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. …
July 7, 2016
More Americans Are Upper Middle Class
Yes, income inequality has risen dramatically over the past 35 years. But something else has happened that might surprise you.
The size of the upper middle class is expanding, as Americans migrate up from the ranks of the middle class and poor, according to a new analysis from the Urban Institute.
Economist Stephen J. Rose uncovered this finding by defining how much income families needed in 1979, just before inequality really took off, to be counted as rich, upper middle class, middle class, lower middle class, or poor. He anchored his class divisions largely around incomes relative to the federal poverty level. For example, he set the income floor for the upper middle class at five times the poverty level. He then used U.S. Census Bureau survey data to estimate the share of American families falling into each income tier in 1979 and in 2014, with incomes adjusted for inflation. …Learn More
July 5, 2016
Parents, Start Student Loan Homework!
Here’s a reminder that parents should start their homework this summer to minimize college loan repayments over the long haul. A few basic decisions can add or subtract thousands of dollars.
A little help came last week, when the interest rates on all federal student loans were reduced. Despite the declines, the rates for the PLUS loans available to parents remain much higher than the loans available to their offspring – taking out a PLUS loan will nearly double the interest paid on $50,000 over 20 years, compared with an undergraduate Stafford loan.
This is an argument for having prospective students take out the loans, rather than the parents. As for paying them back, financial advisers tend to agree that young adults with decades of work ahead of them can share in that responsibility at a time their parents are facing retirement. This complex family decision depends on myriad factors, including how much income the graduate can expect to earn after college and how comfortable the parents are.
There are one-time, upfront fees on federal student loans, and they are also much higher for parent PLUS loans: 4.272 percent of the loan’s principal amount versus 1.068 percent for Stafford loans for undergraduates – these fees will go up for loans disbursed after Oct. 1.
The Institute for College Access & Success has put together an excellent cheat sheet explaining the federal loan options, who qualifies for various types of loans, and the costs of each. To see this sheet, click here.
Below is the institute’s summary of the new loan rates, effective July 1: …Learn More
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
June 28, 2016
Not All Baby Boomers Can Work to 70
There’s one problem with expecting all baby boomers to delay retirement beyond their 60s: it might not be fair.
That’s because people with lower incomes and less education die younger than the well-to-do with more education. Think about what would happen if everyone retired at, say, 70. Those with less education and a lower socioeconomic status (SES) would enjoy fewer years in retirement than people with higher SES.
This gap in retirement duration has also widened in recent decades. That’s because the lowest SES group has seen much smaller improvements in their life expectancy, according to economists at the Center for Retirement Research, which supports this blog.
Their study tracked adults surveyed by the U.S. Census Bureau over time and assigned each one to an SES group by sorting them into four education quartiles. Education levels correlate with income and are widely used to measure SES.
The researchers, by using separate data that match the adults to their death certificates, found that while mortality improved for all SES groups, the gap between the top and bottom SES has increased over the past three decades.
Converting mortality data into average life expectancies, they found that 65-year-old men in the highest SES back in 1979 lived nearly to age 79 – 1½ years longer than men in the lowest SES. But today, older men in the top SES are living to 85 – about 3½ years longer than the lowest SES group.
Given these uneven longevity gains, the researchers asked this question: how much longer could men work today if the goal were to maintain the same retirement-to-work ratios they enjoyed in the late 1970s? …Learn More
June 23, 2016
Our Readers’ Favorite Blogs
It’s the time of year when we highlight blogs that attracted the most page views over the previous six months, according to Google analytics.
Today, we’re listing a “baker’s dozen” – 13 blogs – popular with our readers, instead of the usual top 10. This allows us to highlight some interesting themes that were apparently on readers’ minds:
Many retirees weighed in with their comments on two blogs about how and why they’re taxed:
- How Federal Taxation Drops for Retirees
- Why Most Elderly Pay No Federal Tax
A new feature called “Boomers: Rewriting Retirement” that profiles people who are either approaching retirement or recently retired made the list:
- A Familiar Dilemma: to Work or Retire
Squared Away tried something else new – two quizzes on financial topics – and many readers took them: …Learn More
June 21, 2016
Too Much Health Plan Choice is Costly
Technology, coffee, investments, beer – most consumers value choice in some aspect of their lives. But what if having too many choices leads to bad decisions and costly mistakes?
Carnegie Mellon University economists Saurabh Bhargava and George Loewenstein, and Justin Sydnor from the University of Wisconsin School of Business, found this to be the case at one company that required employees to select from a menu of options and build their personal health plans from the ground up. The researchers found that the employees typically designed health plans that would cost them more than other plans with similar coverage.
The cost of these choices was large for the average employee – about one-quarter of their annual premium payments in the coming year. An extreme example is the group that chose a plan with a $350 deductible. They paid about $1,100 more in premiums to save, at most, $650 in out-of-pocket spending throughout the next year.
There might be reasons that someone would choose a low-deductible plan – not having enough cash on hand in case of a medical emergency, for example. But in this particular setting, Bhargava explained in an email, “none of these explanations could reasonably account for people paying $2 to $4 in extra premiums to reduce $1 in expected out-of-pocket expenses.”
Further, lower-paid employees earning under $40,000 per year were much more likely to make these mistakes.
Bhargava said that the paradox of too many choices confronts the millions of Americans who sign up online for health insurance under the Affordable Care Act (ACA) – including his mother. In a recent presentation, he said she is “like a lot of consumers” and has “a strong aversion to a high deductible.” …