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Managing Retirement Risks

April 18, 2014 Comments off

Managing Retirement Risks (PDF)
Source: American College of Financial Services

This table was built for the Retirement Income Certified Professional® (RICP®) designation program for financial advisors. Building a retirement income plan starts by making sure that the client’s income needs and other financial objectives are met. But after that is the tough task of evaluating all the risks that retirees face, and developing a plan to address each one. This table identifies 18 risks in six different categories. With each risk, we define the risk, provide an example, identify facts that describe the magnitude and scope of the risk, and offer a wide range of possible solutions.

The solutions offered here are intended to provide ideas. Building a retirement income plan is a complex process and building solutions to retirement risks is much more than just checking the box. For example, solving longevity risk may include deferring Social Security, purchasing annuities with lifetime payouts, buying life insurance to provide an income stream to a surviving spouse, and carefully choosing a withdrawal strategy from a retirement portfolio. In other words, almost every risk described here requires a carefully crafted, balanced set of solutions that requires thought, knowledge, and experience.

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The Financial Security Scorecard: A State-by-State Analysis of Economic Pressures Facing Future Retirees

April 18, 2014 Comments off

The Financial Security Scorecard: A State-by-State Analysis of Economic Pressures Facing Future Retirees (PDF)
Source: National Institute on Retirement Security
From press release:

A new analysis finds that nearly every state falls short in key areas that measure retirement readiness. The Financial Security Scorecard: A State-by-State Analysis of Economic Pressures Facing Future Retirees gauges the relative performance of the fifty states and the District of Columbia in three key areas: anticipated retirement income; major retirement costs like housing and healthcare; and labor market conditions for older workers.

The study is designed to serve as a tool for policymakers to help identify potential areas of focus for state-based policy interventions to improve Americans’ retirement prospects.

The U.K.’s Ambitious New Retirement Savings Initiative

April 15, 2014 Comments off

The U.K.’s Ambitious New Retirement Savings Initiative
Source: Center for Retirement Research at Boston College

The brief’s key findings are:

  • The United Kingdom is rolling out a low-cost retirement system for workers who lack pension coverage.
  • The new system has three core elements:
    • Employers auto-enroll their workers at a 4-percent contribution rate, matched by the employer and government combined.
    • A new non-profit provides the infrastructure to keep costs low.
    • The plans’ target date funds start young workers with low-risk investments to avoid losses that could discourage saving.
  • The U.S.’s new “myRA” program includes two similar design features – low-risk investments and government infrastructure – but it lacks auto-enrollment.

Macroeconomic Determinants of Retirement Timing

April 15, 2014 Comments off

Macroeconomic Determinants of Retirement Timing (PDF)
Source: University of Michigan Retirement Research Center

Ongoing aging of the US population makes labor force attachment of older workers a key question of policy interest. This paper analyzes the influence of macroeconomic factors, such as the unemployment rate, inflation rate and housing price level on retirement timing.

The impact of macroeconomic conditions on retirement timing is not unambiguous. On the one hand, adverse macroeconomic conditions can deplete household wealth. This may compel households to extend their working lives when their wealth unexpectedly declines. On the other hand, a weak labor market in a recession, for example, can induce early retirement if older workers become discouraged about future job prospects. Similarly, a high rate of inflation can adversely affect the purchasing power of household wealth, which should encourage continued labor force participation. However, inflation can also lead to erosion of real wages, thereby encouraging workers to retire earlier than they otherwise would. Variations in house prices create yet another wealth effect for households. Real estate prices may significantly affect retirement timing because housing wealth is a major part of financial portfolios of the US middle class.

Millions of Dollars in Potentially Improper Claims for the Qualified Retirement Savings Contributions Credit Are Not Pursued

April 10, 2014 Comments off

Millions of Dollars in Potentially Improper Claims for the Qualified Retirement Savings Contributions Credit Are Not Pursued (PDF)
Source: Treasury Inspector General for Tax Administration

For Tax Year 2011, TIGTA determined that taxpayers potentially made approximately $53 million in improper claims for contributions made to a qualifying retirement account. Based on a comparison with third party data, these claims appear to be potentially either false or overstated. In the future, if the IRS identifies and addresses taxpayers who are potentially ineligible to receive the saver’s credit, it could recover approximately $264 million over five years.

Lower-Income Individuals Without Pensions: Who Misses Out and Why?

April 9, 2014 Comments off

Lower-Income Individuals Without Pensions: Who Misses Out and Why?
Source: Center for Retirement Research at Boston College

In 2010, only 19 percent of individuals ages 50-58 whose household incomes were less than 300 percent of the poverty line participated in a pension of any kind at their current jobs, compared to 56 percent of those above 300 percent of poverty. This paper investigates this pension gap. In particular, we decompose the pension participation rate into its four elements in order to compare coverage between higher- and lower-income individuals: 1) the fraction of people who are currently working (the employment rate); 2) the fraction of workers who are in firms that offer pension benefits to at least some workers (the offer rate); 3) the fraction of workers who are eligible for pension benefits, conditional on being in a firm where it is offered (the eligibility rate); and 4) the fraction of workers who enroll in a pension plan when they are eligible (the take-up rate). We find that the substantial pension gap between higher- and lower-income individuals is driven primarily by the lower-income group’s lower employment rate and the smaller probability of working for an employer that offers pensions; when lower-income workers do have a pension plan at work, their eligibility and take-up rates are nearly equivalent to higher-income workers. We also find that the factors associated with a higher value for each element of pension participation are very consistent: higher education and income, previous pension history, and job characteristics including firm size, occupation, job tenure, and union status. Together, these findings suggest that policies such as automatic enrollment that focus on pension eligibility or take-up are unlikely to close the pension coverage gap between older, lower-income individuals and their higher-income contemporaries; instead, greater pension participation requires more jobs and, in particular, more “good jobs.”

CRS — Reducing Cost-of-Living Adjustments for Military Retirees and the Bipartisan Budget Act: In Brief

April 8, 2014 Comments off

Reducing Cost-of-Living Adjustments for Military Retirees and the Bipartisan Budget Act: In Brief (PDF)
Source: Congressional Research Service (via University of North Texas Digital Library)

In addition to raising budget caps in FY2014 and FY2015, the Bipartisan Budget Act (BBA) reduced the cost of living adjustments (COLAs) provided to working-age military retirees under the age of 62 from the full Consumer Price Index (CPI) to the CPI less 1%. Military retirees would then receive a “bump-up” at age 62 that would raise their benefit level to an amount that included full rather than partial CPI adjustments for each year below the age of 62. This new benefit level would then be increased for full CPI adjustments in later years. According to CBO, this change would save the Department of Defense $6.235 billion over the decade.

This CPI adjustment in the BBA originally applied to nearly all military retirees including those receiving military disability benefits, as well as those receiving survivors benefits. In response to concerns about potential effects, Congress restored full CPI COLA adjustments for disabled military retirees and survivors in the FY2014 Omnibus (H.R. 3547/P.L. 113-76) signed by the President on January 17, 2014. Several bills have recently been introduced that would reverse the COLA decrease for nondisabled military retirees as well. Although the reduced COLAs do not go into effect until December 1, 2015, some Members have called for action sooner.

Many of today’s nondisabled retired military are 62 or older, so the COLA adjustments in the BBA will not affect them. Most nondisability retirees under age 62 would be affected, with the greatest effect on recently retired and future nondisablity military retirees, who could face reduced COLAs for 20 years or more. As a point of comparison, had disabled retirees continued to face these adjustments, the effect would have been larger because they tend to retire younger and thus would have faced COLA reductions for more years.

Fiduciary Duty and Investment Advice: Attitudes of Plan Sponsors

April 4, 2014 Comments off

Fiduciary Duty and Investment Advice: Attitudes of Plan Sponsors
Source: AARP Research

This AARP survey of employers that sponsor retirement savings plans (“plan sponsors”) examines a range of issues related to investment advice available to plan participants from the financial institutions that provide their plan (the “DC provider”). It reveals widespread support for holding advice to a “fiduciary” standard; that is, requiring advice offered by DC providers to individual plan participants to be in the best interest of the participants.

Employment, late-life work, retirement, and well-being in Europe and the United States

April 4, 2014 Comments off

Employment, late-life work, retirement, and well-being in Europe and the United States (PDF)
Source: IZA Journal of European Labor Studies

Flexible work arrangements and retirement options provide one solution for the challenges of unemployment and underemployment, aging populations, and unsustainable public pension systems in welfare states around the world. We examine the relationships between well-being and job satisfaction on the one hand and employment status and retirement, on the other, using Gallup World Poll data for several European countries and the United States. We find that voluntary part-time workers are happier, experience less stress and anger, and have higher job satisfaction than other employees. Using statistical matching, we show that late-life workers under voluntary part-time or full-time arrangements have higher well-being than retirees. There is no well-being premium for involuntary late-life work and self-employment compared to retirement, however. Our findings inform ongoing debates about the optimal retirement age and the fiscal burdens of public pension systems.

Supplemental Retirement Plans Offered by City and County Governments

April 4, 2014 Comments off

Supplemental Retirement Plans Offered by City and County Governments
Source: Center for State & Local Government Excellence

This new issue brief examines the structure and terms of supplemental savings plans offered by 20 cities and counties around the country.

See also: Using Automatic Escalation in Public Sector Retirement Plans to Increase Savings

How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey

April 3, 2014 Comments off

How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey
Source: Employee Benefit Research Institute

+ In May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. The 2014 Retirement Confidence Survey (RCS) included a series of questions concerning monthly income illustrations similar in many respects to those provided by the EBSA’s online Lifetime Income Calculator.

+ The vast majority of respondents said the retirement income projection was useful; more than 1 in 3 (36 percent) of the respondents thought that it was very useful to hear an estimate of the monthly retirement income they might expect from their plan, and another 49 percent thought it was somewhat useful.

+ A total of 17 percent of the respondents indicated that this information would lead them to increase the amount they were contributing. However, of those responding that their illustrated value was much less or somewhat less than expected, 35 percent indicated they would increase their contributions.

Is Pension Coverage a Problem in the Private Sector?

April 3, 2014 Comments off

Is Pension Coverage a Problem in the Private Sector?
Source: Center for Retirement Research at Boston College

The brief’s key findings are:

  • Commentators question whether pension coverage is a serious problem, indicating that 80 percent have access to a plan.
  • But this number refers to access – not participation – and to full-time workers in both the public and private sectors.
  • A review of four household surveys and one employer survey finds that only about half of all private workers (age 25-64) are participating in a plan.
  • So, yes, coverage remains a serious problem.

Executive Retirement Benefits: Survey of Executive Retirement Benefit Practices — Benefits Data Source

April 3, 2014 Comments off

Executive Retirement Benefits: Survey of Executive Retirement Benefit Practices — Benefits Data Source
Source: Towers Watson

+ On average, executive benefit plans deliver an additional 5% to 7% of earnings in annual retirement income to a mid-level executive.

+ About half of organizations that sponsor employer-paid nonqualified plans offer only pure restoration executive benefits.

CRS — Federal Employees’ Retirement System: Budget and Trust Fund Issues

April 2, 2014 Comments off

Federal Employees’ Retirement System: Budget and Trust Fund Issues (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

Most of the civilian federal workforce is covered by one of two retirement systems: (1) the Civil Service Retirement System (CSRS) for individuals hired before 1984 or (2) the Federal Employees’ Retirement System (FERS) for individuals hired in 1984 or later. FERS annuities are fully funded by the sum of employee and employer contributions and interest earned by the Treasury bonds held by the Civil Service Retirement and Disability Fund (CSRDF). The federal government makes supplemental payments into the CSRDF on behalf of employees covered by the CSRS because employee and agency contributions and interest earnings do not meet the full cost of the benefits earned by employees covered by that system.

The Office of Personnel Management (OPM) estimated that in FY2014, obligations from the CSRDF would total $80.0 billion, of which $79.4 billion will represent annuity payments to retirees and survivors. Other outlays consist of refunds, payments to estates, and administrative expenses. Obligations from the fund are projected to increase by 3.4% to $82.7 billion in FY2015, of which $82.1 billion will represent annuity payments. OPM estimated that receipts to the CSRDF from all sources would be $95.3 billion in FY2014 and $98.5 billion in FY2015. The year-end balance of the CSRDF was projected to increase from $848.5 billion at the end of FY2014 to $861.8 billion at the end of FY2015.

Employer-sponsored benefits extended to domestic partners

April 2, 2014 Comments off

Employer-sponsored benefits extended to domestic partners
Source: Bureau of Labor Statistics

As part of compensation packages offered to employees, it is common for employers to extend certain benefits to an employee’s family members. For example, employment-based health benefits typically include insurance coverage for the family, and traditional (defined-benefit) pension plans provide survivor benefits to spouses of married employees. As employers recognize different family structures, many have adapted by offering similar benefits to employees who have varied family units. For example, employers often vary employee contributions for health benefits based on family makeup by identifying different contribution amounts for married employees with children and for single employees with children. New data provide a picture of how frequently certain benefits are extended to unmarried opposite-sex and unmarried same-sex partners. For example, 72 percent of civilian workers had access to employment-based health benefits in March 2013, with nearly all the employers extending these benefits to spouses and children, but only 32 percent of civilian workers had health benefits extended to unmarried same-sex domestic partners and 26 percent had benefits extended to unmarried opposite-sex domestic partners.

CRS — Worker Participation in Employer-Sponsored Pensions: A Fact Sheet

March 31, 2014 Comments off

Worker Participation in Employer-Sponsored Pensions: A Fact Sheet (PDF)
Source: Congressional Research Service (via Federation of American Scientists)

This fact sheet provides data on the percentage of American workers who have access to and who participate in employer-sponsored pension plans. The data are from the National Compensation Survey (NCS), which is conducted by the Bureau of Labor Statistics (BLS).1 The NCS provides data on occupational earnings and the availability of employee benefits among U.S. workers.

TIGTA — Millions of Dollars in Potentially Improper Self-Employed Retirement Plan Deductions Are Allowed

March 31, 2014 Comments off

Millions of Dollars in Potentially Improper Self-Employed Retirement Plan Deductions Are Allowed (PDF)
Source: Treasury Inspector General for Tax Administration

IMPACT ON TAXPAYERS
Self-employed taxpayers may deduct contributions that are made to their own Simplified Employee Pension (SEP) or other qualified retirement plan account on line 28 of their individual tax return under certain circumstances.

WHY TIGTA DID THE AUDIT
The overall objective was to determine whether the IRS’s controls and third‑party data are adequate to identify improper deductions for contributions made by self‑employed taxpayers to their own SEP plan retirement account.

WHAT TIGTA FOUND
This could be verified using information provided by taxpayers when individual tax returns are filed. If the IRS improves controls, it could prevent improper deductions and potentially protect $71 million in revenue over five years. In addition, TIGTA found that the IRS could better use third‑party data to detect potentially improper SEP deductions. For example, to be able to claim a SEP deduction on line 28 of Form 1040, self‑employed taxpayers must show net earnings on a self-employed business. If the IRS improves controls, it could detect improper deductions and potentially realize $29 million in revenue over five years.

WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS enhance controls to prevent and detect improper claims on line 28 and assess the need for additional third‑party data to verify line 28 deductions. In their response, IRS management disagreed with TIGTA’s conclusion…but they agreed that certain actions can be taken to improve existing processes. TIGTA does not believe that the IRS’s corrective actions are sufficient. This audit identified millions of dollars in potentially improper or fraudulent claims… TIGTA continues to believe that the IRS should consider additional controls to prevent or detect potentially improper retirement plan deductions.

Lessons from Abroad for the U.S. Entitlement Debate

March 27, 2014 Comments off

Lessons from Abroad for the U.S. Entitlement Debate
Source: Center for Strategic & International Studies

The unsustainable federal budget outlook will inevitably push entitlement reform to the forefront of the national policy debate. As America’s leaders consider reform options, they will have much to learn from the experience of other developed countries, several of which have recently enacted far-reaching overhauls of their state pension systems that greatly reduce the long-term fiscal burden of their aging populations. Lessons from Abroad for the U.S. Entitlement Debate places America’s aging challenge in international perspective, examines the most promising reform initiatives in nine other developed countries, and draws practical lessons for U.S. policymakers.

Public Pension Reform Series

March 25, 2014 Comments off

Public Pension Reform Series
Source: Brookings Institution

Improving Public Pensions: Balancing Competing Priorities by Patten Priestley Mahler, Chingos, and Whitehurst makes a significant contribution to the public pension discourse by providing policymakers and stakeholders with a framework for evaluating proposed reforms to pension systems – even in light of the frequently competing objectives of such systems. The authors begin by defining three essential goals of a pension system: to provide adequate retirement security; to ensure fiscal sustainability; and to maintain/improve public-sector workforce productivity. By analyzing the performance of various pension system designs against these three goals, the authors conclude that a collective defined-contribution plan is best suited to meet the complex objectives of a pension system.

The collective defined-contribution approach to pension reform combines many of the advantages of the defined-benefit plan currently favored in the public sector with those of the defined-contribution plan prevalent in the private sector.

Whereas Improving Public Pensions provides a means by which to evaluate proposed reforms, and identifies an ideal pension plan, Pension Politics: Public Employee Retirement System Reform in Four States by Patrick McGuinn provides actionable policy recommendations for those states that are looking to enact such reforms. McGuinn examines recent pension reform efforts in four states with diverse political climates. Two of the states (Utah and Rhode Island) succeeded in passing significant structural changes to their pension systems, while the others (New Jersey and Illinois) enacted more limited, less innovative changes. McGuinn highlights what activities have and have not been successful in producing meaningful reform, and details a number of recommendations for other states seeking to successfully improve their underfunded pension systems.

Quantifying policy tradeoffs to support aging populations

March 25, 2014 Comments off

Quantifying policy tradeoffs to support aging populations
Source: Demographic Research

Background:
Coping with aging populations is a challenge for most developed countries. Supporting non-working adults can create an unsustainable burden on those working. One way of dealing with this is to raise the normal pension age, but this has proven unpopular. A complementary approach is to raise the average labor force participation rate. These policies are generally more politically palatable because they often remove barriers, allowing people who would like to work to do so.

Objective:
To conceptualize and estimate the trade-off between pension age and labor force participation rate policies.

Methods: We project the populations of European countries and apply different levels of labor force participation rates to the projected populations. We introduce the notion of a relative burden, which is the ratio of the fraction of the income of people in the labor market in 2050 that they transfer to adults out of the labor market to the same fraction in 2009. We use this indicator to investigate the trade-offs between changes in normal pension ages and the general level of labor force participation rates.

Results:
We show that, in most European countries, a difference in policies that results in an increase in average labor force participation rates by an additional one to two percentage points by 2050 can substitute for a one-year increase in the normal pension age. This is important because, in many European countries, without additional increases in labor force participation rates, normal pension ages would have to be raised well above 68 by 2050 to keep the burden on those working manageable.

Conclusions:
Because of anticipated increases in life expectancy and health at older ages as well as because of financial necessity, some mix of increases in pension ages and in labor force participation rates will be needed. Pension age changes by themselves will not be sufficient.

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