Dodged a Bullet? “Rothification” Likely to Reduce Retirement Saving

The brief’s key findings are:

  • As part of tax reform, Congress considered changes to 401(k)s that would require most new contributions to go to a Roth, rather than a traditional, account.
  • This budget gimmick would help pay for tax cuts because Roths are taxed up-front, rather than in retirement.
  • Such a change, however, could also affect how much people save.
    • Some could save more by keeping their contribution steady.
    • Some may save the same by reducing their contribution to maintain their take-home pay.
    • But many, especially those who have lower incomes or are cash-strapped, may overreact and save much less.
  • Rather than risk disrupting the retirement savings system, a better idea is to focus on actions to boost saving and expand access to workplace retirement plans.

Property Tax Deferral: A Proposal to Help Massachusetts Seniors

The brief’s key findings are:

  • Some states and localities allow older homeowners to defer property taxes, with deferred amounts repaid with interest when the house is sold.
  • However, these programs have many limitations and very low take-up.
  • A proposed redesign for Massachusetts would:
    • open up the program to all older homeowners by removing income limits;
    • make sign up very simple – just check a box on the tax bill; and
    • have the state reimburse localities and collect repayments from participants.
  • Creating a pilot program to test this new design would be a good way to gauge its viability and improve its effectiveness.

How Have Municipal Bond Markets Reacted to Pension Reform?

The brief’s key findings are:

  • Bond rating agencies have begun accounting for public pension funding and have cited pensions in several downgrades.
  • As a result, state and local governments see that their pension finances could threaten their ability to borrow at affordable rates.
  • This study examines the impact of both pension finances and pension reforms on borrowing costs from 2009 to 2014.
  • The results show that a higher ratio of unfunded pension liability to government revenue is related to increased borrowing costs.
  • Pension reforms appear to reduce borrowing costs but the result is not statistically significant, perhaps because those making changes also had poor general finances.

A First Look at Alternative Investments and Public Pensions

The brief’s key findings are:

  • Public pension plans have boosted their holdings in alternative assets, defined as private equity, hedge funds, real estate, and commodities.
  • This shift reflects a search for higher returns, a hedge for other investment risks, and diversification.
  • The question is how the shift has affected returns and volatility over two periods: 2005-2015 and 2010-2015.
  • In terms of returns, a 10-percent increase in the average allocation to alternatives was associated with a reduction of 30-45 basis points, primarily due to hedge funds.
  • In terms of volatility, alternatives did not have a statistically significant effect. Hedge funds reduced volatility, but real estate and commodities increased it.
  • This analysis is only a first look at this area; further research is clearly warranted.

How Much Long-Term Care Do Adult Children Provide?

The brief’s key findings are:

  • As people age and their health deteriorates, they begin to need more help with daily activities.
  • While many formal long-term care services are available, cost concerns and personal preferences lead many to rely on informal care from adult children.
  • At any given point, 6 percent of adult children serve as caregivers, and 17 percent will take on this role at some point in their lives.
  • Those who do provide care devote an average of 77 hours per month, which can take a toll on both the finances and health of the caregiver.
  • The caregiving burden on adult children is likely to become a bigger concern as baby boomers move into their 80s.

How Will More Retirees Affect Investment Returns?

The brief’s key findings are:

  • Economic theory suggests that retirees draw down the assets they accumulated in their work lives, so a higher retiree-worker ratio reduces the supply of saving, thereby increasing investment returns.
  • However, research generally shows that retirees draw down their wealth much more slowly than expected, particularly the wealthy who hold most of the assets.
  • Therefore, as retirees retain much of their wealth, a higher retiree-worker ratio leads to a greater supply of savings and a decrease in investment returns.
  • To the extent that investment returns decrease, workers will need to save more to maintain their standard of living in retirement.

Who Contributes to Individual Retirement Accounts?

The brief’s key findings are:

  • IRAs were intended to give those without an employer plan access to a tax-deferred savings vehicle.
  • Today, IRAs hold nearly half of all private retirement assets, but most of these funds are rollovers from 401(k)s, rather than contributions.
  • The 14 percent of households who do contribute to IRAs include:
    • higher-income dual-earners who also save in a 401(k);
    • moderate-income singles or one-earner couples, often with a 401(k); and
    • higher-income entrepreneurs with no current 401(k).
  • One way to turn IRAs back into an active savings vehicle – one used more for contributions – is to auto-enroll all workers without an employer plan in an IRA.

Is Home Equity an Underutilized Retirement Asset?

The brief’s key findings are:

  • Home equity, the largest asset for most households entering retirement, can be tapped by downsizing or by taking a reverse mortgage.
  • Few households currently use either option due to behavioral and informational barriers, a preference to stay in one’s home, and high transaction costs.
  • To the extent that behavioral and informational barriers impede downsizing or reverse mortgages, home equity is an underutilized retirement asset.
  • An open question is whether more retirees will overcome these impediments and tap home equity in response to growing financial pressures.

How Has the Shift to 401(k) Plans Affected Retirement Income?

The brief’s key findings are:

  • This analysis addresses how the transition from defined benefit to defined contribution plans affected retirement wealth and income during 1992-2010.
  • The results show:
    • total retirement wealth from employer plans was roughly flat, and this wealth is now more skewed toward those with more education;
    • the income produced by each dollar of retirement wealth has declined, despite a tendency for workers to retire later; and
    • the amount of income relative to a worker’s earnings has declined.
  • The bottom line is that employer plans are providing less retirement income today than in the past.

Do Households Have a Good Sense of Their Retirement Preparedness?

The brief’s key findings are:

  • Do households in the National Retirement Risk Index identified as “at risk” recognize their situation?
  • The analysis finds that almost 60 percent of households have a good sense of whether or not they are on track for retirement.
  • But about 20 percent incorrectly think they are prepared, in large part because they do not recognize that their 401(k) savings are inadequate.
  • These households are in the most danger of saving too little, but even those who know they are unprepared may not take action unless prodded.

How Job Changes Affect Retirement Timing by Socioeconomic Status

The brief’s key findings are:

  • Workers in their 50s today, compared to previous generations, are more likely to switch jobs voluntarily.
  • The question is whether such job changes lengthen or shorten a worker’s career.
  • The results suggest that job changes lengthen careers: those who switch jobs are much more likely to still be in the labor force at age 65 than those who stay put.
  • This effect is somewhat larger for better-educated workers than for less-educated workers.

Target Date Funds: What’s Under the Hood?

The brief’s key findings are:

  • While nearly 60 percent of new 401(k) participants have savings in target date funds (TDFs), little research has looked under the hood of this investment vehicle.
  • This analysis uses a unique dataset with extensive information on the underlying mutual funds that TDFs hold.
  • The results show that TDFs:
    • often invest in specialized assets (e.g., emerging markets and real estate);
    • charge fees that are only modestly higher than if an individual investor assembled a similar portfolio on his own; and
    • earn returns that are broadly in line with other mutual funds.

Cognitive Aging and the Capacity to Manage Money

The brief’s key findings are:

  • Most people in their 70s and 80s can still manage their money, as financial capacity relies on accumulated knowledge, which largely stays intact with age.
  • However, financial novices who lack such knowledge and are forced to take over money management after a spouse dies will likely need help.
  • And individuals who develop a cognitive impairment may see a substantial reduction in their financial capacity and need someone to step in for them.
  • Given that this impaired group will grow to more than a third of individuals who reach their 80s, better monitoring of financial capacity will be essential.

State and Local Pension Reform Since the Financial Crisis

The brief’s key findings are:

  • Since the financial crisis, 74 percent of state plans and 57 percent of large local plans have cut benefits or raised employee contributions to curb rising costs.
  • Plans with a larger pension cost burden and lower initial employee contributions were more likely to enact such changes.
  • And, among plans that made changes, those in states with the strongest legal protections for current workers were more likely to limit the cuts to new hires.

Cognitive Aging: A Primer

The brief’s key findings are:

  • A growing body of research shows that cognitive aging reduces the brain’s processing ability, but also increases its stock of useful knowledge.
  • On balance, most workers are able to stay productive through their 50s and 60s and retain the capacity to manage their finances once they retire.
  • Some people, however, are vulnerable to declining performance in the workplace or to making poor financial decisions.
  • Forthcoming briefs will assess these issues in greater depth.

Does Public Pension Funding Affect Where People Move?

The brief’s key findings are:

  • Individuals who move generally go to places with the best mix of amenities, including low tax rates and a robust economy.
  • An open question is whether a state’s unfunded pension liabilities could also affect moving decisions.
  • While movers generally know little about a state’s pension finances, critical news stories could signal poor fiscal management.
  • The analysis finds that, in addition to traditional factors, a state’s pension funding does play a role, albeit small.

Will Pensions and OPEBs Break State and Local Budgets?

The brief’s key findings are:

  • The analysis looks at the costs of pensions, OPEBs, and debt service for all states and the largest counties and cities.
  • Costs assume a 6-percent discount rate and an adequate amortization schedule, and are compared to own-source revenue.
  • The good news is that the total cost burden appears under control in many jurisdictions, but a handful face an enormous challenge.

How Much Does Housing Affect Retirement Security? An NRRI Update

The brief’s key findings are:

  • Net housing wealth, a major asset for most households, depends on the value of the house and the amount of mortgage debt.
  • The analysis tests how below-trend house prices and high housing debt affected the 2013 National Retirement Risk Index (NRRI).
  • The results show that the impact of house prices and, particularly, debt, was large; absent these effects, the NRRI would have been 44 percent rather than 52 percent.
  • Looking past 2013, the continuing recovery in house prices will help the NRRI a bit, but it is unclear whether the high-debt pattern is temporary or permanent.

Can We Increase Retirement Saving?

The brief’s key findings are:

  • Today’s workers must save on their own for a secure retirement, so researchers have examined existing options for encouraging them.
  • Tax incentives: recent research suggests that increasing the generosity of tax incentives for 401(k)s and IRAs would not significantly increase saving.
  • 401(k) design: auto-enrollment has boosted participation, but, to date, low default contribution rates and little auto-escalation have dampened the rise in saving.
  • Auto-IRAs: recently adopted by some states, they would require employers without a plan to enroll their workers in an IRA, with the ability to opt out.

Does Socioeconomic Status Lead People to Retire Too Soon?

The brief’s key findings are:

  • The ability to stay on the job long enough for a secure retirement may vary by socioeconomic status (SES).
  • Using education for SES, the analysis calculates a retirement gap – the difference between how long households plan to work and how long they need to work.
  • Not surprisingly, retirement gaps are both more common and larger among households in the bottom education quartile compared to those in higher quartiles.
  • Even after controlling for demographic/financial characteristics and pre-retirement shocks, the bottom-quartile households still have much larger gaps.
  • Thus, premature retirement by low-SES households is a big problem.  However, relatively poor health and job prospects may make it harder for them to work longer.

How Job Options Narrow for Older Workers by Socioeconomic Status

The brief’s key findings are:

  • Job-changers over age 50 increasingly end up in “old-person” jobs, with a high share of older hires relative to prime-age hires. 
  • These basic findings hold by gender and by education. 
  • However, the overall outlook has improved since the late 1990s for all groups, particularly for older women with more education.
  • Also, older job-changers hired into “old-person” jobs are paid no less than other jobs.

How Can We Realize the Value That Annuities Offer in a 401(k) World?

The brief’s key findings are:

  • A growing number of people are entering retirement with more 401(k) savings and less annuity income from Social Security and traditional pensions.
  • Annuities assure a lifelong income stream and – compared to other draw-down options – can provide attractive payouts, which can help cover late-life health costs.
  • But few individuals buy annuities, partly due to behavioral barriers such as the complexity of valuing the product and the way that draw-down options are framed.
  • Options for overcoming these barriers include:
    • educating individuals to focus more on the income they can draw from their nest egg, rather than its size; and
    • automatically putting a portion of 401(k) assets in an annuity, perhaps an Advanced Life Deferred Annuity that kicks in later in retirement.

Reducing Default Rates of Reverse Mortgages

The brief’s key findings are:

  • In any loan program, a key objective is balancing the twin goals of high take-up rates and low default rates.
  • In 2013, the federal government announced new rules to curb default rates of reverse mortgages by limiting initial withdrawals and requiring underwriting.
  • To assess the effects of the new rules, this analysis uses a unique dataset linking borrower characteristics to their loan activity.
  • The results show that the new rules could reduce default rates by up to 50 percent, with only a small impact on take-up.

Social Security’s Financial Outlook: The 2016 Update in Perspective

The brief’s key findings are:

  • The 2016 Trustees Report shows virtually no change:
    • Social Security’s 75-year deficit is 2.66 percent of payroll, just a hair below the 2015 projection.
    • The deficit as a percentage of GDP remains at about 1 percent.
    • Trust fund exhaustion is still 2034, after which payroll taxes still cover about three quarters of promised benefits.
  • The shortfall is manageable, but action should be taken soon to restore confidence in the program and give people time to adjust to needed changes.
  • Also of note, the Bipartisan Budget Act of 2015 did two things:
    • It reallocated payroll taxes to extend the life of the DI trust fund.
    • It helpfully eliminated claiming loopholes, which had a small positive effect on program finances.

The Funding of State and Local Pensions: 2015-2020

The brief’s key findings are:

  • In 2015, the funded ratio of state and local pensions using traditional accounting rules, with smoothed asset values, rose from 73 percent to 74 percent.
  • The funded ratio using new accounting rules, with market value, declined slightly.
  • Required contributions continued to climb in 2015, but plans also stepped up their payments from 86 percent to 91 percent of the required amount.
  • The funding outlook suggests steady improvement if plans realize expected returns, but a downward drift if returns fall short, as many financial experts predict.

How Work & Marriage Trends Affect Social Security’s Family Benefits

The brief’s key findings are:

  • Social Security’s spousal and survivor (“family”) benefits were designed in the 1930s for a one-earner married couple.
  • Today, family benefits contribute less to retirement income because most married women work, and many households are headed by single mothers.
  • Single mothers who were never married are not eligible for family benefits, nor are divorced women who were married less than 10 years.
  • These women often find it harder to earn an adequate Social Security benefit on their own, as their work opportunities are constrained by child-rearing duties.
  • Policy experts have suggested ways to help:
    • Earnings sharing among married couples could raise benefits for women who later become divorced.
    • Caregiving credits could help mothers regardless of their marital status.

Do Households Save More When the Kids Leave Home?

The brief’s key findings are:

  • When kids fly the coop, parents have extra money on hand.  The question is do they spend it or save it for retirement?
  • Spending the extra money means fewer resources at retirement and a higher standard of living to target; saving it means more resources and a lower target.
  • Using tax data, the analysis shows that households save only slightly more in 401(k)s when kids leave, far below what is likely needed for a secure retirement.
  • In short, empty nesters appear to spend most of the new-found slack in their budget, rather than save it, a choice that will undermine their retirement security.

Are Counties Major Players in Public Pension Plans?

The brief’s key findings are:

  • County governments play only a limited role in most states, but in a handful of states they are major public service providers.
  • In these states, led by California, Maryland, and Virginia, counties employ lots of workers and provide pensions.
  • County pension costs, which include contributions to plans they administer and to state-run plans they participate in, equal 4.8 percent of their revenues.
  • The plans sponsored by counties are about 75 percent funded, slightly on the high end compared to other governmental entities.
  • Overall, counties hold 12 percent of unfunded public pension liabilities, indicating that – with a few exceptions – they play a modest role in the pension world.

Could the Saver’s Credit Enhance State Coverage Initiatives?

The brief’s key findings are:

  • States are introducing initiatives to provide retirement plan coverage to private sector workers who lack it.
  • These initiatives could be supplemented by the Saver’s Credit, a federal tax incentive for low- and moderate-income savers.
  • The existing Saver’s Credit is limited and not refundable, but proposed legislation would extend the Credit and make it refundable.
  • Our analysis shows that the proposed Credit could considerably enhance state efforts by encouraging participation and savings.

How Do Job Skills That Decline With Age Affect White-Collar Workers?

The brief’s key findings are:

  • The ability to work longer can be hampered by skills that decline with age.
  • Declining physical skills – such as diminished strength and flexibility – are easy to spot and often associated with blue-collar jobs.
  • But white-collar jobs may also require abilities that decline with age, including cognitive and fine motor skills.
  • The analysis created an index measuring the reliance on skills that decline with age for over 900 occupations.
  • The results show that while blue-collar jobs are more vulnerable to eroding skills, some white-collar jobs are vulnerable too, which can lead to earlier retirements.

State Savings Initiatives: Lessons from California and Connecticut

The brief’s key findings are:

  • California and Connecticut are seeking to provide retirement plan coverage to private sector workers who lack it.
  • Both states propose a mandate on employers to either provide their own plan or automatically enroll their workers in a state Auto-IRA program.
  • Both states have completed feasibility studies that offer important lessons:
    • a mandate with auto-enrollment will yield high worker participation rates;
    • employer support is mixed, but they will not discourage participation; and
    • successful implementation requires minimizing the employer burden and creating an efficient recordkeeping system and enforcement mechanism.

How Big a Burden Are State and Local OPEB Benefits?

The brief’s key findings are:

  • State and local OPEB liabilities, largely retiree health, have received growing attention due to rising health costs and a change from cash to accrual accounting.
  • This analysis provides a comprehensive look at OPEBs in 2012-2013 at the state, county, city and school district levels.
  • The three key insights are:
    • aggregate unfunded OPEB liabilities are an estimated $862 billion – nearly two thirds of which is held at the local level;
    • these unfunded liabilities are equivalent to 28 percent of the unfunded liabilities of pensions (using the OPEB interest rate for pensions); and
    • while OPEB liabilities are large, several factors – such as  sponsors’ flexibility to scale back benefits – limit their potential drain on resources.

State Initiatives to Cover Uncovered Private Sector Workers

The brief’s key findings are:

  • Half of private sector workers are not covered by an employer-sponsored retirement plan.
  • The federal government has made no progress on closing this coverage gap, so the states are stepping into the breach:
    • Four states have adopted a mandatory Auto-IRA program.
    • Two other states are setting up voluntary marketplaces.
  • Of these two approaches, the Auto-IRA would be much more effective.
  • But a national Auto-IRA would be much better than 50 separate state plans.

How Do Non-Financial Factors Affect Retirement Decisions?

The brief’s key findings are:

  • Studies show that financial factors have a statistically significant, but small, impact on retirement decisions.
  • So it is not surprising that non-financial factors have a major influence on those who choose to work into their late 60s or 70s.
  • When workers retire, they are often being pulled by a desire for other activities rather than pushed by a dislike of work.

Will the Explosion of Student Debt Widen the Retirement Security Gap?

The brief’s key findings are:

  • In 2013, 55 percent of households in their twenties had student debt, with an average amount of $31,000.
  • The question is whether student debt – by reducing 401(k) savings and delaying home purchases – could have a big impact on retirement preparedness.
  • The analysis uses the National Retirement Risk Index (NRRI), which measures the percentage of working-age households “at risk” of falling short in retirement.
  • If NRRI households had started out with today’s student debt levels, the Index would be 56.2 percent instead of the already alarming 51.6 percent.
  • The bottom line is that college costs should be included in broader policy discussions over how to improve financial security.

GASB 68: How Will State Unfunded Pension Liabilities Affect Big Cities?

The brief’s key findings are:

  • New accounting provisions – GASB 68 – require localities in state cost-sharing plans to report their share of the plan’s unfunded liability on their books.
  • This change severely increases the unfunded liabilities of the affected cities, though the states’ unfunded liabilities drop by a corresponding amount.
  • The impact on our full sample of 173 cities is much more modest, because the 92 affected cities are small.
  • The big question is whether cities with a portion of the state plan’s burden on their books have a greater interest in reducing the unfunded liabilities.

Does a Uniform Retirement Age Make Sense?

The brief’s key findings are:

  • Due to rising life expectancies, many policy experts would encourage people to work longer.
  • However, such changes assume all workers, regardless of socioeconomic status (SES), have experienced similar gains in life expectancy.
  • In fact, between 1979 and 2011, the gain for men in the lowest education quartile was one third lower than for men in the highest quartile.
  • If the goal were to keep the same balance of retirement to work years as in 1979, low-SES men could work to 68 today, while high-SES men could work to 69½.
  • Thus, retirement policies that treat all workers the same hurt low-SES workers.

Investment Returns: Defined Benefit vs. Defined Contribution Plans

The brief’s key findings are:

  • The analysis compares returns by plan type from 1990-2012 using data from the U.S. Department of Labor’s Form 5500.
  • During this period, defined benefit plans outperformed 401(k)s by an average of 0.7 percent per year, even after controlling for plan size and asset allocation.
  • In addition, much of the money accumulated in 401(k)s is eventually rolled over into IRAs, which earn even lower returns.
  • One reason for the lower returns in 401(k)s and IRAs is higher fees, which should be a major concern as they can sharply reduce a saver’s nest egg over time.

Forensics and the Future of a Connecticut Pension Plan

The brief’s key findings are: 

  • Connecticut’s State Employees Retirement System faces a large unfunded liability, despite recent efforts by the State to fund.
  • A significant source of the liability is the “legacy debt” built up before the State began pre-funding its pensions in the 1970s.
  • More recently, inadequate contributions, low investment returns (since 2000), and early retirement incentives have added to the problem.
  • A promising approach for addressing the funding problem is to provide more breathing room in exchange for a real and sustained commitment to funding by:
    • separately funding the legacy debt over multiple generations; while
    • funding ongoing benefits using a stricter method for calculating required contributions, and reducing the long-term assumed return on plan assets.

The Affordable Care Act, Medicare Costs, and Retirement Security

The brief’s key findings are:

  • The 2010 Affordable Care Act (ACA) included roughly 165 provisions to improve Medicare’s finances.
  • The Medicare Trustees Report, which reflects the ACA provisions, shows dramatically lower cost projections for Medicare in the future.
  • The Medicare actuaries also produce alternative projections assuming that the legislated restraints on growth in payments to health providers are not feasible.
  • A review of both sets of projections over the past six years shows that the gap between them is narrowing due to declines in the alternative cost projections.
  • However, a significant gap still remains, which underscores the inherent uncertainty involved in long-range projections.

Will Social Security Keep Fewer of Tomorrow’s Elderly Out of Poverty?

The brief’s key findings are:

  • Social Security has been very successful in reducing old-age poverty, but this success could be challenged if benefits are cut to close the program’s funding gap.
  • The effect of benefit cuts on poverty depends on how poverty is defined.
  • The official measure of poverty is a static concept that does not account for rising living standards.
  • Thus, a spike in poverty from benefit cuts would be transient, as wage growth would push up Social Security benefits over time.
  • In contrast, a supplemental measure of poverty, which many experts consider more accurate, increases the poverty thresholds along with wage growth.
  • Under this measure, then, benefit cuts would cause a long-lasting rise in poverty rates, as wage growth would push up poverty thresholds as well as benefit levels.

Do We Need a Price Index for the Elderly?

The brief’s key findings are:

  • The recent news of no Social Security COLA in 2016 will prompt some to argue that an inflation index for the elderly only would have shown a rise in prices.
  • Historically, an experimental index for the elderly (the CPI-E) has regularly risen more quickly than the broader index used for the COLA (the CPI-W).
  • However, since 2002, average CPI-W and CPI-E inflation have been virtually identical due mainly to slower growth in health costs.
  • If health cost growth stays modest, the two indexes may remain similar.  But if it surges again, it may be time to use an index designed specifically for the elderly.

Why Do People Lapse Their Long-Term Care Insurance?

The brief’s key findings are:

  • More than one quarter of those who buy long-term care insurance at age 65 will let their policies lapse at some point, forfeiting all benefits.
  • Lapses could be due to the burden of insurance premiums, a strategic calculation that care use is less likely, or poor decisions due to declining cognitive ability.
  • The analysis finds support for both the “financial burden” and “cognitive decline” explanations.
  • The consequences of lapsing are significant, as lapsers are actually more likely than non-lapsers to use care in the future, partly due to cognitive decline.
  • Thus, for some lapsers, having insurance could be counterproductive as they buy it to protect against risk but drop it just when the risk becomes more likely.

How Has Shift to Defined Contribution Plans Affected Saving?

The brief’s key findings are:

  • Many believe that people are saving less for retirement due to the shift from defined benefit (DB) to defined contribution (DC) plans.
  • The analysis uses National Income and Product Accounts data, with adjustments, to compare DB benefit accruals with DC contributions from 1984-2012.
  • The results show that the percentage of total salaries going to retirement saving has declined slightly during this period.
  • But if returns on asset accumulations are included, the annual change in pension wealth is relatively steady, so the shift to DC plans has not led to less total saving.
  • What has changed is that individuals, rather than plan sponsors, now bear all of the risk.

How Do Inheritances Affect the National Retirement Risk Index?

The brief’s key findings are:

  • Taking away inheritances from households that have them reduces the NRRI by less than one percentage point.
  • Inheritances could become more prevalent in the future due to unspent 401(k) balances, but increasing future inheritances has only a minimal effect.
  • The reasons for the modest impact are:
    • the majority of households do not get an inheritance under either scenario;
    • for those who receive an inheritance, the amounts are relatively small; and
    • many with inheritances in the two scenarios are already well prepared, so either taking away or adding an inheritance does not put them “at risk.”
  • If the analysis is limited only to households with inheritances, the impact on the percentage at risk is more substantial.

No Social Security COLA Causes Medicare Flap

The brief’s key findings are:

  • In 2016, for only the third time in 40 years, Social Security beneficiaries are not expected to receive a cost-of-living adjustment (COLA).
  • No COLA means that Medicare Part B premiums cannot increase for most beneficiaries, so a minority has to bear the full burden of rising costs.
  • Beyond this immediate flap, a broader issue is that Medicare premium growth is not fully captured by the inflation measure used to set the COLA.
  • As a result, when Medicare premiums rise rapidly, older Americans cannot maintain their non-Medicare spending.
  • In short, even the Social Security COLA does not fully insulate older households from the erosive impact of inflation.

Are 401(k) Investment Menus Set Solely for Plan Participants?

The brief’s key findings are:

  • Mutual fund companies that are trustees of 401(k) plans must serve plan participants’ needs, but they also have an incentive to promote their own funds.
  • The analysis suggests that these trustees tend to favor their own funds, especially their poor-quality funds.
  • And 401(k) participants do not offset this bias by shifting their savings away from trustee-affiliated funds.
  • In short, fund companies serving as trustees often make decisions that appear to adversely affect employees’ retirement security.

Social Security’s Financial Outlook: The 2015 Update in Perspective

The brief’s key findings are:

  • The 2015 Trustees Report shows little change from last year:
    • Social Security’s 75-year deficit declined modestly from 2.88 percent to 2.68 percent of payroll.
    • The deficit as a percent of GDP remains at about 1 percent.
    • Trust fund exhaustion moved back slightly from 2033 to 2034, after which payroll taxes still cover about three quarters of promised benefits.
  • The shortfall is manageable, but action should be taken soon to restore confidence in the program and give people time to adjust to needed changes.
  • In addition, the disability insurance program needs immediate attention, as its trust fund is expected to be exhausted next year.

Does the Social Security “Statement” Add Value?

The brief’s key findings are:

  • To help workers better plan for retirement, the Social Security Administration provides a Statement with personalized benefit estimates.
  • Surveys have explored how workers view the Statement, and research studies have examined its effectiveness.
  • The results indicate that workers generally consider the Statement a valuable resource, and it improves their benefit knowledge.
  • At the same time, studies have not found any effect on workers’ Social Security claiming behavior.

Do Catch-Up Contributions Increase 401(k) Saving?

The brief’s key findings are:

  • To encourage Americans to save more for retirement, some suggest raising 401(k) contribution limits.
  • To assess such an option, this analysis estimates the effects of a 2001 increase in 401(k) limits that also introduced a higher “catch-up” limit for those 50 and over.
  • The increase in the limits did boost contributions in 2002-05, but mostly for those near the prior limits, particularly those eligible to make catch-up contributions.
  • Since few participants – only about 10 percent – are constrained by the limits, raising them does not offer a broad-based solution for low saving rates.

The Funding of State and Local Pensions: 2014-2018

The brief’s key findings are:

  • During 2014, public plans adopted new accounting standards for reporting purposes but continued to use the traditional standards for funding purposes.
  • The traditional funded ratio rose from 72 percent in 2013 to 74 percent in 2014 – the first improvement since the financial crisis.
  • Required contributions continued to climb in 2014, but plans stepped up their payments from 82 percent to 88 percent of the required amount.
  • The outlook for the next several years suggests continued steady improvement in funding unless plans experience lower than assumed asset returns.

Does Mortality Differ Between Public and Private Sector Workers?

The brief’s key findings are:

  • In projecting pension costs, state and local plans assume their workers will live longer than private sector workers. Is this assumption accurate and, if so, why?
  • The analysis confirms that public sector workers – particularly women – have lower mortality rates than their private sector counterparts.
  • The question is whether lower mortality reflects the nature of the job or the nature of the workers.
  • The answer is the workers – specifically their education levels.  Controlling for education, the gap between public and private workers disappears.

Are Americans of All Ages and Income Levels Shortsighted About Their Finances?

The brief’s key findings are:

  • A recent CRR analysis of a FINRA Investor Education Foundation survey found that financial satisfaction depends much more on meeting day-to-day, rather than distant, needs.
  • This study explores whether households of all ages and income levels are also shortsighted.
  • The results confirm that distant needs, like retirement saving, consistently take a back-seat to more immediate concerns.
  • The results underscore the importance of making it easy and automatic for Americans to save for distant goals that may otherwise receive little attention.

Trends in Social Security Claiming

The brief’s key findings are:

  • Over the past 25 years, the average retirement age for U.S. workers has been rising, a trend that should align with when people first claim Social Security.
  • But the percentage of all initial claimants who are age 62 shows little change until recently.
  • A better metric to capture claiming behavior over time – when the population is aging – is the percentage of workers turning age 62 who claim at 62.
  • This measure, based on unpublished Social Security data, shows a steep decline in claiming at 62 since the mid-1990s: from 56 percent to 36 percent for men.
  • In short, while more than a third of workers still claim right away, a growing number are waiting until their mid-60s or later.

Falling Short: The Coming Retirement Crisis and What to Do About It

The brief’s key findings are:

  • Today’s workers face a brewing retirement crisis due to:
    • a growing need for income driven by longer lifespans, rising health costs, and low interest rates; and
    • reduced support from Social Security and defined benefit pension plans.
  • Fortunately, the solutions are at hand:
    • Policymakers should shore up Social Security with more revenue, make 401(k)s fully automatic, and ensure everyone has access to a savings plan.
    • Individuals should work longer – to age 70 if possible – and consider tapping their home equity in retirement to support day-to-day needs.
  • Any delay in responding to the challenge will only make adjustments more painful down the road.

How Will Longer Lifespans Affect State and Local Pension Funding?

The brief’s key findings are:

  • Rising life expectancy makes defined benefit pension plans more expensive.
  • The question is the extent to which state and local plans have already incorporated rising life expectancy into their cost estimates.
  • The analysis explores how plan liabilities and funded ratios would be affected by using
    • RP-2014, a new mortality table designed for private plans; and
    • a stricter standard that fully incorporates future mortality improvements.
  • Under the first scenario, liabilities and funding would barely change. Under the second, the average funded ratio would drop from 73 to 67 percent.
  • Since not even the private sector fully incorporates future improvements, public plans seem to be making a serious effort to keep their assumptions up to date.

Are Cognitive Constraints a Barrier to Annuitization?

The brief’s key findings are:

  • Even though retirees are increasingly responsible for deciding how to draw down their assets, few buy annuities.
  • Researchers have offered a host of explanations for the limited take-up, but the puzzle has never been solved.
  • This analysis finds that valuing annuities is hard for people, so they may only buy one if offered a very good deal.
  • To test this finding, alternative explanations were explored and the results were negative, strengthening the conclusion that people find annuities hard to value.
  • These results suggest that many individuals, on their own, may have difficulty making well-informed choices about managing their money in retirement.

Are Retirees Falling Short? Reconciling the Conflicting Evidence

The brief‘s key findings are:

  • Federal Reserve data show that retirement preparedness has been declining over time, but studies on the level of preparedness offer conflicting assessments.
  • The National Retirement Risk Index (NRRI) finds half of households are “at risk,” while studies of optimal savings suggest less than one-tenth will fall short.
  • The optimal savings results depend crucially on two assumptions:
    • households spend less when their kids leave home (the NRRI assumes no decline); and
    • households plan for declining consumption in retirement (the NRRI assumes steady consumption).
  • While the issue remains unsettled, the Federal Reserve data are consistent with the NRRI finding that retirement shortfalls are a growing problem.

The Average Retirement Age – An Update

The brief’s key findings are:

  • Labor force activity among older Americans began rising in the mid-1980s due to:
    • changing Social Security incentives;
    • the shift to 401(k) plans; and
    • improving health, longevity, and education.
  • Updated data, however, suggest that these factors may have played themselves out.
  • As a result, the average retirement age has increased only slightly in the last 10 years: to 64 for men and 62 for women.

Dog Bites Man: Americans Are Shortsighted About Their Finances

The brief’s key findings are:

  • Americans need to save more on their own for retirement, but human nature suggests they will focus more on day-to-day financial needs.
  • Analysis of a recent survey confirms that a household’s level of financial satisfaction is tied more to short-term – rather than long-term – concerns.
  • Even households that are in reasonable shape in the short term do not seem to focus more on distant concerns like retirement saving.
  • And households that are more financially literate appear only modestly more attuned to long-term financial issues.

The Impact of Leakages on 401(k)/IRA Assets

The brief’s key findings are:

  • As 401(k)s and IRAs have become the dominant source of retirement saving, the potential for pre-retirement withdrawals – “leakages” – has grown.
  • Leakages occur via three channels: 1) in-service withdrawals for hardships or after age 59½; 2) cashouts when individuals leave a job; and 3) loans.
  • Estimates indicate that about 1.5 percent of assets leaks out of 401(k)s/IRAs each year, reducing wealth at retirement by about 25 percent.
  • Given the size of leakages, it may be time to take steps to curtail them such as:
    • limiting hardship withdrawals to unpredictable events;
    • raising the age for penalty-free withdrawals to better align with when people actually retire; and
    • closing down cashouts by requiring the money to stay in the 401(k) system or be rolled over into an IRA.

How Does Aging Affect Financial Decision Making?

The brief’s key findings are:

  • With the shift from traditional pensions to 401(k) plans, the welfare of retirees depends increasingly on their ability to make sound financial decisions.
  • Using a dataset that follows a group of older individuals in the Chicago area, the analysis examines how aging affects financial decision making.
  • Participants who suffer cognitive decline experience a reduction in their financial literacy but no change in their confidence in managing their money.
  • Perhaps not surprisingly then, while they are more likely to get help with financial decisions, more than half retain primary responsibility for managing their money.

How Did State/Local Plans Become Underfunded?

The brief’s key findings are:

  • A new analytical tool tells a clear story of why unfunded liabilities rose during 2001-2013.
  • The primary factor was investment returns that fell short of expectations due to the two financial crises.
  • A secondary factor was that many plans failed to make adequate contributions, a more serious problem among the worst-funded plans.
  • This type of analysis should be added to every plan’s annual actuarial valuation.

NRRI Update Shows Half Still Falling Short

The brief’s key findings are:

  • Between 2010 and 2013, the National Retirement Risk Index improved only slightly, dropping from 53 percent to 52 percent of working-age households.
  • This result may seem surprising given that the stock market was up and housing prices had begun to rebound.
  • But other factors ­– Social Security’s rising “Full Retirement Age,” declining interest rates, and changes in reverse mortgage rules – acted as counterweights.
  • The bottom line is that retirement security remains a serious challenge; Americans need to save more and/or work longer.

Do Census Data Understate Retirement Income?

The brief’s key findings are:

  • Some claim that retirees are better off than many think, because Census’s Current Population Survey (CPS) does not capture most 401(k)/IRA income.
  • Indeed, the CPS dramatically under-reports 401(k)/IRA income, a serious problem given the shift from defined benefit to defined contribution plans.
  • Interestingly, though, the problem is largely concentrated among upper-income households, which hold most of the 401(k)/IRA wealth.
  • As a result, the CPS currently provides a reasonably good measure of retirement income for the typical middle-income household.
  • Moreover, Census is currently testing ways to improve the CPS survey design to better incorporate all sources of retirement income.

Long-Term Care: How Big a Risk?

The brief’s key findings are:

  • Long-term care is expensive, but only 13 percent of single individuals over 65 have long-term care insurance.
  • Previous models of care usage appear to understate the risk of going into care and overstate the duration of care for those who require it.
  • If long-term care is a more likely, but less expensive, event, fewer people may benefit from insurance than previously estimated.
  • Our analysis shows that it is optimal for only about 20-30 percent of single individuals to buy insurance.
  • This result strengthens the finding of previous research that Medicaid crowd-out can explain why most households do not buy insurance.

Multiemployer Plans – A Proposal to Spread the Pain

The brief’s key findings are:

  • A small, but significant, number of multiemployer pension plans face insolvency in the next 20 years – despite actions to reduce benefits and raise contributions.
  • To avoid insolvency, a Commission with representatives from plans, employers, and unions has proposed allowing plans to cut accrued benefits of current workers and retirees.
  • Critics are concerned that such a tool is unnecessary and would unfairly hurt plan participants, particularly retirees.
  • Our analysis of one large plan suggests that the proposal would improve overall participant welfare, but leave the plan operating largely on a pay-as-you-go basis.
  • Thus, before approving the use of such a tool, regulators should have access to detailed plan data to ensure not only solvency, but also a reasonable level of funding.

Do Public Pensions Help Recruit and Retain High-Quality Workers?

The brief’s key findings are:

  • Research shows that pensions help recruit and retain high-quality workers; thus, cutbacks in public pensions could hurt worker quality.
  • One indicator of quality is the wage that a worker can earn in the private sector.
  • Using this measure, states and localities consistently have a “quality gap” – the workers they lose have a higher private sector wage than those they gain.
  • The analysis shows that jurisdictions with relatively generous pensions have smaller quality gaps, meaning they can better maintain a high-quality workforce.
  • The bottom line is that states and localities should be cautious about scaling pensions back too far.

Can PBGC Save Multiemployer Plans?

The brief’s key findings are:

  • Participants in multiemployer pension plans have their benefits insured by the Pension Benefit Guaranty Corporation (PBGC).
  • However, the PBGC’s guaranteed benefit levels are very low compared to single employer plans.
  • Of greater concern, the PBGC’s insurance fund for multiemployer plans is projected to be exhausted within the next 10 years.
  • One idea is to head off plan insolvencies through “partitions” that transfer some costs to the PBGC, but little support exists for hiking premiums to cover the costs.
  • The bottom line is that the PBGC, as currently structured, will not be able to stave off plan insolvencies or fully protect workers in plans that become insolvent.

401(k)/IRA Holdings in 2013: An Update from the SCF

The brief’s key findings are:

  • The Federal Reserve’s 2013 Survey of Consumer Finances provides an opportunity to examine trends in retirement savings over the past few years.
  • The good news is increased use of target date funds; the bad news is no improvement in participation rates, significant leakages, and high fees.
  • Surprisingly, for working households nearing retirement, median combined 401(k)/IRA balances actually fell from $120,000 in 2010 to $111,000 in 2013.
  • Younger households did see rising balances but retirement savings levels are clearly inadequate, and about half of all households have no 401(k) assets at all.

The Financial Status of Private Sector Multiemployer Pension Plans

The brief’s key findings are:

  • While most multiemployer pension plans are finding their financial footing, a substantial minority face serious problems.
  • The key reason is a declining financial base, which results in negative cash flow.
  • Plans deemed in “critical” condition can raise contributions, cut future benefits, and/or cut “adjustable” benefits that apply to retirees as well as active workers.
  • To date, plans have focused on raising contributions and cutting adjustable benefits, with less emphasis on cutting benefit accruals for active workers.
  • Nevertheless, a simple model suggests that one third of “critical” plans could exhaust their assets within 30 years.

Private Sector Multiemployer Pension Plans – A Primer

The brief’s key findings are:

  • Private sector multiemployer pension plans, which are negotiated by a union with a group of employers, have become a focus of congressional interest.
  •  Multiemployer plans have been hurt by an expansion of benefits during the 1990s and the twin financial crises since 2000.
  •  Most are recovering, but a substantial minority faces serious funding problems.
  •  These problems are exacerbated by unique structural challenges:
    • the cyclical nature of the construction industry, which covers the most plan participants;
    • a low ratio of active to total participants that increases the burden on underfunded plans; and
    • insufficient penalties for employers who withdraw from the plans.

Social Security’s Financial Outlook: The 2014 Update in Perspective

The brief’s key findings are:

  • The 2014 Trustees Report shows little change from last year:
    • Social Security’s 75-year deficit rose modestly to 2.88 percent of payroll.
    • But the deficit as a percent of GDP is still 1 percent.
    • And trust fund exhaustion is still 2033, after which payroll taxes still cover about three quarters of promised benefits.
  • The shortfall is manageable but, with the deficit rising to about 4 percent in two decades, action should be taken soon to avoid larger tax/benefit changes later.
  • And the disability insurance program needs immediate attention, as its trust fund is expected to be exhausted in 2016.

How Much Should People Save?

The brief’s key findings are:

  • The National Retirement Risk Index framework is used to address how much working-age households need to save for retirement.
  • A typical household should get a third of its retirement income from a savings plan, with the low income needing one quarter and the high income one half.
  • A typical household needs to save about 15 percent of earnings, with the low income requiring less and the high income more.
  • For those with a savings shortfall, the necessary savings hike is much more feasible for younger households than for older households.
  • Starting to save early and retiring late dramatically reduce a household’s required saving rate.

An Update on Pension Obligation Bonds

The brief’s key findings are:

  • Some state and local governments issue Pension Obligation Bonds (POBs) to cover their required pension contributions.
  • POBs offer budget relief and potential cost savings, but also carry significant risk.
  • POBs had anegative average real return from 1992-2009, but show a small gain when the time period is extended to 2014.
  • POBs could be a useful tool for fiscally sound governments or as part of a broader pension reform package for fiscally stressed governments.
  • But results to date suggest that, instead, POBs tend to be issued by governments under financial pressure who have little control over the timing.

Medicaid and the Elderly

The brief’s key findings are:

  • Medicaid covers not only the low-income elderly but also those with higher incomes who become impoverished by health costs, such as nursing home care.
  • The percentage of high-income single retirees receiving Medicaid rises with age – from near zero for those in their 70s to 20 percent for those in their late 90s.
  • Even higher-income retirees who never receive Medicaid benefit from the insurance value that it provides, which allows them to maintain smaller reserves.
  • The analysis suggests that single retirees of all incomes value current Medicaid benefits at more than their cost but an expansion at less than its cost.

The Funding of State and Local Pensions: 2013-2017

The brief’s key findings are:

  • Despite a strong stock market, the funded status of public plans in 2013 remained unchanged at 72 percent for two reasons:
    • actuarially smoothed assets grew modestly; and
    • CalPERS, one of the nation’s largest plans, significantly revised its reported funded ratio.
  • An encouraging sign is that sponsors appear to be paying a larger share of their annual required contribution.
  • Going forward, the funded ratio is projected to gradually move above 80 percent, assuming historical stock market returns.

What We Know About Health Reform in Massachusetts

The brief’s key findings are:

  • Numerous studies have examined the impact of Massachusetts’ landmark 2006 health care reform, the basis for the national Affordable Care Act.
  • The results suggest that the Massachusetts reform has largely succeeded by:
    • reducing uninsurance rates;
    • improving health care access and health outcomes; and
    • inducing more firms to offer coverage, without raising unemployment.
  • At the same time improving access to non-employer coverage may have reduced labor force participation for men age 55-64.
  • Finally, while health care cost growth has slowed in recent years, cost control remains a challenge.

COLA Cuts in State/Local Pensions

The brief’s key findings are:

  • Since the financial crisis, 17 states have reduced, suspended, or eliminated cost-of-living-adjustments (COLAs) for public employee pensions.
  • This response was surprising as current employees and retirees tend to be legally shielded from benefit cuts.
  • But the COLA cuts have largely been upheld in the courts under the rationale that – unlike core benefits – they are not part of a contractual right.
  • In short, defined benefit promises in the public sector are not as secure as many thought.

Defined Contribution Plans in the Public Sector: An Update

The brief’s key findings are:

  • Although the introduction of defined contribution plans by some states has received considerable press attention, activity to date has been modest.
  • Moreover, most recent shifts involve either hybrid plans or cash balance plans, rather than stand-alone defined contribution plans.
  • The changes appear driven by a desire to avoid future unfunded liabilities, to reduce investment and mortality risk, and to help short-tenure workers.
  • Such changes transfer risk to participants but, if the new plans enhance the likelihood of responsible funding, they could also offer some increased security.

Why Don’t Lower-Income Individuals Have Pensions?

The brief’s key findings are:

  • Obtaining an employer pension involves four steps: 1) having a job; 2) working for a firm with a plan; 3) being eligible for the plan; and 4) taking up the plan.
  • For lower-income individuals, the weakest links in this chain are a lack of employment and employment with firms that do not offer a plan.
  • Take-up rates are less of a factor, but will become increasingly important as voluntary 401(k)s continue to replace mandatory defined benefit plans.
  • The most effective policy solution for boosting pension participation would be to provide all workers with access to a plan and automatically enroll them.

Is Pension Coverage a Problem in the Private Sector?

The brief’s key findings are:

  • Commentators question whether pension coverage is a serious problem, indicating that 80 percent have access to a plan.
  • But this number refers to access – not participation – and to full-time workers in both the public and private sectors.
  • A review of four household surveys and one employer survey finds that only about half of all private workers (age 25-64) are participating in a plan.
  • So, yes, coverage remains a serious problem.

Do Longevity Expectations Influence Retirement Plans?

The brief’s key findings are:

  • Workers who think they have excellent chances of living to ages 75 and 85 plan to work longer than those who think their chances are poor.
  • These perceptions of life expectancy also influence workers’ actual retirement behavior, though to a lesser degree.
  • These results are consistent with the notion that while workers who expect to live longer plan to retire later, actual behavior is influenced by unexpected shocks.

The U.K.’s Ambitious New Retirement Savings Initiative

The brief’s key findings are:

  • The United Kingdom is rolling out a low-cost retirement system for workers who lack pension coverage.
  • The new system has three core elements:
    • Employers auto-enroll their workers at a 4-percent contribution rate, matched by the employer and government combined.
    • A new non-profit provides the infrastructure to keep costs low.
    • The plans’ target date funds start young workers with low-risk investments to avoid losses that could discourage saving.
  • The U.S.’s new “myRA” program includes two similar design features – low-risk investments and government infrastructure – but it lacks auto-enrollment and matching contributions.

The Impact of Aging Baby Boomers on Labor Force Participation

The brief’s key findings are:

  • Older people have lower labor force participation rates than younger adults, so aging baby boomers are pushing down overall participation.
  • This aging effect accounts for more than 40 percent of the decline since the onset of the Great Recession.
  • An aging population also lowers unemployment slightly because older individuals who remain in the labor force are more likely to have a job.
  • The aging trend will continue for the rest of the decade and will show up in monthly labor force statistics.

How Long Do Unemployed Older Workers Search for a Job?

The brief’s key findings are:

  • The Great Recession threw many older individuals out of work, so it is important to understand their job search activity.
  • The results show little tolerance for a lengthy search; the vast majority either find a job or exit the labor force within a year.
  • Those with financial resources, such as Social Security, leave even sooner.
  • Interestingly, the strength of the local labor market does not seem to have much impact on the duration of job search.

How Will More Obesity and Less Smoking Affect Life Expectancy?

The brief’s key findings are:

  • Obesity is on the rise and smoking is on the decline, so a key issue is the net effect of these two trends on future life expectancy.
  • The analysis examines how each behavior currently affects mortality and applies the results to an estimate of the future prevalence of each behavior.
  • The results show that, in 2040, the benefits of reduced smoking trump the damage from rising obesity.
  • However, the story differs by gender, with a solid gain for men and only a small improvement for women, who see less of a decline in smoking during the period.

The Government’s Redesigned Reverse Mortgage Program

The brief’s key findings are:

  • Reverse mortgages, which allow retirees to tap their home equity, are insured by the government.
  • The financial crisis hurt both the government’s insurance fund and the borrowers.
    • Declining home prices led to losses when homes were sold.
    • More borrowers defaulted.
  • In response, the government has redesigned the program by:
    • creating a single loan option with a lower limit and fees;
    • limiting initial withdrawals; and
    • requiring financial assessments of borrowers.
  • These changes should help reduce pressure on the insurance fund and make defaults less likely.

Are City Fiscal Woes Widespread? Are Pensions the Cause?

The brief’s key findings are:

  • Detroit’s bankruptcy and Chicago’s fiscal problems have led some to question whether cities nationwide are in trouble and if pensions are the reason.
  • But a search for cities identified by the media as financially troubled found only a small number overall, with about one-third located in California.
  • And, among the financially troubled cities, pensions are only a minor factor; the main drivers are poor financial management and weak economies.
  • Thus, the answer to both questions appears to be “no.”

Will the Rebound in Equities and Housing Save Retirement?

The brief’s key findings are:

  • The 2010 National Retirement Risk Index showed that 53 percent of households will not be able to maintain their standard of living in retirement.
  • But equity and house prices have both increased since then.
  • Interestingly, updating the asset values only reduces the Index to 50 percent because:
    • the rise in house prices has been relatively modest in real terms; and
    • the more robust growth in stocks mainly benefits the top third of households.

Social Security and Equities: Lessons from Railroad Retirement

The brief’s key findings are:

  • Some have advocated investing Social Security trust fund assets in equities.
  • A similar proposal adopted by the railroads in 2001 suggests two key hurdles: political risk and financial risk.
  • For political risk, the railroads created an independent trust; a better fit for Social Security might be to limit investments to index funds.
  • For financial risk, the railroads set up an automatic mechanism to respond to shocks; Social Security would need a similar mechanism.

Gauging the Burden of Public Pensions on Cities

The brief’s key findings are:

  • Media stories suggest – especially since the bankruptcy of Detroit – that pensions are the major expense of American cities and could lead to widespread collapse.
  • A comprehensive measure of the cost burden considers how much city taxpayers pay for the pensions of city and county general government workers and teachers.
  • For a sample of 173 cities, these overall pension costs equal 7.9 percent of the total revenue base.
  • The cost burden ranges from 12.3 percent for the highest cost quintile to 2.7 percent for the lowest cost quintile.

Social Security’s Real Retirement Age Is 70

The brief’s key findings are:

  • Due to increases in Social Security’s Delayed Retirement Credit, the effective retirement age is now 70, with monthly benefits reduced for earlier claiming.
  • Benefit levels at 70 appear appropriate given that rising deductions for Medicare and greater benefit taxation have reduced Social Security’s net replacement rates.
  • The shift to 70 should be feasible for many workers given increases in lifespans, health, and education.
  • But vulnerable workers forced to claim early will have low benefits and will be particularly harmed by any further cuts.
  • Policymakers need to inform those who can work that 70 is the new retirement age and devise ways to protect those who cannot work.

How Does 401(k) Auto-Enrollment Relate to the Employer Match and Total Compensation?

The brief’s key findings are:

  • While auto-enrollment boosts 401(k) participation, the resulting cost pressure on matching contributions could prompt employers to reduce their match.
  • Analysis using the National Compensation Survey finds that plans with auto-enrollment do have lower match rates than plans without auto-enrollment.
  • This finding suggests that employers may, indeed, be lowering their match rates to keep their total 401(k) costs from rising.
  • Consistent with this notion, a separate analysis found no evidence of higher 401(k) costs for firms with auto-enrollment.

How Sensitive Is Public Pension Funding to Investment Returns?

The brief’s key findings are:

  • To assess the sensitivity of pension funding to investment returns, the analysis projects funded ratios through 2042 for large public plans using:
    • a stochastic model of year-to-year returns; and
    • a median real return of 4.45 percent, the average used by plans in 2012.
  • The baseline results show that the funded ratio for the 50th-percentile outcome does not reach 100 percent because:
    • plans pay only 80 percent of annual required contributions (ARC); and
    • amortization approaches produce inadequate contributions.
  • Paying 100 percent of the ARC and using more robust funding approaches leads to near full funding by the end of the period.
  • However, even under these more favorable scenarios, the variability of returns still poses risks of funding shortfalls.

Can Educational Attainment Explain the Rise in Labor Force Participation at Older Ages?

The brief’s key findings are:

  • Over the past 25 years, the labor force participation of men age 60-74 jumped from 35 percent to 44 percent.
  • At the same time, the educational levels of older workers increased dramatically in both absolute terms and relative to prime-age workers.
  • Better educated workers are healthier and have more opportunities.
  • Indeed, the analysis suggests that rising education levels account for more than half of the increase in labor force participation.
  • Going forward, gains in education by older workers will slow considerably, which will slow further increases in their labor force participation.

How Has the Financial Crisis Affected the Consumption of Retirees?

The brief’s key findings are:

  • The impact of the financial crisis on the consumption of retirees depends on how much they have in financial assets, how they invest, and their reliance on assets for consumption.
  • The crisis had little effect on those 40 percent with very small amounts of financial assets and the top 5 percent with very large amounts.
  • In contrast, the broad middle class did experience declines in consumption:
    • At one extreme, households that invested in short-term deposits and tried to live off the interest saw significant declines.
    • At the other extreme, investors in balanced portfolios who gradually drew down their wealth lost more modest amounts.
  • Most middle-class households, though, combine some behavioral aspects from the two extremes, so the impact on their consumption lies in between.

New Brunswick’s New Shared Risk Pension Plan

The brief’s key findings are:

  • Under financial pressure, U.S. state and local pension plans have curbed future benefit costs.  But these changes have been ad hoc and unexpected.
  • New Brunswick’s new Shared Risk model is designed to respond to shocks in a more orderly and predictable way and to help head off trouble in advance.
  • The model’s key features are:
    • splitting benefits into “base” and “ancillary” components;
    • laying out detailed steps in advance for adjusting benefits and contributions; and
    • creating a risk management framework to help keep plans on track.

How Does Women Working Affect Social Security Replacement Rates?

The brief’s key findings are:

    • For married households, the amount of pre-retirement income replaced by Social Security depends on the labor force activity of both spouses.
      • At the high end, couples with a non-working spouse get the replacement rate from the worker’s benefit and from a spousal benefit.
      • At the low end, couples with two working spouses and identical earnings get the same replacement rate as an individual worker.
      • In the middle, couples see their replacement rate fall as the lower earner’s wages rise.
    • As women go to work, replacement rates decline.
      • They have dropped from 47 percent for those born early in the Depression to 42 percent for Early Boomers.
      • By the time that Generation Xers retire, replacement rates are projected to fall by an additional 5 percentage points.
    • In addition to women working, Social Security’s rising Full Retirement Age has also contributed to falling replacement rates.

The Funding of State and Local Pensions: 2012-2016

The brief’s key findings are:

  • During 2012, using current GASB standards, the funded status of public plans declined slightly from 75 percent to 73 percent.
  • This decline reflected slow asset growth, which was only partly mitigated by reduced liability growth.
  • States and localities also continued to fall short on their annual required contribution payments.
  • Going forward, the funded ratio is projected to gradually move above 80 percent, assuming a healthy stock market.

The Impact of Interest Rates on the National Retirement Risk Index

The brief’s key findings are:

  • The National Retirement Risk Index shows that changes in interest rates have only a modest effect on retirement preparedness for three reasons:
    • Most households have relatively little financial wealth to annuitize.
    • The effect on annuity income is muted, because the principal portion of the annuity payout is unaffected by interest rates.
    • Changes in the annuity income from a reverse mortgage are partly offset by changes in the amount that can be borrowed.

Social Security’s Financial Outlook: The 2013 Update in Perspective

The brief’s key findings are:

  • The 2013 Trustees Report shows virtually no change from last year:
    • Social Security’s deficit still about 2.7 percent of payroll.
    • Deficit as a percent of GDP still less than 1 percent.
    • Trust fund exhaustion still 2033, after which payroll taxes still cover about three quarters of promised benefits.
  • While the shortfall is manageable, it should be eliminated soon to:
    • Restore confidence in the program.
    • Avoid larger tax/benefit changes that would result from delay.
    • More fairly distribute the burden across generations.
  • And the disability insurance program needs immediate attention, as its trust fund is expected to be exhausted in 2016.

How Important Is Medicare Eligibility in the Timing of Retirement?

The brief’s key findings are:

  • Although Social Security’s “Full Retirement Age” has moved to 66, 65 remains a popular age to withdraw from the labor force.
  • One reason might be the availability of Medicare at 65, particularly for workers who have employer coverage while working but not after they retire.
  • The analysis, which relates retirement patterns to health coverage, suggests that Medicare explains about 30 percent of the continued spike in age-65 retirements.
  • And, as anticipated, those who would lose employer coverage if they retired before 65 appear to be the most affected by Medicare eligibility.

Public Sector Workers and Job Security

The brief’s key findings are:

  • State and local government employment dropped sharply during the Great Recession, unlike in previous recessions, and continues to decline even today.
  • But this decline in public sector employment was less severe than that experienced by the private sector.
  • Being a state/local worker reduced the probability of job loss by 2 percentage points, after controlling for education and other characteristics.
  • While this relative job security is an attractive aspect of state/local employment, it is not enough to tip the balance of total compensation in favor of public workers.

Can Incentives for Long-Term Care Insurance Reduce Medicaid Spending?

The brief’s key findings are:

  • In an effort to curb Medicaid costs, many states encourage people to buy long-term care insurance by offering enhanced policies through private insurers.
  • Under these policies, if individuals exhaust their private insurance benefits, the state allows them to qualify for Medicaid while keeping more of their assets.
  • This study finds that, for single men and women, the enhanced policies will likely increase Medicaid costs rather than reduce them.
  • The reason is that most of the likely buyers of the enhanced policies would have otherwise bought a traditional policy, which has no subsidy from Medicaid.

Australia’s Retirement System: Strengths, Weaknesses, and Reforms

The brief’s key findings are:

  • Australia’s retirement system has two key components: a means-tested government benefit and a mandatory savings account financed by employers.
  • The government benefit provides a basic income, and about three quarters of retirees qualify.
  • The savings accounts require employer contributions of 9 percent of pay for each worker, rising to 12 percent by 2020, and workers choose how to invest.
  • By making savings mandatory, Australia has solved the pension coverage problem, and the system will provide substantial benefits once it fully matures.
  • Key concerns remain, such as incentives to spend down savings to get a higher government benefit and low levels of annuitization.

Do Income Projections Affect Retirement Saving?

The brief’s key findings are:

  • One barrier to saving may be ignorance about how it translates into retirement income.
  • A recent study conducted a field experiment to see whether providing workers with retirement income projections affected the amount they saved.
  • The results show that such projections, accompanied by information on retirement planning, could modestly increase saving.
    • The experiment’s positive effect on saving works, in part, by boosting individuals’ knowledge and confidence.
    • But its effect on saving is limited among those with who have difficulty paying bills, prefer to “live for today,” or tend to procrastinate.

Subsidies vs. Nudges: Which Policies Increase Saving the Most?

The brief’s key findings are:

  • To encourage retirement saving, policymakers use two types of tools: tax subsidies and automatic contributions.
  • Both tools are effective at increasing retirement saving, but such increases could simply be offset by a reduction in a household’s non-retirement saving.
  • A recent study, using Danish data, addresses this issue:
    • A revision in the Danish tax subsidy led to a change in retirement saving, but it was almost fully offset by a change in non-retirement saving.
    • In contrast, automatic contributions boosted retirement saving with only a small impact on non-retirement saving.

State and Local Pension Costs: Pre-Crisis, Post-Crisis, and Post-Reform

The brief’s key findings are:

  • This study examines the long-term effects of pension reforms on employer costs and on state budgets for a sample of 32 plans in 15 states.
  • The results show:
    • for most plans, the reforms fully offset or more than offset the impact of the financial crisis on the sponsors’ costs.
    • for the sample as a whole, pension costs as a share of state-local budgets are projected to eventually fall below pre-crisis levels.
  • A few caveats: the projections assume that the reforms stick, that plan sponsors consistently make their required payments, and that they earn expected returns.
  • Detailed results for each plan are available in a companion series of fact sheets.

Will Regulations to Reduce IRA Fees Work?

The brief’s key findings are:

  • Due to 401(k) rollovers, IRAs have become the biggest form of retirement savings.
  • But IRAs tend to have higher fees, partly because commissions ­– such as 12b-1 fees – encourage broker-dealers to sell more expensive mutual funds.
  • 12b-1 fees would have been eliminated under a 2010 Department of Labor reform proposal.
  • This study finds that eliminating 12b-1 fees would produce only modest benefits and, despite industry concerns, would create little harm.
  • Bolder reforms merit consideration, such as keeping savings in 401(k)s, extending 401(k) protections to rollover IRAs, and limiting fees in both accounts.

Locally-Administered Pension Plans: 2007-2011

The brief’s key findings are:

  • 2011 data show that locally-administered pension plans continue to be slightly less funded than state-run plans – 72 percent vs. 76 percent.
  • This result is puzzling because local plan sponsors generally pay a larger share of their annual required contribution than state plan sponsors.
  • The explanation is that state plans have historically earned higher returns because they invest more in risky assets.
  • For mature plans with substantial assets, higher returns more than offset lower contributions.
  • During the financial crisis, though, local plans were able to narrow the funding gap because their less risky portfolios fared better.

Compensation Matters: The Case of Teachers

The brief’s key findings are:

  • Many public sector pension plans have recently cut pension benefits for new hires, thereby reducing compensation.
  • The analysis looks at how such cutbacks could affect the quality of teachers.
  • One proxy for teacher quality is the average SAT score at a teacher’s undergraduate institution.
  • The analysis finds that school districts with higher wages and/or higher pensions are able to hire teachers from institutions with higher SAT scores.
  • These results suggest that cutting compensation for new teachers is not costless, as it will likely reduce applicant quality.

How Do Employers’ 401(k) Mutual Fund Selections Affect Performance?

The brief’s key findings are:

  • 401(k) performance is affected by the decisions of plan administrators as well as participant choices.
  • Administrators choose mutual funds that perform worse than comparable indexes but better than comparable, randomly selected funds.
  • When making changes to a plan’s fund offerings, administrators chase returns and do not improve performance.
  • Participants also tend to chase returns through contribution changes and asset transfers, and their investment strategies add no value.

A Nudge Isn’t Always Enough

The brief’s key findings are:

  • Defaults, such as 401(k) auto-enrollment, have encouraged people to adopt behaviors that align with their intentions.
  • Researchers have begun to explore what happens when the default may not align with intentions.
  • A new experiment tested whether defaults could encourage low-income tax filers to invest about 10 percent of their refunds in U.S. Savings Bonds.
  • The default did not work: only 9 percent of the experimental group purchased bonds, no different than the control group.
  • The evidence suggests a likely explanation: participants had plans to spend their refunds.

How Retirement Provisions Affect Tenure of State and Local Workers

The brief’s key findings are:

  • The “backloaded” benefit structure of public sector defined benefit plans favors long-tenure workers over short-tenure workers.
  • However, when a defined benefit plan is combined with either Social Security or a defined contribution plan, the degree of backloading is reduced.
  • Not surprisingly, then, the analysis shows that public workers with either Social Security or a defined contribution plan are less likely to stay until retirement age.
  • Giving workers more flexibility to switch jobs leads to better employment matches.

The Impact of Long Vesting Periods on State and Local Workers

The brief’s key findings are:

  • Public sector defined benefit plans provide short-tenure workers with little or no pension benefits.
  • One reason is that these plans have long vesting periods – the years of service needed to qualify for any benefit.
  • The longer the vesting period, the less likely an employee will remain long enough to vest.
  • This effect helps explain why nearly half of workers depart without any promise of future benefits.

The National Retirement Risk Index: An Update

The brief’s key findings are:

  • The National Retirement Risk Index (NRRI), based on newly released Survey of Consumer Finances data, shows that over half of households may be unable to maintain their standard of living in retirement.
  • Between 2007 and 2010, the NRRI jumped by 9 percentage points due to:
    • the bursting of the housing bubble (4.5 percentage points);
    • falling interest rates (2.2 percentage points);
    • the ongoing rise in Social Security’s Full Retirement Age (1.6 percentage points); and
    • continued low stock prices (0.8 percentage points).
  • The hardest hit households were those nearing retirement and those with high incomes.

Can Retirees Base Wealth Withdrawals on the IRS’ Required Minimum Distributions?

The brief’s key findings are:

  • Retiring baby boomers need a strategy to draw down their 401(k)/IRA balances to avoid either outliving their savings or scrimping on consumption during retirement.
  • Traditional strategies include spending only the income, consuming assets based on life expectancy, and drawing 4 percent of initial assets each year.
  • A comparison found that a new option using the IRS’ Required Minimum Distributions (RMD) does about as well as the traditional options and actually outperforms the 4-percent rule.
  • The RMD option is also easy and creates no adverse incentives.
  • A somewhat more complicated version of the RMD option does even better, approaching an optimal withdrawal pattern.

Are Aging Baby Boomers Squeezing Young Workers Out of Jobs?

The brief’s key findings are:

  • Individuals need to work longer for a secure retirement, but critics argue that more work by older people reduces jobs for the young.
  • An exhaustive analysis, however, covering the 1977-2011 period found absolutely no evidence of such “crowding out.”
  • This finding holds for both men and women, for groups with different educational levels, and even during the Great Recession.

Using Participant Data to Improve 401(k) Asset Allocation

The brief’s key findings are:

  • Since many households fail to shift their 401(k) assets towards less risky investments as they age, target date funds do it automatically.
  • Conventional target date funds rely only on the participant’s age to determine the asset allocation strategy.
  • In contrast, semi-personalized target date funds add information on the participant’s earnings, 401(k) balance, and savings rate.
  • Both investment strategies are better than leaving individuals on their own, but the semi-personalized approach generally outperforms the conventional approach.
  • These results can be further improved by including information on the household rather than simply the individual and by accounting for earnings uncertainty.

The Pension Coverage Problem in the Private Sector

The brief’s key findings are:

  • Only 42 percent of private sector workers age 25-64 have any type of pension coverage in their current job.
  • This coverage gap creates two types of problems:
    • More than a third of households end up at retirement with only Social Security.
    • Workers who move in and out of coverage accumulate only modest amounts in their 401(k)s.
  • Simplifying pension plans has not solved the coverage problem.
  • Recently, both federal and state policymakers have put forth proposals to cover the uncovered.
  • But given the low level of Social Security benefits and modest 401(k) balances, any new tier should be universal.

2010 SCF Suggests Even Greater Retirement Risks

The brief’s key findings are:

  • The wealth-to-income ratio for current workers is a good way to gauge their retirement preparedness.
  • During 1983-2007, these ratios were remarkably stable, which should never have been a source for comfort as the need for wealth increased due to:
    • rising life expectancy;
    • the shift to 401(k) plans;
    • increasing health care costs; and
    • lower real interest rates.
  • In 2010, the ratios dropped substantially, signaling even more serious problems ahead for future retirees.

Legal Constraints on Changes in State and Local Pensions

The brief’s key findings are:

  • In responding to pension shortfalls, most states are legally constrained from reducing future benefits for current workers.
  • These constraints make it difficult to adjust to changing conditions and to share the burdens of reform fairly between new and current participants.
  • The legal boundaries for pension benefits are typically defined under a contracts-based approach rather than a constitutional provision.
  • Narrowing the contract definition to when the worker performs the service would still protect benefits earned to date, while allowing adjustments to future benefits.

Who Claimed Social Security Early Due to the Great Recession?

The brief’s key findings are:

  • The severity of the Great Recession is projected to have increased the probability of claiming Social Security at age 62 by more than 5 percentage points.
  • This increase was relatively uniform across the income spectrum.
  • The affected individuals claimed six months earlier, resulting in a 4.6 percent reduction in monthly benefits.

401(k) Plans in 2010: An Update from the SCF

The brief’s key findings are:

  • Progress in the 401(k) system stalled in the wake of the economic crisis, according to the 2010 Survey of Consumer Finances data.
  • Despite an increase in auto-enrollment, the percent of employees not participating ticked up.
  • And 401(k) contributions slipped, while leakages through cash outs, loans, and hardship withdrawals increased.
  • As a result, the typical household approaching retirement had only $120,000 in 401(k)/IRA holdings in 2010, about the same as in 2007.
  • This amount would provide only $575 in monthly income, assuming a household purchases a joint-and-survivor annuity.

How Important Is Asset Allocation to Retirement Security?

The brief’s key findings are:

  • Financial planners often tout asset allocation to boost retirement preparedness.
  • But the typical household nearing retirement has less than $100,000 in savings.
  • Hence, asset allocation lost when tested against three alternatives: working longer, taking a reverse mortgage, and controlling spending.
  • Even for households with substantial financial assets, asset allocation is less important than one would expect.

Should You Buy an Annuity from Social Security?

The brief’s key findings are:

  • Households now retiring need to transform their 401(k) and IRA savings into retirement income.
  • One way is to delay claiming Social Security to increase their monthly benefit, using savings to pay current expenses while they wait.
  • In effect, they are buying an annuity from Social Security:  The savings used is the “price” and the increase in their monthly benefit the annuity income it “buys.”
  • Buying an annuity from Social Security is generally the best deal in town, especially in today’s low interest-rate environment.

The Funding of State and Local Pensions: 2011-2015

The brief’s key findings are:

  • During 2011, the funded status of public plans slipped from 76 percent to 75 percent.
  • This decline reflected slow asset growth due to actuarial smoothing, which was partly mitigated by an unexpected reduction in liability growth.
  • Going forward, the funded ratio is projected to remain steady next year and then gradually improve as the market meltdown is phased out of the calculations.

Social Security’s Financial Outlook: The 2012 Update in Perspective

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The brief’s key findings are:

  • Social Security’s 75-year deficit is significantly higher than last year’s projection: 2.67 percent of payroll versus 2.22 percent of payroll.
  • This increase reflects the slow recovery from the recession and rising disability rolls, among other factors.
  • The bottom line remains the same: Social Security faces a real, but manageable, shortfall and stabilizing the system’s finances should be a high priority.

Why Do More People Die During Economic Expansions?

The brief’s key findings are:

  • When economic times are good, deaths in the United States increase.
  • Previous research suggests that a likely culprit is poorer health habits tied to greater job demands.
  • However, the increase in mortality is largely driven by deaths among elderly women in nursing homes.
  • These nursing home deaths may reflect increased shortages of caregivers during economic expansions.

How Can Employers Encourage Young Workers to Save for Retirement?

The brief’s key findings are:

  • One reason young workers don’t save for retirement is that the event is so far off.
  • An experiment to boost their saving tested different ads:
    • abstract or concrete wording (“why you should save more now” vs. “how you can save more now”); and
    • a short- or long-term savings goal (“how much to save from each paycheck” vs. “how much to save over your lifetime”).
  • The most effective ads paired abstract wording with a long-term goal and concrete wording with a short-term goal.
  • Therefore, communications designed to spur saving by young workers should match the framing of the message to the time horizon of the savings milestone.

Can the Actuarial Reduction for Social Security Early Retirement Still Be Right?

The brief’s key findings are:

  • Monthly Social Security benefits claimed at age 62, rather than 65, are reduced about 20 percent to avoid additional costs to the program.
  • When the reduction was set over 50 years ago, a worker claiming at 62 received benefits about 20 percent longer.  As life expectancy has risen, this worker now receives benefits only about 15 percent longer.
  • But the cost of benefits, the present discounted value of lifetime benefits, also depends on interest rates.  Rates have generally risen since the 1960s, making future benefits less costly.
  • These higher rates have largely offset the impact of rising life expectancy, suggesting that the reduction factor has proven remarkably durable over time.

The Rise of Financial Fraud

The brief’s key findings are:

  • Financial fraud complaints by consumers have surged over the past decade, fueled by the rise of Internet-based scams.
  • This trend will likely continue as scammers target aging baby boomers, who have substantial assets and face cognitive decline.
  • Consumers can help protect themselves by recognizing standard fraud strategies and the disguises used by scammers.

What’s the Tax Advantage of 401(k)s?

The brief’s key findings are:

  • The tax deferral for 401(k) plans costs the Treasury about $50-70 billion per year.
  • Calculating the cost requires comparing how much individuals would pay in taxes on savings within a 401(k) to how much they would pay outside a 401(k).
  • Recent deficit reduction proposals would lower 401(k) contribution caps, which would reduce the tax advantage of 401(k)s for high earners.
  • However, these proposals would also eliminate preferential tax rates for dividends and capital gains, which would increase the attractiveness of 401(k)s.

Do Income Taxes Affect the Progressivity of Social Security?

The brief’s key findings are:

  • Low earners receive much more in Social Security benefits than they pay in Social Security taxes, reflecting the program’s progressive design.
  • The interaction between Social Security provisions and income taxes has little net effect on the program’s progressivity:
    • the exemption of employers’ Social Security contributions from workers’ income taxes makes the system less progressive, but
    • the income taxation of retirees’ Social Security benefits makes the system more progressive.
  • Over time, the income tax effects will add to progressivity because an increasing percentage of retirees will pay taxes on their benefits.

Why Do State Disability Application Rates Vary Over Time?

The brief’s key findings are:

  • Application rates for federal Disability Insurance (DI) have risen since the late-1990s.
  • The economy is a key driver; rising unemployment and declining labor force participation lead to higher DI application rates.
  • Interestingly, states with strict health insurance regulations have lower application rates, a finding that merits further exploration.

What Explains Variation in Disability Application Rates Across States?

The brief’s key findings are:

  • Application rates for federal Disability Insurance (DI) vary greatly by state, which has raised concerns that states apply standards inconsistently.
  • However, the main factors driving the variation are health, demographic, and employment characteristics.
  • Interestingly, states that require employers to provide temporary disability insurance have lower DI application rates.

Do Low-Income Workers Benefit From 401(k) Plans?

The brief’s key findings are:

  • Previous studies find that the tax deferral advantage offered by 401(k) plans mainly benefits high-income workers, who face higher marginal tax rates.
  • A key assumption is that employer 401(k) contributions do not affect workers’ total compensation – that is, they are fully offset by lower wages.
  • However, our results suggest that additional employer contributions raise total compensation for low-income workers by about 70 to 90 cents per dollar of contribution.

How Would GASB Proposals Affect State and Local Pension Reporting?

The brief’s key findings are:

  • GASB proposes two major changes for reporting purposes.
  • Assets would be valued at market rather than smoothed.
  • Liabilities would be discounted by a blended rate using:
    • the long-run return for liabilities covered by projected assets; and
    • the high-grade municipal bond rate for liabilities covered by other resources.
  • These changes would reduce reported funded ratios for our sample of large plans from 76 percent to 57 percent in 2010.

Disability Insurance: Does Extending Unemployment Benefits Help?

The brief’s key findings are:

  • Jobless individuals tend to delay applying for disability insurance (SSDI) until their extended unemployment insurance (UI) runs out.
  • Those who do apply for SSDI while still on unemployment are more likely to be approved, suggesting they are less healthy than those who delay.
  • UI extensions do not appear to reduce SSDI costs, because any given application is more likely to be approved due to worsening health or poor job prospects.

How Much to Save for a Secure Retirement

The brief’s key findings are:

  • Recent estimates suggest that people need about 80 percent of their pre-retirement income in retirement.
  • The saving rate needed to hit this target depends on earnings, saving start age, retirement age, and asset returns.
    • An average earner who starts saving at 35 and retires at 67 needs to save 18 percent each year, assuming a 4-percent return.
    • The comparable rates for low and high earners are 12 percent and 22 percent, respectively.
  • Starting early and working longer are more powerful levers for gaining a secure retirement than earning higher returns.

How Prepared Are State and Local Workers for Retirement?

The brief’s key findings are:

  • Most state-local pension plans are designed to provide adequate retirement income for full-career workers.
  • However, the vast majority of state-local workers spend only a portion of their career in the public sector.
  • As a result, most households with state-local employment retire with total replacement rates that fall well short of the 80-percent target.

Boston College Launches New Center for Financial Literacy

Today, Boston College announced the creation of the Center for Financial Literacy (CFL), with first-year funding of $3.0 million from the U.S. Social Security Administration. The CFL’s mission is to produce educational materials and programs that help people make reasonable financial decisions throughout their working lives and into retirement. The CFL will be led by Center Director Alicia H. Munnell, Program Director Steven Sass, and Creative Director Ronn Campisi.

The Boston College team has extensive experience producing financial literacy materials using print, film, and interactive media. They will be joined by active partners from the National Bureau of Economic Research, The Brookings Institution, The College of William and Mary, Innovations for Poverty Action, Financial Engines, Knowledge Networks, and the National Endowment for Financial Education.

The Social Security grant calls for the CFL and its partners, in the first year of a five-year period, to:

  • produce print and Web-based interactive guides to financial issues facing retirees;
  • develop a Web-based interactive program to help older workers choose a target retirement age;
  • field commitment programs to help low- and moderate-income households control their finances;
  • design a plan for a comprehensive “go-to” financial website;
  • review the effectiveness of existing financial literacy programs;
  • create a financial literacy “food pyramid”; and
  • evaluate how target date funds are used by 401(k) participants.

“Given the turbulent economic climate and the shift of financial risk to individuals, people need help,” said Alicia Munnell. “The new Center will provide essential tools to improve decision-making.” In addition to directing the CFL, Munnell will continue to head the Center for Retirement Research at Boston College, which focuses on conducting and broadly disseminating research on retirement income issues.

Introducing the Financial Security Project website – a CRR initiative

The Financial Security Project at Boston College offers resources to help people make better financial decisions.

Come explore our:

  • Unique publications and interactive tools for near and new retirees;
  • New research findings on financial education; and
  • Squared Away blog on the latest innovations in the field.

We invite comments to help us improve our products, so please let us know what you think.

Comparing Wealth in Retirement: State-Local Versus Private Sector Workers

The brief’s key findings are:

  • Overall, 65-year-old couples with a state-local worker do not end up with more wealth at retirement than their private sector counterparts.
  • The results, however, differ by tenure in the state-local sector:
    • The one-third with long tenure have 11 to 18 percent more wealth at age 65.
    • The other two-thirds have less wealth at age 65.
  • For long-tenure workers, the wealth gain may be more from having a defined benefit plan, which forces saving, than from having higher compensation.

Comparing Compensation: State-Local Versus Private Sector Workers

The brief’s key findings are:

  • Critics claim that the compensation of state-local workers is overly generous.
  • Previous studies have found mixed results.
  • Our analysis finds that compensation of state-local and private sector workers is roughly similar:
    • state-local workers earn 9.5 percent less than comparable private sector workers; but
    • this wage gap is mostly offset by higher pension and retiree health benefits.
  • Thus, before making major changes to public compensation, policymakers should carefully consider the specifics of their state or locality.

Implications of a ‘Chained’ CPI

The brief’s key findings are:

  • Recent commissions have proposed a “chained” consumer price index to adjust Social Security benefits.
  • The chained index, which allows spending patterns to shift as prices change, would rise more slowly than the current index.
  • But the current index likely understates the inflation faced by the elderly, and the low-income elderly may have little flexibility.
  • An alternative way for current retirees to bear some of the burden of a Social Security fix would be a one-time delay in the inflation adjustment.

What Is the Average Retirement Age?

The brief’s key findings are:

  • Since the mid-1990s, the average retirement age has risen:
    • from 62 to 64 for men; and
    • from 60 to 62 for women.
  • This trend toward later retirement has been driven by several factors:
    • changing incentives in Social Security and employer pensions;
    • better education and health coupled with less strenuous jobs; and
    • the decline in retiree health insurance.
  • In addition, more older women are working today because more of them started working when younger.
  • These factors suggest the trend toward later retirement will continue but risks remain, such as the move away from career employment.

Did the Housing Boom Increase Household Spending?

The brief’s key findings are:

  • Regional variations in U.S. house prices provided a natural experiment to test how price changes influence household spending.
  • Households age 51 and over who saw rapid growth in house prices increased their spending on non-durables (e.g., meals out, vacations, and entertainment).
  • The annual increase was modest but, if sustained over time, could be substantial.
  • Interestingly, when house prices fell, households did not appear to tighten their belts.

Unions and Public Pension Benefits

The brief’s key findings are:

  • Recent debates suggest that union power has led to higher public pension benefits.
  • Interestingly, union strength appears to have no impact on the level or growth of benefits.
    • Because pensions are legislated, not bargained, lobbying expertise may be more important than union size.
  • In contrast, union strength does seem to raise employees’ wages.
    • Because wages are determined through collective bargaining, union numbers appear to matter.
  • Finally, union strength appears to reduce the relative size of the public workforce.
    • Given the effect on wages, reductions in employment would not be unexpected.
  • These results should be viewed as only a first step in understanding the influence of public unions on employee compensation.

An Update on Locally-Administered Pension Plans

The brief’s key findings are:

  • The funded status for local plans fell from 83 percent in 2006 to 77 percent in 2010, similar to the pattern for state plans.
  • Discounting liabilities at the riskless rate would reduce the funded status to the 50-percent range.
  • Local plans are more expensive than state plans, but they have done a better job of making their annual required contributions.
  • Pension payments by local governments are about 8 percent of their total budgets.
  • Strikingly, only 40 percent of local payments go to local plans; the other 60 percent go to state plans that cover local workers, primarily teachers.

Social Security’s Financial Outlook: The 2011 Update in Perspective

  • Highlights of the 2011 Trustees Report:
    • Social Security’s deficit is still about 2 percent of payroll.
    • Deficit as a percent of GDP is less than 1 percent.
    • Trust fund exhaustion moved up one year to 2036.
  • Items of note:
    • COLA is expected to be back after a two-year hiatus.
    • Disability Insurance Trust Fund exhausts its assets in 2018.
    • Future of the employee payroll tax cut is uncertain.

Does Medicare Part D Protect the Elderly from Financial Risk?

The brief’s key findings are:

  • The Medicare Part D prescription drug program covers a large percentage of the elderly and their prescription costs.
  • Strikingly, as of 2007, about 70 percent of the program’s enrollees already had drug coverage before joining Part D.
  • Similarly, about 75 percent of Part D spending substituted for spending by private insurance or individuals.
  • A full assessment of Part D’s overall social impact requires further research.

The Funding of State and Local Pensions in 2010

The brief’s key findings are:

  • During 2010, the funded status of public plans fell from 79 percent to 77
    percent.
  • This decline was primarily due to slow growth in assets, which reflects
    smoothing of market gains and losses over a 5-year period
  • The comparable figures discounting liabilities by the riskless rate are 53 percent to 51 percent.
  • Going forward, the outlook for pension funding is mixed.
    • States and localities have been falling short on required pension payments.
    • But they have been trimming payrolls, reducing benefits for new hires, and raising contributions.
    • And the impact of the financial crisis on asset values will gradually fade.

Is Today’s Price-Earnings Ratio Too High?

The brief’s key findings are:

  • To assess whether stocks are overvalued, analysts often compare stock prices to companies’ cyclically-adjusted (10-year average) earnings.
  • Today’s ratio of stock prices to cyclically-adjusted earnings appears high, which has often signaled a pending fall in prices.
  • However, cyclically-adjusted earnings are unusually low right now because they include two recessions.
  • As the recession of 2001-02 is replaced by higher earnings, the price-earnings ratio will drop back to its historic average by the end of 2012.

A Role for Defined Contribution Plans in the Public Sector

The brief’s key findings are:

  • In recent years, several states have shifted from defined benefit (DB) to defined contribution (DC) pension plans.
  • Many of the new plans are “hybrids” with a slimmed down DB plan and a minimal DC plan, which shifts substantial risk to employees.
  • A better hybrid design could offer a full DB plan up to an income cap and “stack” a DC plan on top for those with higher incomes.
  • The “stacked” approach would give those with modest incomes the full protection of a DB plan while limiting taxpayers’ commitment to those with higher incomes.

Do Social Security Statements Affect Knowledge and Behavior?

The brief’s key findings are:

  • Social Security’s annual Statement of estimated benefits at different ages helps people plan for retirement.
  • Those receiving it are more likely to provide an estimate of their benefits, and their estimates tend to be more accurate.
  • The Statement does not appear to change retirement behavior; further research is needed to determine why.

Can State and Local Pensions Muddle Through?

The brief’s key findings are:

  • The market crash has hurt public pensions, and quick fixes aren’t feasible because:
    • pension cuts for new hires take time to add up; and
    • tax revenues have been hit hard by the recession.
  • Fortunately, most plans do not face a liquidity crisis.
  • Years to exhaustion depend on investment returns and concept. With 8 percent returns, most plans have:
    • at least 15 years under “termination” concept.
    • at least 30 years under “ongoing” concept.
  • Notable exceptions include Connecticut SERS, Illinois SERS, Illinois Universities, Kentucky ERS, Louisiana Teachers, New York City Teachers, and Rhode Island ERS.

Equity Returns in the Coming Decade

The brief’s key findings are:

  • Many forecasters contend that the sluggish economic recovery will limit stock returns over the coming decade.
  • Despite the sluggish recovery, corporate earnings have recovered to nearly match their peak value.
  • Higher earnings can be used to boost returns in several ways: buying back stock, retiring debt, buying stock in other companies, or paying dividends.
  • The bottom line is that, over the coming decade, stock returns are likely to compare favorably to historical averages.

How Can Customized Information Change Financial Plans?

The brief’s key findings are:

  • A 2009 CRR survey measured initial reactions to the financial crisis and then gave respondents customized advice on how to offset their losses.
  • In response, some individuals adjusted their plans to make them more reasonable.
    • More than 40 percent decided to save more and/or work longer.
    • About 25 percent reduced their planned increase in worklife.
  • One third did not respond to the advice; they tended to be older and to have more adequate assets, suggesting less flexibility or desire to change plans.

The Impact of Pensions on State Borrowing Costs

The brief’s key findings are:

  • Both public pensions and municipal bonds are in the headlines.
  • An important question is how pensions affect municipal bond rates.
    • Our analysis of 37,500 bond issues found that pensions raise rates by a modest 3-7 basis points.
    • However, if pension costs rise as a share of state budgets, this impact could increase in the future.
  • Interestingly, pensions do not appear to have an impact on bond ratings.

What Is ‘CLASS’? And Will It Work?

The brief’s key findings are:

  • Long-term care is the major uninsured expense for most retirees.
  • CLASS is a new, voluntary, national program designed to:
    • alleviate the need for families to impoverish themselves to qualify for Medicaid;
    • reduce the burden of care on families; and
    • offset a bias towards institutionalization.
  • The primary challenge to CLASS is adverse selection – participation mainly by the less healthy.
  • To avoid a death spiral of rising premiums and declining participation, major program changes are needed.

Improving Sweden’s Automatic Pension Adjustment Mechanism

The brief’s key findings are:

  • The economic crisis has provided a ‘stress test’ for many pension systems.
  • In Sweden, the crisis triggered an automatic ‘brake’ to restore financial balance and revealed two problems with the brake’s design:
    • it can favor workers over retirees; and
    • it can result in large shocks for retirees.
  • In response, the brake could be modified to prevent unintended gains for workers and better insulate retirees from risk.

How Important Are Inheritances for Baby Boomers?

The brief’s key findings are:

  • Baby boomers could inherit about $8.4 trillion.
  • Two-thirds of boomer households will likely receive some inheritance, with a median amount of $64,000.
    • But inheritances are not a silver bullet:
      • 70 percent of the estimated total represents prospective amounts.
      • Market volatility can have a substantial impact.
      • Boomers’ parents may pass on less if their own retirement needs are greater than expected.

Responding to the Downturn: How Does Information Change Behavior?

The brief’s key findings are:

  • Over 40 percent of respondents to a 2009 CRR survey planned no response to the financial crisis.
  • But after it was made clear that their only options are to save more, work longer, or spend less in retirement, most opted to alter saving or work plans.
  • Those who changed had greater needs in retirement, a history of high saving, and/or had not thought a lot about the downturn.

How Will Higher Tax Rates Affect the National Retirement Risk Index?

The brief’s key findings are:

  • Increased taxes and spending cuts will be needed to bring the federal budget under control.
  • Relying heavily on tax increases would modestly raise the overall NRRI (the percent of households ‘at risk’ in retirement) from 51 to 54 percent.
  • But the NRRI would jump sharply for high-income Early Boomers, who face sharply higher income taxes and have little time to adjust.
  • And while Gen Xers would see little change in their ‘at risk’ status, higher taxes would reduce their consumption both before and after retirement.

Do Parents Live It Up When Children Fly the Coop?

The brief’s key findings are:

  • Estimates of retirement security depend crucially on the assumption of what parents do with the money that is freed up when their children leave home.
  • The Health and Retirement Study’s consumption survey is used to determine whether parents save it for retirement or spend it on consumption.
  • The results show that households whose kids move out increase spending by about 50 percent per person relative to other households.
  • Such changes increase the risk that households will be unable to maintain their pre-retirement living standard once they retire.

How Do Responses to the Downturn Vary by Household Characteristics?

The brief’s key findings are:

  • Half of respondents to a 2009 CRR survey planned to respond to the downturn by working longer, saving more, or both.
  • Their choice was influenced by different factors:
    • “Work longer” was favored by those with large losses or a greater dependence on assets, less time to recover, and high anxiety;
    • “Save more” was favored by those with higher incomes, higher expectations for stock returns, and greater job security;
    • “Work longer and save more” predictably reflected a blend of these responses plus lower contribution rates.

The Impact of Public Pensions on State and Local Budgets

The brief’s key findings are:

  • Currently, state and local pension contributions equal 3.8 percent of total budgets.
  • To get back on a path to full funding, sponsors will need to contribute:
    • 5.0 percent of budgets if liabilities are discounted by 8 percent; or
    • 9.1 percent of budgets if liabilities are discounted at 5 percent.
  • But states with seriously underfunded plans and/or generous benefits – like CA, IL, and NJ – will need to contribute significantly more.

Why Did Poverty Drop for the Elderly?

The brief’s key findings are:

  • The Census Bureau just reported a big jump in the poverty rate in 2009.
  • But poverty rates actually fell for those over 65 as:
    • Social Security recipients got a large cost-of-living adjustment and a one-time stimulus payment; and
    • the poverty threshold dipped due to lower inflation in 2009.
  • This situation is temporary, with old-age poverty likely to rise in 2010 and 2011.

Social Security’s Financial Outlook: The 2010 Update in Perspective

The brief’s key findings are:

  • The 2010 Trustees Report had no surprises – Social Security still faces a modest deficit of 2 percent of payroll, which is newsworthy given the economic crisis.
  • The recession has had some shorter-term effects:
    • prices are still below their 2008 levels, so beneficiaries are not expected to receive a COLA for the second straight year.
    • average wages have dropped, so the maximum contribution base and the exempt amount for the earnings test will stay at current levels.
  • For the third straight year, the Report was not signed by any public trustees; the absence of these independent voices reflects a failure of the political process.

Problems with State-Local Final Pay Plans and Options for Reform

The brief’s key findings are:

  • Defined benefit plans based on final pay:
    • “backload” benefits, so younger shorter-service employees get virtually nothing;
    • favor those with high earnings growth, who tend to be higher paid; and
    • invite sudden late-career “spikes” in earnings.
  • Moving to career-average earnings would:
    • provide reasonable benefits for younger shorter-service employees;
    • treat high- and low-paid employees more equitably; and
    • avoid late-career spikes in earnings.

Pension Participation and Uncovered Workers

The brief’s key findings are:

  • The Obama Administration has proposed “Auto-IRAs” to boost pension coverage among those not currently offered a plan.
  • Such a policy is seen to offer great potential, given that 60 percent of low-income workers currently offered a 401(k) choose to participate.
  • However, these low-income workers with 401(k)s are different from their counterparts at firms that do not offer 401(k)s.
  • Taking this difference into account, take-up among low-income workers could be as low as one third.

Will Better Access to Health Care Change How Much Older Men Work?

The brief’s key findings are:

  • An expansion in the Veterans Administration health care system offers insights on how health insurance reform may affect older workers’ employment decisions.
  • The VA reform provided free coverage outside of employment, causing older male workers to work less by increasing their income and reducing job lock.
  • More-educated workers used such health care to move to self-employment, while the less educated were more likely to leave the labor force altogether.
  • In contrast, groups who tend to have worse health actually worked more, likely due to improved health from the new coverage or better work incentives.

What is the Age of Reason?

The brief’s key findings are:

  • Individuals make the most effective financial decisions in middle age, resulting in lower fees and interest rates on credit and loan transactions.
  • Financial performance declines for older adults, raising a potential concern as the retirement system has shifted more decisions to individuals.
  • A range of policy responses is possible – from improved disclosure of financial products to stricter regulatory review.
  • Any response should carefully weigh the costs as well as the benefits.

Reducing Costs of 401(k) Plans with ETFs and Commingled Trusts

The brief’s key findings are:

  • 401(k) plan expenses include both explicit fees and trading costs.
  • Trading costs are a major expense for actively-managed funds.
  • While such funds do not necessarily produce higher net returns, they do handle the bulk of 401(k) equities.
  • Without giving up active management, shifting to exchange-traded funds and commingled trusts can cut total expenses by 0.7 percent of assets.

Valuing Liabilities in State and Local Plans

The brief’s key findings are:

  • What rate to use to discount public pension liabilities is a hot topic.
    • The Government Accounting Standards Board recommends the estimated return on pension assets – about 8 percent.
    • Economists generally argue for a riskless rate – about 5 percent.
  • Reducing the discount rate would raise the unfunded liability by $1.5 trillion.
  • While a lower discount rate greatly impacts reported funding status, it does not change what pension benefits teachers and firefighters ultimately receive.
  • And any change in funding policy would have to wait until the economy recovers.

The Case For Longevity Bonds

The brief’s key findings are:

  • “Longevity bonds” would allow insurers and pension plans to hedge aggregate longevity risk.
  • The bonds’ coupon would rise if a cohort lived longer than expected, offsetting higher annuity costs.
  • Longevity bonds would lower capital requirements for insurers and reduce risk for pension plan sponsors.
  • Governments could take the lead in issuing such bonds and gradually shift most of the responsibility to the capital markets.

A New Social Security ‘Notch’? Bad News for People Born in 1947

The brief’s key findings are:

  • While Social Security beneficiaries received no COLA this year, they are still ahead of the game.
  • The reason is that they received a larger-than-usual COLA in 2009, which took effect right after prices dropped due to the economic crisis.
  • But individuals who turned 62 in 2009 are not so lucky – their benefits will likely be lower than older and younger recipients due to a quirk in the benefit formula.
  • To prevent such a ‘notch,’ policymakers could increase benefits for the 1947 group and modify the benefit formula to prevent a recurrence in the future.


Does Staying Healthy Reduce Your Lifetime Health Care Costs?

The brief’s key findings are:

  • Retirees in good health face higher lifetime health care costs than those in poor health.
    • A typical healthy couple at age 65 can expect to spend $260,000 with a 5-percent risk of exceeding $570,000.
    • A typical unhealthy couple can expect to spend $220,000 with a 5-percent risk of exceeding $465,000.
  • Those in good health live longer, eventually become less healthy, and often need nursing home care.
  • So the healthy who delay buying Medigap or long-term care insurance could face much higher premiums later.

How To Close the Funding Gap in Dutch Pension Plans? Impact on Generations

The brief’s key findings are:

  • The financial crisis stressed the Dutch pension system, as assets dropped below the required 105 percent of liabilities.
  • Automatic indexation adjustments, introduced in recent years, may not be sufficient to restore solvency.
  • Policymakers now have to consider more substantial measures, which affect retirees and workers differently.
  • This process highlights the need to more effectively distribute risk across generations within the pension system.

The Funding of State and Local Pensions: 2009-2013

The brief’s key findings are:

  • State and local plans, which were headed toward full funding, were knocked off track by the financial crisis.
  • Their funding ratio dropped from 84 percent in 2008 to an estimated 78 percent in 2009.
  • Funding will likely continue to decline to 72 percent by 2013.
  • Reversing this decline will be difficult, as plans face constraints in increasing revenues from either employee contributions or taxes.

Returns on 401(k) Assets by Cohort

The brief’s key findings are:

  • Early Baby Boomers were hit hard by the financial crisis.
  • But, over their careers, markets have treated them well:
    • they have enjoyed 9-percent returns on equities; and
    • they have fared much better than either Late Boomers or Gen Xers.
  • Gen Xers have faced the worst investment climate, but Late Boomers are more vulnerable because they have less time to recover.

What Is the Distribution of Lifetime Health Care Costs from Age 65?

The brief’s key findings are:

  • Health care costs loom as a major risk for retirees, with nursing home care as the real wild card.
  • A typical couple at age 65 can expect to spend over its remaining lifetime:
    • $197,000 with a 5-percent risk of exceeding $311,000, excluding nursing home care; or
    • $260,000 with a 5-percent risk of exceeding $570,000, including nursing home care.
  • Households need to figure out how to handle such risk.

Workers’ Response to the Market Crash: Save More, Work More?

In summer 2009, the CRR surveyed individuals age 45-59 on how the market crash has affected their retirement planning.

Key findings from our analysis are:

  • In response to the crisis, over 40 percent expected to work longer/save more.
  • Those who were highly distressed were more likely to act.
  • After receiving “reliable” financial advice, the majority of initial “no changers” decided to work longer/save more.

Why Did Some Employers Suspend Their 401(k) Match?

The brief’s key findings are:

  • During 2008-09, over 200 employers suspended their 401(k) matches, affecting 5 percent of active 401(k) participants.
  • Liquidity constraints rather than profitability concerns appear to be the reason.
  • Some large employers that suspended their match have since reinstated it.
  • If the others follow suit, the temporary suspensions may cause little harm for employees – particularly given the alternatives of salary cuts or layoffs.

Pension Obligation Bonds: Financial Crisis Exposes Risks

The brief’s key findings are:

  • Some state and local governments issue Pension Obligation Bonds (POBs) to raise cash to cover their required pension contributions.
  • POBs allow governments to avoid increasing taxes in bad times and could reduce pension costs, but they pose considerable risks.
  • Those who issue POBs are often fiscally stressed and not well-positioned to handle the investment risk.

Is Pension Inequality Growing?

The brief’s key findings are:

  • Among workers whose employers offer a pension plan, participation rates are much lower for low earners and have declined over time.
  • The decline is largely due to the rise of 401(k)s.
  • Low earners often cite monetary constraints, though non-monetary reasons are also important.
  • On the non-monetary side auto-enrollment should help, but little movement occurred between 2004 and 2007.

Pension Coverage and Retirement Security

The brief’s key findings are:

  • Private pensions cover only about half the workforce at any given time.
  • The lack of coverage creates two types of problems:
    • about one third of households never have coverage and end up relying solely on Social Security; and
    • many others move in and out of coverage, resulting in inadequate saving.
  • Expanding coverage is a good goal but only a partial solution, as even those with coverage may need an additional tier of saving.

The Swedish Pension System and the Economic Crisis

The brief’s key findings are:

  • The economic crisis has posed a ‘stress test’ for the automatic benefit adjustments in Sweden’s pension system.
  • Slow wage growth and a collapse in equity values triggered a first-time benefit cut for 2010.
  • Policymakers have revised the automatic adjustments, however, to moderate the decline.
  • Thus, even automatic adjustments may be affected by political considerations

401(k) Plans and Race

The brief’s key findings are:

  • Blacks and Hispanics are less likely to participate in 401(k)s and, when they do, they contribute at lower rates.
  • Even after controlling for age, job tenure, and earnings, these patterns persist.
  • However, adding education, wealth, and plan characteristics makes the differences disappear.
  • So the best way to boost saving among minorities is to ignore race and instead improve plan design for disadvantaged workers.

Why Are Stocks So Risky?

The brief’s key findings are:

  • Stocks have diverged from historic averages for periods of 10 to 20 years.
  • This divergence reflects fluctuations in: 1) corporate earnings; and 2) investors’ assessments of those earnings.
  • Corporate earnings vary, but tend to stabilize and return to long-term economic trends within a few years.
  • In contrast, investors’ valuations have been more volatile, taking decades to fully stabilize.

The National Retirement Risk Index: After The Crash

The brief’s key findings are:

  • The National Retirement Risk Index (NRRI) shows the percent of households ‘at risk’ of failing to maintain their standard of living in retirement.
  • The NRRI jumped from 44 percent to 51 percent today due to:
    • the bursting of the housing bubble;
    • the stock market crash; and
    • the ongoing rise in Social Security’s Full Retirement Age.
  • Clearly, Americans need more retirement saving.

Pension Buyouts: What Can We Learn From the UK Experience?

The brief’s key findings are:

  • Defined benefit pensions are waning due to financial volatility, regulations, and a changing economy.
  • In the UK, pension buyouts – whereby sponsors pay an insurance company to take over plan assets and liabilities – have emerged to help manage the decline.
  • In the US, policymakers resist buyouts, as they would prefer to stop the decline of defined benefit plans rather than manage it.

Making Your Nest Egg Last a Lifetime

The brief’s key findings are:

  • Managing a nest egg in retirement is hard.
  • People don’t know how long they will live and what asset returns to expect.
  • “Rules of thumb,” such as spending either asset income only or a fixed percent of the capital each year, have significant limitations the capital each year, have significant limitations.
  • To minimize risk, a household should consider buying an annuity to cover at least basic living expenses.

Older Americans On The Go: How Often, Where, and Why?

The brief’s key findings are:

  • Nearly one third of older homeowners moved at least once during 1992-2004.
  • Most moves were short distance, indicating no mass migration to the Sun Belt.
  • Most moves appear driven by family or financial reasons or a desire to upgrade housing, not by traditional retirement reasons such as climate or leisure.
  • Movers fall into two broad groups: Planners, who tend to move by choice, and Reactors, who tend to move due to unexpected circumstances.

The Case for Investing in Bonds During Retirement

The brief’s key findings are:

  • Retirees seeking safe investments generally prefer short-term deposits, which preserve capital but offer no guaranteed return.
  • Fluctuating returns can jeopardize a household’s living standard if short-term interest rates fall.
  • In contrast, bonds provide a guaranteed return and – if held to maturity – also preserve capital. The bottom line: bonds should be a standard component of any retiree’s portfolio.

Should Social Security Rely Solely on the Payroll Tax?

The brief’s key findings are:

  • The Social Security payroll tax supports: 1) the cost of current benefits; and 2) the “legacy cost” of paying benefits in excess of contributions to early generations.
  • Covering current costs through the payroll tax gives workers’ a sense that they have earned their benefits and provides a stable revenue source.
  • Covering legacy costs, however, means that low- and middle-income workers are paying disproportionately for the benefits of past generations.
  • Shifting legacy costs to the income tax would spread the burden more broadly.

Should You Carry a Mortgage into Retirement?

The brief’s key findings are:

  • More than 1 in 5 households aged 60-69 in 2007 had a mortgage and had sufficient assets to pay it off.
  • Paying it off makes sense unless a household:
    • can earn a risk-free return that exceeds its mortgage interest rate; or
    • cannot satisfy its demand for risky assets without borrowing money.
  • Few meet these exceptions, so the payoff option is the best bet.

Is Latin America Retreating From Individual Retirement Accounts?

The brief’s key findings are:

  • Many Latin American countries adopted individual retirement accounts (IRAs) to supplement or replace traditional social security systems.
  • Recently, a number of these countries have enacted reforms to better balance individual saving and social risks.
  • The new reforms generally aim to improve – not abandon – IRAs and, at the same time, to provide more adequate protection against old-age poverty.

 

Employers’ (Lack of) Response to the Retirement Income Challenge

The brief’s key findings from a 2006 survey are:

  • Employers expect many of their older workers will need to work longer, but are lukewarm about keeping them.
  • Employers are failing to confront a potential disorderly retirement process.
    • Firms more inclined to help workers plan for retirement or work longer tend to be large, fast-growing, and worried about “brain drain.”
    • Firms that expect many older workers to stay on show no special interest in such retirement initiatives.
  • In short, employers appear to view retirement initiatives only as part of hiring and retention, not as a way to ease retirement transitions.

Risk Pooling and the Market Crash: Lessons From Canada’s Pension Plan

The brief’s key findings are:

  • In the United States, workers hold equities in their 401(k)s, fully exposing them to a stock market crash.
  • Canada’s Pension Plan (CPP) offers an alternative approach –it pools equity risk, dampening the effects on individual households.
  • The CPP responds to a market crash by prompting policymakers to modestly adjust taxes and/or benefits.
  • With a very long-term horizon, the CPP can also respond to a market decline by buying assets at low prices, which helps stabilize the financial market.

Strange But True: Claim and Suspend Social Security

The brief’s key findings are:

  • During the current economic crisis, many older workers are postponing retirement and some retirees are re-entering the labor force.
  • Re-entrants age 66 and over can put their Social Security benefits “on hold” in exchange for higher benefits later.
  • This “claim and suspend” strategy also offers greater flexibility to one-earner couples, allowing the higher earner to delay benefits while his spouse claims.
  • The potential costs to Social Security are modest.

Why Are Older Workers at Greater Risk of Displacement?

The brief’s key findings are:

  • Older workers are now as vulnerable to layoffs as younger workers, because: their job tenure has declined, eroding the traditional protection afforded by seniority; and the risk of layoffs in manufacturing has risen, particularly for older workers.
  • The heightened vulnerability of older workers is a serious concern, because unemployed older workers have a hard time finding a new job.

Strange But True: Claim Social Security Now, Claim More Later

The brief’s key findings are:

  • New rules enable one member of a two-earner couple to claim a Social Security spousal benefit at age 66 and then claim a higher retired worker benefit later.
  • The most likely person to use this strategy is the higher-earning spouse, who can receive benefits while working without losing the gains of claiming later.
  • If this strategy were widely adopted, it would cost Social Security about $10 billion per year.

How Do Emotions Influence Saving Behavior?

The brief’s key findings are:

  • A recent experiment tested how retirement saving is affected by two emotions:
    • hope (the degree of yearning for a secure retirement); and
    • hopefulness (the perceived likelihood of a secure retirement).
  • The experiment “threatened” these emotions by telling some participants that the chances of a secure retirement were worse than expected.
  • Responses to the threat differed; compared to the relevant control group,
    • those with high hope shifted their hypothetical portfolio toward equities.
    • those with high hopefulness were more likely to join a hypothetical plan.
    • those with low hopefulness were less likely to join a plan.
  • These behavioral responses suggest that communication about retirement saving needs to be tailored to the characteristics of the individual.

Long-Term Care Costs and the National Retirement Risk Index

The brief’s key findings are:

  • The National Retirement Risk Index (NRRI) shows the percent of households ‘at risk’ of failing to maintain their standard of living in retirement.
  • The need to purchase long-term care insurance or to use home equity for nursing home expenses raises the NRRI to about 65 percent.
  • This impact comes from the households in the top two thirds of the income distribution; the bottom third will likely rely on Medicaid.
  • Previously, the NRRI showed that 44 percent of households were ‘at risk’ of falling short in retirement, 61 percent including health care costs.

Strange But True: Free Loan From Social Security

The brief’s key findings are:

  • An unconventional strategy allows individuals to use early Social Security benefits like a “free loan,” paying back the principal while keeping the interest.
  • If this strategy were widely adopted, it would cost Social Security $6 billion to $11 billion per year today and more in the future.
  • The strategy primarily benefits higher income individuals, who have the financial resources to invest their benefits and tend to be in better health.

An Update on 401(k) Plans: Insights From the 2007 SCF

The brief’s key findings are:

  • The 2007 Survey of Consumer Finances shows 401(k)/IRA balances of $78,000 for those approaching retirement, a modest improvement over 2004.
  • This progress was due to slightly higher participation rates, improved diversification, reduced leakage, and the maturation of 401(k)s.
  • However, by October 2008, the stock market collapse had reduced 401(k)/IRA balances by about 30 percent – to just $56,000.
  • In addition, companies have begun cutting their employer match, and hardship withdrawals – while still at low levels – have ticked up.
  • The inadequacy of 401(k) balances suggests the need for a new tier of saving.

What Does It Cost To Guarantee Returns?

The brief’s key findings are:

  • The financial crisis suggests the need for a new universal tier of retirement saving accounts to supplement Social Security and 401(k)s.
  • To prevent large drops in asset values and fluctuations in replacement rates, policymakers might find it desirable to provide guarantees.
  • But low guarantees would have had no effect historically.
  • And finance theory says that high guarantees are prohibitively expensive.
  •  The only way to provide high guarantees is if the government were willing and able to bear more risk than other investors.

The Structure of 401(k) Fees

The brief’s key findings are:

  • 401(k) fees are complex and may not closely correspond to costs.
  • Fees also raise design issues, such as transfers from high-balance to lowbalance participants and from participants to non-plan investors.
  • Better disclosure could help employers and participants avoid unreasonable costs.
  • Policymakers may also want to opine on the transfers embedded in today’s fee structure.

Recessions and Older Workers

The brief’s key findings are:

  • Despite the current recession, the employment rate of older men has not fallen.
  • This surprising fact is the net result of two long-term developments.
  • On the one hand, the labor force participation of older workers has risen steadily due to changes in Social Security, job demands, and health care access.
  • And 401(k)s have exposed workers to stock market collapses.
  • On the other hand, declining job tenure has eroded older workers’ protection against layoffs, increasing the risk of unemployment.

Can the Bottom Third Work Longer?

The brief’s key findings are:

  • The labor force activity of low-skilled men age 50-64 has declined significantly since 1960.
  • The decline mirrors the growth of disability insurance, SSI, early retirement benefits, and employers’ preference for high-skilled workers.
  • Health has improved for this group, but their disability-free life expectancy remains limited.
  • So working until their mid-60s may not be realistic or even desirable for many low-skilled men.

The Funding Status of Locally Administered Pension Plans

The brief’s key findings are:

  • Contrary to conventional wisdom, local plans are at least as well funded as state plans.
    • Funding ratio: 85 percent for local plans vs. 84 percent for state plans.
    • Making required contributions: 69 percent for local plans vs. 54 percent for state plans.
  • Despite this relatively positive outlook, some jurisdictions face serious shortfalls and a deteriorating economy may produce a gloomier picture going forward.

Is CalPERS a Sovereign Wealth Fund?

The brief’s key findings are:

  • Sovereign wealth funds (SWFs) – government-sponsored pools of financial assets – are drawing increasing scrutiny by regulators.
  • However, the definition of a SWF is widely debated.
  • Perhaps SWFs are best defined as funds that invest in the government’s interests and have no specific outside liabilities.
  • Thus, public pension funds such as CalPERS, which are largely independent and have fiduciary responsibilities to public workers, are not SWFs.

How Much Risk is Acceptable?

The brief’s key findings are:

  • The financial crisis suggests the need for a new universal tier of retirement saving to supplement Social Security and 401(k)s.
  • If the tier were a defined contribution system, asset levels would vary with market returns and payouts with interest rates.
  • Replacement rates would fluctuate as much as 25 percentage points – even if everyone invested in an identical target-date fund.
  • An alternative is to guarantee a fixed return, but this return will almost always be lower than that under a target-date fund, and guarantees are not costless.