Retirement in 2070 Ray Boshara Director, Center for Household Financial Stability Federal Reserve Bank of St. Louis* University of North Carolina Chapel Hill November 13, 2017 *These are my own views, and not necessarily the views of the Federal Reserve Bank of St. Louis, Federal Reserve System, or the Board of Governors
Introduction What is Retirement? Overview of Talk: I. Demographics of wealth and retirement savings II. III. IV. Challenges facing and reforms to the current system Millennials and retirement: facts and surveys Bigger ideas V. If retiring in 2070 1
The Demographics of Wealth: Thrivers & Strugglers in Today s Economy 2
Age / Birth Year Source: Emmons and Ricketts analysis of 2016 Survey of Consumer Finances of the Federal Reserve Board $235,500 $131,262 $16,546 3
Retirement and Liquid Savings by Age Median Value of Retirement and Liquid Savings, by Age of Family Head, 2013 SCF Sample Thousands (Ownership rates below bars) $148 $140 $120 $100 $80 $60 $40 $20 $0 $12 Retirement Savings Safe and Liquid Assets $8 $43 $31 $86 $46 $104 39% 76% 55% 74% 57% 80% 59% 82% 48% 85% 29% 87% < 35 35-44 45-54 55-64 65-74 >75 NOTE: All estimates are conditional on ownership. Retirement accounts include IRAs, Keough accounts, and pension accounts which allow withdrawals or loans. Safe and liquid assets include: holdings of checking, savings, money market, and call accounts; holdings of certificates of deposit; and holdings of savings bonds. SOURCE: Survey of Consumer Finances, Federal Reserve Board of Governors. $69 $64 $69 $26
Education Source: Emmons and Ricketts analysis of 2016 Survey of Consumer Finances of the Federal Reserve Board $443,148 $228,580 $76,566 $65,992 $23,756 5
Retirement and Liquid Savings by Education Median Value of Retirement and Liquid Savings, by Education of Family Head, 2013 SCF Sample Thousands (Ownership rates below bars) $180 $158 $160 $145 $140 Retirement Savings $120 $100 $80 $60 $40 $20 $0 $14 Safe and Liquid Assets $4 $37 $15 14% 52% 40% 75% 67% 91% 80% 98% No HS/GED HS/GED College, Up to Degree Grad./Prof. Degree NOTE: All estimates are conditional on ownership. Retirement accounts include IRAs, Keough accounts, and pension accounts which allow withdrawals or loans. Safe and liquid assets include: holdings of checking, savings, money market, and call accounts; holdings of certificates of deposit; and holdings of savings bonds. SOURCE: Survey of Consumer Finances, Federal Reserve Board of Governors. $66 $53
Race & Ethnicity Source: Emmons and Ricketts analysis of 2016 Survey of Consumer Finances of the Federal Reserve Board $162,640 $100,160 $21,552 $16446 7
Retirement and Liquid Savings by Race & Ethnicity Median Value of Retirement and Liquid Savings, by Race of Family Head, 2013 SCF Sample Thousands (Ownership rates below bars) $80 $75 Retirement Savings $70 $60 $50 $40 $30 $20 $10 $0 $44 $60 $31 $18 $18 White, Non-Hispanic Asian/Other Black Hispanic, any Race $7 Safe and Liquid Assets 56% 85% 50% 81% 34% 66% 26% 63% NOTE: All estimates are conditional on ownership. Retirement accounts include IRAs, Keough accounts, and pension accounts which allow withdrawals or loans. Safe and liquid assets include: holdings of checking, savings, money market, and call accounts; holdings of certificates of deposit; and holdings of savings bonds. SOURCE: Survey of Consumer Finances, Federal Reserve Board of Governors. $5
Retirement and Liquid Savings Race & Ethnicity and Education Median Value of Retirement Savings, by Race and Education, 2013 SCF Sample Thousands (Ownership rates below bars) $200 $150 White, Non-Hispanic Black Hispanic, any Race $190 $100 $84 $50 $0 $19 $6 $49 $17 $24 $20 $12 $15 $18 18% 11% 10% 45% 28% 27% 71% 56% 45% 83% 58% 58% No HS/GED HS/GED College, Up to Degree Grad./Prof. Degree NOTE: All estimates conditional on ownership. Retirement accounts include IRAs, Keough accounts, and pension accounts which allow withdrawals or loans (such as 401(k) accounts). SOURCE: Survey of Consumer Finances, Federal Reserve Board of Governors. $34
Challenges Facing Current System (D. Mitchell, Report from Leadership Forum on Retirement Savings, Sept. 2017; and others) 1. Coverage gap 2. Widespread financial instability 3. Upside-down tax subsidies 4. Increasing longevity 5. Social Security outlays exceeding revenues 10
Coverage Gap / Transition from Defined Benefit to Defined Contribution System Source: Devlin-Foltz, Henriques, Sabelhaus (2017) 11
Coverage Gap, Whites v. Non-Whites Retirement Accounts, Households 55-64, Ownership Rate by Race/Ethnicity Percent 100 90 White Nonwhite 80 70 60 54.8 60.5 57.0 60.6 61.8 68.6 64.6 65.3 64.4 66.0 50 40 30 44.5 42.2 43.0 43.2 39.4 39.4 36.5 20 23.2 24.5 30.2 10 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Source: Federal Reserve board of Governors, Survey of Consumer Finances 12
Financial Gaps, Whites v. Non-Whites Retirement Accounts, Households 55-64, Median Value by Race/Ethnicity, Conditional on Ownership Thousands of 2016 $ 180 160 White Nonwhite 154.8 140 121.1 128.0 132.4 133.0 120 100 80 60 40 20 0 83.5 74.7 47.4 56.9 52.3 66.7 59.6 59.8 50.4 37.1 35.1 33.2 24.6 23.6 23.8 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Source: Federal Reserve board of Governors, Survey of Consumer Finances 13
Widespread Financial Instability 57% of Americans are challenged to achieve financial health (CFSI, 2015) 70% of households are incomeconstrained, savings limited, and/or debt-challenged (Pew, 2015) An unexpected expense of $400 would prompt nearly half of all families to borrow funds, sell something, or simply not pay (Federal Reserve, 2015-2017) Families experience volatility five months per year; 42% of families struggle to meet monthly expenses, due in part to growing income and expense volatility (U.S. Financial Diaries, 2016) Nearly two-thirds of Americans see money as a very or somewhat significant source of stress. (APA, 2015)
Upside-Down Tax Incentives for Retirement Savings (Urban Institute, 2014) Average Annual Benefit from Retirement Tax Programs 15
Longer Lifespans and Retirements Expected Life Expectancy at Birth, by Gender Years 90 80 70 60 Projections 50 40 Men Women 30 1901 1913 1925 1937 1949 1961 1973 1985 1997 2009 2021 2033 2045 2057 2069 2081 2093 Source: National Center for Health Statistics, Projections from Social Security Administration, Bell and Miller (August 2005). 16
Projected Surge in Dependent-Age Population Dependent-Age Population (<20 and 65+) per Prime-Age Person Ratio 1.00 0.95 Projections 0.90 0.85 0.80 0.75 0.70 0.65 0.60 1901 1913 1925 1937 1949 1961 1973 1985 1997 2009 2021 2033 2045 2057 Source: Census Bureau, Projections as of December 2016. 17
Projected Surge: Children, Workers, and Retirees Population Shares, Actual and Projected Ratio 70.0 60.0 Projections 50.0 40.0 30.0 20.0 10.0 Working Age Children & Youth Retirement Age 0.0 1901 1913 1925 1937 1949 1961 1973 1985 1997 2009 2021 2033 2045 2057 Source: Census Bureau, Projections as of December 2016. 18
SS Outlays Growing Faster Than Income Social Security Trust Fund Ratio (Assets as % of Cost) Percent 400 Trust Fund Ratio 350 Intermediate 300 Low Cost High Cost 250 Projections 200 150 100 50 0 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 2025 Source: Social Security Administration, Projections as of July 2017. 19
Key Reforms: Current System (D. Mitchell, Report from Leadership Forum on Retirement Savings, Sept. 2017; and others) Strengthen the public safety net: Health care, food assistance, financial security (EITC, Child Tax Credits, UBI, etc.) Social Security Medicare, Medicaid and Long- Term Care On our present course, spending on entitlements will eventually consume almost all revenues if no policies are changed. Tim McBride, Health Economist, Washington University in St. Louis, 2017 Promote savings among families and through employers: Automatic enrollment with opt-out State plans Side Car accounts Embedded annuities Refundable Savers Credit / Retirement savings subsidies 20
Retirement in 2070: Facts and Perceptions Review/Facts: Worrisome wealth trends among young, less educated, and non-white 61% of those 35 or younger have no retirement savings; those with retirement savings have $12,000 Coverage gaps Widespread financial insecurity Declining birthrates and family formation Social Security shortfall or depletion, and diminishing buying power of SS benefits Unsustainability of Medicare, Medicaid and entitlement funding Surveys: 81% of Millennial workers are concerned that Social Security will not be there for them (Transamerica Center, 2014) 51% expect to receive no benefit at all (Pew, 2014) More Millennials believe in UFOs (46%) than in Social Security s future (28%) (Peterson, 1996) 21
Millennials and Retirement Savings 66% of Millennials expect their primary source of income to be self-funded (Transamerica Center, 2014) Employed Millennials offered a retirement plan at work were labeled super savers because they saved earlier and more than previous generations (Transamerica Center, 2014) 85% of Millennials say they already have or will have enough resources to lead the kind of life they want (Pew, 2014) Millennials perceive their financial prospects to be favorable even in the face of evidence to the contrary (Pew, 2014) 22
Bigger Ideas Retirement savings accounts at birth for everyone Roth at Birth, KidSave, Baby Bonds, Aspire Act, etc. Reduce cumulative disadvantage via a cradle-to-grave life-course perspective focused on health, education, employment and financial capability (Morrow-Howell & Sherraden, 2015) Allow workers who take time off to care for dependent children or parents to continue to accrue Social Security and Medicaid benefits. Re-imagine / re-orient the social contract towards young? Leverage the sharing economy; reduce the need for private wealth Redefine success, retirement, and the American Dream 23
If Retiring in 2070 Build wealth start early, and diversify assets and risk Keep debts low and tied to income-producing assets Build education and skills early, and throughout life; achieve a wealth-education-wealth virtuous cycle Expect to work longer, engage in productive aging Promote financial, health and retirement security for all Americans 24