Archive
Should You Buy an Annuity From Social Security
The brief’s key findings are:
- Households now retiring need to transform their 401(k) and IRA savings into retirement income.
- One way is to delay claiming Social Security to increase their monthly benefit, using savings to pay current expenses while they wait.
- In effect, they are buying an annuity from Social Security: The savings used is the “price” and the increase in their monthly benefit the annuity income it “buys.
- ”Buying an annuity from Social Security is generally the best deal in town, especially in today’s low interest-rate environment.
Social Security — Great Recession-Induced Early Claimers: Who Are They? How Much Do They Lose?
During the Great Recession, more older workers have claimed Social Security benefits early. This paper addresses two important policy questions: Who are these early claimers? How much retirement income have they lost as a result of claiming early? Using the Health and Retirement Study (HRS) we estimate a discrete-time hazard model that makes claiming Social Security benefits a function of age, personal characteristics, and the national unemployment rate. We project that high unemployment rates during the Great Recession led to a 5-percentage-point increase in the probability of claiming early relative to a less severe recession such as the 2001-2003 downturn, and this increase was nearly uniform across socioeconomic groups. Our estimates also suggest that while the Great Recession did impact the claiming decision, it did not cause a dramatic change in benefits. “Great Recession Claimers” – those whom we simulate were likely to claim early during the Great Recession but would not have in a milder downturn – filed for Social Security only 6 months earlier, on average, than they would have in a minor recession. This modest change in timing reduced their monthly Social Security benefit checks by $56, or 4.6 percent of average monthly benefits, and the Social Security replacement rate fell by 1.7 percentage points relative to a more typical recession. The benefit reduction resulted from the combined effect of the actuarial reduction for early claiming and the foregone opportunity to continue working and increase the wage base used for calculating benefits.
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The Rise of Financial Fraud
The brief’s key findings are:
- Financial fraud complaints by consumers have surged over the past decade, fueled by the rise of Internet-based scams.
- This trend will likely continue as scammers target aging baby boomers, who have substantial assets and face cognitive decline.
- Consumers can help protect themselves by recognizing standard fraud strategies and the disguises used by scammers.
Why Do More People Die During Economic Expansions?
The brief’s key findings are:
- When economic times are good, deaths in the United States increase.
- Previous research suggests that a likely culprit is poorer health habits tied to greater job demands.
- However, the increase in mortality is largely driven by deaths among elderly women in nursing homes.
- These nursing home deaths may reflect increased shortages of caregivers during economic expansions.
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How Important Is Asset Allocation To Financial Security In Retirement?
Financial advice tends to focus on financial assets, but other levers may be more important for most households. This paper proceeds in three stages. The first section reports a simple Excel spreadsheet exercise that provides a stylized example of the tradeoff between returns and time spent in the labor force. The second section uses data from the Health and Retirement Study (HRS) on pre-retirees aged 51-64 to see how the gap between retirement needs and retirement resources is affected by working longer, taking out a reverse mortgage, controlling spending, and shifting all assets to equities with no risk. The third section uses a simple dynamic programming model to calculate a risk-adjusted measure of the value for the average household of moving from a typical conservative portfolio to an optimal portfolio. The answer from all three exercises is the same: the focus on asset allocation is misplaced.
How Can Employers Encourage Young Workers to Save for Retirement?
- One reason young workers don’t save for retirement is that the event is so far off.
- An experiment to boost their saving tested different ads:
- abstract or concrete wording (“why you should save more now” vs. “how you can save more now”);
- and a short- or long-term savings goal (“how much to save from each paycheck” vs. “how much to save over your lifetime”).
- The most effective ads paired abstract wording with a long-term goal and concrete wording with a short-term goal.
- Therefore, communications designed to spur saving by young workers should match the framing of the message to the time horizon of the savings milestone.
The Rise of Financial Fraud
The Rise of Financial Fraud
Source: Center for Retirement Research at Boston College
Individuals save for decades to ensure that they will have financial security in retirement. That security can be threatened or eliminated virtually overnight if an individual who is in or near retirement becomes the victim of a financial fraud, such as a Ponzi scheme or sham investment in high-yield securities.
Fueled by the Internet, the incidence of financial fraud is on the rise. Law enforcement officials and fraud experts expect the trend to continue or accelerate as aging baby boomers increasingly become targets. According to the Federal Trade Commission (FTC), Americans in 2010 submitted more than 1 million complaints about financial and other fraud – up 35 percent in just three years. But these data do not fully represent fraud’s pervasiveness, because researchers say that it often goes unreported to the authorities…
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Related study: The Rise of Financial Fraud: Scams Never Change but Disguises Do (Financial Security Project at Boston College)
Do Income Taxes Affect the Progressivity of Social Security?
Do Income Taxes Affect the Progressivity of Social Security?
Policymakers have designed Social Security to be a progressive retirement program that replaces a larger share of monthly earnings for low- and middle-income workers than for high earners. However, previous research has found that, although the Disability Insurance (DI) component of Social Security is very progressive, the Old-Age and Survivors Insurance (OASI) component may be less progressive than intended. One reason is that high earners tend to live longer than low earners. Since Social Security pays an annuity that lasts throughout retirement, it benefits high earners with greater longevity…
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Do Low-Income Workers Benefit From 401(k) Plans?
401(k) plans – the main retirement savings vehicle for millions of workers – allow participants to save on a tax-deferred basis. This tax incentive is more valuable to workers in high-income families than workers in low-income families because they face higher marginal income tax rates. Not surprisingly, then, studies of the distributional effects of 401(k)s find that they mainly benefit high-income workers. However, these studies assume that employer contributions to 401(k)s do not affect the total compensation that each worker receives – that is, every worker “pays for” employer contributions in the form of lower wages. This brief challenges this assumption, testing whether employer contributions may actually increase total compensation for low-income workers, who may be more reluctant than high-income workers to accept wage reductions in exchange for retirement saving contributions…
How Would GASB Proposals Affect State and Local Pension Reporting?
How Would GASB Proposals Affect State and Local Pension Reporting?
Source: Center for Retirement Research at Boston College
States and localities account for pensions in their financial statements according to standards laid out by the Governmental Accounting Standards Board (GASB). Under these standards, state and local plans generally follow an actuarial model and discount their liabilities by the long-term yield on the assets held in the pension fund, roughly 8 percent. Most economists contend that the discount rate should reflect the risk associated with the liabilities and, given that benefits are guaranteed under most state laws, the appropriate discount factor is closer to the riskless rate. The point is not that liabilities should be larger or smaller, but rather that the discount rate should reflect the nature of the liabilities; the characteristics of the assets backing the liabilities are irrelevant…
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Disability Insurance: Does Extending Unemployment Benefits Help?
Disability Insurance: Does Extending Unemployment Benefits Help?
Source: Center for Retirement Research at Boston College
The Great Recession has resulted in the highest national unemployment rate in nearly 30 years, and those who find themselves unemployed remain jobless longer than ever before. In response, the federal government has extended unemployment insurance (UI) benefits for up to 99 weeks, almost a year and a half longer than normal durations. At the same time, applications for Social Security disability insurance (SSDI) benefits, which had been increasing for decades,1 reached an all-time high in 2009 and have continued to rise. An important question is how the availability of unemployment insurance, in general, and extended UI benefits, in particular, affect SSDI applications and the composition of the pool of applicants. This question is the topic of this brief…
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Why Don’t Retirees Insure Against Long-Term Care Expenses? Evidence from Survey Responses
Why Don’t Retirees Insure Against Long-Term Care Expenses? Evidence from Survey Responses (PDF)
Source: Center for Retirement Research at Boston College
We conduct a detailed survey of those nearing and in retirement to help assess the relative support for numerous alternative hypotheses regarding the small size of the long-term care insurance market. We categorize these hypotheses into four broad categories: (i) Preferences and Beliefs, which includes factors such as time preference, risk aversion, bequests, statedependent utility, and beliefs about the need for care, (ii) Substitutes for Insurance, such as the ability to pay for care out of wealth, home equity, or family resources, a plan to rely on Medicaid, or mistaken beliefs that such care is covered by Medicare, (iii) Substitutes for Formal Care, most notably including the ability to receive care from family members rather than relying on formal market-based care, and (iv) Features of the Private Market, including concerns about cost, affordability, counter-party risk, and distrust of insurers. We find numerous significant differences in the likelihood of buying insurance based on differences in each of these dimensions. For example, we find that individuals are much more likely to purchase private long-term care insurance if they place a higher value on money when sick versus money when healthy (i.e., state-dependent preferences), if they report a stronger bequest motive, if they believe they are more likely to need care, if they place a stronger emphasis on the avoidance of burdening their families with care provision, prefer care to be given by professionals, and believe premiums are appropriately priced given the care they provide. Individuals are much less likely to purchase private insurance if they believe their family is likely to take care of them, if they are concerned about affordability of insurance, if they are more concerned about counter-party risk, or that they insurance company might deny legitimate claims or raise premiums in the future.
Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
Comparing Wealth in Retirement: State-Local Versus Private Sector Workers
Source: Center for Retirement Research at Boston College
The compensation of public employees is a hot topic in the wake of the financial crisis. Funded levels of public pension plans declined sharply at the same time that state and local revenues collapsed. As a result, plan sponsors in most states are looking for ways to reduce pension costs. The assumption – either explicit or implied – is that pensions are too generous. Pensions, of course, are just one part of compensation, so any comparison must also consider wages and other benefits. The question of comparability of compensation in the state-local and private sectors was the focus of a recent Issue in Brief. The conclusion was that wages for workers with similar characteristics, education, and experience were higher in the private sector than the public, but benefits for state-local workers roughly offset the wage penalty. Taken as a whole, compensation in the two sectors is roughly comparable…
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Did the Housing Boom Increase Household Spending?
Did the Housing Boom Increase Household Spending?
Source: Center for Retirement Research at Boston College
Between 1995 and 2007, inflation-adjusted house prices more than doubled in some areas of the United States. During this unprecedented boom, households spent more and reduced their saving rate. A key question is how much of the increased spending was related to rising house prices, as opposed to other factors? And, if households spent more when prices soared, are they likely to cut back during the housing bust? The answers can help in assessing retirement saving trends.
This brief uses the Health and Retirement Study to examine the spending behavior of older households during the housing boom and subsequent bust. It compares changes in spending on non-durable goods (e.g., meals out, vacations, and entertainment) of households in areas with rapid growth in house prices to those in areas with relatively stable prices. The results show that rising house prices led to a modest increase in annual consumption that, if sustained over time, could eat up a significant portion of the gain. Interestingly, the study also finds that households experiencing a decline in house prices do not correspondingly reduce their consumption…
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Comparing Compensation: State-Local Versus Private Sector Workers
Comparing Compensation: State-Local Versus Private Sector Workers
Source: Center for Retirement Research at Boston College
The comparability of state-local versus private sector pay has become a major issue in the wake of the financial crisis. Funded levels of public pension plans declined sharply, and governments’ ability to make required contributions has been severely constrained by the collapse of state-local budgets. Politicians everywhere are looking for ways to reduce pension costs and increase revenues. Often such efforts are couched in terms of excessively generous existing compensation – especially, current pensions. Dueling studies have appeared arguing that state-local workers are paid less or more than their private sector counterparts. Virtually all agree that wages of state-local employees are lower than for private sector workers with similar education and experience, but researchers differ on the extent to which pensions and other benefits compensate for the shortfall. This brief builds on the recent wave of studies by refining the estimates of the value of benefits…
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Exploration of Retirement Planning Attitudes and Behavior
Exploration of Retirement Planning Attitudes and Behavior
Source: Financial Security Project at Boston College (Center for Retirement Research)
In the fall of 2010, the CRR sponsored a series of qualitative interviews with consumers on a range of retirement issues. The objective was to explore consumers’ attitudes and behavior toward retirement planning, including knowledge gaps, sources of information, and unmet needs. A total of 70 individuals aged 50-65 were interviewed in three cities (Hartford, Cincinnati, and Phoenix). This report summarizes the interview results.
The key findings of the report, prepared by the Boathouse Group and Plan-it Marketing, were:
1) Retirement is a life stage that is bigger than “financial planning;” expand definition to reflect and acknowledge both financial and non-financial goals.
- Key goals: travel, leisure vs. “financial” goals
- Must maintain standard of living to get there
2) The road to retirement is not linear.
- Consumers not seeking/receiving appropriate information but absolutely need it, particularly in preparing for curve balls.
3) Deep emotions and attitudes need to be addressed to be relevant.
4) Fear of believing in Social Security drives disregard for its importance.
5) Given passiveness in seeking help, an active “push” strategy for delivering information to consumers would be most effective.
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Does Medicare Part D Protect the Elderly from Financial Risk?
Does Medicare Part D Protect the Elderly from Financial Risk?
Source: Center for Retirement Research at Boston College
The Medicare Modernization Act of 2003 added the Part D prescription drug benefit to the Medicare program. This addition, which became effective in 2006, increased Medicare program costs by more than 10 percent in order to provide, for the first time, prescription drug coverage to enrollees. Part D has since enrolled a sizeable share of elders and now pays for a large percentage of their prescriptions. Despite the program’s size and importance, however, little is known about its effectiveness. One way to measure its success is to determine to what extent it provides financial security to elders. If Part D covers prescription drug spending that was putting older Americans at financial risk, it may result in large social gains. If it simply substitutes for – or “crowds out” – existing insurance arrangements, the social gains may be much smaller. Beyond a crowd-out analysis, a full evaluation of Part D also needs to consider other social benefits and costs, such as the potential health benefits and the efficiency costs of subsidizing drug coverage. The study summarized in this brief evaluates Part D’s impact using the 2002-5 and 2007 waves of the Medical Expenditure Panel Survey (MEPS) before and right after the program’s implementation…
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The Funding of State and Local Pensions in 2010
The Funding of State and Local Pensions in 2010
Source: Center for Retirement Research at Boston College
The financial crisis of 2008-09 was a major setback for state and local pension plans, as plummeting asset values caused their funded ratios to drop significantly. The initial impact of the crisis on plan health was covered in a brief published last year. Since that time, several new developments have had a mixed effect on the current and future health of public plans. On the positive side, the stock market has risen significantly from the 2009 trough. And many states have introduced reforms to increase pension contributions and reduce future costs. On the negative side, recent growth in liabilities has outpaced growth in actuarial assets (because these values smooth market gains and losses over a five-year period). Moreover, the recession that accompanied the financial crisis has made it more difficult for states and localities to contribute the full amount of their required pension contribution. This brief explores how all of these developments affected the funded status of state and local plans in 2010…
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How Can Customized Information Change Financial Plans?
How Can Customized Information Change Financial Plans?
Source: Center for Retirement Research at Boston College
Many workers nearing retirement experienced a dramatic decrease in their retirement assets when the stock market crashed in 2008. In order to maintain their expected standard of living in retirement, workers needed to work longer, save more, or do both. To measure the response of older workers to this downturn, the Center for Retirement Research at Boston College (CRR) fielded the CRR 2009 Retirement Survey on a nationally representative sample of 45-59-year-old labor force participants with relatively high pre-downturn assets.
This brief is the final in a series of four based on the CRR 2009 Retirement Survey. The first brief described the Survey and highlighted the inclusion of numerous financial, employment, and behavioral factors that are omitted from other surveys. The second brief explored the relationship between these factors and worker responses to the downturn. The third brief examined how worker responses were affected when their options were made explicit – work longer, save more, or live on less in retirement. This brief explores how respondents reacted once they received information tailored to their specific situation…
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Can State and Local Pensions Muddle Through?
Can State and Local Pensions Muddle Through?
Source: Center for Retirement Research at Boston College
The finances of state and local pension plans are headline news almost daily. Indeed, although these plans were moving toward prefunding their promised benefits, two financial crises in 10 years have thrown them seriously off course. Measured by the standards of the Government Accounting Standards Board, between 2008 and 2009 the ratio of assets to liabilities for our sample of 126 plans dropped from 84 percent to 79 percent. But this decline is only the beginning of the bad news that will emerge as the losses are spread over the next several years. Furthermore, the funded levels are closer to 50 percent if liabilities are discounted by a riskless rate, as recommended by economists and financial experts. What do these numbers imply for the future of these plans?…
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