November 17, 2016
Early Social Security Filers Afraid to Lose
Retirement experts and financial advisers maintain there is a right way and a wrong way to approach Social Security.
For most people, the right way is to view waiting until your late 60s to sign up for benefits as the route to boosting your retirement income and protecting against out-living your savings. People who delay will have a larger Social Security check to pay the bills that come due every single month for as long as they live.
The wrong way is to make a decision based on fear – the fear of losing money if you don’t sign up soon after turning 62, the earliest age allowed under the program. While you might feel that delaying means losing out, delay can, in fact, protect you and your spouse from a more consequential loss in the future: inadequate monthly income when you are very old.
A study on this issue used a new technique to identify which individuals possess this fear of loss. In six different online surveys, the researchers asked some 7,000 working-age adults to choose between numerous pairs of gambles showing the probabilities of scoring a financial gain (45 percent), losing money (45 percent), or breaking even (10 percent). In each pair, one gamble had a smaller potential dollar loss than a second gamble in which they could lose more money – but also win more.
Loss aversion was prevalent. They found that about 70 percent of adults showed some degree of loss aversion, meaning that they preferred the gamble that risked a smaller dollar loss.
Next, the researchers analyzed whether the people who were most loss averse also plan to claim their Social Security benefits at younger ages. In all six surveys, the most loss-averse workers were significantly more likely to claim their benefits earlier.
The researchers hope their new technique and findings improve the ability to identify who is loss averse, so that experts can design better ways to help people make smart decisions about their Social Security, the bedrock of most Americans’ retirement security. Learn More
September 22, 2016
Seniors Enjoy More Disability-Free Years
Persistent increases in U.S. life expectancy are widely recognized. But if we’re living longer, what’s also important is whether those additional years of life are healthy years.
Even using this higher standard, the news is good.
A 65-year-old American today can expect to live to about age 84 – or about one year and four months longer than a 65-year-old in the early 1990s, according to a new study. But there was a bigger increase – one year and 10 months – in the time the elderly enjoy being free of disabling medical conditions that limit their quality of life.
The researchers, a team of economists and biostatisticians at Harvard, pinpointed two conditions that are the dominant reasons the elderly are remaining healthier longer: dramatic declines in cardiovascular conditions in the form of heart disease and stroke, and improved vision, which allows seniors to remain independent and active.
The study used medical data from a Medicare survey that asks a wide range of questions about the respondents’ ability to function and perform basic tasks. The researchers found a decline in the share of seniors reporting they have some sort of disability – to about 42 percent currently – and most of this decline occurred during the final months or years of a person’s life.
They also tried to identify the primary reasons for the health improvements, though they were cautious about these results. Heart attacks and strokes are major causes of death in this country. But cardiovascular disease is being treated aggressively – with statins, beta-blockers, even low-dose aspirin – and the treatments might have reduced mortality and the prevalence of heart attacks. …Learn More
September 20, 2016
Lift SNAP’s Asset Test and People Save
When a low-wage worker has a dental emergency or the car breaks down, it can set off a chain reaction of financial problems. Losing a job due to that car problem is a catastrophe. It’s not an exaggeration to say that having just a little money in a bank account is a lifesaver.
But low-income Americans are discouraged from saving due to the asset limits in joint federal-state assistance programs such as food stamps, Medicaid, and Temporary Assistance to Needy Families. These asset limits create a Catch-22: if the recipient builds up the savings crucial to their financial well-being, they lose their assistance, which is also critical to their well-being.
This illustrates just how difficult it is to design programs to help the poor and low-wage workers. Without asset limits, a relatively well-off person who earns very little would qualify for food stamps. But using asset limits to restrict who qualifies can harm our most financially fragile populations.
New research looking into the impact of asset limits among recipients under the Supplemental Nutrition Assistance Program (SNAP) – once known as food stamps – confirms that asset limits inhibit saving.
“Having a policy where people don’t save or draw down their assets before they apply for benefits can really harm long-term economic success for these families,” said Caroline Ratcliffe, a senior fellow at the Urban Institute who conducted the study. …Learn More
August 4, 2016
Social Security Credits for Moms?
Dramatic changes in the U.S. family structure over several decades – more divorce, single motherhood, and unmarried couples – could have a big impact on the financial security of baby boomer women as they march into retirement – and on future retirees.
A review of studies on Social Security spousal and survivor benefits by the Center for Retirement Research, which sponsors this blog, examines the difficulty of providing retirement security for the growing ranks of women and mothers who do not fit the traditional family mold.
Social Security’s benefits were designed for the typical family when the pension program was enacted in the 1930s, a family portrayed at the time by Henry Barbour and his wife, Fanny, in the popular radio soap opera, “One Man’s Family.” A spouse, usually the wife, is guaranteed half of her husband’s full retirement age benefit under the program when she reaches her full retirement age – whether she works or not. When her husband dies, her survivor benefit equals his pension benefit.
But women who marry and become divorced within 10 years are not eligible for these benefits. Nor, of course, are single working women, who receive benefits based solely on their own work histories. Increasing numbers of women reaching retirement age today either were in short-term marriages or never married and won’t receive a spousal or survivor benefit. The problem is that most of these women are mothers. …Learn More
July 26, 2016
Impact of Raising Austria’s Pension Age
Like the United States, many European countries are concerned about shoring up their pension systems for their aging populations. In 2000, Austria took action by introducing a series of small increases in the earliest age at which workers can begin receiving their federal pensions.
This reform is gradually phasing out early eligibility entirely. Raising the earliest claiming ages, from 60 to 65 for men and from 55 to 60 for women, will cause them to converge, next year, with the pension program’s standard – or “normal” – retirement ages.
Prior to the reform, workers who had signed up for benefits before their normal retirement age received only mild reductions in their monthly benefits. The reform, in addition to gradually raising the early retirement age, exacted a larger penalty on the early claimers, increasing the incentive to continue working.
Austria’s pension changes have provided researchers with a unique natural experiment to see how workers reacted to a delay in their eligibility. A study by economists at the University of Texas at Austin and the Vienna University of Economics and Business, which they will present tomorrow at the NBER Summer Institute, have concluded that the reforms have had a “pronounced” effect. …Learn More
July 12, 2016
What’s New in Public Pension Funding
A small group of researchers at the Center for Retirement Research, which sponsors this blog, produces a large volume of analysis of the nation’s state and local government pension funds.
Their work isn’t typical of the personal finance information that appears in this blog. But it turns a bright light on the financial condition of the pension funds that millions of state and local government workers and retirees rely on. The bottom line, according to these studies, is that while some funds are in poor condition, many more are managing.
The following are short descriptions of the Center’s recent reports, with links to the full reports:
- The big picture is updated in the new brief, “The Funding of State and Local Pensions: 2015-2020.” Eight years after the financial crisis, new data have confirmed that pension plan funding stabilized in 2015. And despite poor stock market performance last year, plan funding improved slightly in 2015 under traditional accounting methods. On the other hand, funding is slightly lower under new accounting rules that require the plans’ financial statements to value their investment portfolios at market values.
The appendix in this brief provides funded levels for 160 individual plans in the Center’s public pension database.
- “Are Counties Major Players in Public Pension Plans?” The answer in this report is no, with the exceptions of California, Maryland and Virginia, where counties account for about 15 percent of pension assets.
- While retiree health plans are quickly disappearing at private employers, they remain prevalent in the public sector. These plans are not fully funded, and their unfunded liabilities are relatively large – equivalent to 28 percent of all liabilities for unfunded public pension plans – according to a March report, “How Big a Burden Are State and Local OPEB Benefits?”
- New accounting rules, known as GASB 68, require city pension funds that are joint participants in plans administered by their state, to transfer their net unfunded liabilities from the state’s to the local government’s books. …
June 30, 2016
401(k) Investment Options: Less is More
There’s plenty of evidence of the unfortunate consequences for employees overwhelmed by too many investment options in their 401(k) plans. Studies find that confused employees might not join the plan at all, select investment funds that are not well diversified, or throw up their hands and put an equal amount in each fund offered by their employer. And as employers add more options, the new funds often carry higher fees and produce lower returns.
A new study took the opposite tack, examining how employees reacted when one large U.S. employer reduced the number of investment options. The results were lower fees and less turnover, saving employees an average of $9,400 over a 20-year period. Further, their new portfolios were less risky.
The employer, a non-profit organization, cut the number of investment options roughly in half, from the 90 different funds initially in the plan. The employer also simplified the plan by sorting employees’ choices into four groups:
- 13 Target Date Funds (TDFs) with low fees and investments determined by an employee’s age;
- 4 index funds invested in a money market, diversified U.S. stocks, diversified U.S. bonds, and diversified international stocks;
- 32 mutual funds organized by risk level, from small-cap growth funds and REITs to balanced funds and Treasury bond funds;
- A brokerage account with wide latitude to invest.
The researchers – Donald Keim and Olivia Mitchell at The Wharton School – analyzed the responses among those affected by the change, which was anyone who held at least one mutual fund eliminated during the plan streamlining. Those affected who did not choose replacement funds were defaulted into a TDF appropriate for their age. …Learn More