Don't raise SS retirement age

In a Fact Sheet issued today, the Economic Policy Institute (EPI) gives ten reasons not to raise the retirement age for Social Security. Among them:

• Raising the retirement age is a benefit cut, and benefits are already too low.
• It cuts benefits for all retirees, whether they retire at age 62, age 70, or any other age—and it is a cut for retired workers’ spouses, widows, and dependents, as well.
• Social Security’s problem is not that people are living longer.
• The biggest financial problem facing Social Security is rising income inequality, which cannot be addressed by raising the retirement age.
• The shortfall can be reduced without cutting benefits. Taxes should be raised on the highest earners, who pay a much lower share of their income in Social Security taxes.

Top Ten Reasons Not to Raise the Retirement Age (pdf, 2pp/76kB), Aug. 24, 2010

Retirement readiness

In its July Issue Brief, the Employee Benefit Research Institute (EBRI) discusses the adequacy of retirement preparation, specifically the issue of retirees "at risk" of inadequate retirement income. The study uses two assessment models EBRI developed--the Retirement Security Projection Model (RSPM) and the Retirement Readiness Rating--and examines:

• Modeling retirement income adequacy
• "At risk" levels, by age and income
• Future eligibility in a defined contribution plan
• Running short of money
• Additional savings needed

EBRI divides the "at risk" population into three age cohorts: Early Boomers (born between 1948–1954, now ages 56–62); Late Boomers (born between 1955–1964, now ages 46–55), and Generation Xers (born between 1965–1974, now ages 36–45). Among the paper's conclusions:

The baseline 2010 Retirement Readiness Rating finds that nearly one-half (47.2 percent) of the oldest cohort (Early Baby Boomers) are simulated to be “at risk” of not having sufficient retirement resources to pay for "basic" retirement expenditures as well as uninsured health care costs. The percentage "at risk" drops for the Late Boomers (to 43.7 percent) but then increases slightly for Generation Xers to 44.5 percent.

The EBRI Retirement Readiness Rating: Retirement Income Preparation and Future Prospects, July 2010
      Issue Brief (pdf, 36pp/748kB)
      Executive Summary

SS "notch" for '47?

In a May brief the Center for Retirement Research at Boston College reports on lower Social Security benefits for new retirees born in 1947 compared to those born in 1930-1946. This is due to an "unintended quirk" in the benefit formula, and the paper urges congressional action for adjustment.

Since cost-of-living adjustments (COLA) were adopted in 1975, this is the first year of no COLA. The formula for granting COLA interacted with a spike in inflation in 2008, and those born in 1947 did not receive the 5.8 percent "windfall COLA" paid in Jan. 2009. The paper explains the term "notch" from the 1970s when beneficiaries born in 1917-1921 appeared to be at a disadvantage because of changes in SS benefit rules.

A New Social Security 'Notch'? Bad News for People Born in 1947, May 2010
      Brief (pdf, 8pp/203 kB)
      Introduction

Pension funding 2009-2013

A recent paper from the Center for Retirement Research at Boston College reports on funding levels for state and local pension plans for FY2009, the first year that reflects the financial crisis, and projections for 2010-2013.

The report covers: (1) the evolution of public sector funding, which from the early 1980s made significant progress until the 2008 market collapse; (2) 2009 status of plans; and (3) projections for 2010-2013 under three different scenarios for the stock market (Dow Jones Wilshire 5000 Index).

An appendix of 109 state and 17 local plans provides ratios of assets to liabilities for 2001-2008 and estimates for 2009. The aggregate funding ratio declined from 91.4 in 2001 to 84.3 in 2008 and 78.5 in 2009. Hawaii went from 90.6 (2001) to 68.8 (2008) to an estimated 62.9 (2009).

From the Conclusion:

The key question is what should be done. A major increase in contributions is not realistic at this time....if funding levels are to be restored quickly, the money must come primarily from tax revenues. But the recession has decimated tax revenues and increased the demand for state and local services. Thus, finding additional taxes to make up for market losses will be extremely difficult. One small step that would be viewed as a commitment to responsible funding would be for states and localities to at least pay their full ARC [annual required contribution]. Otherwise, the only option is to wait for the market and the economy to recover.

The Funding of State and Local Pensions: 2009-2013, April 2010
      Report (pdf, 18pp/268kB)
      Introduction

Employee benefits databook

The Employee Benefit Research Institute (EBRI) maintains its Databook on Employee Benefits online and updates it when new data is available.

Topics include the retirement income system; employer-sponsored benefit plans; government programs such as Social Security, Medicare, and Medicaid; health insurance; and labor force and demographic trends.

The book is organized into four sections -- overview, retirement programs, health programs, and other employee benefits. The date next to each chapter link indicates when data and/or links were last updated.

EBRI Databook on Employee Benefits, updated March 2010

Health costs post-65

The Center for Retirement Research at Boston College published two papers on health care costs from age 65. Both papers used data from the Health and Retirement Study (HRS).

"Nursing home care is the real wild card in assessing potential health care costs" is the keynote of the brief, "What Is the Distribution of Lifetime Health Care Costs from Age 65?" which calculates:

At age 65, a typical married couple free of chronic disease can expect to spend $197,000 on remaining lifetime health care costs – excluding nursing home care – while it faces a 5-percent probability that these costs will exceed $311,000. Including nursing home care, the mean cost is $260,000, with a 5-percent probability of costs exceeding $570,000.

In the working paper, "How Much Is Enough? The Distribution of Lifetime Health Care Costs," the same figures are carried forward for a couple age 85 who still face a 5 percent chance of remaining health care costs exceeding $477,000. It concludes: "The risk is not of destitution, but of health care costs impoverishing a couple or a surviving spouse, or of the household not having the retirement it planned for."


What is the Distribution of Lifetime Health Care Costs from Age 65?, March 2010
      Report (pdf, 7pp/112kB)
      Introduction

How Much Is Enough? The Distribution of Lifetime Health Care Costs, Feb. 2010
      Report (pdf, 45pp/1.8MB)
      Abstract

Health reform and retiree benefits

In its January Issue Brief, the Employee Benefit Research Institute (EBRI) examines the impact of healthcare legislation now in Congress on retiree health benefits. The paper covers:

• Reinsurance program for early retirees
• Medicare drug benefits
• Tax treatment of employer subsidies under MMA
• Postretirement benefit changes

EBRI's summation:

Since the mid-1990s, there has been erosion in retiree health benefits. This has been driven by the excessive cost of offering this benefit due to new accounting rules and the increasing cost associated with providing the benefit. Fewer private-sector employers offer the benefits, both private- and public-sector employers have been increasing retiree premiums and cost sharing, and workers are finding it harder to qualify for a subsidized benefit....

However, current legislative proposals will increase the cost to employers of offering retiree health benefits. If these proposals pass...private-sector employment-based retiree health benefits are practically certain to decline: They will be less valuable to retirees in the future, and employers will find they are not as necessary to offer in the future, dramatically reducing the number of retirees enrolled in employment-based plans.

Implications of Health Reform for Retiree Health Benefits< jan. 2010
      Issue Brief (pdf, 20pp/428kB)
      Executive Summary

Public retiree health liabilities

Today the Government Accountability Office (GAO) released a study on state and local governments' retiree health liabilities, specifically: (1) what has been reported in their annual comprehensive annual financial reports (CAFR), (2) actions they have taken to address retiree health liabilities, and (3) the overall fiscal pressures they face.

Under accounting standards issued by the Governmental Accounting Standards Board (GASB) in 2004, governments are required to account for costs of other postemployment benefits (OPEB) when they are earned (during employment) and not when they are paid (during retirement). The largest component of OPEB is retiree health benefits. Historically, governments have not funded these benefits when they were earned, therefore much of their liability may be unfunded. According to GAO, the total unfunded OPEB liability in state and the largest local governments exceeds $530 billion.

For this study, GAO selected 10 governments and reviewed their actions in more detail: four states--Alaska, Nevada, New Jersey, and South Carolina; three counties--Montgomery County, MD; Harris County, TX; and Oakland County, MI; and three cities--Gainesville, FL, New York, NY; and Thousand Oaks, CA.

GAO found that some governments have addressed retiree health liabilities through prefunding using irrevocable trusts, and making benefit changes such as: (1) changing the type of health benefit plan, (2) changing the level of government contributions, and (3) changing eligibility requirements.

State and Local Government Retiree Health Benefits: Liabilities Are Largely Unfunded, but Some Governments Are Taking Action, GAO-10-61 (pdf, 49pp/772kB), Nov. 30, 2009

Living longer and the 3-legged stool

That the retirement of boomers and longer life expectancies will strain the traditional three-legged stool of retirement income--Social Security, pensions, and personal savings--is not news, but a report from the Congressional Research Service (CRS) buttresses this projection with data on the demographics and budget issues of seniors. Relating to people 65 and older, the report covers:

• Employment
• Sources and amounts of income
• Household income
• Poverty status
• Changes in income as people age

The report's conclusion is also reiterative:

With Social Security facing a financial shortfall and the number of private-sector pensions continuing to decline, it is likely that a relatively greater share of current workers' future retirement income will have to be financed from their own personal savings.

Income of Americans Aged 65 and Older, 1968 to 2008, RL33387 (pdf, 40pp/324kB), from Open CRS, Nov. 4, 2009

Retiring boomers' impact on assets

With the 78 million baby boomers born between 1946 and 1964 beginning to retire (the oldest having turned 62 in 2008), some economists had warned of a fall in prices of assets as boomers sold their holdings to finance their retirement. However, a paper from the Congressional Budget Office (CBO) reports that such a scenario is unlikely, based on the behavior of earlier groups of retirees. CBO cites three factors:

1. Retirees generally are cautious about selling assets to finance consumption because they might need those assets in the future. They might live longer than expected, and medical costs, which are likely to rise as people age, could be higher than anticipated.
2. Rather than spend all of their assets, retirees might intentionally retain some to make bequests.
3. Wealth in the United States is highly concentrated: One-third of the nation’s financial assets is held by the wealthiest 1 percent of the U.S. population. The wealthiest people do not spend significant portions of their assets during retirement and in most cases die leaving bequests.

Will the Demand for Assets Fall When the Baby Boomers Retire?
      Report (pdf, 33pp/788kB), Sept. 2009
      Blog, Sept. 8, 2009

Financing social security; bonds in retirement

"It's no secret that Social Security is facing a long-term financing shortfall" begins a recent paper by Alicia Munnel, Director of the Center for Retirement Research at Boston College, who discusses whether a portion of Social Security should be financed with the income tax, or general revenues. Munnel notes the two components of Social Security costs: the contributions that generate current benefits and contributions "to make up for paying benefits to early participants that far exceeded their contributions." It is the latter that needs shoring up. Her conclusion:

...the shift from the payroll tax to general revenues for the portion of the system’s financing associated with the start-up of the program would represent a more equitable sharing of the burden. At the same time, through the payroll tax workers would be paying an amount for their benefits equal to what they would have paid had a trust fund accumulated.

In another paper from the Center, research economist Anthony Webb argues that for retirement income security, households should seek return on capital over return of capital. He briefly discusses short-term deposits, long-term bonds, and Treasury Inflation-Protected Securities (TIPS). He states, "...the true risk-free asset is a portfolio of bonds and, in particular, inflation-protected bonds of appropriate maturities."


Should Social Security Rely Solely on the Payroll Tax?
      Report, IB#9-16 (pdf, 7pp/188kB), Aug. 2009
      Summary

The Case for Investing in Bonds During Retirement,
      Report, IB#9-17 (pdf, 6pp/156kB), Aug. 2009
      Summary

Steady pays off for 401(k)s

From its annual EBRI/ICI 401(k) database update report, the Employee Benefit Research Institute (EBRI) examined how a consistent group of participants accumulated retirement assets for the eight-year period 1999-2007 (consistent meaning those with accounts at the end of each year from 1999 thru 2007).

For consistent participants at year-end 2007:

• The average 401(k) account grew 9.5% annually to $137,430, double the average account balance among all database participants.
• The median 401(k) account grew 15.2% annually to $76,946, more than four times the median account balance among all database participants.

What Does Consistent Participation in 401(k) Plans Generate? July 2009
      Issue Brief (pdf, 16pp/368kB),
      Executive Summary

PBGC

Douglas J. Elliott of Brookings Economic Studies and the Center On Federal Financial Institutions (COFFI) has authored a guide to the Pension Benefit Guaranty Corporation (PBGC). The PBGC was established by the Employee Retirement Income Security Act (ERISA) of 1974, which was enacted in part, according to the paper, because of the bankruptcies of automakers Packard and Studebaker in the 1960s that left many employees with greatly reduced pensions. The current crisis in the auto industry raises the same concern. The PBGC basically guarantees pensions when a firm goes bankrupt. It is primarily funded by premiums from employers that offer defined benefit pension plans. The PBGC itself is in major financial stress, being $11 billion in debt as of Sept. 2008. A GM bankruptcy could add $20 billion to the deficit.

The guide covers:

• Background on retirement plans
• Pension funding rules
• Guarantees provided by the PBGC
• How the PBGC works
• The situation in the auto industry
• The PBGC's financial crisis
• Options to fix the crisis
• Glossary of terms

A Guide to the Pension Benefit Guaranty Corporation (pdf, 50pp/436kB), May 20, 2009

Public pension plans

In its April Notes, the Employee Benefit Research Institute (EBRI) covered public pension plan asset allocations.

This analysis examines the volatility in employer contribution rates caused by the higher-return-seeking/higher-risk investment portfolios adopted by many pension plans, and whether plan sponsors will increase fixed-income investments in order to reduce volatility. It appears that, in the short run, a significant shift toward a lower-return investment policy in return for reduced volatility in employer contributions is unlikely to occur because of plan sponsors’ expected high returns from current asset allocations, their current ability to use high discount rates, and the tendency of investment managers to not deviate from peer group investments.

Public Pension Plan Asset Allocations
      Report (pdf, 12pp/328kB), April 2009
      Executive Summary
      Press release

Recent GAO reports

From the Government Accountability Office (GAO):

DEFINED BENEFIT PENSIONS: Survey Results of the Nation's Largest Private Defined Benefit Plan Sponsors, GAO-09-291 (pdf, 65pp/3.8MB), March 30, 2009

GAO surveyed 94 of the nation's largest defined benefit (DB) plan sponsors for (1) changes to pension and benefit offerings, including to defined contribution (DC) plans and health offerings, over the last 10 years, and (2) possible future changes to pensions and how they might be influenced by changes in pension law and other factors. There were 44 responses. GAO noted a significant shift from DB plans to DC plans. DB plans have declined from about 92,000 in 1990 to under 29,000 today, and 28 percent of plans reported in the survey were under a plan freeze.


CLIMATE CHANGE: Observations on Federal Efforts to Adapt to a Changing Climate, GAO-09-534T (pdf, 14pp/184kB), March 25, 2009

GAO has been working with the Select Committee on Energy Independence and Global Warming on adaption. This testimony summarizes (1) actions that federal, state, local, and international authorities are taking to adapt to a changing climate, (2) the challenges that federal, state, and local officials face in their efforts to adapt, and (3) relevant actions that Congress and federal agencies can take.


URBAN PARTNERSHIP AGREEMENTS: Congestion Relief Initiative Holds Promise; Some Improvements Needed in Selection Process, GAO-09-154 (pdf, 99pp/928kB), March 25, 2009

In 2007 the Dept. of Transportation (DOT) awarded $848 million to five cities (Miami, Minneapolis, New York, San Francisco, and Seattle) under the Urban Partnership Agreements (UPA, Urban Partnerships) to relieve congestion. The UPA initiative encouraged the use of the 4 Ts: tolling (congestion pricing), transit, technology, and telecommuting. This report addresses (1) how well DOT communicated UPA selection criteria, (2) whether it had discretion to allocate grant funds to UPA recipients and consider congestion pricing as a priority selection factor, and (3) how it is ensuring that UPA award conditions are met and results are assessed.


U.S. POSTAL SERVICE: Escalating Financial Problems Require Major Cost Reductions to Limit Losses, GAO-09-475T (pdf, 20pp/264kB), March 25, 2009

The financial problems of the U.S. Postal Service (USPS) have been widely covered in the media. In this testimony, GAO reports on USPS's deteriorating finances, with such stats as accelerating declines in mail volume (11 billion pieces) and losses ($2 billion) in the first five months of FY 2009. GAO focuses on (1) USPS's financial condition and outlook and (2) its options and actions to remain financially viable in the short and long term.

401(k)s - fees and returns

This month the Center for Retirement Research at Boston College published two briefs on 401(k) plans, both with an eye to increasing retirement income.

The first brief finds 401(k) fees "so complex, confusing, or obscure that many sponsors and participants report that they do not understand either their magnitude or their consequences." The report raises three design issues: (1) charging a percent of assets, which often varies by type of asset, does not allow participants to weigh benefits against costs of their plan's services; (2) a constant expense ratio transfers wealth from higher balances to lower ones because twice the assets do not incur twice the management cost but participants pay twice the fee; and (3) 401-(k) funds in asset pools with other investors "can decouple fees and costs in a way that needlessly reduces" the returns on those 401(k)s.

The second brief discusses guaranteed returns, particularly in light of the current financial crisis that has "decimated" retirement accounts. It considers the cost and effect of guarantees in retrospect, specifically smoothing replacement rates and avoiding sharp drops, and prospective guarantees. The brief concludes that "the feasibility of providing attractive guarantees for returns in a new tier of savings accounts depends on whether applying private insurers' risk preferences to the government is appropriate."

The Structure of 401(k) Fees, Feb. 2009
      Report (pdf, 8pp/148kB)
      Summary

What Does It Cost To Guarantee Returns? Feb. 2009
      Report (pdf, 14pp/276kB)
      Summary

401(k)s now

The Employee Benefit Research Institute (EBRI) and Investment Company Institute (ICI) have collaborated since 1996 in developing a comprehensive database on 401(k) participants, including information on demographic, contribution, asset allocation, and loan and withdrawal activity. EBRI's website on the Defined Contribution and Participant Behavior Research Program lists its research in this area. Using this data, EBRI recently presented testimony before the House Education and Labor Committee on The Impact of the Financial Crisis on Workers’ Retirement Security (pdf, 26pp/232kB), Oct. 7, 2008. Graphic data on 401(k) balances and changes due to market volatility are provided to Nov. 26, 2008.

According to its website, ICI is the national association of U.S. investment companies, and "seeks to encourage adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, their shareholders, directors, and advisers."

Defined benefit plans

Two papers on the state of public and private defined benefit plans in the current financial crisis were published by the Center for Retirement Research at Boston College. The briefs explore the loss of approximately $1 trillion each in public and private defined benefit equities between Oct. 9, 2007 and Oct. 9, 2008, and the different impacts on participants and plan sponsors in each sector.

The Financial Crisis and Private Defined Benefit Plans
      Report (pdf, 8pp/188kB)
      Summary

The Financial Crisis and State/Local Defined Benefit Plans
      Report (pdf, 9pp/212kB)
      Summary

Recent GAO reports

From the Government Accountability Office (GAO):

LOBBYING DISCLOSURE: Observations on Lobbyists' Compliance with New Disclosure Requirements, GAO-08-1099 (pdf, 37pp/1.5MB), Sept. 30, 2008

This is GAO's first annual report on the Honest Leadership and Open Government Act (HLOGA) of 2007, P.L. 110-81 (pdf, 42pp.), which requires GAO to report on (1) lobbyists' compliance with the Act with supporting documents, (2) challenges to complying with the Act, and (3) the process for referring cases to the Dept. of Justice and other means to enforce the Act.


ELECTIONS: States, Territories, and the District Are Taking a Range of Important Steps to Manage Their Varied Voting System Environments, GAO-08-874 (pdf, 129pp/1.98MB), Sept. 25, 2008

For this study GAO was asked to answer the following questions: (1) what voting methods and systems are jurisdictions using in federal elections and what changes are underway; (2) how do they certify or otherwise approve voting systems; (3) what other steps do they take to ensure the accuracy, reliability, and security of voting systems; (4) how do they identify, evaluate, and respond to voting system problems; and (5) how do they view federal voting system-related resources and services.


WILDLIFE REFUGES: Changes in Funding, Staffing, and Other Factors Create Concerns about Future Sustainability, GAO-08-797 (pdf, 131pp/3.2MB), Sept. 22, 2008

The National Wildlife Refuge System (NWRS) comprises 548 wildlife refuges and 37 wetland management districts. (Hawaii has 18 wildlife refuges.) GAO's study covers funding, staffing, policy initiatives, external factors (extreme weather, adjacent development), habitat management, and visitor services in FY 2002-2007.


PENSION BENEFIT GUARANTY CORPORATION: Improvements Needed to Address Financial and Management Challenges, GAO-08-1162T (pdf, 29pp/504kB), Sept. 24, 2008

PENSION BENEFIT GUARANTY CORPORATION: Need for Improved Oversight Persists, GAO-08-1062 (pdf, 34pp/964kB), Sept. 10, 2008

The Pension Benefit Guaranty Corporation (PBGC) insures the pensions of nearly 44 million private-sector workers and retirees. The Sept. 24 testimony covers (1) PBGC's role in protecting pension benefits and how it is funded, (2) the financial challenges facing PBGC, and (3) PBGC's governance, oversight and management challenges. It focuses on the single-employer pension insurance program. The Sept. 10 study covers (1) the steps PBGC has taken to improve policy direction and oversight, and (2) Congressional and other governmental oversight.


COASTAL ZONE MANAGEMENT: Measuring Program's Effectiveness Continues to Be a Challenge, GAO-08-1045 (pdf, 59pp/1.18MB), Sept. 12, 2008

Coastal zone management is administered by the Office of Ocean and Coastal Resource Management (OCRM), of the National Oceanic and Atmospheric Administration (NOAA), that provides grants to participating states under the Coastal Zone Management Act (CZMA). There are 34 state programs (including territories and commonwealths). GAO reported on (1) NOAA's methodology for awarding CZMA grants, (2) how NOAA ensures that grant activities comply with the CZMA, and (3) how NOAA measures the effectiveness of state programs. There are tables for each of the grant types: coastal zone management, coastal zone enhancement, and coastal nonpoint pollution control. Allocations for the 3 types of grants for Hawaii in FY 2008 were $1.8 million, $174,000, and $42,000, respectively.

Behavioral econ for retirement, health care

Peter Orszag, Director of the Congressional Budget Office (CBO), recently spoke on how behavioral economics as applied to decisionmaking in savings and retirement can be applied to health care. Speaking on the Utility of Defaults, he said: "Inertia...is a powerful force in decisionmaking, so people tend to stick with a default, even when they can, at very low cost, pick another option." He analyzed the positive effect of automatic enrollment of workers in 401(k) plans.

According to Orszag, applying behavioral economics to health care has been limited because relatively little research and implementation have been carried out.

To reduce the amount of money spent on ineffective health care, we must first determine which procedures and treatments are effective....Incentives must be properly structured and made evident. Defaults must reflect expert knowledge and judgment about what choices will optimize the welfare of the typical individual but still allow individual choice.

Perpetuating inefficient health care, he said, are such factors as the lack of clarity in health insurance costs and the influence of doctors and other medical professionals on health decisions. However, "an even more important determinant than the health care system is an individual's behavior." Just as automatic 401(k) enrollment has narrowed the gap in savings between high and low socioeconomic groups, incentives can be used to narrow the socioeconomic gap in healthy lifestyles.

Behavioral Economics: Lessons from Retirement Research for Health Care and Beyond (pdf, 14pp/140kB), Aug. 7, 2008