Retirement Implications of Demographic and Family Change Symposium Monograph: Overview
- Overview of Papers
- By Neela K. Ranade
The topic announced for the Call for Papers: "Retirement Implications of Demographic and Family Change" was broad in scope. It was also of wide interest, as attested by the large number of organizations that cosponsored the Call for Papers. Given the subject of the Call for Papers, we expected to receive papers that would comment on the specific structures of the U.S. and Canadian social insurance and employer retirement systems and how these might be modified to better fit changing needs. But we also hoped for multinational comparisons and illuminating papers regarding solutions tried in other countries and their application to the U.S. or Canada. Further, we invited prospective writers to not be restricted to the topic of pensions, but consider also the related issues of long-term care and retiree health benefits.
The Society of Actuaries Social Security Committee, the primary sponsor of the Call for Papers, was not disappointed in its wish to receive a wide spectrum of papers. The papers that we received covered major themes as well as ancillary subjects. Papers ranged from providing specific solutions to legal or actuarial issues (Scahill and Forman, Wong and Clark, Chen and Scott) to covering broad concepts (Chang), as well as projecting trends (Parker, Andrews). Some papers were expository (Rappaport and Yau, Chen) while others reported results of empirical research (Clark and d'Ambrosio) and yet others established a hypothesis to be confirmed with future research (Brothers). One paper was eminently practical and would fit with little modification in a consumer financial planning magazine (Orth). While most papers focused on pensions and Social Security benefits, a couple of entries examined the implications of demographic and family change for long-term care and retiree health benefits (Chen, Brown). We were gratified to see an international perspective (Holden and Kim, Sinha). And as actuaries, we were delighted to note the analytical rigor and sophisticated models employed by many of the papers (Pattison; Brown, Damm and Sharara; Hoffman and Guo).
This article provides a glimpse of the topics covered by the papers but for a real exploration, you need to attend the June 25–26 San Francisco Symposium or visit the SOA Web site to gain access to the papers and a full appreciation of what is covered.
Yung–Ping Chen and John Scott reviewed U.S. statistics for the period 1962 to 1998 to demonstrate that the share of elderly income attributable to employment has been showing an upward trend. Much of this is on account of more elderly continuing to work in part–time jobs and phasing in full retirement. There are, however, many impediments to phased retirement. The authors identified legal, plan design, economic and cultural barriers to phased retirement and suggested possible solutions.
An employee phasing into retirement may work a reduced work schedule on the career job before retirement from that job. In their paper, Patricia Scahill and Jonathan Forman explored the actuarial aspects of this type of phased retirement for a traditional defined–benefit pension plan. The paper contains useful tables on how alternate payout patterns that are actuarially equitable may be structured for a phased retiree. Actuarial equity means that there is no actuarial gain to the employer on account of the employee working a reduced work schedule. The authors' examination of actuarial implications would be applicable to public U.S. pension plans as well as pension plans in other countries. The authors also commented on the permissibility of the different payout provisions under ERISA. Another section of the paper addressed how the disclosure and spousal protection rules under ERISA would apply to a phased retirement situation.
Aliya Wong and Denise Clark proposed that multiemployer plans could provide added security to older workers in phased retirement by allowing portability. The paper addressed both unionized and non–unionized situations. Further, the authors discussed the need to change current legal requirements such as accrual rules with respect to back–loading benefits and the forfeiture of benefits during prohibited employment.
Age at Retirement
Do individuals make rational retirement age decisions? Linda Smith Brothers believes that although an individual ought to decide upon a retirement age based on a rational assessment of money, time, and effort, in reality individuals are often influenced by an anchor, defined as the retirement ages chosen by friends, neighbors, relatives and colleagues. Brothers asserts that individuals influenced by an anchor often make irrational and unwise decisions. Her paper established a series of propositions hypothesizing the effect of anchoring and outlines research that would be necessary to confirm the hypothesis.
Robert Brown, Robin Damm and Ishmael Sharara presented an intriguing regression model that presents a strong positive correlation between the Wealth Transfer Index and the average age at retirement for workers in Canada. The Wealth Transfer Index is a statistic defined in earlier work by Brown and measures the relative demand for wealth placed on the labor force by youth, unemployed and aged. Applying the regression model, the authors suggested that the Canadian baby boom cohort may experience an increase in the normal retirement age in the period 2017–2034, as they will be forced to retire at ages that will allow for an acceptable transfer of wealth from workers to dependents.
Family Retirement Benefits
The U.S. Social Security and employer benefit plan systems were based on models of a traditional family, characterized by a one–wage–earner family with a stable marriage. This traditional family is now by far in the minority. Anna Rappaport and Manha Yau provided a good summary of alternate household structures and supplied data on life cycle histories and poverty in the U.S. Their paper presented a conceptual framework for the design of family benefits within the Social Security or employer pension systems. The paper also included some examples of family benefits in other nations.
Yung–Ping Chen listed statistics on the changing U.S. family structure in the last 30 years. The author pointed out that the problem of inadequate Social Security benefits is aggravated among blacks and Hispanics since changes in family structure have been more pronounced among these groups than among whites. Chen's paper addressed several reform proposals to the U.S. Social Security system that have been suggested in order to provide better income protection to dependents and to older women in poverty. These included raising the survivor benefit while lowering the spousal benefit; lowering the years–of–marriage requirement; instituting a minimum benefit; implementing earnings sharing; and instituting a two–tier Social Security system consisting of a flat first tier and a second earnings–based tier.
When a family has entitlement to two sets of retirement income arising from the spouses' employment history, decisions regarding whether or not to take a lump sum and the optimal age to start Social Security benefits become more complicated. Beverly Orth's paper laid out much needed guidance on these issues. Among the variables discussed were the relative ages of the spouses, the relative health of the spouses, the relative benefits of the spouses and the need for protection of other dependents. The paper also recommended new forms of annuity options for private pension plans and changes to the U.S. Social Security system to accommodate the needs of two–income families.
Lorrie Hoffman and Lijia Guo developed a model to examine the impact on individual and aggregate benefits of a change in the formula for Social Security surviving spouse benefits to the "de–coupled allocation" policy. This policy would change the current benefit loss (ranging from 33% to 50%) upon spousal death to 40% in order to help alleviate poverty among the elderly. Their analysis showed that for the year 2001, the "de–coupled allocation policy" would improve the financial condition of the 11% of American citizens who live below the poverty line while not significantly increasing aggregate Social Security payments. The authors added that the model could also be used to study the impact of spousal credit sharing for a working couple.
As with Rappaport and Yau, Karen Holden and Meeryoung Kim were concerned with the deleterious impact of the Social Security benefit formula on poverty among elderly women. Holden and Kim add an international perspective by comparing the income consequences of a husband's death in the U.S., Britain and Germany. Using longitudinal data, the authors examined changes in income as women move from marriage to widowhood in the three countries and attempt to address whether the different approaches a nation takes toward social insurance make a difference to the income levels of women as they are widowed.
Projecting future trends is an important tool of trade for actuaries. The Call for Papers produced a fair number of prognosticators.
In his paper on the Canadian implications of aging, Doug Andrews outlined how the costs of life insurance, medical care, disability and retirement in Canada would be impacted by increases in longevity. The paper examined both employer–sponsored plans and social security programs and concluded that longevity increases would result in greater cost increases for social security programs than for employer–sponsored plans. Andrews' paper concluded with an insightful section on the likely changes in the Canadian Social Insurance and employer retirement programs over the coming years. He concluded that Social Insurance programs will likely increase the starting age for benefits, decrease indexing of benefits once commenced, and reduce ancillary death and disability benefits. He believes that Social health programs will impose greater limitations on the choice of doctors, types of conditions and drugs covered, and out–of–Canada care. He also sees a trend towards more flexible benefit programs for employers to control costs while providing choice as well as adoption of catastrophic insurance programs with no coverage of budgetable expenses.
Thornton Parker presented an opinion contrary to the one currently prevalent in the media regarding the appropriate allocation for stocks in retirement portfolios. Based on the trends for savings, numbers of workers and numbers of retirees, Parker believes that it is highly likely that stock prices will drop when the cohort of baby boom retirees starts selling assets to cover retirement income needs. Parker's scenario is alarming and quite convincing (at least to the author of this article who reduced her defined contribution plan stock allocation after reading the article). Parker ended his article on a positive note with a belief that with creative dialogue and action, the American people, government and corporations can take the bold steps that will be necessary to cope with the situation. One issue not considered by the author is the possibility that stock prices may be propped up for some time if the Social Security reform proposal of individual accounts invested in stocks is adopted.
David Pattison wrote a scholarly paper that examined a technique for testing the sensitivity of U.S. Social Security taxes and benefits to changes in women's employment and earnings. The modeling led to some striking conclusions. For example, since women's earnings are lower than men's, if the proportion of working women increases without an increase in women's wages, this would lead to a lowering of the National Average Wage, which can have paradoxical results. If women returned in greater numbers to work, the retired worker benefits for the returning women would rise. However the effect of a smaller national average wage on the husbands' benefits of the married women would reduce the spouse benefits and widows' benefits payable on the husbands' accounts leading to a net reduction in the total benefits for many women returning to the labor force.
Over the last 20 years, defined contribution plans have become the predominant means of delivering retirement income. These plans require employees to make wise decisions regarding participation, contribution and investment choices. While a link between financial education and employee retirement decisions seems intuitively obvious, little empirical work has been done in establishing this link. Robert Clark and Madeleine d'Ambrosio reported in their paper on the impact of TIAA–CREF financial planning seminars on the retirement goals and savings behavior of participants. The authors' research revealed that, after receiving information on the level of income in retirement needed to continue pre–retirement consumption, seminar participants amended their income goals toward this level. The authors' findings are preliminary, based as they are on a small sample of 270 initial surveys with the third survey yet to be administered. TIAA–CREF intends to continue the research project and the methods outlined in the article could be duplicated elsewhere by other researchers.
Individual Accounts for Social Security
The Bush administration's Social Security Commission has recommended individual accounts as a pivotal reform measure. Tapen Sinha's paper reported on the experience with pension privatization with individual accounts in Chile and seven other Latin American countries. Administrative costs for countries with privatized accounts have been 5 to 100 times higher than in the developed countries. The author points out that while privatization is popularly regarded as a way to stimulate the economy, it does not automatically raise capital. Rather, the capital comes through cutting benefits or raising taxes, avenues that are open whether or not a system goes through privatization. Sinha added that the success (limited as it is) that privatization has enjoyed in Latin America is very much linked to the unique demographic and political conditions in those countries and not necessarily transferable to the developed nations. The worker–to–retiree ratio in most Latin American countries is much higher than in the developed nations and many of the Latin countries have autocratic regimes. At a time when privatized Social Security systems are being viewed as a solution in nations ranging from ex–Soviet Union countries to the U.S., Sinha's paper sounded an important cautionary note.
A very different view is presented by Chiu–Cheng Chang, who believes that a Dynamic Social Security System (DSSS) featuring individual Social Security accounts would best accommodate the demographic, family and lifestyle changes affecting most industrial countries. Under the DSSS, employers and employees would contribute equally to an individual account that would earn a tax–exempt interest. Being a defined contribution scheme, the DSSS would be fully portable across employers in the same country or even across nations, subject to agreement between nations for pooling of service. Every individual would have his or her own DSSS account based on their work history, and adult children could use their DSSS contributions to top off their parents' accounts to discharge their filial duties. The DSSS system might fit well a culture such as that of Singapore, but it might constitute a large government–administered scheme that makes many Americans uncomfortable. Despite lengthening careers, women continue to reduce work and earnings for child rearing. Chang does not discuss how the DSSS would provide adequate income to homemakers who may get divorced or widowed in the future.
Health and Long–Term Care
Yung–Ping Chen's paper addressed the growing issue of funding for long–term care services that looms when a nation's aged population increases. Chen provided statistics on the disability–adjusted life expectancy (DALE), or number of years of life without disability for some nations, and discussed the approach to public long–term care funding in Germany and Japan. The author suggested an interesting approach to providing informal long–term care services by utilizing the services of high school students on a mandatory basis and the young–old on a voluntary basis. Chen favors a funding model consisting of a social insurance program for a basic amount of long–term care coverage to be supplemented by private insurance and personal savings.
Robert Brown developed a model to demonstrate that the increased tax revenues that will flow to the Canadian government from income drawn from qualified pension plans by baby boom retirees will match nicely the increased funds needed for their health care delivery by the government. He also offered suggestions for adapting the model to the U.S. situation.
With so many good papers to evaluate, the Society of Actuaries Prize Selection Subcommittee faced a challenging job. The entries were judged for originality, creativity, exposition and adherence to the scope of the Call for Papers. After lengthy conference calls, the subcommittee decided that four papers were equally meritorious and awarded four prizes of $1,500 apiece. The prize–winning papers are:
- The Pattern and Consequence of Survivorship Provisions in Public Retirement Plans: Comparison of Britain, U.S. and Germany–Karen Holden and Meeryoung Kim
- Protecting Participants and Beneficiaries in a Phased Retirement World–Patricia L. Scahill and Jonathan Barry Forman
- Can Latin American Experience Teach Us Something about Privatized Pensions with Individual Accounts?–Tapen Sinha
- Retirement Option Decisions for Married Couples–Beverly Orth
- The Scahill and Forman paper also was a favorite with "WorldatWork," which awarded the authors a $5,000 prize for the paper that best examined the issues from a total remuneration standpoint.
I would like to thank the Prize Selection Committee consisting of Judy Anderson, Joe Applebaum, Sam Gutterman, Bruce MacDonald and Neela Ranade for poring over hundreds of pages of materials in determining the award–winning entries.
With increasing life span, declining worker–retiree ratios and changing family structures, creative approaches are needed to handle the problems posed by the existing structures of the public and private retirement systems in the U.S. and Canada. The symposium "Retirement Implications of Demographic and Family Change" will provide a forum for discussion and a chance to explore some solutions to the challenges raised.
Neela K. Ranade, FSA, MAAA, EA, is the President of BlueStar Consultants in Warren, NJ, and a Planning Committee member, Retirement Implications of Demographic and Family Change. She can be reached at firstname.lastname@example.org.