Wednesday, February 27, 2013

Americans Anxious About Retirement?

Michael Fletcher of the Washington Post reports, Americans anxious about retirement (h/t, Suzanne Bishopric):
Even as the economy slowly improves, the vast majority of Americans remain deeply worried about their ability to achieve a secure retirement, according to a new survey.

The poll, to be released by the National Institute on Retirement Security (NIRS) at a conference on Tuesday, found that 55 percent of Americans are “very concerned” that the current economic conditions are harming their retirement prospects. An additional 30 percent reported being “somewhat concerned” about their ability to retire.

The level of anxiety Americans feel about their preparation for retirement has continued to peak in the recession’s aftermath, a finding that the poll’s sponsors said highlights the need for policymakers to bolster the nation’s retirement programs.

“People are anxious about retirement. We know that,” said Diane Oakley, president of NIRS, a Washington-based nonprofit organization. “The question is, how do you get people to act on that?”

As aging Americans are increasingly burdened by debt, spiraling health-care costs and diminishing pension coverage, an increasing number of researchers argue that a long era of improved living standards for the elderly is now in jeopardy.

The Senate’s Health, Education, Labor and Pension Committee says the nation faces a $6.6 trillion retirement-savings deficit. Meanwhile, a retirement security index developed by Boston College’s Center on Retirement Research as well as economists at the New School have found that a majority of Americans are at risk of being financially worse off than their parents in retirement.

The Service Employees International Union recently released a fact sheet saying that black and Latino workers are particularly at risk for seeing their standard of living significantly erode in retirement because they tend to have fewer assets, less retirement income and higher medical expenses.

NIRS is among a number of groups calling on the federal government to bolster Social Security benefits or to create a new layer of retirement help for future retirees. But those calls have been overshadowed by concern about the nation’s long-term debt, which has prompted many policymakers to focus on ways to reduce Social Security and other retirement benefits rather than increase them.

The high anxiety Americans feel about retirement has them clamoring for the protections that used to be common for workers, the survey found. More than four in five Americans, for example, have favorable views of traditional pensions, which pay a guaranteed amount to retirees for life. Americans hold that view even though many experts point out that 401(k)s and other defined contribution plans are actually better suited for American workers, who tend to change jobs frequently. The problem is Americans do not save enough in them, and too often tap them for non-retirement needs. Traditional pensions, meanwhile, are most lucrative for workers who retire after a long tenure on the job.

The poll found widespread support for protecting Social Security benefits at current levels, as well as for the idea of a new pension program that would stay with workers even as they changed jobs and offer a guaranteed lifelong income once they retire.

“What people really need is a paycheck for life,” Oakley said.

The telephone survey was conducted in December 2012 and involved 8,000 Americans ages 25 and older, NIRS said.
I've already covered America's new pension poverty and commend Michael Fletcher and other reporters for shining the spotlight on America's retirement crisis.

Importantly, even though the financial crisis is over, the retirement crisis will continue to weigh heavily on the minds of millions who cannot afford to retire in dignity and security.

Worse still, Allison Linn of NBC News reports, Not-So-Golden Years: Over 75, Burdened By Debt:
The golden years are supposed to be a time when you can live off the wealth you've accumulated over a lifetime, not feel like you have to take on more debt to make ends meet.

But a new batch of research shows that Americans ages 75 and over appear to have grown more burdened by debt in recent years, and experts say a likely culprit is medical expenses.

A new analysis of government data, released earlier this month by the Employee Benefit Research Institute, found that between 2007 and 2010 people who are 75 and older were more likely to have debt, and their average debt levels increased significantly.

That's in stark contrast to other older Americans in their 50s and 60s, who generally saw debt levels stabilize during that period.

In general, the good news is that people ages 75 and older are much less likely to have debt, and generally carry far less debt, than other older Americans. But Craig Copeland, a senior research associate with EBRI and the report's author, said it was still troubling to see that the trend for that group was toward increasing, rather than decreasing, debt burdens.

"It really looked like something wasn't going well for them," Copeland said.

He suspects that many Americans who are 75 and older have few options but to take on debt when a big unexpected expense arises, because many are living on fixed retirement incomes and don't work. That means they can't, say, work a few extra hours or take on a second job if they need to pay for something.

That unexpected expense may be health-related. Although most older Americans are covered by Medicare, Copeland noted that many are still on the hook for co-pays and other out-of-pocket expenses.

That means a person with a limited income can have their finances thrown into disarray by one unexpected event, such as a broken hip that requires significant co-pays or the sudden need for a very expensive prescription that isn't fully covered.

"In a lot of cases it seems to be that health care is a particularly vexing issue," he said.

The percentage of people 75 and above who had debt grew from 31.2 percent in 2007, the year the nation went into recession, to 38.5 percent in 2010, a year after the recession officially ended, according to the EBRI's analysis of Census data. The average amount of debt for those with debt also more than doubled, from $13,665 in 2007 to $27,409 in 2010.

The debt loads were far greater for people in their 50s and 60s, but the trend lines were far less troubling. The percentage of people ages 55 to 64 who held debt fell from 81.7 percent to 77.6 percent. For people ages 65 to 74, the percentage holding debt held steady at about 65 percent.

The average debt for 55- to 64-year-old debtholders fell from $112,075 in 2007 to $107,060 in 2010. For people ages 65 to 74, average debt fell from $72,922 in 2007 to $70,875 in 2010.

It makes sense for younger people to have more debt because they are still paying off big expenses, like houses, and they also are more likely to be bringing home a paycheck. By the time you reach your mid-70s, many would expect to have paid off the house and retired from regular work.

For people 75 and older, Copeland said his research showed that both median credit card and housing debt increased for those who had those types of debt.

Lucia Dunn, an economist at The Ohio State University, said her more recent research also has shown that older Americans have been taking on more credit card debt in recent years. She also suspects that unexpected medical expenses are a key problem for that group.

But in general, she said the really troubling finding she's seeing is that younger Americans appear to be taking on more debt than previous generations, and paying it off at slower rates.

That could mean that today's young people have even bigger problems than their parents and grandparents when they reach age 75 and older.

"The elderly are taking it in (but) not as fast as the younger ones," she said. "The really young cohorts are really digging a hole for themselves."
You can read the full research report from the Employee Benefit Research Institute by clicking here.  It's very worrisome and this disaster will impact younger Americans much harder when they reach their not-so-golden years.

What's even more depressing is the asinine policy response to the retirement crisis. Vancouver's News1130 reports, Washington state looking at aggressive pension reform:
While governments in this country grapple with pension reform, an aggressive idea is being fiercely debated just south of our border.

Politicians in Washington state are mulling over the idea of shifting government workers from pensions to RRSPs.

The plan would move current workers under the age of 45 away from defined benefit plans into defined contributions. New workers would also go into the RRSP plan.

Jordan Bateman of the Canadian Taxpayers Federation says that’s even more aggressive than what’s being discussed here in Canada.

“Right now, I think what needs to happen in Canada, [is] we need to change new employees over to the defined contribution plan or RRSP style. It’s the standard now in the private sector,” he tells us.

But Bateman feels something needs to happen in this country.

“We just can’t continue with these two classes of pensioners in Canada — one who happened to have a government job and one who have a private sector job paying for their own pension and paying for the government guy’s pension.”

Pension reforms are on the minds of governments all over this country these days, while a number of studies suggest Canadians are not saving enough for retirement.
With all due respect to Jordan Bateman, Bill Tufts and others who are concerned about the "crushing debt of public pensions," they really don't have a clue about what's in the best interest of all workers and the health of developed economies.

Importantly, shifting workers into 401(k)s, RRSPs or defined-contribution plans is effectively condemning them to  pension poverty. Moreover, instead of reducing public debt, you will see a worsening of the debt profile of many developed economies as taxpayers will bear the burden of exploding social welfare costs. It will also severely hamper productivity, the ultimate determinant of the wealth of a nation.

Finally, News1130 also reports, Canada’s pension system has room for improvement:
A new report is suggesting several ways the federal government could improve the country’s pension system. It includes expansion of the Canada Pension Plan (CPP) to allow larger contributions.

Critics of this strategy have complained about the impact on business, as expanding CPP would increase payroll taxes. Report co-author Jack Mintz with the University of Calgary’s School of Public Policy says there is a way to mitigate that problem.

“And there we suggest if we also increase the eligibility age from 65 to 67, which would make a lot of sense given that people are living much longer (…) that actually will mute any increase in payroll taxes to pay for additional benefits,” he says.

Mintz says the change also would allow retiring workers to draw a larger maximum pension, rather than having to rely on the guaranteed income supplement (GIS). The age increase would have to be phased-in to protect older workers who’ve been paying into the pension system for years.

“But it would be a real help for younger people today,” he adds. “At least when they do end up in the retired years they could count on a certain floor of income.”

The report makes several other recommendations, including making CPP contributions deductible from taxable income, like RRSP investments, to encourage workers to maximize contributions.

It suggests treating group RRSPs like defined-contribution registered pension plans (RPPs), another move that would reduce payroll taxes, and upping the age limit for RPP and RRSP contributions from 71 to 75 years to reflect the increase in life expectancies.

Also:
  • Allowing RRSP contributions to be altered to allow lifetime averaging, allowing workers to take advantage of additional contribution room.
  • Increased contribution limits on Tax-Free Savings Accounts
  • Creation of a capital-gains deferral account to allow investors to sell off underperforming assets, without fear of triggering a tax bill, as long as they reinvest the proceeds.
You can read the entire report here. I agree with all the recommendations above, especially expanding the CPP, which is in the news again after the head of CIBC recently came out to sound the alarm on our retirement crisis.

I would, however, go a step further and completely revamp our pension system to make sure pensions are a public good and managed by large, well governed public pension plans. Companies shouldn't be in the business of managing pensions. America's corporate pension gap is soaring and in Canada, things aren't better as Air Canada's pension relief could hurt competition.

Below, leave you once again with a new pension funding documentary, co-produced by Ontario Teachers' and Cormana Productions (also available here). Entitled Pension Plan Evolution - A New Financial Reality, the 23-minute video takes a global look at how pension plans are changing to meet economic and demographic challenges ranging from volatile markets to increasing longevity.

It includes interviews with thought leaders from around the world addressing important pension issues such as: How will pension plans meet their commitments to members? How will contributions and pension benefits be affected? This is a must watch for anyone concerned about their pension and the future of  retirement systems around the world.