Whither Retirement Strategies?

Transcription

1 Whither Retirement Strategies? Discussion of Byrne & Reilly and Fitchner & Seligman papers PENSION RESEARCH COUNCIL 2017 CONFERENCE Emily Kessler, FSA, Society of Actuaries 04 May 2017

2 How do you prepare for retirement in a low interest rate environment? Don t have the power of compounding: have to take a lot of risk to get a little return Fitchner & Seligman show how households fared post-2008 Financial Crisis Byrne & Riley test sensible solutions, including Save longer/save more/retire later Link Social Security claiming to years of work Allow partial payments/later claiming ages for Social Security 2

3 Will these solutions work? Solutions assume few market shocks Structural flaw in the DC system: no cushioning against market shocks If the new normal is working longer, retiring later, saving more, what happens when there s a market shock? Long-term trends of increasing disparity Some accelerated by great recession/market downturn of 2008 Have to think of solutions that will work GIVEN widening disparities 3

4 Wealth Evolution Among the Retired For HRS households with a retired person; 2015 dollars ( = 2008 wave) 500, , ,000 all but top 1 - percent 8,900,000 7,900,000 6,900,000 5,900,000 top 1 - percent 200, , ,000 all but top 10 - percent 75 - percent below median 25 - percent bottom 10-percent Average Years Since Retirement 4,900,000 3,900,000 2,900,000 1,900, , ,000 top 10 - percent Average Years Since Retirement Source: Fitchner & Seligman presentation to Pension Research Council on 4 May 2017; 1 May 2017 draft provided by authors 4

5 Loan to Value For HRS households with a retired person; percentage of home s worth ( = 2008 wave) 90% 80% 70% 60% 50% 40% 30% 20% bottom 10 - percent 25- percent below median 75- percent 10% % Note: it is possible Average to break Years out Since changes Retirement in mortgage balances and home values. Average Years Since Retirement home values have declined and mortgage values have increased among the bottom 10 percent of the wealth distribution 30% 25% 20% 15% 10% 5% top 1 - percent top 10 - percent Source: Fitchner & Seligman presentation to Pension Research Council on 4 May 2017; 1 May 2017 draft provided by authors 5

6 Widening wealth gap Ratio of wealth of upper income households to middle income households Data not available Source: accessed 19 April Pew Research Center tabulations of Survey of Consumer Finances public-use data 6

7 Widening wealth gap Only upper income households gained wealth post-2007 Upper income Middle income Lower income All families 0 100, , , , , , , ,

8 Widening income gap (Example: PA) Study of total employment in Pennsylvania, Over 190,000 jobs were lost, : Job growth in private sector ( ). Total employment changed (0.3) percent (declined) during Bottom line: Minimal change in total employment during suggests a static, no growth Pennsylvania economy - Great Recession to recovery. Source: accessed 19 Apr 2017, page 3 8

9 Widening income gap (Example: PA) Pennsylvania Private Sector Employment Change (Net): By Industry Wage Groups Average Annual Weekly Wage High $1,293 and over Medium $651 $1,292 Low $0 $650 High 1.4% 13,904 (68,291) (3.2)% Middle Low 6.2% 95,233 Total 0.9% 40,866 (120,000) (90,000) (60,000) (30,000) 0 30,000 60,000 90, ,000 Total Low Middle High Source: accessed 19 Apr 2017, Table 1 & Figure 9 9

10 Widening work experiences near retirement: Employment Status Age 60 U.S. White Males 100% All Males 100% Lowest Income Quintile 100% Highest Income Quintile 80% 80% 80% 60% 60% 60% 40% 40% 40% 20% 20% 20% 0% % % Full-time Part-time Retired Full-time Part-time Retired Full-time Part-time Retired Source: Gordodnichenko, Y. et al Macroeconomic Determinants of Retirement Timing, 2013, Institute for the Study of Labor (IZA), Bonn, Germany. Data estimated from Figure 2 graphs. 10

11 Widening life expectancy All education levels Change in Male Age 65 Life Expectancy 1990 to 2008 less than High School High School Diploma College graduate or greater Non-Hispanic White Black Hispanic CAVEAT: Proportion of population with high school diploma or greater has significantly increased over this period. Source: Olshansky, J et al, Differences In Life Expectancy Due To Race And Educational Differences Are Widening, And Many May Not Catch Up Health Affairs, August 2012 vol. 31,no , accessed 20 April 2017 at Exhibit A10 data 11

12 Expected Age at Death for 40 Year Olds in Years Life expectancy income gap The Health Inequality Project Expected Age at Death vs. Household Income Percentile - By Gender at Age 40 Women Men Women, Bottom 1%: 78.8 Women, Top 1%: 88.9 Men, Bottom 1%: 72.7 Men, Top 1%: Household Income Percentile Source: The Health Inequality Project, 12

13 (Maybe) Widening savings behavior 1.3 Ratio of average employee-effective deferral rate by income to average overall deferral rate <30,000 30,000-49,999 50,000-74,999 75,000-99, , Average deferral rate Source: accessed 19 April 2017, Figure 33 13

14 So what does this have to do with low interest rates? Solutions to work longer/save more/delay claiming Social Security don t work for well for populations who Are losing access to well paying jobs Are starting from a lower level of employment (have already lost access to jobs) Have not seen life expectancy gains of more welleducated peers Have not recovered lost wealth from great recession 14

15 Get more creative Better leverage Social Security Allow partial claiming Increase progressivity Widen early retirement reductions to account for widening life expectancy By benefit size or average lifetime income Leverage annuitization (preferably group) Cut annuitization costs by accounting for substandard mortality, writing simple life annuities Caveat: Acknowledging difficulty of realization of some of these ideas 15

16 Thank you