Archive for the ‘retirement’ Category

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.

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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.
Highlights -

2. Private Pensions: Targeted Revisions Could Improve Usefulness of Form 5500 Information. GAO-14-441, June 5.
Highlights -

3. IRS Correspondence Audits: Better Management Could Improve Tax Compliance and Reduce Taxpayer Burden. GAO-14-479, June 5.
Highlights -

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.

Understanding Cuts to Public Pensions

June 12, 2014 Comments off

Understanding Cuts to Public Pensions
Source: Economic Policy Institute

In the past several years, fears that underfunded public pensions are a growing burden on taxpayers have led to calls to cut employer-provided pension benefits through increased employee contributions, increased retirement ages, reduced cost-of-living adjustments (COLAs), or other changes. But too often news reports on proposed or enacted pension cuts either overplay the rationale behind them, or minimize the impacts on affected workers. The latter is especially true with changes that do not decrease take-home pay but reduce future retirement benefits and thus may be harder to quantify.

This primer is intended to help organizations understand both the rationales behind and the details of proposed cuts to public pensions. It provides tools for assessing and understanding the true underlying health of public pension plans, the history behind any actuarial shortfalls, and the impacts on workers and taxpayers of proposed or enacted legislation that reduces pension benefits. The primer is organized as a series of 10 steps, although all may not be relevant in every situation. While it ends with a specific example of the percentage change in lifetime benefits, measured in real terms, received by a prototypical worker under four different pension plan changes, it provides guidance on using alternative measures as well.

Global Uncertainty Fuels Workers’ Desire for Retirement Security — 2013/2014 Global Benefit Attitudes Survey

June 11, 2014 Comments off

Global Uncertainty Fuels Workers’ Desire for Retirement Security — 2013/2014 Global Benefit Attitudes Survey
Source: Towers Watson

The 2013/2014 Global Benefit Attitudes Study examines how employees’ preferences for retirement security affects their financial priorities and retirement planning, what makes them join an organization and what makes them stay, and the kind of benefits they desire.

The research was conducted in 12 countries, and the survey was completed by 22,347 employees representing all job levels and major industry sectors.

For large numbers of employees around the world, retirement security has become a higher priority.

Employees in India, Brazil, Canada and the U.S. lead the world in concern about retirement security, while it is less of a priority in Japan.

Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database

May 29, 2014 Comments off

Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database
Source: Employee Benefit Research Institute

Executive Summary

  • As part of the EBRI Center for Research on Retirement Income (EBRI CRI), the EBRI IRA Database is an ongoing project that collects data from IRA plan administrators across the nation. For year-end 2012, it contained information on 25.3 million accounts owned by 19.9 million unique individuals, with total assets of $2.09 trillion. The EBRI IRA Database is unique in its ability to track individual IRA owners with more than one account, thereby providing a more accurate measure of how much they have accumulated in IRAs.
  • The average IRA account balance in 2012 was $81,660, while the average IRA individual balance (all accounts from the same person combined) was $105,001. Overall, the cumulative IRA average balance was 29 percent larger than the unique account balance.
  • Rollovers overwhelmingly outweighed new contributions in dollar terms. While almost 2.4 million accounts received contributions, compared with the 1.3 million accounts that received rollovers in 2012, 10 times the amount of dollars were added to IRAs through rollovers than from contributions.
  • The average individual IRA balance increased with age for owners ages 25 or older, from $11,009 for those ages 25–29 to $192,961 for those ages 70 or older.
  • Looking at individuals who maintained an IRA account in the database over the three-year period in question, the overall average balance increased each year—from $95,431 in 2010 to $95,547 in 2011 and to $106,205 in 2012.
  • Males had higher individual average and median balances than females: $139,467 and $36,949 for males, respectively, vs., $81,700 and $25,969 for females. However, the likelihood of contributing to an IRA did not significantly differ by gender within the database, as both Roth and traditional IRAs owned by either males or females (as well as those without a gender identified in the database) had similar probabilities of receiving contributions.
  • IRA owners were more likely to be male. In particular, those with an IRA originally opened by a rollover, or a SEP/SIMPLE IRA were much more likely to be male (57.4 percent of the former, and 58.2 percent of the latter).
  • Younger Roth IRA owners were more likely to contribute to the Roth IRA than were older Roth IRA owners: 43 percent of Roth owners ages 25–29 contributed to their Roth in 2012, compared with 21 percent of Roth owners ages 60–64.

Retirement Security Tops List of Employee Concerns

May 27, 2014 Comments off

Retirement Security Tops List of Employee Concerns
Source: Towers Watson


  • Older DC plan-only participants are more likely to expect most of their retirement income to come from Social Security.
  • Almost seven in 10 workers were happy with their health plans in 2007, but satisfaction rates dropped to 59% in 2013.
  • Sixty-two percent would give up some pay for a guaranteed retirement benefit, and more than half would sacrifice pay for a more generous benefit.

New From the GAO

May 27, 2014 Comments off

New GAO Report
Source: Government Accountability Office

Retirement Security: Challenges for Those Claiming Social Security Benefits Early and New Health Coverage Options. GAO-14-311, April 23.
Highlights -

Procrastinators and Retirement Planning Behavior

May 22, 2014 Comments off

Procrastinators and Retirement Planning Behavior
Source: Kelley School of Business, Indiana University

We provide new and robust empirical evidence that procrastinators behave differently than non-procrastinators at virtually every decision point in the retirement planning process. Empirically, we define a procrastinator as an individual who waits until approximately the last day of an enrollment period to make a health care plan election. We then use this measure to study how procrastination affects retirement planning. We find that procrastinators are less likely to participate in supplemental savings plan, take longer to sign up for plans, contribute less, and are more likely to stick with what is the likely default portfolio choice. Among DB participants, we find that procrastinators are less likely to annuitize, evidence that is most consistent with procrastination being a manifestation of present biased preferences. We also find that procrastinators are more susceptible to the framing differences between traditional DB and cash balance plans, consistent with the predictions of investment-framing for those with present-biased preferences.

Accenture Survey Finds Public Pension Data is Untapped Goldmine

May 22, 2014 Comments off

Accenture Survey Finds Public Pension Data is Untapped Goldmine
Source: Accenture

Nearly all (92 percent) of surveyed decision-makers at U.S. public retirement systems believe their organizations would benefit from increased use of data analytics, according to new survey findings from Accenture (NYSE:ACN).

“Every public retirement agency is required to maintain information about members in its system, which often amounts to decades worth of data,” said Owen Davies, who leads Accenture’s North American public pensions practice. “And, with nearly 20 million members, public pension managers are sitting on years of untapped data, a goldmine of information with the potential to yield insights and strengthen pension performance. Data-driven decision-making can help cash-strapped retirement systems provide appropriate benefits and services to their members, an increasingly challenging responsibility, as well as help in areas such as investment efficiency and compliance.”

The survey – of 100 decision makers and C-suite executives at national, state and local public retirement agencies – found that the overwhelming majority, 87 percent, of respondents said their organizations already use some degree of data analytics, but only 19 percent of respondents said their organizations use analytics “a great deal.”

15th Annual Transamerica Retirement Survey

May 13, 2014 Comments off

15th Annual Transamerica Retirement Survey
Source: Transamerica Center for Retirement Studies
From press release:

Today, nonprofit Transamerica Center for Retirement Studies® (“TCRS”) released new research evaluating the effects of what is commonly referred to as the Great Recession on American workers and their retirement outlook. “2014 represents a confluence of economic and demographic occurrences,” said Catherine Collinson, president of TCRS. “As the U.S. economy and American workers are still recovering from the Great Recession, 2014 marks the year that the last of the Baby Boomers will be turning 50 and the eve of Generation X’s midcentury milestone birthday.”

As the lead release from the 15th Annual Transamerica Retirement Survey, one of the largest and longest-running national surveys of its kind, this new research examines current trends among American workers and compares the retirement outlooks of Baby Boomers, Generation X, and Millennials.

Economists have pinpointed the Great Recession as lasting from December 2007 through mid-2009, when the recovery began. In 2014, American workers have their own opinions about the state of the recovery:

  • Only two percent of workers believe that the Great Recession has ended with a full economic recovery;
  • Sixty-five percent of workers believe that the Great Recession has ended but with mixed views about the current state of the recovery; and

Thirty-five percent of workers believe the Great Recession has not yet ended. An even higher percentage of Baby Boomers (40 percent) believe that it has not ended.

Few workers were unscathed by the Great Recession. However, the majority of workers (58 percent) now say that they are financially recovering: 14 percent have fully recovered and 44 percent have somewhat recovered. Another 15 percent say they were not impacted.

When Do State and Local Pension Plans Encourage Workers to Retire?

May 9, 2014 Comments off

When Do State and Local Pension Plans Encourage Workers to Retire?
Source: Urban Institute

Traditional defined benefit pension plans that cover nearly all state and local government employees generally penalize work at older ages. In more than three-fifths of state-administered plans, employees hired at age 25 will receive lower lifetime pension benefits if they continue working after age 57 because retirement-eligible workers cannot receive benefit checks while they remain on the job. This reduction in benefits can create strong retirement incentives, which are hard to justify as the population ages and health gains and declines in physical work enable more older people to work. Well-designed public pension reforms could eliminate these work disincentives.

Snapshot of older consumers and mortgage debt

May 9, 2014 Comments off

Snapshot of older consumers and mortgage debt
Source: Consumer Financial Protection Bureau

Older homeowners are carrying more mortgage debt than ever before. Today, compared to a decade ago, fewer older Americans own their home outright. In this snapshot, we analyze data from the Census Bureau, the Federal Reserve, and the CFPB’s own consumer complaints to describe the growing number of older consumers carrying mortgage debt, and the risks that this trend presents to their financial security.


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