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

Transcription

1 Falling Short: The Coming Retirement Crisis and What to Do About It Alicia H. Munnell Peter F. Drucker Professor, Boston College Carroll School of Management Director, Center for Retirement Research at Boston College Sage Fall Conference 2015 Austin, TX September 28, 2015

2 1 The book in one slide. When people get older and stop working, they need retirement income. But on their own, they would not save and would have little income. So, the U.S. set up systems (Social Security and employer plans) to make people save. The problem is these systems are now producing less saving and less retirement income at a time when people need more. We can solve this problem by working longer and fixing the systems to produce more saving and more retirement income.

3 2 How big is the problem? The NRRI shows half of current workers falling short. The National Retirement Risk Index, % 40% 53% 52% 45% 44% 37% 38% 40% 38% 31% 31% 30% 20% 0% Source: Alicia H. Munnell, Wenliang Hou, and Anthony Webb NRRI Update Shows Half Still Falling Short. Issue in Brief Center for Retirement Research at Boston College.

4 3 The problem is driven by a growing gap between: the need for retirement income and the availability of retirement resources.

5 4 One reason people need more retirement income is that they are living a lot longer. Life Expectancy at Age 65, Men Women Source: U.S. Social Security Administration The Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Government Printing Office.

6 5 But they are only working a bit longer, so the retirement span is growing. Average Years in Retirement for Men, Average retirement age Life expectancy years 18 years 20 years 22 years Note: Average retirement defined as when 50 percent of individuals are not participating in the labor force. Sources: Center for Retirement Research at Boston College estimates from U.S. Census Bureau. Current Population Survey, ; and U.S. Social Security Administration The Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Government Printing Office.

7 6 In addition, people need more because retiree health care costs are high and rising. Medicare Part B Premium and Out-of-Pocket Payments as Percent of Average Social Security Benefits, % 18.6% 16% 15.0% 12% 8% 6.8% 4% 0% Source: Centers for Medicare & Medicaid Services, Office of the Actuary SMI Out-of-Pocket Expenses as a Percent of Illustrative Social Security Benefit.

8 7 And interest rates are low, which reduces what people get from their nest egg. 6% Real Interest Rate, % 2% 0% -2% Sources: U.S. Board of Governors of the Federal Reserve System Selected Interest Rates (Daily) H.15. Available at Joseph G. Haubrich, George Pennacchi, and Peter Ritchken Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps. Working Paper Federal Reserve Bank of Cleveland; and unpublished estimates from Richard Kopcke.

9 8 At the same time, the U.S. retirement system is contracting. Retirement Income Social Security Employer-Sponsored Pensions Individual Saving Defined Benefit Plans Defined Contribution - 401(k) - Plans

10 9 Social Security will replace a shrinking share of pre-retirement earnings. Social Security Replacement Rates for Average Earner Retiring at Age 65, 1985, 2000, 2015, and % 40% Reported replacement rate (retirement at age 65) After Part B SMI deduction After personal income taxation 42% 40% 39% 39% 37% 36% 36% 36% 32% 30% 20% 0% Sources: Centers for Medicare and Medicaid Services Unpublished data from Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. Government Printing Office; and U.S. Social Security Administration Unpublished data from The Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Government Printing Office.

11 10 And employer plans have shifted from defined benefit to 401(k). Workers with Pension Coverage by Type of Plan, 1983, 1992, 2001, and % 60% 40% 62% 44% 71% 61% 40% % 23% 17% 12% 26% 16% 16% 13% 0% Defined benefit only Defined contribution - 401(k) plans - only Both Source: Center for Retirement Research at Boston College calculations based on U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, 1983, 1992, 2001, and 2013.

12 11 401(k)s could work, but people make mistakes at every step. 100% 80% 60% Prevalence of 401(k) Mistakes 53% 54% 99% 40% 20% 21% 25% 0% Individuals not participating in 401(k) Individuals contributing 6 percent or less Assets in high-fee funds Loss of assets due to leakages Individuals who do not annuitize Sources: Author s calculations based on U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, 2013; Vanguard Group, Inc How America Saves 2015; Investment Company Institute ICI Research Perspective. 20(3); and Alicia H. Munnell and Anthony Webb The Impact of Leakages from 401(k)s and IRAs. Working Paper Center for Retirement Research at Boston College.

13 12 And these mistakes erode their balances. Impact of Fees, Leakages, and Contributions on 401(k)/IRA Balances, 2013 $400,000 $200,000 $373,000 Fees $314,000 Leakages $236,000 Intermittent contributions $165,000 Immature system $100,000 $0 Hypothetical Observed Source: Alicia H. Munnell (k)/IRA Holdings in 2013: An Update from the SCF. Issue in Brief Center for Retirement Research at Boston College.

14 13 Still, having a plan is very important because people do not save on their own. $400,000 Wealth of Typical Household with Head Age 55-64, 2013 $300,000 $301,300 $200,000 $153,700 $100,000 $0 Social Security Defined benefit $69,100 Primary house $40,100 Defined contribution $12,500 $14,100 Financial assets Other assets Source: Alicia H. Munnell (k)/IRA Holdings in 2013: An Update from the SCF. Issue in Brief Center for Retirement Research at Boston College.

15 14 So we should be very concerned that only half of private sector workers have a plan. Percent of Private Sector Workers Ages Participating in an Employer-Sponsored Pension, % 80% 60% 40% 20% 0% Source: U.S. Census Bureau. Current Population Survey,

16 15 What can we do? Solutions are straightforward o Work longer to build assets & shrink retirement period; o Save more via Social Security and employer plans; and o Consider the house as a retirement asset. but will require concerted efforts by: o We as individuals; and o We as a nation.

17 16 Working longer is feasible for most, and they can still enjoy a lengthy retirement. Retirement Age Equal to Age-65 Retirement in 1940, Based on Rising Life Expectancy (In Years: Months) Year Age at which ratio of expected retirement to working years remain constant : : : : : : : : : :08 Note: For the ratio of expected retirement to working years, people are assumed to start work at 20. Source: Author s calculations using U.S. Social Security Administration Life Table Functions Based on the Alternative 2 Mortality Probabilities in the 2004 Trustees Report (unpublished).

18 Thousands 17 And it improves security in three ways. Social Security Benefits Up 76% 401(k) Assets Nearly Double Increased Ratio of Working to Retirement Years 160% 120% 132% $200 $160 $ :1 80% 75% $120 $80 $ :1 40% $40 1 0% Age $ Age Age Source: Author s calculations; and Charles D. Ellis, Alicia H. Munnell, and Andrew D. Eschtruth Falling Short: The Coming Retirement Crisis and What to Do About It. Oxford, UK: Oxford University Press.

19 18 By itself, working until age 70 would do the trick for most people. 100% Cumulative Readiness by Retirement Age 80% 60% SS benefits available at age 62 40% 20% DB plans available at age 55 0% Source: Alicia H. Munnell, Anthony Webb, Luke Delorme, and Francesca Golub-Sass National Retirement Risk Index: How Much Longer Do We Need to Work? Issue in Brief Center for Retirement Research at Boston College.

20 19 On the saving side, the first step is to shore up Social Security. Projected Social Security Income and Cost Rates, as a Percent of Taxable Payroll, % 16% 12% 8% 4% Income rate Cost rate 0% Source: Alicia H. Munnell Social Security s Financial Outlook: The 2015 Update in Perspective. Issue in Brief Center for Retirement Research at Boston College.

21 20 Next, we need to get more money into 401(k) plans by making them fully automatic Percent of 401(k) Plans with Automatic Enrollment and Automatic Escalation, 2013 Percent of Plans with Automatic Enrollment, 2013 Percent of Automatic Enrollment Plans that Increase Default Deferrals over Time, % 35% 50% 50% With Without 35% With Without Voluntary Source: Plan Sponsor Council of America th Annual Survey of Profit Sharing and 401(k) Plans.

22 21 reduce money leaking out Annual Leakages Out of Vanguard Accounts as a Percent of Assets, % 0.5% 0.4% 0.3% 0.2% 0.2% 0.2% 0.0% Cashouts Hardship withdrawals Post 591/2 59½ withdrawals Loan defaults Source: Alicia H. Munnell and Anthony Webb The Impact of Leakages on 401(k)/IRA Assets. Issue in Brief Center for Retirement Research at Boston College.

23 Percent of assets 22 and keep an eye on investment fees. Fees as a Percent of Assets for Actively Managed and Index Funds, % 0.86% Actively managed Index 0.63% 0.5% 0.11% 0.11% 0.0% Equity Bond Source: Investment Company Institute Investment Company Fact Book.

24 23 Investment fees are a particular concern, because 401(k) savings have shifted to IRAs. Private Retirement Assets, Trillions of Dollars, 2014 Q4 $8 $7.4 $6 $5.4 $4 $3.1 $2 $0 Defined benefit plans Defined contribution (401(k) plans) IRAs Source: U.S. Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, 2014.

25 24 A final issue with 401(k)s is how people will draw down their assets in retirement. Percent of Remaining Median Assets in 2002 for Singles Ages in 1995, by Permanent Income Quintile 100% 92% 75% 64% 77% 72% 50% 25% 14% 0% Bottom Second Third Fourth Top Source: Mariacristina De Nardi, Eric French, and John Bailey Jones Life Expectancy and Old Age Savings. American Economic Review: Papers and Proceedings 99(2):

26 25 Draw-down solutions include buying an annuity or using sensible rules of thumb. Single Premium Immediate Annuities (SPIAs) provide a secure flow of monthly income throughout retirement. Advanced Life Deferred Annuities kick in later than SPIAs, providing income for a shorter period but at a very low cost. IRS Requirement Minimum Distribution Rules provide a reasonable way to draw down your assets without an annuity.

27 26 Beyond 401(k)s, we need to cover the half of workers with no retirement savings plan. MyRA and AutoIRA (President Obama) State-based initiatives (CA, CT, IL, etc.) NEST accounts (United Kingdom)

28 27 Differences in the details are not critical, as most of the ideas share common principles. Ensure that all workers have access to an employer-based retirement savings plan. Auto-enroll workers to ensure high participation rates. Emphasize low-fee funds.

29 28 Finally, we need to convince retirees to view their house as a potential source of income.

30 29 People can get money from their house in two ways: downsize or take a reverse mortgage. Source: Steven A. Sass, Alicia H. Munnell, and Andrew D. Eschtruth Using Your House for Income in Retirement. Center for Retirement Research at Boston College.

31 30 Conclusion The current retirement income systems will deliver less when people need more. As a result, half are at risk of having insufficient income in retirement. As individuals and as a nation, we can solve the problem by working longer and saving more. We can achieve these solutions by fixing our current systems.

32 31 Some argue that the NRRI overstates the problem, but raw data tell the same story. Ratio of Wealth to Income by Age from the Survey of Consumer Finances, Source: Center for Retirement Research at Boston College calculations based on U.S. Board of Governors of the Federal Reserve System, Survey of Consumer Finances,

33 32 Due to mistakes, participants often end up with modest balances. 401(k)/IRA Balances for Median Working Household with a 401(k), Age 55-64, by Income Quintile, 2013 Bottom Second Third Fourth $13,000 $53,000 $100,000 $132,000 Top $452,000 $0 $200,000 $400,000 $600,000 Source: Alicia H. Munnell (k)/IRA Holdings in 2013: An Update from the SCF. Issue in Brief Center for Retirement Research at Boston College.