotlikoff, professor of economics at Boston University, president of Economic Security Planning Inc. and author of “Jimmy Stewart Is Dead,” is a columnist for Bloomberg News The opinions expressed are his own.)

http://www.investmentnews.com/article/20110309/FREE/110309903
 
Teachers in many states are being laid off and there is an assault on their pay and perks, so one might want to downwardly estimate their projected earnings taking into account the increased insecurity and possibly lower wages. I've always felt there's an argument to be made for trade school -- plumbing, electrical work, carpentry, welding, operating machine tools. It's skilled work, not just pushing paper and formulas around. And it still does not pay badly (though of course everything has been influenced by this "recession").
 

DominiConnor

Quant Headhunter
Yes, there's a big issue around job security and risk here...

When I was a kid in the 1970s TV repairmen were better paid than plumbers, and there were more of them.
The mean time between failure of a TV was months, not the decades we expect now, and because they were expensive, it was worth repairing them.
That will sound bizarre to most reading this, and that is my point...
Transistor and IC based TVs swept in, making them vastly more reliable, and so much cheaper that today most TVs aren't worth repairing. That transition took only a couple of years, partly because the old TVs were so unreliable there was no legacy gear to maintain.
Yes, I'm an old git, but careers should be long, so how do different lines of work experience risk, and what can you do about it ?

Plumbing ain't going away until we get Star Trek grade robots, but there is a steady increase in productivity through better tools, pre-built units, and more reliable water systems, so I expect gentle drift down. However, it may get much more technical. Already there are mandatory courses for certain types of work, such as anything involving natural gas, people with low education may struggle to be allowed to continue.
On the other hand, the change from fossil fuel to roof water heaters et al will push up demand, so my call is that plumbing is not that risky as a career.

Medics can get hit by changes in technology, and the breakdown rate of doctors is one of the highest of any profession, and higher than most non professional groups. If you drink yourself out of a job, that's at least as bad as standard unemployment. Doctiring is portable. Provided you qualify in a civilised country you can work almost anywhere on Earth, that's not true of plumbers.

Teaching is the activity that most reminds me of TV repairmen.
The technology to improve productivity such as recorded lectures, telepresence, computer based learning, etc has increased massively over the last 30 years, but it has been fought hard by the profession, almost all of whom regard any technology invented after 1945 as scariliy close to witchcraft. That may change, or it may not, risk is like that.

A particular issue for Americans is their pathetically indequate education system.
If you look at the distribution of earnings relative to education level, and how it has changed over the last 25 years, you find a very large % of Americans have little education and even before the recession actually had decreased disposable income for decades.

Skilled workers on the other hand have got more expensive, and effectively the entire increase in spending power of Americans since about 1975 has gone to the 40% of Americans who have educations that don't embarass them when they speak to people from other countries.
But 'things' have got cheaper in real terms, cars, computers, toys, porn, and TVs

That means the time of more skilled Americans are becoming much more expensive compared to 'things', and that means the ratio of skilled time to things is under pressure to decrease. An egregious example being medical care, where for 50 years Americans have had no problem with child mortality rates that would shame 3rd world countries, but are now realising that medical care costs are screwing with middle class white people, and thus need to be curbed. That's going to be harsh on people who do medicine.
 
I just wonder when people will learn that life isn't all about the money? Spending your life helping sick people and making complicated diagnoses beats the shit out of sticking a plunger down a toilet, even if the plunger does get paid more.
 
I just wonder when people will learn that life isn't all about the money? Spending your life helping sick people and making complicated diagnoses beats the shit out of sticking a plunger down a toilet, even if the plunger does get paid more.

I didn't really see anyone imply life is "all about the money" in this thread. However, I do agree a plumbing probably isn't an enjoyable job to do. I wouldn't want to see someone with an IQ over 108 wasting their time doing it honestly.
 
I didn't really see anyone imply life is "all about the money" in this thread. However, I do agree a plumbing probably isn't an enjoyable job to do. I wouldn't want to see someone with an IQ over 108 wasting their time doing it honestly.

Well, when the only metric used to decide which career to follow is money, it's kind of implied, isn't it? IQ is irrelevant. You somehow assume that people with high IQ's only like doing work that's reserved for people with "high IQ's", which is false. It's more to do with what you find interesting and enjoy. My brother, who has an IQ well above 108, is a plasterer, and he loves his job.
 

alain

Older and Wiser
However, I do agree a plumbing probably isn't an enjoyable job to do.

It might not be enjoyable to you. Some people love it. I can tell you that the plumber that installed the condensing heating unit in my house not only knew the installation but he gave me a detail explanation about the way the machine worked. I have seen the latest technology in HVAC units and they are very sophisticated.
 
However, I do agree a plumbing probably isn't an enjoyable job to do. I wouldn't want to see someone with an IQ over 108 wasting their time doing it honestly.

There's more to plumbing than fixing a broken toilet just as there's more to car mechanics than opening the bonnet. I don't know what I will do when my car mechanic retires -- they don't make his kind any more. It took a lenthy apprenticeship program (where among other things he was made to disassemble a Chrysler and then reassemble it) and a lifetime of experience to make him what he is. He's a master at diagnosis and explaining where future problems will lie. Skilled workers like him command a premium -- just like skilled coders.

I remember when I called over a couple of workmen to install locks on the doors of my house in England: they buggered it up. I remember when my Escort got hit by another car and I took it to a mechanic: he buggered it up. Not easy to find intelligent and experienced workmen. There is a level of skill involved, which most people seem not to appreciate -- until and unless something goes wrong. For some reason manual craftsmanship is looked down on, while parasitic paper-shuffling activity (law, accountancy, "management") is looked up at.
 
And in the US, being a licensed plumber, electrician, repairman is not easy. I asked a member here on how to become a licensed electrician in NY and here is what he said. It seems more difficult to licensed than to become a quant ;)

One would need to have W2's from licensed electrical firms for the last 7.5 years working as an electrician. He would have to pass a written and a practical test and then submit a list of paperwork to get a firm approved as a licensed electrical contractor. If he has the years under a licensed electrician there is a electrical test prep school that he can join and it takes about a year if he passes the test. One cannot pass the electricians test without taking the prep class as familiarity with the test questions is needed unless he is an electrical engineer and someone that recently took the class can give him the material for review. In either case he will need to attend the class on the practical test as it is not intuitive or based on experience but more like monkey see and monkey do.
http://www.nyc.gov/html/dob/downloads/pdf/elec_lic_checklists.pdf
 
And in the US, being a licensed plumber, electrician, repairman is not easy. I asked a member here on how to become a licensed electrician in NY and here is what he said. It seems more difficult to licensed than to become a quant ;)

Skilled workers like machinists, electricians, and mechanics are an aristocracy among skilled workers, and have their own subcultures. There's some sort of apprentice-journeyman-master hierarchy still in play. I socially mingle with some welders, electricians, and builders where I'm at, and I have respect for their knowledge and skill.

On a side note, and to reinforce the point about hierarchy, when my father couldn't get a job after he finished his PhD in chemistry at Bristol, he worked as an assistant bricklayer for a while, under the supervision of a master bricklayer.
 
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