Aging and the Macroeconomy Long-Term Implications of an Older Population (2012) / Chapter Skim
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7 Saving and Retirement Security
7 Saving and Retirement Security
Pages 122-152
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From page 122... ...
For instance, as people age and move into retirement, many will begin liquidating their stock of retirement assets to generate income that pays for living expenses, health care, and retirement care, among other things. Accordingly, as the percentage of the population in retirement grows relative to the rest of the population, the cumulative effect of such disinvestment may place downward pressure on the value of equities, housing, and other assets held by the older population.
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From page 123... ...
DEFINING RETIREMENT WEALTH AND SAVING To provide context for the rest of the chapter, the committee begins by examining how national and household wealth in the United States, as well as saving rates and retirement adequacy, have changed over the recent past. As will be seen, personal household saving has increased of late, but these patterns are offset by the largest federal budget deficits in decades.
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From page 124... ...
Figure 7-1 suggests that growth in net wealth is correlated with the real business cycle. National Saving Patterns To effectively discuss saving and the impact of an aging society on saving, the committee distinguishes between private and government saving.
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From page 125... ...
The 1960-1985 period was characterized by relatively high personal saving rates, the 1985-2005 period was characterized by rapidly declining personal saving rates, and the last 5 years (2006-2011) have seen steadily increasing personal saving rates.
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From page 126... ...
Figure 7-4 shows net government saving over the 1960-2010 period and demonstrates that total net government saving is strongly correlated with net federal saving. Indeed, state and local government saving rates have averaged about 0.38 percent of GDP over the past 50 years, ranging from a high of 1.25 percent in 1972 to a low of negative 0.55 percent in 2009.
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From page 127... ...
7-4.eps bitmap with vector type & arrows ment net saving has ranged from a low of around negative 8.7 percent in 2010 to a high of about 1.9 percent in 2000. The historically large deficits of the last 3 years, in part caused by efforts to help the economy recover from the deep recession that followed the financial crisis in 2008, have unfortunately coincided with the leading edge of the retirement of the baby boom generation.
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From page 128... ...
Total net national saving has dropped substantially, owing to the historically large federal deficits and the accompanying large decrease in public saving. The stock of household wealth has also declined owing to the sharp decline in home prices, along with the need for millions of Americans to tap into their retirement saving owing to high unemployment.
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From page 129... ...
ARE SAVING RATES SUFFICIENT IN VIEW OF POPULATION AGING? This section asks whether household saving rates are adequate in view of population aging, and it identifies which subsets of people are at risk of falling behind.
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From page 130... ...
Social Security wealth/ 88 72 59 55 42 37 31 26 21 12 28 total wealth (%) NOTE: Households with the top and bottom 1 percent of total wealth are excluded.
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From page 131... ...
In the absence of Social Security, these two dimensions of adequacy are highly correlated because having sufficient retirement resources is crucial to generating adequate retirement income to support retirement consumption. Yet the progressivity of the current Social Security benefit structure means that some households with low lifetime earnings will require fewer of their own retirement assets to achieve adequacy.
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From page 132... ...
Mitchell and Moore (1998) conclude that most older households have accumulated far too little to replace preretirement income if they plan on retiring at age 62; in fact they would need to save on average 18 percent more per year (above current saving rates)
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From page 133... ...
One factor differentiating those who save from those who do not is financial literacy; as Lusardi and Mitchell (2011) show, the least financially literate are also least likely to plan for retirement and to actually execute successful saving plans.
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From page 134... ...
If accurate, these estimates suggest many current workers are quite likely to be undersaving for a secure old age. Handling Risk During Retirement Whether workers and retirees have adequate retirement provision depends in large part on the risks people will face, which in turn suggests that understanding retirement risks is critical to predicting whether retirement accumulations will be adequate.
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From page 135... ...
On the whole, there is little agreement in the literature about whether an aging population will liquidate equity holdings en masse. In practice there are many different assets available to investors, with different risk attributes and correspondingly different expected returns.
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From page 136... ...
Some have argued for a universal-coverage national health care insurance program with mandatory participation that would result in young healthy people bearing a larger share of risk burden of paying for older people's health care costs. Even under present law, as people age, they tend to become more dependent on government health care programs, so an aging population will likely generate increasing pressure on the Medicare and Medicaid systems, leading to the potential of ever-increasing shifts of elderly health-related risk burdens onto the working age population in an attempt to maintain system solvency.
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From page 137... ...
focusing on a retiree's income flow compared to pre-retirement income, and asking whether the retiree's living standard is close to that experienced during the working life, or (2) focusing on the sufficiency of retirement resources, or the stock of assets available to smooth lifetime wellbeing.
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From page 138... ...
Workplace Retirement Income Plan Risk Americans' retirement saving adequacy is strongly influenced by whether people participate in a workplace retirement income program. In the United States, pensions are usually of the DB or DC variety, though a plan may also be structured as a hybrid with both DB and DC characteristics.
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From page 139... ...
Moreover, though corporate DB plans have funding requirements, there is in fact widespread underfunding in this sector as well. In DC plans, low contribution rates (which result in inadequate retirement assets)
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From page 140... ...
Employers who offer retirement plan contribution and investment defaults generally see higher pension saving rates (only partly offset by reductions in voluntary nonpension saving; Card and Ransom, 2011)
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From page 141... ...
Because Social Security is often presented as a publicly managed DB retirement program financed by lifetime worker contributions, many wrongly assume that there is no need for them to devote anything more to retirement saving. So while Social Security was initially conceived of as an insurance program (Scheiber and Shoven, 1999)
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From page 142... ...
Another potential factor contributing to low saving rates is financial illiteracy. That is, those who fail to understand basic economic and financial concepts may lack adequate tools for determining how -- and how much-to save, as well as how to draw down assets in retirement.
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From page 143... ...
A different way to reduce the need for retirement income is to develop policies that encourage longer working lives and later retirement. For instance, raising the Social Security full retirement age and Medicare eligibility age would likely induce many individuals to extend their working lives, giving them additional years to make contributions to private retirement saving accounts as well as to the Social Security system.
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From page 144... ...
More generally, pressures to reform Social Security and the long-term shift in private retirement schemes from DB to DC plans of various sorts, as well as increased reliance on individual saving, imply that the financial risks associated with retirement income -- asset returns and the stability and liquidity of assets -- will increasingly be borne by individuals rather than public or private pension schemes. Such trends are widely expected to create significant demand for major innovations in financial instruments and markets geared to meet these varied needs.
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From page 145... ...
The most significant are likely to be longevity risk, duration risk, inflation risk, house price risk, health care cost risk, and of course the risk that markets for any or all of these risks may lose liquidity for short or even extended periods. The events of the recent financial crisis demonstrate graphically the potential for such disruptions to have major and potentially lasting impact on retirement income security for large segments of the population.
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From page 146... ...
For example, asset management practices vary widely by income and wealth level: The wealthiest accumulate assets in retirement, middle-income families decumulate financial assets in this stage, and lower segments of the distribution exhaust assets and depend on Social Security for retirement income. Several studies have noted the widening of income and wealth distributions in the United States and other developed countries, trends that are expected to continue and exacerbate the variability of retirement income approaches and needs across the wealth distribution in the future.
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From page 147... ...
To the extent that this inadequacy is due to people's financial illiteracy, early retirement, and reliance mainly on Social Security and Medicare, the problem of inadequate retirement saving is likely to worsen as the population ages. Household savings adequacy will also depend on the cost of health care, which may prove to be even larger than out-of-pocket expenses if defined to include other costs related to poor health, such as moving expenses and the like (Poterba, Venti, and Wise, 2010)
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From page 148... ...
. Low financial literacy will affect workers' and retirees' confidence in the retirement savings decisions they make and their ability to adjust to and recover from macroeco the incidence of individuals requiring long-term care (or nursing home)
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From page 149... ...
Several other options exist for enhancing Americans' retirement security, including raising retirement ages, improving insurance protection and long-term care, fixing Social Security and Medicare, and instituting a number of private-market solutions: more saving, better financial literacy, reverse mortgages, and better long-term care and annuity products. It is also important to remember that uncertainty breeds fear and paralysis
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From page 150... ...
This measure is called the conventional net saving rate and is shown in Figure 7-A-1 as "net S/NNP." The National Income and Product Accounts (NIPA) personal saving rate (the fraction of personal income that is not consumed)
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From page 151... ...
For this reason, some economists have argued that the NIPA definition does not accurately capture the true personal saving rate, so other factors should be taken into account. Figure 7-A-1 also includes a different savings rate (net Dom I/NNP)
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From page 152... ...
152 AGING AND THE MACROECONOMY indirect (such as military spending)
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