Transcript The Changing U.S. Retirement Landscape

Lecture 2: The Changing
U.S. Retirement Landscape
Monday, August 28 2006
By the end of this lecture, you
should be able to:
Explain why retirement income has become
major issue in private and public sector
Describe current sources of income for the
elderly
Describe major trends facing retirement
landscape in the US
Discuss rationale for public concern over
pensions
Explain why employers might offer pensions
out of self-interest
Demographic Shifts
Life expectancy (at birth)
1900: male = 51.5, female = 58.3
2000: male = 79.6, female = 84.3
Fertility declines
Work patterns
In 1900, 2/3 of those who reached 65 continued
working
Today, only 1/8 continue working after 65
Living arrangements
Nearly 3 out of 4 retired men in 1900 lived with
adult children
Today, fewer than 1 in 5 do
Income Sources of Aged (65+) Households 2002
Employer
Pensions
19%
Other
3%
Social Security
39%
Asset Income
14%
Earnings
25%
Source: Fast Facts & Figures
about Social Security,
August 2004
Social Security Act of 1935
Social Security as a national retirement
system
Championed by FDR to offer “some
measure of protection to the average
citizen and to his family … against
poverty ridden old age”
Backdrop: high unemployment (25% in
1932) and stock market crash of 1929
Social Security Today
In 2005, more than 48 million Americans will
receive approx. $518 billion in benefits
Approx 40 million of these are retirees, or their
dependents and survivors (rest is for DI)
More than 9 of every 10 individuals over age
65 receive SS benefits
About 2/3 of elderly receive 50% or more of
their income from Social Security
SS is the only source of income for 22% of
elderly
Employer Sponsored Pensions
Largely gained popularity in post WWII
period – often driven by unionization
Savings accumulated in employer plans is
growing fast
$1.6 trillion in 1985
$5.5 trillion in 2003
Pronounced shift away from defined benefit
to defined contribution plans
Much more to come on this topic!
Individual Savings
Accounts for 15% of all retirement
income, but is highly skewed
More than half of households report
income from assets, but many have
none
Line between personal saving and
pension saving is getting increasingly
blurry
Labor Earnings
In 1962, 36% of households age 55+
received labor earnings
In 2002, only 22% do
Choosing retirement date is an important
adjustment mechanism for those who have
over- or under-saved
Ability to contribute to workforce much
greater today
Better health than elderly of 50 years ago
Job skills not as tied to physical prowess
Public Assistance
Programs such as SSI (Supplemental
Security Income)
5% of elderly households receive some
form of public assistance
For 25% of recipients, it is sole source
of income
What are the Big Trends?
1. Continued aging of the population
2. Shift towards more “self reliance”
DB to DC
Debate over personal accounts
3. Rising health care costs
Population Aging
Ratio of individuals age 20 – 64 to
individuals age 65+
1950:
1975:
2000:
2025:
>7
5.3
4.8
3.3
Today, 1 in 8 citizens is age 65+
By 2050, 1 in 5 will be age 65+
DB vs. DC Plans
Defined Benefit
Defined Contribution
The Shift from DB to DC
1980:
38 million DB participant
20 million DC participants
1999:
41 million DB participants
60 million DC participants
Source: U.S. DOL Private Pension Plan Bulletin
Health Care
U.S. spent 14.1% of GDP on health care in
2001, or about $1.4 trillion
Up from 8.8% of GDP in 1980
Likely to reach 16% by 2010
Growth in costs expected to accelerate –
some estimates that it will be 38% of GDP in
the long-run!!!
Disproportionately large fraction of health
care expenditures incurred by the elderly
A Model of Individual Retirement
Savings Behavior
The “Life Cycle Model”
Individuals like to smooth consumption
over their lifetime
But income is not even over lifetime
What do you do?
A Simplified Life Cycle Model
$
Income
save
Consumption
borrow
Age 22
Spend down wealth
Age 62
death
The “Rational” Case Against Public
and Private Pensions
If individuals were behaving rationally and
with perfect foresight, they should be saving
enough today to take care of their retirement
Attempts to force savings through public or
private pensions will be:
At best, redundant and unnecessary
At worst, harmful, by making people save too
much, etc.
The Case for Public Support of
Retirement Pensions
Inadequate foresight or planning
Uncertainty and imperfect insurance
markets
How long will I live?
What will my expenditure needs be?
Income Redistribution
The Value of Pensions to Employers
Tax deferral
The three Rs
Recruiting
• May help “sort” out type of applicant that you want
Retention
• Vesting rules, back-loaded compensation plans
Retirement
• Influence choice of retirement date
Encourage Productivity
Discourage collective bargaining