By Anna M. Rappaport
Several new books and reports provide interesting information for pension actuaries. This article discusses some of them with some key information.
Retirement Security: Women Still Face Challenges
This report from the Government Accountability Office (GAO Report GAO-12-699, July 2012) provides an up-to-date review of retirement security in the United States, and provides data comparing the situation for men and women. The report documents the shift from defined-benefit (DB) to defined-contribution (DC) plans. It reports that working women’s access to employer-sponsored pensions has improved relative to men’s, but also documents that there are still gaps. It provides DC plan access and participation data by race and gender. The report also looks at the composition of household income for Americans over age 65 by gender. Median income for men in 2010 was $44,400 compared to $33,200 for women. These amounts decline by age. For men, median household income was $53,500 at ages 65-69, dropping to $37,000 at age 80. For women, it was $44,100 at ages 65-69, dropping to $25,000 at ages 80 and over. By marital status, it was lowest for separated women, at $21,500. In 2010, Social Security accounted for 50 percent of income for men and 54 percent for women. For men, DB pensions accounted for 22 percent of income and DC pensions for 2 percent. For women, the corresponding numbers are 20 percent and 1 percent. Major differences in the composition of income by marital status are also documented. Widows are most dependent on Social Security.
The GAO analyzed data from the Health and Retirement Survey (HRS) to estimate the effect of life events on household assets and income, separately for men and women. They showed the biggest impact from becoming divorced or separated after age 50, and the next most important impact from being widowed. Women showed bigger declines in assets and income. They showed a 41 percent decline in household income and assets from being divorced or separated, a 32 percent decline in household assets from becoming widowed, and a 37 percent drop in household income from being widowed. Men had important impacts but fewer than women. Actuaries interested in demonstrating the impact of key risks may be particularly interested in that topic.
The report also reviews a number of policy options and proposals to improve retirement security. They are in the following groups:
- Proposals to expand use of existing tax incentives to save for retirement
- Proposals to expand eligibility and opportunities to accumulate Social Security credits
- Proposals to expand access to retirement savings and strengthen spousal protections
- Proposals to expand opportunities for saving later in life and delay Social Security benefit receipt
- Proposals to ensure lifetime income
- Proposals to ensure income adequacy.
This compilation of proposals reflects proposals made by many different groups and individuals. The GAO report states the proposal and makes an estimate of its potential impact on women. This is an excellent compilation of a range of proposals. This report provides an up-to-date review of the situation. For the full report, go to http://www.gao.gov/products/GAO-12-699.
The Pension Factor 2012: The Role of Defined Benefit Pensions in Reducing Elder Economic Hardships
Report from National Institute on Retirement Security, authored by Frank Porell and Diane Oakley, July 2012.
Many actuaries are very interested in preserving DB plans and in understanding where they stand. This report from the National Institute on Retirement Security provides an insight into how much income today’s older Americans have from DB plans. It offers an analysis of persons age 60 or older with DB pension income in 1998, 2003, 2006 and 2010. It finds that the percentage of individuals with their own or a spouse’s DB pension based on former employment dropped from 52 percent in 1998 to 43 percent in 2010. The median pension amount increased from $11,657 in 1998 to $14,403 in 2010. The mean pension amount increased from $16,157 to $20,493.
The report compares poverty rates among those older Americans with DB pensions and those without DB pensions. Poverty rates in 2010 among those with their own or spouse’s pension income are 1.7 percent compared to 15.5 percent among those with no DB income. The report also analyzes various forms of deprivation among Americans age 60 and over, and compares the situation between those with DB income and those without DB income. The analysis is based on Survey of Income and Program Participation (SIPP) data. For the full report and more research, go to Nirsonline.org/.
Money for Life, by Steve Vernon
Money for Life, How to Generate a Lifetime Retirement Paycheck from Your IRA and 401(k) by Steve Vernon, FSA, is coming around Oct. 1, and it will be available on Amazon.com. There are a lot of things I like about this book. A complex set of technical issues has been translated into easy-to-understand language. The issues have been separated into a set of ideas that is actionable for the average person. The jargon has been stripped away, and there are analogies that help real people relate to the issues in the discussion, and trade-offs are explained clearly. The technical issues are separated and presented in Part Two for those who want to study them. I believe that the practical advice on implementation, provided from a neutral point of view, is a significant differentiator for this work. Vernon has done a wonderful job of explaining the options, providing information on implementation, and providing cautions about more expensive options. He has also written other books and is a regular contributor to CBS MoneyWatch. There is a wealth of retirement education information on his website. For more information, look at RestofLife.com or go to Amazon.com for a copy of the book.
Income Replacement Ratios in the Health and Retirement Study
This article describes the income replacement ratio as a measure of retirement income adequacy and identifies several issues analysts must consider when calculating a replacement ratio. It provides insights into replacement ratios and different ways they have been calculated and used.
The author calculates actual replacement ratios for today’s retirees, and the article presents the income replacement ratios experienced by participants in the original sample cohort of the HRS, who were born between 1931 and 1941. Replacement ratios are shown by the respondent’s birth cohort, age when first classified as retired in the HRS, and preretirement income quartile. Median replacement ratios fall as the retirement period grows longer. The data presented is a good picture of where today’s retirees stand.
The article is from Social Security Bulletin, vol. 72, no. 3, 2012. The author, Patrick J. Purcell, is with the Division of Policy Evaluation, Office of Research, Evaluation and Statistics, Office of Retirement and Disability Policy, Social Security Administration. For the full article, see SSA.gov/policy/docs/ssb/v72n3/v72n3p37.html.
Shifting Income Sources of the Aged
This article discusses the implications of pension trends for the measurement of retirement income. Traditional DB pensions, once a major source of retirement income, are increasingly giving way to tax-qualified DC plans and individual retirement accounts (IRAs). This trend is likely to continue among future retirees who have worked in the private sector. We conclude that the Census Bureau’s Current Population Survey (CPS), one of the primary sources of income data, greatly underreports distributions from DC plans and IRAs, posing an increasing problem for measuring retirement income in the future. The CPS and other data sources need to revise their measures of retirement income to account for periodic (irregular) distributions from DC plans and IRAs.
Social Security Bulletin, vol. 72, no. 3, 2012. Authors are Chris E. Anguelov, Howard M. Iams and Patrick J. Purcell. For the full article, see SSA.gov/policy/docs/ssb/v72n3/v72n3p59.html.
Anna M. Rappaport, FSA, MAAA, is an internationally known expert on retirement strategy and frequent author and speaker. She chairs the SOA Committee on Post Retirement Needs and Risks. She is the president of Anna Rappaport Consulting and can be reached at anna@annarappaport.com.