New book: “Working Longer: The Solution to the Retirement Income Challenge”

Alicia Munnell and Steven Sass of the Center for Retirement Research at Boston College have a new book, Working Longer: The Solution to the Retirement Income Challenge. Here's a short summary of the topics covered:

Why Do We Need to Work Longer?

• Americans need to work longer due to a contracting retirement income system, longer lifespans, and rising health care costs.

• Working longer does not mean working forever — the goal should be to move the average retirement age from 63 to 66.

• Working longer improves retirement security by: 1) boosting monthly Social Security benefits; 2) allowing workers to build up larger 401(k) balances; and 3) reducing the period over which households must rely on their retirement assets.

Will We Be Able to Work Longer?

• Most people will be healthy enough to work until at least 66.

Will We Want to Work Longer?

• Reasons for Hope: For men, the century-long decline in their labor force participation has halted and even begun to reverse. For women, labor force patterns have been converging toward those of men.

• Reasons for Caution: The ability to claim Social Security benefits at age 62 is a powerful inducement to retire. Also greater job turnover makes employment more difficult for workers in their fifties.

Will Employers Want to Employ Us?

• Reasons for Hope: Employers value older workers' productivity and reliability. And some industries could experience labor shortages as the population ages.

• Reasons for Caution: Employers are concerned about older workers' wage and health care costs and question their ability and desire to keep their skills current. Also, many employers can tap a global labor market to replace older workers.

How Can We Encourage Longer Work Lives?

• Workers: Make a plan to keep working and stick to it.

• Employers: Redesign production and personnel systems to fit older workers.

• Federal government: Raise Social Security's Earliest Eligibility Age.

• State government: Develop job skills and job matching programs.

Also, click here for a list of myths regarding retirement that Munnell and Sass discuss, and click here to order a copy.

Read more!

New paper: Encouraging 401(k) holders to purchase annuities

Here's an interesting new paper from the Retirement Security Project by Bill Gale and Mark Iwry of the Brookings Institution, David John, of The Heritage Foundation and Lina Walker, of the RSP. Here's the summary:

This paper proposes a policy that would increase the role of lifetime income products in future retirees' overall retirement planning. Over the next few decades, a substantial number of workers will retire with larger balances in their retirement accounts and have fewer sources of longevity protection than retirees today. They, therefore, must manage these resources to ensure they last throughout their retirement. Lifetime income products would be beneficial for many because payments are made for life and they mitigate the risk of running out of resources late in life. Despite the benefits of lifetime income, current retirees do not use lifetime income products very much and future retirees are unlikely to do so under current arrangements. The reasons may be that retirees already feel they have sufficient guarantees—for example, from social security benefits—against the risk of outliving their resources. However, evidence suggests also that the market for lifetime income products functions poorly and that people do not understand and are biased against the products.

Our strategy addresses market function by making it easier for a substantial number of retirees to purchase lifetime income plans; the increased volume of sales would reduce prices and make them a better value for the average consumer. Our strategy addresses the role of ignorance and bias by giving retirees an opportunity to "test drive" a lifetime income product, which would help overcome existing biases, reframe their view of lifetime income products and improve their ability to evaluate their retirement distribution option.

Specifically, we propose that a substantial portion of assets in 401(k) and other similar plans be automatically directed (defaulted) into a two-year trial income product when retirees take distributions from their plan, unless they affirmatively choose not to participate. Retirees would receive twenty-four consecutive monthly payments from the automatic trial income plan. At the end of the trial period, retirees may elect an alternative distribution option or, if they do nothing, be defaulted into a permanent income distribution plan. Employers and plan sponsors would be encouraged to offer the trial income plan and would have discretion over some of its structure and implementation. By making the proposal voluntary, we allow opting out by anyone who is not interested in purchasing guaranteed lifetime income. Several important questions would have to be resolved before this strategy could be implemented. The aim of this paper is to map out the first of several steps toward increasing the use of income products in 401(k)-type plans, with the ultimate goal of enabling improved retirement outcomes for workers.

Some quick comments: First, I agree with the overall goal of the paper, since annuities provide valuable protection against outliving your assets but most Americans typically don't purchase them. At the same time, I wonder how pressing a problem under-annuitization is for the typical retiree. Low-income retirees subsist largely on Social Security, and so are almost entirely annuitized, while higher income retirees are, well, higher income and presumably can self-insure a bit better. This isn't to say that they wouldn't benefit from greater access to annuities, particularly as we shift from a DB to a DC pension world, but I'll be interested in finding out more about this.

Read more!