Money Culture

June 7, 2022

About 5 million employees in state and local government are not currently part of the Social Security system.

Federal law tries to protect them by requiring that their traditional government pensions provide the same retirement benefits they would receive if they and their employers were instead contributing to Social Security.

But the Center for Retirement Research finds that roughly 17 percent of these workers’ pensions fall short of that modest standard. The reasons involve how long they remain in their government jobs and how their pensions are calculated.

Let’s start with the workers who usually do not fall short: career public sector employees. They are protected because their pension annuities are based on their average salaries in the final years of employment when pay tends to be at its highest. In that way, pensions resemble Social Security. The benefits retain their value because they are based on a worker’s 30 highest years of wages, which Social Security adjusts upward at the rate of average wage growth.

Another group that is relatively unscathed are employees who have worked no more than five years in a government job. If they spend most of their careers in the private sector, they will accumulate many years of Social Security coverage in those jobs.

The government workers most at risk are in medium-tenure jobs lasting about 6 to 20 years, the researchers found. If they leave government mid-career, the wage growth they miss out on will have substantially eroded their pensions. … Learn More

February 24, 2022

Retirees have long been reluctant to spend the money they’ve accumulated in their 401(k) savings plans. But it also used to be common for retirees to have a traditional pension to cover their regular expenses.

By the time the baby boomers came along, pensions were available to a dwindling minority of workers, and it isn’t entirely clear how much they’ll tap into their 401(k)s.

A new study quantifies the impact of this transformation in the U.S. retirement system, where traditional pensions are now found almost exclusively in the public sector. The conclusion, by the Center for Retirement Research, is that retired boomer households lacking a pension seem more likely to rapidly deplete the 401(k) savings they rely on, “leaving them with more risk that they will outlive their savings.”

Consider a simple example of the difference a pension makes. In the past, typical households that started retirement with a pension and $200,000 in 401(k)s and other financial assets had about $28,000 more at age 70 than their counterparts with $200,000 in assets but no pension. After age 75, the difference between the haves and have-nots widened to about $86,000.

For this analysis, the researchers used data on the retirement finances provided in a survey of older Americans, specifically the heads of households born between 1924 and 1953, which includes some of the earliest boomers.

The researchers also found that the pace at which these retirees spent their savings hinged on the percentage of wealth they held in the form of annuities, whether a pension, Social Security, or an insurance company annuity. The retirees who got more of their income from annuities depleted their savings more slowly.

Based on prior generations’ behavior, the researchers roughly estimated that boomers – given their lower pension coverage – are in danger of using up their financial assets at around age 85. This would leave them with little room in their budgets for a long life, a large unexpected medical bill, or an inheritance for their children.

Boomers probably shouldn’t assume then that their parents’ retirement experiences are a reliable indication of how they will fare.

To read this study, authored by Robert Siliciano and Gal Wettstein, see “Can the Drawdown Patterns of Earlier Cohorts Help Predict Boomers’ Behavior?” …Learn More

February 15, 2022

Early in this new documentary, the director’s message seems to be that retirement finances are messy, elusive, and too complicated for mere mortals to understand. He’s right on all counts.

Filmmaker Doug Orchard reminds us in “The Baby Boomer Dilemma: An Exposé on America’s Retirement Experiment” that there are no easy solutions for Social Security, which economists predict will deplete its trust fund reserves around 2034. Closing the shortfall will probably require some combination of benefit cuts and revenue increases.

Social Security is “one of the most important problems we face as a nation,” The Wharton School’s Olivia Mitchell says in the documentary.

Our other primary program – a 401(k)-style retirement savings plan – seems great when the stock market is going up, as it has until recently. Viewers are reminded of the 2008 stock market crash, which panicked older workers who realized they might not have time to make up their losses before retiring. The stock market rises over long periods of time, increasing the money in retirement accounts, but it entails risks that can be unnerving for workers and force them into making bad decisions about their investments.

Finally, the filmmaker presents a real-world example – in Florida – of the difficult decisions workers grapple with in a U.S. retirement system that has largely transitioned from defined benefit pensions, which provide regular monthly income, to 401(k) and other defined contribution plans, which accumulate a pot of savings that retirees have to figure out how to manage.

“Baby boomers are sort of the guinea pig, and we’ve said, ‘Okay you figure it out guys,’ ” says David Babbel at Wharton. …Learn More

January 25, 2022

Retirement for workers in state, county and municipal government fits a certain picture: a regular monthly pension payment awaits them.

But there are important exceptions, which a recent study has filled in. A small minority of public sector workers get some or all of their retirement benefits in the form of a one-time cash payment. Doing so potentially comes at a cost: less financial security in old age.

Of particular concern are the 5 million people working in state and local government jobs that are not covered by Social Security. Social Security – like a pension – is a monthly annuity that provides some certainty about retirement income.

Still, in the larger scheme of things, the vast majority of state and local governments have retained their defined benefit (DB) pensions, even as these plans have virtually disappeared from the private sector, finds an analysis for the Center for Retirement Research by Jean-Pierre Aubry and Kevin Wandrei.

Some workers have the option of converting part of their DB pensions into a cash payment that reduces their regular monthly retirement benefits, and the research suggests that 6 percent of all retired state and local employees do so. Most government plans also offer a joint-survivor annuity that provides a lifelong payment to a deceased retiree’s spouse, but less than half of the workers who have this option actually choose it.

The 12 percent of public sector workers who do not have DB pensions are covered under various plans with a defined contribution (DC) feature. A majority of the workers with these retirement savings plans will take some or all of their benefits in the form of a one-time distribution of assets, the researchers found. …Learn More