Wednesday, March 20, 2013

Americans Bracing For a Retirement Crisis?

Kelly Greene and Vipal Monta of the WSJ report, Workers Saving Too Little to Retire:
Workers and employers in the U.S. are bracing for a retirement crisis, even as the stock market sits near highs and the economy shows signs of improvement.

New data show that powerful financial and demographic forces are combining to squeeze individuals and companies that are trying to save for the future and make their money last.

Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute. Only 49% reported having so little money saved in 2008.

The survey also found that 28% of Americans have no confidence they will have enough money to retire comfortably—the highest level in the study's 23-year history.

The same forces are weighing on corporate balance sheets. Based on another recent report, the Society of Actuaries said that rising life expectancies could add as much as $97 billion to corporate pension liabilities in coming years, an increase of up to 5%.

While Americans are living longer, the extended life spans will make it tougher for workers trying to stretch retirement savings and put additional strains on pension plans.

Scott Ghelfi, 49 years old, a small-business owner in Falmouth, Mass., and his wife own two candy stores and a children's clothing shop. He said they didn't make their normal $24,000 contribution to their retirement plan two years ago because they couldn't afford to take the money out of the businesses.

The total amount in the couple's retirement accounts is less than $200,000, which he considers inadequate.

"Sales are fine, but we're not growing rapidly like we were several years back, and everything is more expensive," Mr. Ghelfi said.

He isn't alone. The percentage of workers who have saved for retirement plunged to 66% from 75% in 2009, according to the Employee Benefit Research Institute survey.

Only about half of the 1,003 workers and 251 retirees surveyed said they were sure they could come up with $2,000 if an unexpected need were to arise in the next month.

"Workers are recognizing there is a crisis," said Alicia Munnell, director of the Boston College Center for Retirement Research. She noted that companies continue to do away with traditional pensions.

The survey of workers and retirees was conducted in January, even as the U.S. stock market was heading toward new highs.

Many people are struggling to make sure they don't run out of money in retirement, said Jack VanDerhei, research director at EBRI, a nonprofit in Washington, D.C.

The EBRI survey doesn't count traditional pensions, which are designed to provide retirees for steady income throughout their lives.

But pensions have become a much smaller component of Americans' retirement-savings mix over the years. The portion of private-sector U.S. workers covered only by so-called defined-benefit plans fell to 3% in 2011 from 28% in 1979, according to U.S. Department of Labor data compiled by EBRI.

Companies that still offer pensions might have to kick in more money to account for longer life spans.

The Society of Actuaries in September released the first update since 2000 to its mortality projections for U.S. retirement plans, which project life spans for pensioners.

The report offers assumptions that actuaries use to project mortality rates.

Companies are expected to start using the new assumptions this year.

According to the society, a male who reaches age 65 in 2013 is expected to live an additional 20.5 years, up from 19.5 in the earlier projections. Women turning 65 this year are now expected to live an additional 22.7 years, up from 21.3.

Although the increases might seem small, Bruce Cadenhead, chief retirement actuary with Mercer, a consulting unit of Marsh & McLennan Cos., said they are the largest he has seen in more than 25 years.

"It represents a meaningful jump in liabilities," he said.

Goodyear Tire & Rubber Co. cited the growth in the life expectancy for its plan's beneficiaries as one reason its global pension-funding gap widened to $3.5 billion last year from $3.1 billion in 2011. A Goodyear spokesman said it made the mortality adjustment "because we saw an increase in [the] actual longevity of our participants."

U.S. pension obligations for all publicly traded companies based in the U.S. totaled $1.93 trillion at the end of 2012, up from $1.60 trillion in 2008, according to Mercer.

The effect of longer life spans on pension obligations has been dwarfed by the impact of declining interest rates over recent years. Because of the way pension obligations are calculated, lower interest rates means that future obligations are higher today.

But interest rates are likely to rise at some point, which will lessen pension obligations. That is less likely with longevity assumptions.

"Rates can go up," said Rama Variankaval, an executive director in the corporate finance advisory group of J.P. Morgan Chase JPM & Co.'s investment bank. "Mortality is more of a one-way street."

Individuals face the same problem, Mr. Cadenhead said: "If we're asking them to provide for their own retirement, they're living longer, and it takes more money to provide for their own needs over the course of a lifetime."

Joe LaCascia, a 75-year-old retired insurance broker in Polk City, Fla., said he and his wife thought they would have enough savings outside their life insurance policies to last until age 95.

Now, he estimates he only has enough to last until they're 85.

He said he is more concerned about what the future holds for his children, a 51-year-old art director-turned-roadie and a 49-year-old third-grade teacher.

"They're never going to be able to create wealth, other than what our generation leaves them and what they do with it," he said. "They have more uncertainty than we have."
The future does indeed look bleak (click on image above) for the next generation(s) as higher taxes, higher cost of living, lower savings, lower investment gains and cuts in benefits are fueling anxiety over retirement and cementing America's new pension poverty.

And what has been the policy response to this slow-motion social welfare disaster? Pretty much the status quo as politicians from all parties bury their heads in the sand. Robert J. Samuelson wrote an interesting opinion piece in the Washington Post on this topic, America the retirement home (h/t, Suzanne Bishopric):
“The president is in the midst of a charm offensive.”

— The Post, referring to President Obama’s meetings with congressional Republicans

We don’t need a charm offensive; we need a candor offensive. The budget debate’s central reality is that federal retirement programs, led by Social Security and Medicare, are crowding out most other government spending. Until we openly recognize and discuss this, it will be impossible to have a “balanced approach” — to use one of President Obama’s favorite phrases. It’s the math: In fiscal 2012, Social Security, Medicare, Medicaid and civil service and military retirement cost $1.7 trillion, about half the budget. If they’re off-limits, the burdens on other programs and tax increases grow ever greater.

It’s already happening. The military is shrinking and weakening: The Army is to be cut by 80,000 troops, the Marines by 20,000. As a share of national income, defense spending ($670 billion in 2012) is headed toward its lowest level since 1940. Even now, the Pentagon says budget limits hamper its response to cyberattacks. “Domestic discretionary spending” — a category that includes food inspectors, the FBI, the National Weather Service and many others — faces a similar fate. By 2023, this spending will drop 33 percent as a share of national income, estimates the Congressional Budget Office. Dozens of programs will be squeezed.

Nor will states and localities escape. Federal grants ($607 billion in 2011) will shrink. States’ Medicaid costs will increase with the number of aged and disabled, which represent two-thirds of Medicaid spending. All this will force higher taxes or reduce traditional state and local spending on schools, police, roads and parks.

The budget debate may seem inconclusive, but it’s having pervasive effects. Choices are being made by default. Almost everything is being subordinated to protect retirees. Solicitude for government’s largest constituency undermines the rest of government. This is an immensely important story almost totally ignored by the media. One reason is that it’s happening spontaneously and invisibly: Growing numbers of elderly are simply collecting existing benefits. The media do not excel at covering inertia.

Liberals drive this process by treating Social Security and Medicare as sacrosanct. Do not touch a penny of benefits; these programs are by definition progressive; all recipients are deserving and needy. Only a few brave liberals complain that this dogma threatens programs for the non-aged poor. “None of us wants to impose new burdens on vulnerable seniors,” write economists Harry J. Holzer of Georgetown University and Isabel Sawhill of the Brookings Institution in The Post. But “for how long will we continue to sacrifice investments in our nation’s children and youth ... to spend more and more on the aged?”

Hypocritical conservatives are liberals’ unspoken allies. Despite constant grumbling about entitlements, they lack the courage of their convictions. Consider House Budget Committee Chairman Paul Ryan’s latest budget plan. From 2014 to 2023, he proposes cutting federal spending by $4.6 trillion. Not a cent comes from Social Security, while Medicare cuts are tiny, about 2 percent. His major Medicare proposal (in effect, a voucher) wouldn’t start until 2024. Most baby boomers escape meaningful benefit cuts. As Holzer and Sawhill fear, most of Ryan’s cuts affect programs for the poor.

What frustrates constructive debate is muddled public opinion. Americans hate deficits but desire more spending and reject higher taxes. In a Pew poll, 87 percent of respondents favored present or greater Social Security spending; only 10 percent backed cuts. Results were similar for 18 of 19 programs, foreign aid being the exception.

Only the occupant of the bully pulpit can yank public opinion back to reality. This requires acknowledging that an aging America needs a new social compact: one recognizing that longer life expectancies justify gradual increases in Social Security’s and Medicare’s eligibility ages; one accepting that sizable numbers of well-off retirees can afford to pay more for their benefits or receive less; one that improves generational fairness by concentrating help for the elderly more on the needy and poor to lighten the burdens — in higher taxes and fewer public services — on workers; and one that limits health costs.

Obama hasn’t talked intelligently or openly about America’s aging. In budget negotiations, the administration has made some proposals (a different inflation adjustment for Social Security benefits, a higher Medicare eligibility age) that broach the subject. But Obama hasn’t put these modest steps into the larger context of social change; nor is it clear how much the administration supports them. It’s true that Republicans should also accept higher taxes — but only after the White House engages retirement spending.

Little is possible while public opinion remains frozen in contradiction. The mistake lies in thinking that the apparent paralysis isn’t policy. It is. Government is being slowly transformed into a vast old-age home, with everything else devalued and degraded.
Samuelson raises many important points that need to be addressed but I'm not in full agreement with everything he proposes. In particular, given the looming retirement crisis, think it's high time the United States does the unthinkable -- expand Social Security to bolster retirement benefits for all Americans and adopt the same management and governance standards as the Canada Pension Plan Investment Board and other large Canadian public pension plans.

But don't think that Canada's retirement system is vastly superior to the U.S. system. David Agnew wrote a comment for rabble.ca, The ecstasy and the agony of Canadian pensions:
Canadian pensions and pension systems get widely varying report cards. For example, in the report OECD Pensions at a Glance, the authors rate Canadian pension systems (including OAS, OAP, and CPP) highly by some criteria, but poorly by others. Canadian systems work well for the disadvantaged, guaranteeing nearly 80 per cent or more of pre-retirement income for those earning half or less of the national average income. By this measure, Canada is in the top eight of the 34 OECD countries.
But for Canadians making the national average wage or above, the pension replacement rate in Canada (comparing guaranteed pension income to pre-retirement income) is only about 40 per cent, compared to the OECD average of 59 per cent. This places average Canadians in the bottom 10 OECD countries by this measure. Depending on which group is considered, the flavour of reports on Canadian pensions varies from "pension crisis" to "what crisis?" Who to believe?

Canada is even more extreme by some measures. Only about 5 per cent of elderly Canadians live in poverty, as noted by the Conference Board and International Labour Organization. By this measure, Canada is near best in the world -- only Holland and France do better. A smaller fraction of Canada's elderly live in poverty compared to Canada's children or workers.

On the other hand, a smaller fraction of Canadian workers get a workplace pension plan compared to the other G7 countries. Only about 35 per cent of Canadian workers have an employer-sponsored pension plan; and if public service employees and unionized employees are excluded, across the rest of the workforce (the majority), less than 20 per cent have a workplace pension plan, and that number is falling. Canada is at the bottom of the G7 countries by this measure.
We are generally following an established trend in some comparable countries, away from defined-benefit pension plans -- but with a difference. In the U.S. and U.K., the numbers of employers offering such plans are also dropping. Employers dropping defined-benefit pension plans in those countries are generally shifting to defined-contribution plans, which are safer for employers but less secure for employees. But this is still better than in Canada, where the alternative to an employer defined-benefit plan is, in most cases, no pension plan.

Canadians get complimented internationally for their levels of personal savings for retirement -- along with the Japanese, we are some of the most saving-inclined people on earth. The OECD report noted above comments: "The proportion of retirement incomes coming from private pensions and other financial assets in Canada is one of the highest among OECD countries." But on closer look, this is a mixed blessing: both a fading habit in Canada, and an unfortunate necessity for too many Canadians, because more desirable and efficient employer-based pension plans are unavailable to them.

Canadians have above-average access to enhanced private savings options through RRSPs. But as in similar plans in Australia, the market in Canada is structured so that too many uninformed buyers have too many choices, resulting in a fragmented market with too many players -- leading to excessive fees for Canadian plans. Others (e.g., the U.S. with their 401 plans) have structured their plans so they achieve more vendor consolidation, resulting in better investment results, with lower fees.

Canada has achieved some of the highest levels of national sustainability of pension plans, while providing some of the least security to individual pensioners. In many major countries like Germany, Italy, France or Brazil, some of today's pension payments come from contributions by other current workers -- a "PAYGO" system considered a drain on the national economy, and less sustainable as the ratio of pensioners to workers rises rapidly in the next 20 years.
But thanks to good pension plan rules in Canada, almost all pension income comes from past contributions made by the pensioners (or their employers). Along with good Canadian regulation of pension funds management, the structure of pension plans in Canada is regarded as one of the most secure, sustainable and beneficial, across the OECD countries (see here, for example). On the other hand, the protection of individual plans in Canada is near the weakest. If a pensioner's former employer/pension-sponsor fails, typically their pension is severely reduced, a problem faced by many pensioners who worked for formerly great employers in Canada. The other G7 countries all have some explicit or implicit form of national insurance scheme against this form of pension fund collapse.

When will Canada catch on and correct this injustice? There are at least five good solutions available. Most OECD countries except Canada have adopted one or more. The first three were strongly recommended by the Ontario Expert Commission on Pensions in 2008.
First, stop the windup of pension plans into annuities when a sponsoring employer fails. The annuity-based windup is the easiest for governments to administer, but causes excessive reduction in pension payouts. Second, create an up-to-date pension insurance program for Canadian pension plans. This is an approach taken explicitly by the U.S., U.K., Germany and Japan. Third and longer-term, restructure pension plan laws so multi-company plans become the norm, reducing or eliminating the risk to pension plans because of a single company's failure, and enabling better investing through larger scale. A small number of such plans exist in Canada, but they are more common in the U.S. and some other countries. A fourth option is simply to raise the priority of pension funds as a company creditor in bankruptcy -- probably the easiest and quickest option for our national government to implement, and already in place in numerous OECD countries.
A fifth potential option is an expansion of CPP (or a similar government-sponsored alternative) to cover more of Canadians' pension needs -- more or less the approach of France, Italy, Brazil and others.
Out of all these options, the fifth one, expanding C/QPP is the best one to address our looming retirement crisis even if some actuaries think it's time to go slow on this proposal. As I mentioned in my last comment, Canadian households are drowning in debt and they too are having a much harder time saving for retirement. This doesn't bode well for Canada's perfect storm.

Below, workers and employers in the U.S. are bracing for a retirement crisis, even as the stock market sits near highs and the economy shows signs of improvement. The Wall Street Journal's Kelly Greene reports