SOCIAL SECURITY, PENSIONS & RETIREMENT INCOME eJOURNAL
To establish current savings behavior, one necessary measurement of retirement preparation is identifying the percentage of workers with employment-based retirement plans, as well as understanding the characteristics of workers with and without access to such programs. The findings from this paper show that there has been a significant increase in the percentage of family heads with a defined contribution (DC) plan (typically a 401(k)-type plan) over time. The likelihood of a working family head participating in a retirement plan increased with the size of his or her employer. In 2010, among family heads working for employers with 10-19 employees, 22.4 percent participated in a plan, compared with 67.2 percent of family heads who worked for employers with 500 or more employees. In 2010, 18.9 percent of family heads who participated in an employment-based retirement plan had a defined benefit (DB) plan only, while 65.0 percent had a defined contribution (DC) plan only, and the remaining 16.1 percent had both a DB and a DC plan. This was a significant change from 1992, when 42.3 percent had a DB plan only, and 40.8 percent had a DC plan only. Asset allocation within a family head’s retirement plan seems to be affected by his or her ownership of other types of retirement plans. Those who own an IRA are more likely to be invested all in stocks if they also own a 401(k)-type of plan. Those who own a DB plan and a 401(k)-type plan are less likely to allocate their DC plan to all interest-earning assets. Due to the increased participation in DC plans, the manner in which participants allocate assets within these plans could have a significant effect upon the financial resources they ultimately will have available in retirement. The distribution of participants invested in each proportion of stocks was found not to vary significantly with age between ages 35-64, although higher educational attainment, income, and net worth were correlated with more investment in stocks. Taken together, this suggests that, even with increased experience, availability, and use of these types of plans, there remains a need for more financial education of participants.
The PDF for the above title, published in the April 2013 issue of EBRI Notes, also contains the fulltext of another April 2013 EBRI Notes article abstracted on SSRN: “Characteristics of the Population With Consumer-Driven and High-Deductible Health Plans, 2005-2012.”
DAVID STANTON, Australian National University (ANU) - Crawford School of Public Policy
ANDREW HERSCOVITCH, Australian Government Department of Families, Housing, Community Services and Indigenous Affairs
The paper outlines an approach to the assessment of policy options and program design. The core concepts of equity, effectiveness, employment, efficiency and economy are discussed. Real-world examples from Australian social policy are considered, including from areas such as retirement incomes; family allowances; dependency to work; disability support and health insurance. The delivery of social programs through the taxation system is also discussed.
There clearly is no one template for turning policy principles into programs. Many processes and players may be involved and unpredictability is ever-present. Most governments are interested in achieving policy as well as political outcomes. They are also more constrained by economic and social realities than is often assumed. This imposes some order and logic on program development.
From a policy adviser’s perspective, the key is ‘preparation meeting opportunity’. It is possible to insert rigour into the process if the issues have been anticipated, the research and analysis done, and the arguments assembled for ministers to consider.
This paper presents long term projections of the cost of public pensions in Australia, taking into account behavioural effects. I assume retirees will make financial decisions to maximise their lifetime utilities, and that their consumption and asset allocation would react to policy changes. I find that the future cost of the Age Pension is likely to be higher than estimated by Australian Treasury in 2010's Intergenerational Report. As future cohorts retire with more savings, they can allocate more money into owner-occupied properties while preparing for retirement and draw down their savings faster, to optimise their Age Pension entitlements. This paper also examines how projected future Age Pension costs are affected by various policy changes, including the legislated increase of superannuation guarantee from 9% to 12%, the possible changes of including the value of family home in the asset test, and indexing Age Pension payments to price inflation instead of wage inflation.
Public-sector pension plans administered by CalPERS face scrutiny because of large unfunded liabilities. The current underfunding is usually blamed on investment losses that occurred during the recent economic downturn. This paper finds that the true culprit is inaccurate actuarial forecasting, not investment performance. The paper looks specifically at the history of the City of Sunnyvale's pension plans over the past seventeen years. It finds that the normal rate of contribution was too small to keep up with the growth in liabilities, even under the assumption that investments earn their anticipated return.
Critics of excessive and opaque 401(k) fees, conflicts of interest, and poor plan design may be right as far as their argument goes; but the reason that 50 million Americans may ultimately be betrayed by their 401(k) is not that mutual fund managers are overpaid, and that some advisors receive commissions. Rather it is that the 401(k) idea “works” when incomes and stock prices are rising, and does not work when income growth and stock returns stall for a prolonged period.
The assumptions used by individuals and advisors in solving the “when can I retire” problem at the height of 401(k) euphoria were, in retrospect, far too optimistic. Stock returns have, until recently, been negative in real terms for a not insignificant period, median family income has regressed, and savings rates languish in the low single digits. It was not just amateur investors that planned poorly – many professionally managed pension funds also extrapolated naively from the experience of the second half of the twentieth century.
If the financial services industry is guilty of anything, it is the abetting and aiding of plan participants in their employment of unrealistic return expectations. It is well established equities have higher expected returns than bonds because their cash flows are less certain; returns are expected to be high, but they could be low, as in the 2000s. Advisors and participants seem to have forgotten about this last part.
On average, 401(k)s are a cheaper, more transparent, and better structured vehicle than at any point in their history. And while more can and should be done to improve them, regulatory reforms cannot salvage the retirement plans of millions of Americans.
This paper seeks to assess the role of expectations on pension income and financial literacy in the decision of joining a pension fund, using a large household survey for Italy. The results confirm past evidence on the role of income and education, and find a strong role played by financial literacy. Forward looking thinking about the sources of income after retirement and forming not overly optimistic expectations on replacement rate are tightly related to enrollment. Finally participation to pension funds is found to depend strongly on the industry of employment. The results provide further evidence for the role of public powers in enhancing participation by providing information and financial education.