Retirement Security: What s Working and What s Not? James Poterba MIT, NBER, & TIAA-CREF. Bipartisan Policy Center 30 July 2014

Transcription

1 Retirement Security: What s Working and What s Not? James Poterba MIT, NBER, & TIAA-CREF Bipartisan Policy Center 30 July 2014

2 Retirement Support: A Three Legged Stool? Three Legs: Social Security, Private Pensions, Personal Saving Only the Top Quarter of Distribution Rely on All Three Sources Large Fraction of Lower-Income Elderly Rely Primarily on Social Security

3 Share of Income, Individuals 65+, March 2013 Earnings 2% Welfare 7% Bottom Quartile Pensions 3% Assets 3% Assets 14% Top Quartile Other 3% Social Security 18% Social Security 85% Pensions 22% Earnings 44% Mean Income = $6756 Mean Income = $78180

4 LFPR for Year Olds, Men Women 15 10

5 Social Security Replacement Rates, 2013 Career Average Earnings as Percentage of National Average Wage Career- Average Earnings Level 25 Percent $11, % 45 Percent $20, Percent $44, Percent $71, Social Security Earnings Limit $113, Replacement Rate, Retirement at Age 65 Source: SSA, Annual Trustees Report, 2013

6 Elderly Poverty Poverty Rate in 2012: Population 65+, 9.1%; Total Population, 15.0% Elderly Poverty Has Fallen Over Time: 24.6% in 1970 when Total Population was 15.1% Older, Single Elderly More at Risk: 13.3% of 75+ Women are Poor Many Elderly Households are Near Poor : 33.7% 65+ are Below 2xPoverty, Comparable to Total Population

7 Analyzing Wealth at Retirement Single Income Source (DB Plans) vs. Composite? Account-Level vs. Individual-Level vs. Household-Level Aggregation In 2010, 42% of Households Aged had IRAs, 29% had DC Plans Households with IRAs Averaged 2.1 Accounts Households with DC Plans Averaged 1.3 Accounts Social Security and Payouts from DB Pensions do not Show Up on Traditional Balance Sheets What Role for Housing Equity?

8 Balance Sheets, Households in 2008 Quantile SS Wealth DB Wealth Financial Assets IRAs & DC Plans Home Equity Net Worth 10 $0 $0 $0 $0 $0 $127K K 0 2K 0 42K Source: Poterba, Venti, & Wise (JEP 2013) from HRS.

9 What Role for Late-Life Medical Costs? Out-of-pocket Medical Expenses in Last Year of Life (Marshall, McGarry and Skinner (2009)): Mean $11, th Percentile: $49, th Percentile: $94,310 Some Households Try to Run Down Assets to Qualify for Medicaid; Others Try to Avoid Medicaid

10 The Decline of Defined Benefit Pension Plans Defined Benefit Plans Large & Medium Private 80% 59% 30% Small Private n/a 20 9 S&L Government n/a Defined Contribution Plans Large/Medium Private Small Private n/a S&L Government n/a 9 19 Source: U.S. Department of Labor.

11 Retirement Plan Coverage, Yr Olds, 2010 IRA 10.5% 10.8% 11.0% DC Plan 9.8% 9.7% 7.8% Total: 70.7% 11.1% DB Plan

12 Retirement Saving Amounts, 55-64Year Olds 2010 IRA $65K $46K $120K $26K DC Plan $52K $312 $85K $100K $360K $45K $192K $205K DB Plan

13 Risks in the Pension Landscape: DB and DC DB Plan Risks Some Firms Did Not Offer DB Plans Firms Might Close or Cap the Plan Back-Loaded Benefit Accrual Accentuated Labor Market Risks DC Plans Risks and Worker Responsibilities Some Firms Do Not Offer DC Plans Participation Decision Contribution Decision Investment Decision Withdrawal Decision While Working, in Retirement Drawdown Choices Annuitize or Not?

14 Snapshot of DC Plan Participant Behavior 2010 SCF: Median 401(k) Account Balance, Married = $83K, Single = $28K (Means $269K and $79K). Medians for 45-54: $67K and $22K Average Equity Allocation: 61 Percent Younger Participants Hold More Stock (Bonds = 16.9% for year olds, 38.1% for 60-69) 8% Allocation to Own-Company Stock (Was 16% in 2000) Withdrawal Rates: SIPP Data in Poterba, Venti, Wise (2012): Before Age 70: 1.9%, After Age 70, 5.8%

15 Assessing Retirement Preparation Many Studies of Saving Adequacy Challenging Measurement Problem How do Consumption Needs Change at Retirement? How Complete are Insurance Markets after Retirement? Length of Life, Medical Costs How Should We Treat Owner-Occupied Housing? Hurd and Rohwedder (2011): 71% of Year Olds Have Resources that Yield 95% Probability of Dying with Positive Wealth

16 Required Annual Saving Rate for Annuity =.5*Final Pay Saving Horizon Annuity Type, 65-Year-Old Male r =.02 r =.03 r = Years Nominal 32.8% 29.6% 26.5% 20 Years 3% Increasing Years Nominal Years 3% Increasing Years Nominal Years 3% Increasing

17 Conclusions Substantial Heterogeneity in Saving Behavior and Lifespan Social Security is Primary Source of Retirement Security for a Large Share of the Elderly DC System is Working for Some, but Significant Group May Not be Saving Enough When Expected Returns Fall, Required Saving to Hit a Replacement Rate Target Must Rise Saving May be Very Challenging for Lower Income Households One Size Fits All Policies are Unlikely to be Optimal