Do Older Americans Have Enough Money Saved To Last Through Retirement? An Analysis

Retirement graph

Do older Americans have enough money saved to last through retirement? It’s a question asked often, but a definitive answer is hard to come by.

An article published in the October issue of Pension Benefits takes aim at answering that question using a metric called the Retirement Readiness Rating (RRR), developed by the Employee Benefit Research Institute.

The analysis, which originally appeared in the EBRI’s June newsletter, was conducted using several different scenarios; the first scenario and the resulting analysis can be seen in Figure 1, above. More on the results:

Figure 1 shows the results assuming that 100 percent of the simulated deterministic expenses are met; in other words, 100 percent of the average expenses (based on post-retirement income) for components likely to be encountered on a regular basis (e.g., food, housing, transportation). In addition to these relatively predictable expenses, the stochastic costs arising from nursing home and home health-care expenses are assumed to be covered in years when the model simulates their existence.

Note that in Figure 1, while 5 percent or less of those in the second-, third-, and highest-income quartiles would run short of money in the first year of retirement, more than 2 in 5 (43 percent) of those in the lowest-income quartile would, based on deterministic and stochastic costs. Moreover, by the 10th year in retirement (assuming retirement at age 65), nearly 3 in 4 (72 percent) of the lowest-income quartile households would run short of money, while fewer than 1 in 5 (19 percent) of those in the second-income quartile would face a similar situation. Only 7 percent of those in the third-income quartile and 2 percent of those in the highest-income quartile are simulated to run short of money within a decade.

By the 20th year in retirement (again, assuming retirement at age 65), more than 4 in 5 (81 percent) of the lowest income quartile households would run short of money, compared with 38 percent of those in the second-income quartile that would face a similar situation. Only 19 percent of those in the third-income quartile and 8 percent of those in the highest-income quartile are simulated to run short of money by the twentieth year. These values continue to increase until all households either run short of money or there are no surviving retirees. By the 35th year in retirement (age 100, assuming retirement at age 65), 83 percent of the lowest-income quartile households would run short of money and almost half (47 percent) of those in the second-income quartile would face a similar situation. Only 28 percent of those in the third-income quartile and 13 percent of those in the highest income quartile are simulated to run short of money eventually.

A summary of the full results:

The results presented in Figures 1 through 6 show that the years of retirement before Baby Boomer and Gen Xer households run short of money vary tremendously by:

  • Preretirement-income quartile.
  • The percentage of average deterministic costs assumed paid by the household.
  • Whether or not nursing home and home health-care expenses are included in the simulation.

However, even when 100 percent of average deterministic costs are paid by the household and nursing home and home health-care expenses are included (Figure 1), only the households in the lowest-income quartile eventually end up with a majority of the households running short of money during retirement.

Each of the six analyses with results presented in Figures 1 through 6 show the same stark conclusion: The lowest preretirement income quartile is the cohort where the vast majority of the shortfall occurs, and the soonest. When nursing home and home health-care expenses are factored in (Figures 1, 3 and 5), the number of households in the lowest-income quartile that is projected to run short of money within 20 years of retirement is considerably larger than those in the other three income quartiles combined. Indeed, as the results across multiple scenarios and assumptions show, the lowest-income quartile is the most vulnerable, while longevity and long-term care are the biggest risk factors across the entire income spectrum.

The full analysis, including all six scenarios, can be read in the October issue of the Pension Benefits, or the EBRI’s June newsletter.


Do Pensions Help Bring Talent To The Public Sector?

job hunting

An oft-cited argument in favor of generous public pensions is that it helps the public sector recruit and retain high-quality workers.

But is that the case? That question is the subject of the latest report from the Center for Retirement Research at Boston College.

The findings of the report, as summarized by the CRR:

– Research shows that pensions help recruit and retain high-quality workers; thus, cutbacks in public pensions could hurt worker quality.

– One indicator of quality is the wage that a worker can earn in the private sector.

– Using this measure, states and localities consistently have a “quality gap” – the workers they lose have a higher private sector wage than those they gain.

– The analysis shows that jurisdictions with relatively generous pensions have smaller quality gaps, meaning they can better maintain a high-quality workforce.

– The bottom line is that states and localities should be cautious about scaling pensions back too far.

The report talks further about the correlation between cutting pensions and a widening “quality gap” between the public and private sector workforce:

As states grapple with challenges facing their pensions, many have taken steps that reduce benefit generosity for their new employees. The analysis suggests that states and localities with relatively generous pensions should be cautious, because reductions in benefits may result in a reduction in their ability to maintain a high-quality workforce. To the extent the quality gap already exists for many of these employers, reducing pension generosity may widen the gap.

A couple of caveats are important. First, some variables that may be correlated with both the quality gap and generosity of pensions – e.g., health insurance benefits – were not included in this analysis due to data limitations. If these factors (rather than pension normal costs) drove the result, then changes in pension benefits may have more muted effects than estimated here. Second, the non-linearity in the result is intriguing, but its source unclear. Why do plans at the bottom of the generosity distribution have smaller quality gaps than plans in the middle? Will reductions in these plans have any effect on the quality gap? Future research will seek to shed light on both the causality of the main result and on its apparent non-linearity.

Read the full report here.


Photo by Kate Hiscock via Flickr CC License

Illinois Loophole Lets Teacher Union Leaders Boost Pensions After Leaving Classroom

Springfield, Illinois

A Washington Times investigation has uncovered an interesting legal quirk in Illinois that lets retired teachers continue to build pension credit after retirement. The law allows teachers who later become union leaders to credit their union salaries towards their pension.

More from the Washington Times:

Collectively, 40 retired union leaders draw $408,136 per month in Illinois teachers’ retirement pension, or $4.9 million per year, according to data generated at the request of The Washington Times by, an online portal aggregating 1.3 billion lines of federal, state and local spending records.

Twenty-four of those retired union leaders have already collected more than $1 million each in retirement benefits, and the payments are likely to continue for years to come, the data show.

The union bosses collecting the payouts had jobs at the National Education Association (NEA), the Illinois Education Association (IEA) and the Illinois Federation of Teachers (IFT) after their teaching careers. Most got massive pay raises when they jumped from the classroom to the unions, swelling their pension payouts by large amounts at the expense of taxpayers.

The labor leaders contribute into the state pension program during the time they work for the unions, but their larger salaries are then used to calculate their final retirement eligibility. The result is taxpayers must pay pensions to these leaders that are exponentially larger than if they just continued to teach in the classroom.

The arrangements live on even as the Illinois Teachers Retirement System (TRS) hurdles toward insolvency — it is currently underfunded by an estimated $54 billion — with teachers currently in the classroom questioning what sort of retirement they’ll receive. Right now, the TRS could only afford to pay out 40 cents on the dollar of each retiree it owes.

“Government pensions should go to government workers, period,” said Adam Andrzejewski, founder of “The pension system for the hard-working teacher and public servant is being drained by union bosses with special pension privileges.”

It’s important to note that the employees in question were still contributing to the pension system during the time they worked with unions — so they weren’t getting a completely free ride.

More details on the law in question, from the Washington Times:

The labor officials are able to collect teacher pensions because of a pension code carve-out granted by the Illinois General Assembly back in 1987 — a change for which the unions lobbied heavily.

Under the pension code, active employees of the IFT and the IEA with previous teaching service can be TRS members. The IFT and IEA have been able to designate employees as active TRS members if they were already TRS members because of previous creditable teaching service. Since the 1940s, the pension code has allowed active employees of the Illinois Association of School Boards with prior TRS creditable service to be active TRS members.

The statutes outlining additional benefits within Illinois state and local pensions have many times “been amended in the state pension code without much public discourse, financial analysis or even justification as to why we should add on nongovernment employees such as municipal associations, unions or anyone else,” said Laurence Msall, president of the Civic Federation, a nonpartisan research organization. “This is the definition of insider benefits that don’t serve identifiable public purpose.”

In 2012, Illinois Gov. Pat Quinn signed a law that prevented teachers from using service time with unions to boost pension benefits – but the law only applies to union work done before the teachers were hired, not after.

Video: Lessons From Pension Reform in Utah

In the video above, former Utah senator Dan Liljenquist talks about the pension reform efforts he sponsored in Utah from 2008-2011 and what other states can learn from those efforts.

Liljenquist sponsored bills that ended “double-dipping” in the state, moved new hires into a defined-contribution plan and ended pension benefits for Utah lawmakers.



A New Era of Pension Transparency In Boston? Not So Fast.

Two silhouetted men shaking hands in front of an American flag

Last week, the Massachusetts Bay Transportation Authority (MBTA) agreed to disclose its member’s pension benefits and to beef up its previously inadequate annual financial reports.

The retirement fund, called the “T” Fund, is among the most tight-lipped in the country because it is not required to follow public records laws.

But a Boston Herald editorial warns us not to cheer for this measure quite yet. The newspaper calls the agreement a “half-measure” that could easily be reversed. From the Boston Herald:

A deal struck between the MBTA and a union representing 3,000 of its workers to disclose more information about employee pensions is a disappointing half-measure. A mere contractual agreement, it could easily be revised in the future. To ensure public access to this vital financial information the disclosure agreement needs the force of law.

Data on T pensions has long been shrouded in secrecy. The MBTA retirement fund was originally formed as a “private” trust, and state courts have upheld that status. That means neither MBTA fare-payers nor state taxpayers have the legal right to data on the pensions that they subsidize.

Amid public pressure over the fund’s secret operations — the board’s investment decisions are private, too, and its meetings aren’t open to the public — Beacon Hill last year passed a law intended to subject the T’s pension fund to state public records and open meeting laws.

But opponents of the new requirement resisted the effort, and actually succeeded in convincing the state’s supervisor of public records that the fund still wasn’t required to open its books.

So much energy wasted, all to keep the public from examining data that should be available for anyone who’s ever swiped a Charlie Card to examine.

The deal struck last week requires the union to turn over data on employee pensions to the T monthly, and the T will then post it on the state’s Open Checkbook website. We are supposed to greet this development with cheers.

But we’d be curious to know what T management had to give up during negotiations to secure the agreement. And we’d note once again that a provision like this negotiated into a labor contract could easily be negotiated out in the future.

The “T” fund is still refusing to disclose documents related to investment losses associated with certain hedge funds.


Photo by via Flickr CC License

Urban Institute Rates Pennsylvania PERS Among Worst In Nation At Covering New Hires

Pennsylvania quarter

The Urban Institute released a report Thursday studying the pension benefits paid by Pennsylvania’s State Employees Retirement System.

The authors rated the System as the third worst in the country in terms of covering new state employees. From the report:

Pennsylvania’s pension plan for state employees receives a failing grade in the Urban Institute’s state and local pension plan report card, and ranks as the third-worst plan in the nation covering newly hired general state employees. The plan scores poorly because it is inadequately funded, it penalizes work at older ages by reducing lifetime benefits for older employees, and it provides few retirement benefits to short-term employees. Age-25 hires must work 32 years before they accumulate rights to future pension benefits worth more than their required plan contributions. Various pension reforms could distribute benefits more equitably across the workforce.

More details on the report’s findings, as reported by TribLive:

The study, published Thursday, said SERs, the state employee retirement system fund that serves about 120,000 retirees and 105,000 state workers, has an $18 billion shortfall and deficits that result in dramatic inequities in pension benefits.

The plan ties benefits to years of service. Researchers found 76 percent of all state-financed pension benefits go to the 25 percent of employees with the largest pensions, and the top 5 percent of recipients receive 22 percent of all benefits.

Those who leave after five years, the minimum time to vest in the system, fared poorly.

Only Massachusetts and New Jersey scored worse than Pennsylvania in terms of covering new state employees, said economist Richard W. Johnson, a senior fellow with the Washington-based Urban Institute and lead author of the study.

Read the full report here.

Survey: Most Expect to Keep Working During Retirement

beach vacation

For most people, retirement brings to mind images of beaches, hammocks and long days devoted to hobbies instead of work.

In fact, more work is probably last on the list of concepts associated with retirement. Or is it?

A survey by Consumer Reports found that the overwhelming majority of people close to retirement actually expect to keep working in some capacity after they’ve officially “retired”. From Consumer Reports:

Eighty-three percent of pre-retirees in our survey expected to work full- or part-time.

The phenomenon of a gradual retirement isn’t so new. Each year since 2007—before the economic downturn—about a quarter of our fully retired respondents have reported starting their retirement by working less, not stopping entirely. They reduced hours at their main job, worked part-time at a new one, or started a business. They worked for a median of four years. The most satisfied partly retired respondents worked 9 hours or less per week.

Laboring longer provides more income and delays when you begin withdrawing from savings, allowing more time for growth. And for many, it keeps those synapses firing.

It’s interesting to note that although 83 percent of respondents said they expected to keep working, past data from the same survey shows only 25 percent actually do.

Perhaps part of the reason for that disconnect are the implications that working has for other retiree benefits—sometimes, more work means less Social Security and pension benefits:

If you haven’t reached full retirement age but have claimed your benefit, Social Security holds on to $1 for every $2 you earn above $15,480. When you reach full retirement age, it gives that deferred amount back, adding to your monthly benefit.

Working shorter hours at the same employer could affect pension benefits or employer-based group health insurance, so check with human resources before you commit to part-time work.

The survey data is part of a larger piece over at Consumer Reports about how to “Stop Freaking Out About Retirement”. It’s worth a read.

Would You Sell Your Future Pension For a Lump Sum of Cash? These Businesses Are Banking On It

Pink Piggy Bank On Top Of A Pile Of One Dollar Bills

You’ve heard of payday advances. But pension advances?

Believe it or not, businesses are popping up that allow retirees to do just that: “sell” a portion (or all) of their future retirement income in exchange for a lump sum of cash today.

The owners of these businesses admit that their service isn’t for everyone. But if you need to pay bills now, they say, then why not sell a portion of your pension for cash? More from Today:

Their pitch, aimed at military and government retirees with generous pension benefits and those with bad credit, is mighty appealing: cash now to pay today’s bills.

Of course, to get tomorrow’s money today, you have to sign over your future pension payments for a specified number of years.  

Mark Corbett runs the website Buy Your Pension, which helps facilitate pension sales. He told TODAY that a pension advance is not for everyone, but he believes it can be beneficial for some people.

“You should not sell your pension unless it saves you money,” he said. “For example, you are using it to pay off bills.”

Four years ago, Corbett got an advance on his private pension — selling a $237,000 nest egg for $89,000 — to pay off his mounting bills. He called it “a godsend” that reduced his stress and probably added years to his life.

But critics say pension advance services are dangerous and financially unwise. The Federal Trade Commission, Financial Industry Regulatory Authority and other consumer protection agencies are already cautioning people to be know the implications of selling your pension. Today writes:

“There are serious financial consequences down the road for taking the money in a lump sum now,” said Gerri Walsh, FINRA’s senior vice president of investor education. “You are getting less money than if you waited and got those monthly pension payments.”

Unlike a traditional loan, you can’t get out of the deal early. If you signed up for a six-year payout, the company gets your pension for a full six years.

“A pension advance is unlike any other type of financing, because you’re required to sign over part of your future income stream,” said Leah Frazier, an attorney for the FTC.

“You could find yourself in a situation down the road where you need money for your basic expenses, but you don’t have it because you took it as an advance.”

And remember: Getting a lump sum pension payment is likely to have some serious tax implications.

“It could push you into a higher tax bracket,” said Lisa Greene-Lewis, lead CPA at TurboTax. “I could see people doing this and getting shocked by the additional taxes they now have to pay.”

The Government Accountability Office (GOA) recently did some secret shopping at nearly 40 pension advance businesses. Based on their experiences, they released a report indicating that they’d found numerous “questionable business practices”.

Last month, Missouri banned pension advances for public employees. They are the only state thus far to do so.


Photo by: www.SeniorLiving.Org

California Governor Calls Out CalPERS On Pension Tweak

Jerry Brown Oakland rally

Today CalPERS approved 99 types of “special pay”, or additional income that can be included in calculating a worker’s pension.

California Governor Jerry Brown was receptive to most of the “special pay” items—except for one. But it was enough to compel him to send a letter to CalPERS urging the board not to approve the pending changes.

At issue is a section of the CalPERS proposal that allows pension benefits to be increased based on temporary pay increases and ad hoc payments.

That contradicts a section of Jerry Brown’s 2012 reform law which states that pension benefits can only be based on “normal monthly pay”, and not “short-term” pay increases. From Reuters:

Although Calpers approved 99 types of extra pay that can be factored in to a worker’s income when calculating their pension, Brown only objected to one of those: allowing temporary upgrade pay to be counted as permanent, pensionable income.

Brown, a Democrat, sent a letter to Calpers last week asking them not to allow temporary upgrade pay to count toward pensions.

On Wednesday, the Calpers board rejected Brown’s opposition and voted to pass all 99 pay provisions, including that temporary pay hikes can be factored into a final pension.

“Today Calpers got it wrong,” Brown said in a statement. “This vote undermines the pension reforms enacted just two years ago. I’ve asked my staff to determine what actions can be taken to protect the integrity of the Public Employees’ Pension Reform Act.”

Read the full letter below, courtesy of the Sacramento Bee:

Screen shot 2014-08-20 at 4.49.36 PM

[A quick PSA, in case you don’t live in California: Edmund is the legal first name of Gov. Jerry Brown.]

Auditors Asking Questions About “Illegal” Pension Benefits at Pennsylvania Fund


Pennsylvania’s top auditor claims that the city of Carbondale boosted pension benefits for certain top cops close to retirement, an action that–due to the nature of the benefit increases–violated state law.

In Pennsylvania, pension benefits can only equal up to 50 percent of a worker’s final year salary. But the city offered to sweeten benefits for four city police officers, who are now earning benefits equal to 65 percent of their final salary.

The auditor says those benefits are a clear breach of state law, but the city says it avoided breaking the law by using a loophole of sorts. From the Times-Tribune:

Last year, Mayor Justin Taylor and city solicitor Frank Ruggiero said the higher benefits were legal because the 15 percent extra for the three officers and 10 percent additional for the disabled officer come from the city’s annual budget rather than the police pension fund. Mr. Taylor said the city would save almost $550,000 during the next four years by replacing the officers with lower-paid full- and part-time officers.

The additional benefits are costing the city an extra $2,326 a month, the auditor general says, or $27,912 a year.

Mr. Taylor said city officials still think they’re right and don’t plan to stop making the payments. The city is weighing its options and might appeal the findings because of a fundamental disagreement over the nature of the payments, which are retirement incentives not pension payments, the mayor said.

“We’ve been disagreeing from day one,” he said.

Auditors informed the city of their concerns back in February. The auditors say the city told them they would respond in 10 days. But the city never called them back.

Now, auditors are threatening punishment. Specifically, they are prepared to withhold all state contributions to the pension fund.

Susan Woods, a spokeswoman for the auditor general, said it may not come to that, but auditors are prepared to take action.

“It hasn’t risen to that level,” she told the Time-Tribune. “If they continue to do this, we do have the ability to withhold.”

Auditors took issue with other areas of the city’s handling of pensions, as well. From the Times-Tribune:

The auditor general also criticized other areas in the city’s pension funds:

  • The city’s provision of cost-of-living increases in pension benefits for firefighters who retired as of Jan. 1, 1993. These firefighters receive a 2.5 percent raise in benefits on the third anniversary of their retirement and every year after that, but the auditor general says the maximum pension should be only 50 percent of the highest salary of an active firefighter.

This criticism was actually a repeat of criticism in an earlier audit.

City officials told auditors they were unable to change the provision through bargaining with the firefighters’ union.

  • The city’s failure to calculate and contribute the interest on its late 2011 minimum pension payments and did not pay its 2012 and 2013 payments. In response to the criticism, the city contributed more than $666,000 to cover the payments and interest.

The Pennsylvania Commonwealth Court ruled in 2001 that cities must abide by the benefit limits imposed by state law.