On Dec. 8, the Pension Benefit Guaranty Corporation (PBGC) convened a forum on “the Future of Pensions.”
The forum was structured around two separate panels of experts (including EBRI President and CEO Dallas Salisbury) who spoke to an audience of pension industry thought leaders on the current retirement landscape, as well as potential enhancements and solutions.
Among the insights/observations shared in the session:
• In 1975, among those over age 65, 23 percent had pension/annuity income; in 2010, that had risen to 33 percent.
• According to EBRI’s Retirement Readiness Rating (RRR) 57 percent of those under age 65 were considered to be at risk of not having sufficient retirement resources to pay for “basic” retirement expenditures and uninsured health care costs, a figure that had declined to 45 percent in 2010.
• In fact, a world in which 30-year job tenure (and associated pension benefit) was never a reality for 80 percent of the nation’s workers. Rather, it was a myth that led “too many to do too little for too long,” leaving many with no retirement resources other than Social Security. Today, more Americans will retire at far more fiscally appropriate times, with more assets from which to draw.
• Financial insecurity looms large, but has increased consumer awareness of the situation, the need to prepare, and the possibility of scaling back retirement expectations.
• Today, about 18 percent of those over age 65 are still in the workforce; 10 years ago, just 11% were.
• People assume they will be able to work longer—but the data indicate they won’t be able to, for reasons outside their control.
• Regulation/legislation does impact/influence the decision by employers to offer workplace retirement plans.
• Employers are rational when it comes to offering benefits—and they consider both shareholder value and employees in their decision-making.
• Employees are also rational when it comes to making decisions; health care a more immediate concern for many than retirement.
• People make rational decisions, but they also tend to be inefficient about those decisions.
• Americans are far too optimistic—they assume that their pay will continue to increase, despite data that indicates that it plateaus for many in their mid-40s. They assume that they will save more later, but they don’t.
• National retirement plan participation rates of 50 percent include workers (part-timers, those under 21) that aren’t normally covered by these plans.
• Health care costs impact certainty/predictability of benefit programs and individual savings rates.
• It’s not how much you have at retirement, it’s how much you have at the end of retirement.
• Guaranteed returns are very expensive.
• The better we understand retirement risks, the better we’ll be able to mitigate them.
• Social Security offers universal defined benefit (DB) coverage—and offers a critical foundation for other retirement solutions to build on.
• If employers are going to take on the risk of offering a DB plan, there has to be some reward beyond just doing right by their retirees.
• Predictability is a key factor in employer decision-making on retirement plan designs.
• Regulations tend to be “one size fits all,” but employers are not, and vary greatly.
• “If you tell employers they can never take it out, they will never put it in.”
• Providing lifetime income in a low interest rate environment is very expensive.
• Employers care about retirement income—don’t drive them away from providing these programs.
• Investment risk, interest rate risk and longevity risk represent the major DB risks for employers. These risks are shifted to workers in the shift to defined contribution (DC) retirement plans, but the impact is very different. Investment risk and interest rate risk have an immediate impact on employer, but not on the individual saver. However, employers have the ability to pool (and thus mitigate) longevity risk—an option not available to individual savers.
- Nevin E. Adams, JD