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15th Annual Transamerica Retirement Survey

August 18, 2014 Comments off

15th Annual Transamerica Retirement Survey
Source: Transamerica

Results from the 15th Annual Transamerica Retirement Survey show retirement expectations and readiness across generations. The initial report, “Three Unique Generations with Very Different Retirements Ahead of Them: Baby Boomers, Generation X and Millennials,” offers comparisons among the three generations. The second report, “Millennial Workers: An Emerging Generation of Super Savers,” explores the youngest group of workers and spotlights their strides toward retirement readiness.

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Paychecks or Promises? Lessons from the Death Spiral of Detroit

August 12, 2014 Comments off

Paychecks or Promises? Lessons from the Death Spiral of Detroit
Source: Federal Reserve Bank of Minneapolis

Pay-with-promises compensation plans accumulate liability for future employee benefits, such as retiree health insurance. A simple economic model demonstrates that such plans can exacerbate fiscal crises faced by cities that experience external economic shocks, such as the departure of a major employer. City leaders often raise taxes and/or reduce public services to pay off legacy employee debts, and such steps encourage residents to move out, reducing the tax base and raising fiscal stress. Pay-as-you-go compensation plans are more prudent; they settle liabilities to employees paycheck by paycheck.

More Americans May Be Adequately Prepared for Retirement Than Previously Thought

August 12, 2014 Comments off

More Americans May Be Adequately Prepared for Retirement Than Previously Thought
Source: RAND Corporation

While many believe that Americans are in terrible shape when it comes to being financially prepared for their “golden years,” new evidence indicates that the news may not be as dire as previously thought. Moving away from previous studies that focused on income replacement rates, a recent report from the RAND Corporation looks instead at consumption in retirement to gain a better understanding of what is needed for adequate preparation. This focus on consumption reflects the fact that spending during retirement is not flat; instead, it tends to decline with age for the vast majority of people, who spend less money on travel or other leisure activities, as well as less on transportation, clothes, and other regular expenses.

Using a rich data-focused approach, RAND researchers came to the conclusion that, overall, about 71 percent of individuals ages 66–69 are adequately economically prepared to retire, given expected consumption. Other key findings — with consequences for both individuals and policymakers — indicate large disparities across subsets of the population and highlight the significant contribution of Social Security to seniors’ financial preparation for retirement.

Federal Reserve Board issues Report on the Economic Well-Being of U.S. Households

August 8, 2014 Comments off

Federal Reserve Board issues Report on the Economic Well-Being of U.S. Households
Source: Federal Reserve Board

In its new Report on the Economic Well-Being of U.S. Households, the Federal Reserve Board provides a snapshot of the self-perceived financial and economic well-being of U.S. households and the issues they face, based on responses to the Board’s 2013 Survey of Household Economics and Decisionmaking. The report provides insight into numerous topics of current relevance to household finances, including: housing and living arrangements; credit access and behavior; education and student loan debt; savings; retirement; and health expenses.

Overall, the survey found that as of September 2013 many households were faring well, but that sizable fractions of the population were at the same time displaying signs of financial stress. Over 60 percent of respondents reported that their families were either “doing okay” or “living comfortably” financially; although one-fourth said that they were “just getting by” financially and another 13 percent said they were struggling to do so. The effects of the recession also continued to be felt by many households, with 34 percent reporting that they were somewhat worse off or much worse off financially than they had been five years earlier in 2008 and 34 percent reporting that they were about the same.

As of September 2013, education debt of some kind was held by 24 percent of the population, with 16 percent having acquired debt for their own education, 7 percent for their spouse/partner’s education, and 6 percent for their child’s education.

The survey results suggest that many households are not adequately prepared for retirement. Thirty-one percent of non-retired respondents reported having no retirement savings or pension, including 19 percent of those ages 55 to 64.

The Great Recession pushed back the planned date of retirement for two-fifths of those ages 45 and over who had not yet retired, and 15 percent of those who had retired since 2008 reported that they retired earlier than planned due to the recession. Among those ages 55 to 64 who had not yet retired, only 18 percent plan to follow the traditional retirement model of working full time until a set date and then stop working altogether, while 24 percent expected to keep working as long as possible, 18 percent expected to retire and then work a part-time job, and 9 percent expected to retire and then become self-employed.

Understanding Public Pension Debt

August 8, 2014 Comments off

Understanding Public Pension Debt
Source: Competitive Enterprise Institute

State government pension debt burdens labor markets and worsens the business climate. To get a clear picture of the extent of this effect around the nation, this paper amalgamates several estimates of states’ pension debts and ranks them from best to worst.

Today, many states face budget crunches due to massive pension debts that have accumulated over the past two decades, often in the billions of dollars. There are several reasons for this.

One reason is legal. In many states, pension payments have stronger legal protections than other kinds of debt. This has made reform extremely difficult, as government employee unions can sue to block any scaling back of generous pension packages.

Then there is the politics. For years, government employee unions have effectively opposed efforts to control the costs of generous pension benefits. Meanwhile, politicians who rely on government unions for electoral support have been reluctant to pursue reform, as they find it much easier to pass the bill to future generations than to anger their union allies.

Another contributing factor has been math—or rather, bad math.

Pension Spending Supports 6.2 Million Jobs, $943 Billion in Economic Input

July 31, 2014 Comments off

Pension Spending Supports 6.2 Million Jobs, $943 Billion in Economic Input
Source: National Institute on Retirement Security

A new economic impact study finds that pension benefit expenditures provide important economic support to the economy, including more than $943 billion in total economic output and 6.2 million jobs in the United States.

Pensionomics 2014: Measuring the Economic Impact of Defined Benefit Pension Expenditures reports the national economic impacts of public and private pension plans, as well as the impact of state and local plans on a state-by-state basis. The study measures the economic ripple effect of retiree spending of pension benefit income, which typically is a stable source of income that lasts through retirement.

How America Saves 2014

July 31, 2014 Comments off

How America Saves 2014
Source: Vanguard

How America Saves 2014 is here! This comprehensive report analyzes the saving, investing, and account activity trends in defined contribution (DC) plans at Vanguard. The report offers useful insights into current issues affecting DC plans, including employer contribution trends, automatic plan features, use of target-date funds, and use of advice services.

The Labor Force Participation Rate Since 2007: Causes and Policy Implications

July 31, 2014 Comments off

The Labor Force Participation Rate Since 2007: Causes and Policy Implications (PDF)
Source: Council of Economic Advisers (White House)

In 2008, the U.S. economy collided with two historic forces. The first force was the Great Recession, the most severe economic crisis in a generation. While the economy has recovered considerably over the last five years, there is little doubt that more work remains to address some of the challenges left in the wake of the Great Recession. The turmoil of 2008 inflicted tremendous pain on millions of families, overshadowing the fact that 2008 also marked a unique milestone in U.S. economic history. That year, the first baby boomers (those born in 1946) turned 62 and became eligible for Social Security early retirement benefits. This second force — the demographic inflection point stemming from the retirement of the baby boomers — was felt far less acutely than the Great Recession, but will continue to have a profound influence on the economy for years to come, well after the business cycle recovery from the Great Recession is considered complete.

In addition to these inflection points in 2008, a number of longer – term trends had been playing out in the U.S. labor force prior to 2008 — and have continued since then. These include the nearly continuous decline in labor force participation rates for prime – age males (i.e., age 25 – 54) since the mid – 1950s and the dramatic rise in labor force participation rates for prime – age females in the 1970s and 1980s followed by a st alling and slight trend decline after the late 1990s.

Many dimensions of the economy’s performance over the last several years can only be properly evaluated when the effects of the Great Recession, the retirement boom, and the longer – term labor force trends are taken into account . One of the clearest illustrations of this point is the labor force participation rate, which represents the fraction of the adult population either working or looking for work. Changes in labor force participation reflect not just current economic conditions like job availability and workers’ assessments of job – finding prospects, but also more structural factors like the age distribution of the population and other aspects of society that impact people’s decisions to participate in the labor force .

This report analyzes the evolution of the labor force participation rate since late 2007 and attempts to quantify the effects of these various forces. We examine the period since 2007 to focus on how each of the two largest forces, the Great Recession and the retirement of the baby boomers, has impacted labor force participation in recent years . We find that the combination of demographic changes and the drop in labor force participation that would have been expected based on historical business cycle patterns explain most but not all of the recent drop in labor force participation. This implies that other factors, likely including both a continuation of pre – existing trends in labor force participation by certain groups and the unique ef fects of the Great Recession have also been important. This report also discusses the labor force participation rates for different groups, discusses potential future scenarios for the participation rate, and lays out policies that would help to boost part icipation in the years to come.

Retirement — How Much Should People Save?

July 29, 2014 Comments off

How Much Should People Save?
Source: Center for Retirement Research at Boston College

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.

New From the GAO

July 28, 2014 Comments off

New GAO Reports
Source: Government Accountability Office

1. Railroad Retirement Board: Total and Permanent Disability Program at Risk of Improper Payments. GAO-14-418,June 26.
http://www.gao.gov/products/GAO-14-418
Highlights – http://www.gao.gov/assets/670/664467.pdf

2. Consumer Financial Protection Bureau: Opportunity Exists to Improve Transparency of Civil Penalty Fund Activities. GAO-14-551, June 26.
http://www.gao.gov/products/GAO-14-551
Highlights – http://www.gao.gov/assets/670/664452.pdf

3. Drinking Water: EPA Program to Protect Underground Sources from Injection of Fluids Associated With Oil and Gas Production Needs Improvement. GAO-14-555, June 27.
http://www.gao.gov/products/GAO-14-555
Highlights – http://www.gao.gov/assets/670/664500.pdf

4. Media Ownership: FCC Should Review the Effects of Broadcaster Agreements on Its Media Policy Goals. GAO-14-558, June 27.
http://www.gao.gov/products/GAO-14-558
Highlights – http://www.gao.gov/assets/670/664485.pdf

5. Security Clearances: Tax Debts Owed by DOD Employees and Contractors. GAO-14-686R, July 28.
http://www.gao.gov/products/GAO-14-686R

Flattening Tax Incentives for Retirement Saving

July 19, 2014 Comments off

Flattening Tax Incentives for Retirement Saving
Source: Brookings Institution

The United States’ pension system has failed millions of workers who enter into retirement with very limited assets relative to what they need to live securely the rest of their lives. According to Survey of Consumer Finance data, about 40 percent of households headed by someone near retirement (ages 55–64) do not hold any assets in retirement savings accounts. The median retirement savings account balance for all households in this age group is only $12,000 (Rhee 2013).

At the same time, the pension landscape has been gradually shifting away from defined benefit (DB) pension plans toward defined contribution (DC) plans. The shift is especially pronounced in the private sector. Between 1989 and 2012, the proportion of private industry full-time workers participating in DB pension plans declined from 42 to 19 percent, while the share participating in DC plans increased from 40 to 51 percent (Bureau of Labor Statistics 2013; Wiatrowski 2011). While DB plans often provide significant benefits for the lucky minority who have been in a single job for many years before retirement, DC plans can be more beneficial for a mobile workforce. At the same time, the transition from DB to DC plans has also presented new challenges.

Because DB pensions are tied to employers, long-term workers sometimes achieve adequate protection even without much planning on their own part. They are automatically enrolled and often do not even have to contribute. Benefits are automatically paid when workers retire. With DB pensions, employers bear the responsibility for ensuring that employees receive pension benefits. In contrast, DC retirement accounts are owned by employees. With most DC plans, the most familiar of which are 401(k)-type plans, workers bear the responsibility for their own financial security. Unless such plans include automatic features, workers have to actively decide to participate, how much to contribute, which investments to put their money in, and how to manage their benefits through retirement.

This paper focuses on the effects of the tax preferences for employer-sponsored defined contribution plans. Using two notable microsimulation models, we simulate the effect of changes in contribution limits to retirement plans, the saver’s credit, and the exclusion of contributions from taxable income on current and future taxes and retirement savings. We find that reducing 401(k) contribution limits would primarily increase taxes for the richest taxpayers; expanding the saver’s credit would raise saving incentives and lower taxes for low- and middle-income taxpayers; and removing the exclusion for retirement saving incentives and replacing it with a 25 percent refundable credit will benefit some taxpayers—mainly low- and middle-income taxpayers—while raising taxes and reducing retirement assets for others—primarily those at the top of the income distribution.

Exploring the Retirement Consumption Puzzle

July 14, 2014 Comments off

Exploring the Retirement Consumption Puzzle
Source: Journal of Financial Planning

Executive Summary

  • Empirical research on retiree spending has noted a “retirement consumption puzzle,” where retiree expenditures tend to decrease both upon and during retirement. This decrease in spending is inconsistent with general economic theories on consumption, which suggest individuals seek to maintain constant consumption over their lifetimes.
  • Government data on consumption was analyzed in this study to understand how retiree consumption actually changes over time.
  • The results of the analysis suggest that although the retiree consumption basket is likely to increase at a rate that is faster than general inflation, actual retiree spending tends to decline in retirement in real terms. This decrease in real consumption averages approximately 1 percent per year during retirement.
  • A “retirement spending smile” effect is noted. This finding has important implications when estimating retirement withdrawal rates and determining optimal spending strategies.

The Funding of State and Local Pensions: 2013-2017

July 14, 2014 Comments off

The Funding of State and Local Pensions: 2013-2017
Source: Center for State & Local Government Excellence

Key findings:

  • Despite a strong stock market, the funded status of public plans in 2013 remained unchanged at 72 percent for two reasons: actuarial smoothed assets grew modestly, and CalPERS, one of the nation’s largest plans, significantly revised its reported funded ratio.
  • Funded levels among plans vary significantly.
  • An encouraging sign is that many sponsors appear to be paying a larger share of their annual required contribution.
  • There is slight improvement in 2013 at the top: 6 percent are 100 percent funded or better; 28 percent are more than 80 percent funded.
  • Going forward, the funded ratio is projected to gradually move above 80 percent, assuming expected stock market returns.

Analysis surveyed 114 state and 36 local plans.

Vulnerability of Social Institutions

July 11, 2014 Comments off

Vulnerability of Social Institutions
Source: OECD

Future generations will pay a high price if we fail to reform pension, health care and unemployment schemes. Social institutions will be tested in the coming years by ageing and slowing growth that threaten their sustainability and the adequacy of their deliveries, undermining the risk sharing that social institutions provide. In the face of these challenges, social institutions need to be reformed and adjusted regularly to adapt to trend changes and to shocks with-long lasting effects.

AARP — African American/Black Social Issues Study

July 8, 2014 Comments off

African American/Black Social Issues Study
Source: AARP

This study examined the importance of key social issues facing African-Americans/ Blacks who are age 50 or older. It also gauged their optimism in regard to these social issues.

Key findings from the study show:

  • Access to high quality health care and having a financially secure retirement are the most important issues facing age 50+ African-Americans/Blacks age 50 and older.
  • The respondents are more optimistic that the country is moving in the right direction in regard to access to high quality health care.
  • There is less optimism that the country is moving in the right direction in regard to having a financially secure retirement.
  • Respondents age 75 and older are more optimistic than those ages 50-64 that the country is moving in the right direction about having a financially secure retirement.

New From the GAO

July 7, 2014 Comments off

New GAO Reports
Source: Government Accountability Office

1. Pension Advance Transactions: Questionable Business Practices Identified. GAO-14-420, June 4.
http://www.gao.gov/products/GAO-14-420
Highlights – http://www.gao.gov/assets/670/663799.pdf

2. Private Pensions: Targeted Revisions Could Improve Usefulness of Form 5500 Information. GAO-14-441, June 5.
http://www.gao.gov/products/GAO-14-441
Highlights – http://www.gao.gov/assets/670/663854.pdf

3. IRS Correspondence Audits: Better Management Could Improve Tax Compliance and Reduce Taxpayer Burden. GAO-14-479, June 5.
http://www.gao.gov/products/GAO-14-479
Highlights – http://www.gao.gov/assets/670/663839.pdf

Healthy, Wealthy, and Wise: Retirement Planning Predicts Employee Health Improvements

July 3, 2014 Comments off

Healthy, Wealthy, and Wise: Retirement Planning Predicts Employee Health Improvements (PDF)
Source: Washington University in St. Louis

Are poor physical and financial health driven by the same underlying psychological factors? We document that the decision to contribute to a 401(k) retirement plan predicts whether or not an individual will act to correct poor physical health indicators revealed during an employer-­‐sponsored health examination. Using this examination as a quasi-­‐exogenous shock to employees’ personal health knowledge, we examine which employees are more likely to improve health, controlling for differences in initial health, demographics, job type, and income. We find that existing retirement contribution patterns and future health improvements are highly correlated. Those that save for the future by contributing to a 401(k) improved abnormal health test results and poor health behaviors approximately 27% more than non-­‐contributors. These findings are consistent with an underlying individual time discounting trait that is both difficult to change and domain interdependent, and that predicts long-­‐term individual behaviors on multiple dimensions.

The big questions about Scottish independence; Towers Watson summarises what Scottish independence could mean for pension plans, their sponsors and financial institutions.

June 17, 2014 Comments off

The big questions about Scottish independence; Towers Watson summarises what Scottish independence could mean for pension plans, their sponsors and financial institutions.
Source: Towers Watson

As we enter the final three months of the countdown to the Scottish Independence referendum, Towers Watson has released a short paper, entitled The big questions, outlining how a yes vote to Scottish independence could affect UK-wide financial institutions and pensions plans. It poses questions in several fundamental areas such as currency, membership of the European Union and tax and fiscal policy.

In the paper Towers Watson summarises the main questions for pension plans, as well as some of those likely to affect the investment and insurance industries, in the event of a yes vote. It suggests that these will only be answered through the developing economic, social and regulatory policies of an independent Scotland and not ahead of time.

Retirement Insights — Breaking the 4% Rule (executive summary)

June 17, 2014 Comments off

Retirement Insights — Breaking the 4% Rule (PDF)
Source: J.P. Morgan

In Brief
• A dynamic model adapts withdrawal rates and asset allocations in response to changes in economic and market environments and shifts in personal circumstances.
• This approach appears to offer greater probability of retirement funding success by measuring the amount of overall satisfaction retirees derive from their withdrawals.
• Understanding the emotional aspects of investing can help draw meaningful—if at times counterintuitive—conclusions about optimal retirement income strategies.
• Case studies suggest the dynamic framework provides a potentially more even balance between generating and withdrawing enough from portfolio assets to maintain sustainable post-retirement living standards, while avoiding the risk of running out of money.

Hat tip: PW

The Funding of State and Local Pensions: 2013-2017

June 12, 2014 Comments off

The Funding of State and Local Pensions: 2013-2017
Source: Center for Retirement Research at Boston College

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;
  • andCalPERS, 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.
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