Assessing Policies for Retirement Income Needs for Data, Research, and Models (1997) / Chapter Skim
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2 Considerations in Retirement Income Predictions
2 Considerations in Retirement Income Predictions
Pages 17-38
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From page 17... ...
Nonetheless, the weight of the evidence supports the conclusion that, with the aging of the population, it will be more difficult to sustain current levels of retirement income security at acceptable costs, and, consequently, that retirement-income-related policies will be the subject of increasing scrutiny and public debate. Current Status On average, retired people and their families today enjoy a reasonable level of 17
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From page 18... ...
. In 1959 the measured poverty rate for people aged 65 and older was 35.2 percent, well above the rate of 22.4 percent for the total population; in 1995 the poverty rate for the
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From page 19... ...
workers also benefited from provisions of the federal income tax code that encouraged the expansion of employersponsored pension plans. In 1993, 47 percent of private nonagricultural wage and salary workers participated in a plan, up from 15 percent in 1940 (Employee Benefit Research Institute, 1994:Tables 9, 11~.
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From page 20... ...
The number of civilian workers aged 16 and over who report that they participated in an employer-sponsored pension plan increased from 53 million in 1979 to 67 million in 1993. However, the percentage of all workers aged 16 and over who participated in a pension plan remained about the same over this period: 46 percent in 1979 and 44 percent in 1993, indicating that the expansion of em 2Recent data indicate that education efforts by employers offering defined contribution pension plans can pay off in terms of the proportion of employees who choose to participate and the level of their contributions (Employee Benefit Research Institute, 1996b)
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From page 21... ...
Types of Pension Plans Trends in the types of pensions offered to employees have raised questions about the likely contributions of employer pensions to retirement income security. There are two major categories of plans, each with many variants: defined benefit plans, which guarantee a specific retirement benefit, and defined contribution plans (401(k)
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From page 22... ...
, and workers who are laid off in midcareer may receive significantly lower benefits because such plans typically link benefits to years of service and highest years of earnings (see Samwick and Skinner, 1993~.5 Also, because defined benefit plans increasingly offer partial lump-sum payment options, the risks that benefits will not last a lifetime may be increasing for the recipients (and their survivors) of these plans as well as the recipients of defined contribution plans.
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From page 23... ...
Aggravating the situation is that people with low asset levels are less likely to have employer pension benefits than are people with higher asset levels (Gustman and Juster, 1996:Table 2-5~. In fact, understanding people's motives for saving and why so many people save so little may be one of the key questions for policy makers, given that such motives influence not only personal savings but also elective pension plan contributions.
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From page 24... ...
Data on trends in retiree health insurance coverage are harder to obtain, but there are indications that a significant proportion of employers are curtailing health insurance coverage for current and future retirees or plan to do so in the near future (see, e.g., Buck Consultants, Inc., 1993; Lohse, 1993~. Demographic and Socioeconomic Trends Several demographic and socioeconomic trends are contributing to the concern about future retirement income security.
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From page 25... ...
Of course, the worst case may not develop because of countervailing factors. For example, higher immigration levels could mean increased revenues to the Social Security system; the spread of managed care could achieve significant, sustained reductions in the rate of increase in health care costs; and stepped-up efforts by the government, employers, and financial investment companies to educate workers about the need to increase pension plan contributions and other savings could have a positive effect.
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From page 26... ...
; a concern to maintain a mixed public-private system of benefits in which employers play an important role; and, perhaps most important, a focus on putting more responsibility on individuals to save for their own retirement and health care needs, through their employers and other means. Proposals to stimulate increased savings by individuals include simplifying pension regulations to encourage small businesses to set up certain kinds of defined contribution benefit plans for their workers, increasing incentives to contribute to Individual Retirement Accounts (IRAs)
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From page 27... ...
Indeed, a problem with policy changes that tinker with the existing system, instead of attempting radical reform, is that they may increase the perception that the system is at risk and that workers cannot be confident that the rules will stay the same for any length of time. Employer Pensions Social Security is not and was never intended to be the only source of retirement income security: historically, employer-provided pensions have also been ex 10At present, the primary insurance (benefit)
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From page 28... ...
increasing tax incentives to contribute to defined contribution pension Perhaps even more important are policy changes that alter employer behavior. Examples of policy changes that could increase retirement income security by altering the behavior of employers include the following: · raising the limits on the extent to which employers can prefund defined benefit pension plans; · increasing protections for spousal benefits in pension plans; · equalizing the tax treatment of employee contributions to defined benefit and defined contribution pension plans (contributions to defined benefit plans are i{Recent pension simplification legislation made changes in the direction of some of the policy options listed: for example, increasing the penalty for early withdrawals from a "simple" pension account within the first 2 years after the account is set up (the rules were not changed for 401(k)
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From page 29... ...
; · mandating additional pension plan design constraints for employers, such as indexation of pensions and altering the ability to offset employer pensions by Social Security benefits; · allowing employers to opt out of Social Security (as is possible in the United Kingdom) and provide comparable or better benefits through pension plans; and · mandating employer pensions.
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From page 30... ...
There may be reason to encourage older cohorts to hold assets for bequest purposes so as to enhance the retirement income security of their children. In this case, it would be important to model policy changes that protect assets against the risks of longterm health care costs for example, subsidizing long-term-care insurance.l2 Alternatively, there may be reason to encourage current retirees to use their assets to reduce the taxpayer costs of providing health care and other benefits to them.
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From page 31... ...
; and · making one or a combination of changes to Medicare, such as: changing coinsurance rates and deductibles, changing the mix of benefits (e.g., providing prescription drug coverage but curtailing some other kinds of benefits) , increasing Medicare payroll taxes, providing incentives for enrollees to move into managed care or to set up medical savings accounts, providing vouchers for enrollees to purchase lower cost private insurance, means-testing the receipt of Medicare benefits, improving the monitoring of Medicare claims to reduce unneeded services and fraudulent claims, or turning Medicare into a catastrophic insurance program with the expectation that private insurance will cover expenses up to the ceiling at which Medicare begins to provide benefits.
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From page 32... ...
For example, in some employer pension plans, healthier people may, on average, receive more lifetime pension benefits than less healthy people with the same contributions because of their longer life expectancy (the same is true of Social Security)
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From page 33... ...
Hence, one criterion for evaluating a proposed policy change is the extent to which it would increase national savings. For example, current restrictions on the extent to which employers can prefund defined benefit pension plans are designed to increase federal tax revenues in the short run, but these restrictions probably decrease corporate savings, certainly in the short run and perhaps in the long run as well, with the result that the net effect on national savings may be negative (see Schieber and Shoven, 1993; England, 1994~.
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From page 34... ...
Evaluating proposals on a range of outcome criteria is also important because policy changes can change behavior in ways that alter the original estimates of costs and benefits. For example, a policy change to maintain the adequacy of income for future retirees by, say, requiring increased contributions to employer pension plans or increased Social Security payroll taxes might induce workers to reduce work hours and thereby decrease their pension plan or payroll tax contributions.
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From page 35... ...
to consider the effects of policy changes on retirement income security overall. Even when the focus is on specific policies and narrow issues, it is important to consider such interactions among components of retirement income as the following: · many employer pension plans are linked to the benefit structure of the Social Security system, so that plan provisions could be expected to change if Social Security changes; · Social Security retirement and disability insurance benefits are competing sources of support for early retirees, so that changes in one program can be expected to affect the other; and · newer forms of employer pension plans that allow workers to determine the level of their contributions and the choice of investment vehicles are very similar to other kinds of personal savings, so that there is a strong reason for analyzing them within the same framework.
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From page 36... ...
Many changes for example, in the tax treatment of employee or employer contributions to pension plans are not likely to alter the behavior of people who are near retirement, but such changes may well have significant behavioral effects on younger workers and their employers over the longer run. In turn, behavioral responses to policy changes may have yet further consequences for long-term outcomes.
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From page 37... ...
Knowledge About Behavior Many behaviors and processes contribute to the retirement income security of current and future generations. The capability to address important questions about many retirement-income-related policy proposals, particularly over the longer term, requires a solid base of research knowledge and ways to incorpo rate that knowledge effectively in projection models in such areas as: · employers' decisions about whether and what types of pension plans and other benefits (e.g., health insurance, disability benefits)
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From page 38... ...
When estimates have been done, the methods used such as constructing "high," "intermediate," and "low" scenarios for long-range forecasts of the elderly population or the balance in the Social Security trust fund have often had little scientific basis. Admittedly, the task of estimating uncertainty is difficult.
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