Economics of Retirement

Chained CPI is a Cut in Benefits for the Most Vulnerable

On April 10, President Obama introduced his budget proposal for Fiscal Year 2014, which includes a controversial change in how the Social Security program determines benefits for seniors. In short, the President wants the program to determine cost of living adjustments based on a "chained" Consumer Price Index (CPI), rather than a traditional CPI.

The chained CPI assumes that people can easily substitute cheaper goods for households necessities. However, SCEPA Director and retirement expert Teresa Ghilarducci joins the PBS Newshour blog, "Does Obama Have it Right or Wrong on Social Security?," to argue that seniors face the opposite as they age, as more and more of their income is taken up by expensive healthcare services and other products that do not have cheaper substitutes. It is also increasingly difficult for the elderly, especially those with health problems or disabilities, to buy in bulk or go from store to store bargain shopping. This fact is well-documented and led the U.S. Department of Labor's Bureau of Labor Statistics (BLS) to develop a measure of inflation that reflects the true costs of aging: the Current Price Index for the Elderly (CPI-E).

The differences between the chained CPI and the traditional CPI are only .03% lower per year. However, these small cuts year after year would mean that the average retiree would lose $1,147 a year by age 85. The cumulative cuts to people on Social Security reach $28,000 by the time a retiree is 95 according to Social Security advocates. In contrast, linking Social Security benefits to CPI-E would raise benefits by 6% for a 95-year-old rather than cut them by tens of thousands of dollars.

Hardworking Americans Deserve Hardworking Retirement Plans

The Urban Institute recently published a Retirement Security Data Brief that shows Americans are contributing more to defined contribution (DC) plans of the 401(k) variety than to defined benefit (DC) pension plans as less employers offer DB plans to their employees. This supports SCEPA research, which has documented the effect of this structural shift in the labor market - a downward trend in individual’s ability to retire at their current standard of living due to high fees and market losses.

In their documentation of this trend, The Urban Institute’s analysis can be misleading. It shows that when adjusted for inflation, DC assets have increased by 5 percent from 2007 to 2012, suggesting that DC accounts have recovered from the recession and that these accounts can recover from market vulnerability. However, this calculation includes yearly workers’ contributions, which is the same problem faced by the Beardstown Ladies, the savvy group of older women who pooled their knowledge to invest their money. Their fantastical returns reported in their best selling book were audited when it was discovered they included their contributions as earnings.

When yearly contributions are subtracted, the increase is only 1 percent - hardly enough to be considered a recovery and certainly not enough to adequately prepare for retirement.

American workers' retirement plans are not working as hard for them as they should. If these funds had been contributed to a Guaranteed Retirement Account it would have created a more stable and significant source of retirement funding. The GRA shields workers' hard-earned savings from stock market crashes by pooling investments and guaranteeing a rate of return. GRA plans would provide 3 percent returns above inflation, plus the 5 percent of combined employee-employer annual contributions. This 8 percent increase over 4 years would mean an increase of 32 percent, including their own contributions.

Raising the Retirement Age Hurts ALL Workers

Thoughtful economist Gene Steuerle, institute fellow at the Urban Institute and a former deputy assistant secretary of the Treasury, reveals a basic truth in his recent article, "Getting the Facts Straight on Retirement Age." Namely, that the rich who live longer win, win, and win some more. But raising the retirement age needs to be viewed more broadly. Cutting benefits hurts ALL workers. In just one example, they are left having to beg for jobs at older ages, rather than having a livable social security benefit in their back pocket when negotiating. 

Dark Humor Highlights Retirement Crisis

It's funny, but it's also true.  In the post, A Small, Deluded Minority Still Believes in Successful Retirement, the popular blog Gawker satirized the fact that the overwhelming majority of Americans are all too aware of their insecure retirement prospects.Hamilton Nolan, editor at Gawker, picks up on the National Institute on Retirement Security (NIRS) poll, publicized by the Washington Post, that the vast majority of Americans are anxious about not having enough money to retire. According to Gawker, the 15 percent of Americans who are not worried about retirement should "wise up" because they are being "completely unrealistic" about their financial future. I am sympathetic to their antics, as I have continued to advocate that retirement insecurity is no laughing matter.

Media Documents Downward Mobility for Future Retirees

Two recent articles feature SCEPA research as they shed light on the unfortunate trend emerging for Americans who hope to retire: downward mobility.

On February 16, 2013, The Washington Post ran the story, Fiscal Troubles Ahead for Most Future Retirees. This is the first time that Americans are going to be relatively worse off than their parents or grandparents in old age. The article cites SCEPA's Retirement Income Security Project and its work documenting the failure of 401(k) accounts to adequately prepare Americans for retirement. It also makes note that a diversity of organizations found similar results in retirement trends, including the conservative Heritage Foundation and the Senate's Committee on Health, Education, Labor and Pensions.

On February 19, 2013, the LA Times ran,  A Crucial Step Toward Retirement Security for the Working Class. Reporter Michael Hiltzik gives a succinct overview of California's new law to help low-wage workers save for retirement as well as the political challenges to enacting this common sense solution. The new plan is modeled after SCEPA's State Guaranteed Retirement proposal. Once implemented, California will expand access to retirement saving for more than six million people

The Vulnerability of Nearing Retirement

In my capacity as the Director of The New School's Schwartz Center for Economic Policy Analysis (SCEPA), I have been working with a research team to document the need for reform measures to prevent a crisis of downward mobility in retirement resulting from inadequate savings, eroding pension institutions, and decreasing access to and participation in effective retirement savings vehicles at work.

As part of this project, we are investigating how the environment in the years before retirement affects people's health and wealth when they finally get to an age to retire - similar to the long-term benefits of prenatal nutrition for a newborn baby and beyond.

Our new research paper, "The Crisis of Jobs and Healthcare for Unemployed Americans Aged 55-64", documents older individuals' experiences of unemployment, intermittent health care coverage, and increasingly harsh work conditions. Using data from the U.S. Census Bureau's Survey of Income and Program Participation (SIPP), we investigate the impact of the Affordable Care Act (ACA) reform on this population and whether the unemployment faced by older Americans is cyclical or structural in nature.

Exploring solutions to this crisis, including job retraining programs and tax incentive plans, we find that workforce development and unemployment insurance policies must take into account the new reality that the unemployed are increasingly older, extremely low income, less likely to be able to retire on pensions, have little access to spousal income or health care and are often displaced from their career industries.

These results illustrate the increasing vulnerability of those approaching retirement age and suggest potentially dire results of raising the Social Security retirement age.

Raising the Social Security Retirement Age Makes No Sense

PBS Newshour's Business Desk blog asked me to comment on the impact of raising the retirement age. Despite conventional rhetoric, the physical and mental demands of older workers' jobs have intensified, making raising the retirement age poor economic policy.

Retirement Account Balances by Income: Even the Highest Earners Don't Have Enough

I have been working on new research documenting that, despite the growing tax breaks and intensive advertising campaigns for 401(k) and IRA retirement accounts, Americans nearing retirement are more likely than previously expected to experience downward mobility in their golden years. Specifically, people ages 50 to 64 - 58 million in 2010 - will likely not have enough retirement assets to maintain their standard of living when they reach their mid-sixties.

Using data from the U.S. Census Bureau's Survey of Income and Program Participation (SIPP), SCEPA's new Fact Sheet, Near Retirees' Defined Contribution Retirement Account Balances, is the first to provide a breakdown of defined contribution (DC) retirement account balances by income.

Three quarters of near retirees (ages 50 to 64) have annual incomes below $52,201, with an average total retirement account balance of $26,395 . When stretched out into an annuity over an average retirement lifetime, this sum does not provide a significant addition to a monthly Social Security benefit (see Table 1.) Further, the median value of retirement account balances for half of near retirees is zero, meaning that over half of this group has no retirement savings.

Individuals with incomes over $52,201 per year have more in their retirement accounts, but their balances are not high. Their average retirement account balance for this income group is $105,012. Because only a few people have very high balances, the median balance is much lower; 50 percent of people ages 50-64 in the top 25 percent of the income distribution have retirement account balances of only $52,000.

The numbers are lower than previous estimates based on the data set. Previous estimates rely on the Survey of Consumer Finances (SCF), which aims to measure the net assets of U.S. families by over-sampling people likely to be wealthy to provide more precise estimates of wealth. This includes assets that only the wealthy own, such as municipal bonds and business assets. In contrast, the SIPP allows researchers to conduct analyses of government programs for the low-income population, over-sampling the low-income population. Since the two data sets focus on different groups of people, SIPP estimates of retirement wealth differ from estimates based on SCF data and more accurately represent the American population.

Downward Mobility Among NYC Retirees

The financial security of the next generation of New York retirees is at risk. If current trends persist, 37% or close to 750,000 workers approaching retirement who live in metropolitan areas of New York State, are projected to be poor or near poor in retirement.

This impeding crisis, documented in a recent report by SCEPA and New York City Comptroller John C. Liu, is due to the decline in employer sponsorship of retirement savings vehicles, the increasing prevalence of defined contribution (DC) plans over traditional defined benefit (DB) plans, and the overall erosion of household savings.

To assess the future impact of these factors on the retirement readiness of New Yorkers, SCEPA published "New York's Retirees: Falling Into Poverty," a research report on the downward mobility of New York's next generation of retirees. We looked at workers who are currently ages 25-64 and are living in metropolitan areas of New York State (46% of whom live in New York City), and we projected the income stream that will be available to them when they reach age 65.  Results show that if current trends persist, many middle and low income workers will experience downward mobility or a steep drop in their living standards when they retire, and several will face severe economic hardship:

• 23 percent of workers ages 25-64 living in New York State metropolitan areas will not have the assets needed to prevent them from being poor when they retire at age 65. This means their total net worth, including all of their savings for retirement in employer-sponsored plans and Social Security built up over their lifetime, will not be sufficient to keep them above the NYC adjusted poverty level of $13,662.
• 36 percent of workers ages 55-64 living in New York State metropolitan areas who are nearing retirement are at risk of being poor or near-poor, meaning they will be living at or below 200 percent of the NYC adjusted poverty level of $27,324.
• 74 percent of currently low-income workers and 35 percent of currently middle-income workers ages 50-64 living in New York State metropolitan areas are projected to be poor or near-poor in retirement.
• Although workers who participate in a retirement plan are at a lower risk of being poor in retirement than those who do not save for retirement, workers whose primary retirement plan is a DC plan fare significantly worse than those whose primary plan is a DB plan. Thirty-eight percent of workers ages 25-64 whose primary plan is a DC plan will be poor or near-poor compared to only 7 percent of DB plan participants.

401(k) Plans Magnify Effects of Recession

My new study with SCEPA researchers Joelle Saad-Lessler and Eloy Fisher, "The Automatic Stabilizing Effects of Social Security and 401(k) Plans," documents how the economic recovery is impeded by market-based retirement plans, such as 401(k)s, and shows how government-supported accounts such as pensions and Social Security stabilize and support economic recovery.

This study makes it clear that the private sector's historic transition towards market-based retirement plans and away from traditional pensions has not only harmed investors who lost their savings in the Great Recession, but injured the overall economy. In fact, 401(k)s not only de-stabilize the economy, they significantly undermine the benefits of other stabilizing programs, including the federal income tax, unemployment insurance, and Medicare and disability insurance.

As the first-ever comparative study of how large pension institutions impact the long-term business cycle, the study compares the effects of Social Security against market-based retirement vehicles such as 401(k) plans. The size of both of these systems - 93% of American workers are covered by Social Security, and 63% possess 401(k)-type retirement plans - gives them a significant influence on the economy.

The study finds that market-based retirement accounts increase the volatility of the business cycle, contributing to an overheating of the economy during expansive periods and exacerbating economic contraction during recessionary spells. On the other hand, Social Security helps to reign in the economy during periods of expansion, and stimulating it during recessions - a function known as an automatic stabilizer. The study finds that for every $1 increase in real GDP, 401(k) plans reduce government programs' automatic stabilizing impact by 15%.

Our study provides hard proof that 401(k)s are a lose-lose for both individuals and the economy. They expose individuals' retirement savings to market risk and hurt the economy's overall ability to create jobs and spur consumption. Economists of all stripes understand the importance of automatic stabilizers to the economy. Now is the time for policy makers to follow by addressing the unintended consequences of incentivizing market-based retirement accounts at the expense of programs that are a win-win for everyone, including traditional pensions and Social Security.