Public workers aren’t confident about having enough income and savings to last through retirement. Why? The number one reason is inadequate savings. A significant portion of people (15 percent) are also worried that state and local-level pension reforms will cut into their pension benefits.
Chart credit: Retirement Confidence Survey 2014
The Illinois Supreme Court on Wednesday complied with a request by Illinois Attorney General Lisa Madigan to fast track the hearing over the state’s pension reform law, which a lower court found unconstitutional.
From Reuters:
The court ordered public labor unions and retiree groups challenging the law and the state to file their briefs in January and February with oral arguments to be scheduled in March. Illinois Attorney General Lisa Madigan had asked the court last week to speed up the appeal process.
The state asked for oral arguments as early as Jan. 22 and no later than March 10 to enable Illinois’ upcoming budget to incorporate about $1 billion in cost-savings under the law, or adequate spending cuts or tax increases to offset those savings.
The pension reform law was supposed to go into effect on June 1 but was put on hold by Sangamon County Circuit Court Judge John Belz in May pending his Nov. 21 ruling in five consolidated lawsuits. The state’s new fiscal year begins July 1 and the legislature usually passes a budget by May 31.
The law’s opponents asked the supreme court on Tuesday not to speed up the case.
The law raises retirement ages and suspends COLAs for some workers, and makes state contributions to the pension system enforceable by the Illinois Supreme Court.
Are affluent households worrying about having enough money to last through retirement? According to a survey from Bank of America, the short answer is “yes” – in fact, it’s one of their biggest concerns.
Bank of America polled 1,000 “affluent” people with investable assets of between $50,000 and $250,000. The results were published in the October issue of Pension Benefits:
“More than half (55%) of the mass affluent (defined as individuals with $50,000 to $250,000 in total household investable assets) fear going broke during retirement-far more common than other stress-inducing pressures such as losing their job (37%).
More women than men (59% versus 51%) are frightened about the possibility of not having enough money throughout retirement, and the fear of an uncertain retirement is also most common among 61% of Gen Xers (aged 35 to 50) and 61% of Boomers (aged 51 to 64). Only 41% of Millennials (aged 18 to 34) feel this way.
Despite their fears about future finances, many mass affluent won’t consider cutting back on indulgences today to save for retirement-from entertainment (33%) to eating out (30%) to vacations (28%).
Even if they were faced with a hypothetical milliondollar windfall, fewer than one in five (19%) would make it a priority to set aside the ‘found money’ for their retirement years.
More Boomers (27%) than Gen Xers (16%) and Millennials (6%) would first consider allocating a million-dollar lottery prize to their retirement funds.
Additionally, the most common factors competing with respondents’ regular retirement savings are unexpected costs (33%) and paying off big debts (31%). Paying off large debts (such as student loans) has competed with the retirement savings of more Millennials (38%) than any other generation.
On average, retired respondents stopped working at age 68; however, those who have not retired plan to at age 65. Single mass affluents, on average, plan to retire or have retired at age 62. More than two in five (41%) mass affluents who have not retired yet imagine that they’ll need an annual income somewhere in the $50,000 to $99,999 range when they retire.
About a quarter of Millennials (24%) and Gen Xers (25%) believe they’ll need at least $150,000 annually when they retire-far more than Boomers, with just 11% believing they’ll need that much income in retirement.
As for when people began saving for retirement:
Most (90%) of the mass affluent have retirement savings and began saving at 33 years old, but Millennials are planning for the future at a much younger age, with more than half (54%) starting between the ages of 18 to 24- Eighty percent of Millennials currently have retirement savings.
The most common trigger for those with retirement savings to begin investing for retirement was an account being offered at work (48%). Far fewer were spurred to invest due to major life events like getting married (18%) or having their first child (12%).
More millennials (36%) and Gen Xers (32%) than Boomers (15%) and Seniors (12%) were motivated to save for retirement when they started their first jobs. Almost three in ten (28%) Millennials first started saving for retirement after a raise or promotion at work, versus 10% of older generations.
The article can be read in the journal Pension Benefits. The report can also be viewed here.
Photo by 401kcalculator.org
Stephen Herzenberg, the executive director of the Keystone Research Center, took to the newspaper on Monday to counter Pennsylvania Gov. Tom Corbett’s argument that the best bet for saving the state’s pensions would be to switch new hires into a 401(k)-type plan.
Herzenberg claims in an op-ed that such a plan would provide no savings for the state, reduce benefits for retirees and actually increase the state’s pension debt.
Herzenberg starts by talking about the fees and other costs associated with 401(k) plans. From the op-ed, published in the Patriot-News:
For two years, Governor Corbett has advocated a shift from pooled, professionally managed, defined-benefit pensions to a system where each employee manages an individual account, similar to a private sector 401(k) plan.
[…]
How does the efficiency of today’s defined benefit pensions system translate, in bottom-line terms, measured by the level of contributions required to fund retirement? According to the National Institute on Retirement Security, individual 401(k)-style accounts cost 45% to 85% more than traditional pooled pensions to achieve the same retirement benefit. That’s a big efficiency gap.
A lot of this efficiency gap results from the fees that financial firms charge holders of individual accounts – for administration, for financial management and trading stocks, and for converting savings at retirement into a monthly pension check guaranteed until the end of life – an “annuity.” In essence, these fees are transfer from Main Street retirees to Wall Street. In an economy with stagnant middle-class incomes and all the gains for recent growth already going to the top, such a transfer seems like the last thing we need.
Given the high fees and low returns of 401(k)-style accounts, it is hardly a surprise that actuaries who have studied the Governor’s proposal for an immediate switch to them – or a more gradual switch under a new “hybrid” proposal that the Governor now supports – don’t find any savings.
Far from providing savings, in fact, this switch could result in a large upfront transition costs – because the investment returns on the existing pension plans would fall as the plans wind down. The Governor’s plan was projected to have a $42 billion transition cost.
He goes on to write that Corbett’s plan would be “highly inefficient” and would actually reduce retirement benefits. From the op-ed:
The switch would also reduce retirement benefits. This is not only bad for teachers, nurses, public safety personnel, and other public servants. It could also require a future wage increase to enable the state and school districts to attract and retain high-quality staff – another cost to taxpayers.
In his recent book on inequality, economist Thomas Piketty worries that high returns and low financial management costs are only accessible to massive pools of wealth. This means that the assets of the wealthiest individuals and families grow faster than the wealth of the rest of us. It reinforces the drfit back towards Gilded Age levels of wealth inequality.
But in the context of public sector retirement plans, defined-benefit pensions give taxpayers and the middle class the ability to grow their pooled retirement savings in the same manner as Warren Buffet and Bill Gates.
If define benefit pensions are poorly managed, as they have been in Pennsylvania, they do create some challenges. As with paying a credit card bill, if you don’t put in the required contributions you can run up a large expensive debt. But the way to fix that problem is to pay the required contributions, not to switch to a highly inefficient retirement savings vehicle.
Read the entire column here.
A recent survey reveals that more workers are confident in their retirement income in 2013 than in 2009, but most are still worried about their long-term prospects–especially those 50 and older. From Pension Benefits:
Retirement confidence climbed between 2009 and 2013, and nearly one-quarter of employees are now Very confident’ of having enough income for the first 15 years of retirement. This reflects improving financial conditions over the past four years as employees have rebuilt their savings. When asked to assess their prospects 25 years after retiring, however, only 8% remain confident of a financially comfortable retirement.
Since the start of the financial crisis, confidence levels for workers age 50 and older have declined by 10 percentage points. In 2007, 34% were very confident of their ability to afford the first 15 years of retirement, compared with only 24% in 2013.
Workers with defined-benefit plans are more confident than those with defined-contribution plans. On the flip side, the prospect of benefit cuts worry workers in DB plans. From Pension Benefits:
Participants in defined benefit plans (DB) are 35% more likely to be satisfied with their finances than those with only a defined contribution (DC) plan.
Roughly half of DB plan participants (45%) are afraid their retirement plan might be cut and about one-third (36%) fear having to bear more investment risk in the future. And for DB plan participants who have recently undergone a cut to their retirement program, 70% fear more curtailments are on the horizon.
Another interesting trend: Workers are becoming more engaged with their retirement plans. From Pension Benefits:
Since 2010, employees have become more involved and interested in retirement planning. Slightly more than half of all employees review their retirement plans frequently. Sixty-three percent of DB plan participants track their savings carefully compared with 48% of DC-plan-only participants. Older and midcareer workers report greater engagement with retirement than younger workers and saving for retirement is their number one financial priority.
You can read the full survey results by clicking here (subscribers only).
The article is published in Pension Benefits.
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