Category Archives: Retirement

Examining the Nest Egg: The Sources of Retirement Income for Older Americans

Source: Frank Porell, Tyler Bond, National Institute on Retirement Security (NRIS), January 2020

From the summary:
A new report finds that a large portion (40 percent) of older Americans rely only on Social Security income in retirement while only a small percentage of older Americans (seven percent) receive income from Social Security, a defined benefit pension, and a defined contribution account. Retirement income from these three sources is widely considered to be the ideal situation to ensure retirement security, particularly for the middle class. Retirees with these three sources of income are far less likely to face poverty and economic hardship.

These findings are contained in a new report from the National Institute on Retirement Security (NIRS), Examining the Nest Egg: The Sources of Retirement Income for Older Americans. The report is co-authored by Tyler Bond, NIRS manager of research, and Dr. Frank Porell, University of Massachusetts Boston professor emeritus.

The analysis also finds that without income from Social Security in 2013, the number of poor older U.S. households would have increased by more than 200 percent to 11 million households. Absent income from defined benefit pensions, the number of poor older households would have increased by 19 percent to more than four million households in 2013. Defined contribution plans, however, are less powerful at keeping older households out of poverty than pensions and Social Security because fewer near-poor households have assets in 401(k)-style defined contribution accounts and income from those accounts provided a smaller portion of total income. Without income from defined contribution accounts, the estimated number of poor older households would have increased by five percent.

The Role and Importance of Individual Retirement Accounts

Source: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, Published February 12, 2020
(subscription required)

From the abstract:
What are now called “traditional IRAs” (Individual Retirement Accounts) were created by the Employee Retirement Income Security Act of 1974. Roth IRAs were added in 1997. Employer-sponsored Simplified Employee Pensions–IRAs were added in 1978 and Savings Investment Match Plans for Employees–IRAs (and 401(k)s) in 1996. Together IRAs hold $8.8 trillion in assets, one third of the total $27.1 trillion in all retirement plans. This article examines the role and importance of IRAs in the U.S. retirement system and the development of the different types of IRAs and their interaction with each other.

Social Security Is a Great Equalizer

Source: Wenliang Hou and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, IB#20-2, January 2020

The brief’s key findings are:

  • As the U.S. grows more diverse, it is important to understand how much Social Security affects the relative economic status of retirees by race/ethnicity.
  • This analysis uses the Health and Retirement Study to examine Social Security as a share of retirement wealth for whites, blacks, and Hispanics during 1992-2016.
  • Without Social Security, a typical white household has 5 to 7 times the wealth of a minority household, but adding in Social Security reduces the gap to 2 to 3.
  • Social Security has a similar leveling effect across the wealth distribution, but is particularly important for lower- and middle-income households.
  • Social Security reduces inequality because it covers nearly all workers and has a progressive benefit design, making it the most equal form of retirement wealth.

Measuring Racial/Ethnic Retirement Wealth Inequality

Source: Wenliang Hou and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, WP#2020-2, January 2020

From the abstract:
As the U.S. population becomes more diverse, it will be increasingly important for policymakers addressing Social Security’s solvency to understand how reliant various racial and ethnic groups will be on the program versus other sources of retirement wealth. Yet, to date, studies on retirement wealth have tended not to focus on race and ethnicity, have largely ignored the role of Social Security, or have excluded the most recent cohort approaching retirement – the Late Boomers. This project uses data from the Health and Retirement Study (HRS) to document the retirement resources of white, black, and Hispanic households at various points in the wealth distribution for five HRS cohorts of 51-56 year olds between 1992 and 2016.

The paper found that:

  • In 2016, the typical black household had 46 percent of the retirement wealth of the typical white household, while the typical Hispanic household had 49 percent.
  • This inequality would be much higher but for the presence of Social Security – black households had just 14 percent of the non-Social Security retirement wealth when compared to white households, and Hispanic households had just 20 percent.
  • The 1992 to 2010 HRS cohorts showed little change in retirement wealth inequality, although a decline in 51-56 year old white households’ retirement wealth between 2010 and 2016 narrowed the racial and ethnic gaps in retirement wealth slightly.
  • The progressivity of Social Security combined with lower average incomes for minority households means that replacement rates are more equal than wealth – in 2016, the replacement rate of black households was 82 percent of white households and Hispanic households was 95 percent.

The policy implications of the findings are:

  • Across-the-board benefit cuts, such as increases in the Full Retirement Age, will have an outsize impact on black and Hispanic households’ retirement wealth.
  • As policymakers consider changes to the Social Security program to shore up its finances, considering ways to mitigate any impact on these groups may be important.

Union workers more likely than nonunion workers to have retirement benefits in 2019

Source: Bureau of Labor Statistics, U.S. Department of Labor, TED: The Economics Daily, October 25, 2019

Ninety-four percent of civilian union workers and 67 percent of nonunion workers had access to retirement benefits through their employer in March 2019. Access means the benefit is available to employees, regardless of whether they chose to participate. Eighty-five percent of union workers and 51 percent of nonunion workers participated in an employer-sponsored retirement benefit plan. The take-up rate—the share of workers with access who participate in the plan—was 90 percent for union workers and 77 percent for nonunion workers.

Pension Reforms and Public Sector Turnover

Source: Evgenia Gorina, Trang Hoang, Journal of Public Administration Research and Theory, Published: June 24, 2019

From the abstract:
Over the past decade, many states have reformed their retirement systems by reducing benefit generosity, tightening retirement provisions, introducing non-defined-benefit (DB) plan options and even replacing DB plans with defined-contribution plans. Many of these reforms have affected post-employment benefits that public workers will receive when they retire. Have these reforms also affected the attractiveness of public sector employment? To answer this question, we use state-level data from 2002 to 2015 and examine the relationship between state pension reforms and public employee turnover following the reforms. We find that employee responsiveness to the reforms was tangible and that it differed by reform type and worker education. These results are important because the design of public retirement benefits will continue to influence the ability of the public sector to recruit and retain high-quality workforce.

A correction has been published.

Financial Asset Inequality and Its Implications for Retirement Security

Source: Nari Rhee, Tyler Bond, National Institute on Retirement Security, Issue Brief, September 2019

From the summary:

A new research brief finds that financial asset inequality among Americans continues to increase, and the inequality is consistent across generations. This wealth inequality, combined with dangerously low retirement savings among most households, poses a significant threat to retirement for working Americans.

The new analysis indicates that from 2004 to 2016, the share of financial assets owned by the top 25 percent of Baby Boomer households grew from 86 percent to 91 percent. Meanwhile, the share of assets owned by the bottom 50 percent of Baby Boomer households shrank from three percent in 2004 to below two percent in 2016.

Among GenX households, the wealthiest top 25 percent owned 87 percent of financial assets in 2016. Millennials in 2016 reached a comparable degree of financial asset concentration, with 85 percent of financial assets owned by the wealthiest 25 percent.

The research brief also recommends three well-established public policies to help improve retirement security for working Americans:

Michigan Supreme Court Denies Lifetime Benefits To Governmental Employees

Source: Amelia Dantzer, Employment Alert, Volume 36, Issue 18, September 4, 2019
(subscription required)

The Michigan Supreme Court has held in a ruling that governmental employees were not entitled to lifetime health benefits because their collective bargaining agreements (CBA) did not create a vested right to lifetime coverage. The court found that none of the relevant bargaining agreements included express language providing for vested, lifetime health benefits, and all the agreements contained “durational” clauses providing that the terms are only in effect for three years. Specifically, the court held that “[t]he CBAs contain a general three-year durational clause, and no provision specifies that the benefits in dispute are subject to any different duration. If the parties meant to vest healthcare benefits for life, they easily could have said so in the CBAs, but they did not.”

Employee Benefits—It’s Time to Start Talking About Annuities in 401(k) Plans

Source: Mark E. Bokert and Alan Hahn, Employee Relations Law Journal, Vol. 45, No. 2, Autumn 2019
(subscription required)

From the abstract:
When an employee retires, he or she typically has three sources of income to draw upon: personal savings, Social Security, and a retirement plan (typically a 401(k) plan). These income sources are subject to certain risks. There is “longevity risk,” i.e., the risk that the retiree will outlive his or her savings. There is also “inflation risk,” i.e., the risk that the retiree’s purchasing power will erode over time. There is also an “incapacity risk,” i.e., the risk that the retiree will have a diminishing capacity to oversee his or her investments as he or she ages.

Annuities can help solve several of these issues because they provide benefits over a retiree’s lifetime. As a result, some employers are adding annuities to their 401(k) plan. Congress is also encouraging 401(k) plan sponsors to offer in-plan annuities. Proposed bipartisan legislation alleviates many concerns that 401(k) plan sponsors have about offering annuities within their plans. This legislation is expected to be enacted into law later this year. As in-plan annuities solve important retirement issues and are far less expensive to participants than those available in the retail market, plan sponsors may wish to consider making in-plan annuities available to their 401(k) plan participants.

The Evolution of Private Sector Retirement Income From Defined-Benefit Pensions to Target-Date 401(k) Plans

Source: John G. Kilgour, Compensation & Benefits Review, OnlineFirst, Published July 19, 2019

From the https://doi.org/10.1177/0886368719864480:
Traditional employer-sponsored defined-benefit pension plans in the private sector that provided lifetime benefits have declined precipitously since 1985. They have been largely replaced by Section 401(k) plans in which investment control, market risk and longevity risk have been transferred from the employer to the participant. Most participants opted for the low-yielding money market plan default option, which proved inadequate for providing viable retirement income. The Pension Reform Act of 2006 made two important changes to 401(k) plans: (1) allowed automatic enrollment and (2) allowed target-date funds as a “qualified default investment alternative.” This article examines the evolution from defined-benefit pensions to target-date funds and the closely related collective investment trusts.