The Center for Retirement Research at Boston College has released a new Issue in Brief:
“Who Contributes to Individual Retirement Accounts?”
by Anqi Chen and Alicia H. Munnell
The brief’s key findings are:
In today’s Wall Street Journal I “debate” Alicia Munnell of the Center for Retirement Research on whether Americans face a “crisis” of inadequate retirement saving. I think both sides make good points and readers will have to judge for themselves.
But I think a graphic featured in the story makes some of my point for me. The right-hand side of the graphic shows the Center for Retirement Research’s estimates of the percentage of households who are at risk of an inadequate retirement income. The left-hand side shows total retirement savings as a percentage of GDP, from the Federal Reserve’s flow of funds database.
But here’s the thing: only one of these two charts shows data. The Fed figures are based on tabulations of balances in IRA, 401(k) and other savings accounts, along with the benefits accrued by participants in defined benefit pension plans. These show that retirement savings have roughly tripled as a percentage of GDP since 401(k)s were introduced in 1979.
The right-hand figure isn’t data. It’s the CRR’s interpretation of how many households have inadequate retirement savings, based both upon data (mostly from the Survey of Consumer Finances) and the CRR’s interpretation of what counts as an adequate retirement income.
So to make these figures consistent, the CRR has to hold that there are other factors that more than offset a tripling of retirement savings. I talk about some of these factors in this National Affairs article from 2014, but the short story is that I don’t buy it. Sure, life spans have gone up a bit and the Social Security retirement age has increased by a year. But Americans are also retiring 2 years later than they used to. And again, there’s that tripling of retirement savings.
Maybe Americans still aren’t saving enough, even if they’re saving more than they used to. I doubt it, given that most current retirees say that they’re doing just fine. But still, I think it’s hard to make the case that tomorrow’s retirees will be significantly worse off than today’s are.Read more!
We exploit variation in National Insurance contributions (NICs) – the UK’s system of social security contributions – and a large panel dataset to examine the effects of 35 years of employee and employer NICs reforms on labour cost (gross earnings plus employer NICs), hours of work and labour cost per hour, both immediately (0–6 months) after reforms are implemented and in the slightly longer term (12–18 months). We consider assumptions under which the estimated coefficients on net-of-marginal and net-of-average tax rates in a panel regression can be interpreted as behavioural elasticities or as reflecting incidence. We find a compensated elasticity of taxable earnings with respect to the marginal rate of employee NICs of about 0.2–0.3, operating largely through hours of work, while that with respect to the marginal rate of employer NICs is not statistically significantly different from zero.
We also find that labour cost falls by a much larger amount when the average rate of employer NICs is reduced than when the average rate of employee NICs is reduced, which is consistent with the economic incidence of NICs being strongly affected by its formal legal incidence. Estimates from the hours and hourly labour cost regressions provide further support to this interpretation of the findings, and also suggest the presence of substantial income effects – though also, after 1999, a puzzling effect of average employer NICs rates on hours of work. Each of these results remains true after 12–18 months (if anything, coefficients on lagged changes in NICs rates strengthen these findings), implying that any shifting of employer NICs changes to the individual employees concerned (and vice versa for employee NICs) does not begin over this time horizon. These results are similar to those found by Lehmann et al. (2013) for France but represent an extension of that work by considering hours as well as labour cost responses and second-year as well as immediate effects.
Click here to access the paper.Read more!
Over the past two decades, the share of individuals claiming Social Security at the Early Eligibility Age has dropped and the average retirement age has increased. At the same time, Social Security rules have changed substantially, employer-sponsored retirement plans have shifted from defined benefit (DB) to defined contribution (DC), health has improved, and mortality has decreased. In theory, all of these changes could lead to a trend towards later claiming. Disentangling the effect of any one change is difficult because they have been occurring simultaneously. This paper uses the Gustman and Steinmeier structural model of retirement timing to investigate which of these changes matter most by simulating their effects on the original cohort (1931-1941 birth years) of the Health and Retirement Study (HRS). The predicted behavior is then compared to the actual retirements of the Early Baby Boomer cohort (1948-1953 birth years) to see how much of the later cohort’s delayed claiming and retirement can be explained by these changes.
This paper found that:
The policy implications of this paper are:
In the new issue of National Affairs I have a long article outlining a conservative agenda for retirement security, which both debunks some myths about retirement saving and proposes some ideas that could help those who need to save more for retirement to do so.
The truth is, increased Social Security benefits and other progressive reforms would actually aid the highest earners the most, fail to make the program solvent or pay for higher benefits, and prompt Americans to reduce their retirement savings. Another progressive approach, retirement plans run by state governments, risks lowering private saving and forcing Americans to rely on public officials with poor track records of delivering on the benefits they promise. The overall result would be future retirees receiving a substantially greater share of their total income from the government, which has shown itself to be a poor steward of citizens' money.
This is an unacceptable outcome for conservatives who care about America's tradition of limited government and personal responsibility. Too often in the past, however, conservatives have failed to articulate a compelling vision for Social Security reform that would gain political support. They have treated reform as merely an accounting exercise requiring tax-and-benefit adjustments, rather than as an opportunity to truly strengthen the program and America's private retirement-savings system.
You can check out the whole article here.Read more!
Drawing on insights from behavioral law and economics, automatic enrollment IRAs are intended to address the nation’s retirement savings gap by taking advantage of workers’ inertia. Although automatic enrollment IRAs were initially intended to apply at the federal level, they have gained little traction at the federal level, and states have begun to step into the breach. Between September 2012 and June 2016, five states enacted state automatic enrollment IRA programs.
Studies have uniformly shown that workers are more likely to participate in an automatic enrollment 401(k) plan than in a traditional opt-in 401(k) plan. Proponents of state automatic enrollment IRAs point to this experience to contend that state automatic enrollment IRAs are an answer, or at least a partial answer, to increasing retirement savings in this country. The efficacy of such programs, however, raises more complicated and nuanced questions. This article identifies the fundamental as well subsidiary and sometimes overlapping questions they raise. It then offers important insights on how to address the many issues these questions implicate.
In traditional life cycle models, the equity-bond glide path shifts investment allocation from riskier assets to relatively safer assets as investors approach retirement. In this paper, we develop a smart beta glide path which seeks to take advantage of broad, persistent patterns within asset classes to identify securities with higher risk-adjusted returns than the market. Within equities, investors can shift from return-enhancing strategies — like value, momentum, size, and quality — to risk-reducing strategies like minimum volatility as they move through their life cycles. Adopting smart beta glide paths may improve Sharpe ratios by up to 20% over a standard equity-bond glide path.Read more!
There’s a proposal associated with tax reform that would fund Social Security from general tax revenues rather than from the program’s own dedicated payroll tax. What should we think about this?
Brenton Smith is against. He argues that the Social Security payroll tax was set up for a reason, which is to establish a link between taxes and benefits that will strengthen Social Security politically by distinguishing it form a “welfare” program.
All that is true. But as I argued at Forbes,the link between taxes and benefits – which creates the perception that Social Security is an “earned benefit” – can be unhelpful when it comes to reforms, especially reforms that would restrain benefits for middle and upper income Americans and focus a smaller, more affordable program on preventing poverty in old age.Read more!
That’s the question. And here are a bunch of answers.
Starting with a pro/con in the Wall Street Journal between Alicia Munnell of the Center for Retirement Research and Mike Tanner of the Cato Institute.
I followed up at Forbes with some thoughts that Munnell and Tanner hadn’t hit on. Namely, that while stock investment is kind of a nothing – higher expected returns, but higher risk to match – people who propose it do so instead of full-solvency reforms rather than in addition to them. So stock market investment could encourage Congress to further delay real reforms.
And here’s another write-up from Alicia Munnell at Marketwatch.Read more!
The Congressional Research Service has an opening for an Analyst in Income Security
From the job description:
The analyst will prepare objective, non-partisan analytical studies and descriptive and background reports on retirement policy; provide personal consultation and assistance to congressional committees, Members, and staff on such policies throughout the legislative process; and participate in or lead team research projects and seminars.
This work requires knowledge of the history, trends, and current status of retirement policy; measurement of retirement income and wealth; economic and health shocks in retirement; the role of defined benefit plans, defined contribution plans, and Social Security in retirement savings; decumulation of retirement wealth, including options for annuitization; insights from behavioral economics on retirement income security; and labor force issues related to older workers. The analyst is also expected to develop over time the skills necessary to provide legislative analysis and consultation to congressional committees, Members, and staff at increasingly sophisticated levels.
The ideal candidate would have a background in economics, demography, mathematics, statistics, or a related field and have applied these skills to public policy analysis. Strong research, analytical, writing, and presentation skills are essential.
The job is posted at the GS-12 level ($79,720 per year in Washington DC). The application deadline is April 26, 2017 and the complete job listing is available here: https://www.usajobs.gov/GetJob/ViewDetails/466768700/ .Read more!