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Whither Retirement Strategies? Discussion of Byrne & Reilly and Fitchner & Seligman papers PENSION RESEARCH COUNCIL 2017 CONFERENCE
Emily Kessler, FSA, Society of Actuaries
04 May 2017
How do you prepare for retirement in a low interest rate environment?• Don’t have the power of compounding: have to take
a lot of risk to get a little return
• Fitchner & Seligman show how households fared post-2008 Financial Crisis
• Byrne & Riley test sensible solutions, including• Save longer/save more/retire later
• Link Social Security claiming to years of work
• Allow partial payments/later claiming ages for Social Security
2
Will these solutions work?
• Solutions assume few market shocks• Structural flaw in the DC system: no cushioning against
market shocks
• If the new normal is working longer, retiring later, saving more, what happens when there’s a market shock?
• Long-term trends of increasing disparity• Some accelerated by great recession/market downturn
of 2008
• Have to think of solutions that will work GIVEN widening disparities
3
Wealth Evolution Among the Retired
For HRS households with a retired person; 2015 dollars ( = 2008 wave)
4
-100,000
0
100,000
200,000
300,000
400,000
500,000
-2 0 2 4 6 8 10 12 14 16 18 20
Average Years Since Retirement
below median
bottom 10-percent
all but top 10 - percent
all but top 1 - percent
75 - percent
25 - percent
-100,000
900,000
1,900,000
2,900,000
3,900,000
4,900,000
5,900,000
6,900,000
7,900,000
8,900,000
-2 0 2 4 6 8 10 12 14 16 18 20
Average Years Since Retirement
top 10 - percent
top 1 - percent
Source: Fitchner & Seligman presentation to Pension Research Council on 4 May 2017; 1 May 2017 draft provided by authors
Loan to Value
For HRS households with a retired person; percentage of home’s worth ( = 2008 wave)
5
Note: it is possible to break out changes in mortgage balances and home values. home values have declined and mortgage values have increased among the bottom 10 percent of the wealth distribution
Source: Fitchner & Seligman presentation to Pension Research Council on 4 May 2017; 1 May 2017 draft provided by authors
10%
20%
30%
40%
50%
60%
70%
80%
90%
-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement
below median
bottom 10 - percent
75- percent
25- percent
0%
5%
10%
15%
20%
25%
30%
-2 0 2 4 6 8 10 12 14 16 18 20
Average Years Since Retirement
top 10 - percent
top 1 - percent
Widening wealth gap
3.4
Data not available
4.2
3.6 3.6
4.14.4
5.0
4.5
6.26.6
0
1
2
3
4
5
6
7
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Ratio of wealth of upper income households to middle income households
6
Source: http://www.pewresearch.org/fact-tank/2014/12/17/wealth-gap-upper-middle-income/ accessed 19 April 2017. Pew Research Center tabulations of Survey of Consumer Finances public-use data
Widening wealth gap
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000
All families
Lower income
Middle income
Upper income
Only upper income households gained wealth post-2007
2013 2010 2007
7
Widening income gap (Example: PA)
• Study of total employment in Pennsylvania, 2008-14
• Over 190,000 jobs were lost, 2008 - 2009.
• 2010-2014: Job growth in private sector (2010-14).
• Total employment changed (0.3) percent (declined) during 2008-14.
• “Bottom line: Minimal change in total employment during 2008-14 suggests a static, no growth Pennsylvania economy - Great Recession to recovery.”
8
Source: http://aese.psu.edu/research/centers/cecd/publications/market-trends/pennsylvania-great-recession-to-recovery, accessed 19 Apr 2017, page 3
Widening income gap (Example: PA)
40,866
95,233
(68,291)
13,904
(120,000) (90,000) (60,000) (30,000) 0 30,000 60,000 90,000 120,000
Total
Low
Middle
High
Pennsylvania Private Sector Employment Change (Net): By Industry Wage Groups 2008-2014
Total Low Middle High
1.4%
(3.2)%
6.2%
0.9%
9
Source: http://aese.psu.edu/research/centers/cecd/publications/market-trends/pennsylvania-great-recession-to-recovery, accessed 19 Apr 2017, Table 1 & Figure 9
2014 Average Annual Weekly Wage
High $1,293 and over
Medium $651 – $1,292
Low $0 – $650
Widening work experiences near retirement: Employment Status Age 60 – U.S. White Males
10
0%
20%
40%
60%
80%
100%
1960 1970 1980 1990 2000 2010
All Males
Full-time Part-time Retired
0%
20%
40%
60%
80%
100%
1960 1970 1980 1990 2000 2010
Lowest Income Quintile
Full-time Part-time Retired
0%
20%
40%
60%
80%
100%
1960 1970 1980 1990 2000 2010
Highest Income Quintile
Full-time Part-time Retired
Source: Gordodnichenko, Y. et al “Macroeconomic Determinants of Retirement Timing,” 2013, Institute for the Study of Labor (IZA), Bonn, Germany. Data estimated from Figure 2 graphs.
Widening life expectancy
11
CAVEAT: Proportion of population with high school diploma or greater has significantly increased over this period.
-2
-1
0
1
2
3
4
5
6
7
All education levels less than HighSchool
High SchoolDiploma
College graduate orgreater
Change in Male Age 65 Life Expectancy – 1990 to 2008
Non-Hispanic White
Black
Hispanic
Source: Olshansky, J et al, “Differences In Life Expectancy Due To Race And Educational Differences Are Widening, And Many May Not Catch Up” Health Affairs, August 2012 vol. 31,no. 8 1803-1813, accessed 20 April 2017 at http://content.healthaffairs.org/content/31/8/1803.full; Exhibit A10 data
12
Source: The Health Inequality Project, https://healthinequality.org/
Life expectancy income gap“The Health Inequality Project”
Women
Men
Women, Bottom 1%: 78.8Women, Top 1%: 88.9
Men, Bottom 1%: 72.7
Men, Top 1%: 87.3
70
75
80
85
90
0 20 40 60 80 100Household Income Percentile
Expected Age at Death vs. Household Income
Percentile - By Gender at Age 40
Expecte
d A
ge a
t D
eath
for
40 Y
ear
Old
s in Y
ears
(Maybe) Widening savings behavior
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Ratio of average employee-effective deferral rate by income to average overall deferral rate
<30,000 30,000 - 49,999 50,000 - 74,999 75,000 - 99,999 100,000+
13
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Average deferral rate 7.3 7.3 7.0 6.8 6.9 6.9 6.9 7.0 6.8 6.8
Source: https://pressroom.vanguard.com/nonindexed/HAS2016_Final.pdf accessed 19 April 2017, Figure 33
So what does this have to do with low interest rates?• Solutions to work longer/save more/delay claiming
Social Security don’t work for well for populations who• Are losing access to well paying jobs
• Are starting from a lower level of employment (have already lost access to jobs)
• Have not seen life expectancy gains of more well-educated peers
• Have not recovered lost wealth from great recession
14
Get more creative
• Better leverage Social Security • Allow partial claiming
• Increase progressivity
• Widen early retirement reductions to account for widening life expectancy • By benefit size or average lifetime income
• Leverage annuitization (preferably group) • Cut annuitization costs by accounting for substandard
mortality, writing simple life annuities
15
Caveat: Acknowledging difficulty of realization of some of these ideas
Thank you