The U.S. has a major funding problem with its entitlement spending (Social Security and Medicare) programs. However,  the U.S. population is younger than that of Europe because the Fertility Rate is higher and Life Expectancy is (sadly) lower. Add to that the fact that European social programs are more generous than those of the U.S., and Europe has bigger problems than those of the U.S.

This has generally been ignored during the ascension of the Euro. However, Johathan R. Laing reports in Barron’s this week (link) that a new report by GaveKal, “an international investment-research boutique” notes that “rapidly aging populations in euroland figure to decimate working populations there and increase the governmental financial burden at a pace far faster than in the U.S.”

In addition to the U.S. having a younger population, the U.S. population works longer hours and later in life. The AARP ‘Profit From Experience’ report (link) included data showing that the U.S. workers stay on the job longer than all other G7 countries other than Japan.

Combine these facts with reports that indicate that Boomers want to stay on the job even longer, and the U.S. competitive advantage could grow even greater. What is needed is a continuing thrust to make sure that outdated policies and practices do not stand in the way of Boomers staying on the job when they would like to do so. For instance, EBRI reports (link) that 37% of workers retired earlier than they had planned. Health, disability, and caring for family members were part of the reason. However, downsizing and obsolete skills were a significant factor. Work incentives and retraining could probably bring a lot of these workers back to being productive for society.
 

It is not often that there is an opportunity to report good news on the subject of retirement preparation. However, three studies released recently have included very positive developments in 401(k) auto participation.

Wells Fargo’s Institutional Trust Services, and BPS&M (a benefits planning division of Wells Fargo) issued their twelfth annual report on ‘Strategic Initiatives in Retirement Plans.’ (Link) Included was the information that plans using automatic enrollment for their 401(k) programs had increased from 26% of respondents  (employers) to 44% from 2006 to 2007. Human resource professionals have called this increase in one year amazing.

“The Pension Protection Act of 2006 has opened the door for employers to design plans that encourage plan participation…,” according to the study. The change from having employees ‘opt-in’ (actively sign up for a 401(k)) vs. ‘opt-out’ (they are automatically enrolled and have to take action to drop out) led to these amazing statistics above.

The Employee Benefit Research Institute estimates that auto enrollment, and auto escalation (another provision of the PPA) “will result in a significant increase of 401(k) accumulations - especially for low-income workers - compared with estimates previously determined for automatic enrollment.” (Link)

And a Harris Interactive poll, sponsored by AARP, FINRA, and Retirement Security Project (Link) measured the employee attitudes toward automatic 401(k) enrollment. Of those enrolled in a 401(k) plan, 98% either strongly or somewhat agreed that they were “..glad (their) company offers automatic enrollment.” Even for those who opted out, 79% strongly or somewhat agreed they were glad their company offered automatic enrollment.

The PPA has been described as the biggest improvement in pension legislation in many years. So, since congress takes so much criticism, it is only fitting that for a positive move, we should thank the PPA’s sponsors. They are Representatives Boehm (OH), Camp (MI), McKeon (CA), Kline (MN), and Thomas (CA).

From the 1950’s to the early 80’s there was a constant trend toward earlier retirement. However, in the mid 80’s that trend gradually started changing. At a recent AARP International Profit From Experience Conference, Jan Denys, the Manager Corporate Communication and Public Affairs and Labor Market Expert, Randstaad, Belgium, noted this change in many countries and he suggested that governments and employers should “surf the trend.”

In many countries the trend to later retirement is a function of governments having to make the official date of retirement an older age. This is badly needed, as retiree social programs are severely testing government financial capabilities. However, changing the retirement age is meeting with mixed results. It is amazing that Sarkozy was elected in France with a key plank in his platform being that the French needed to work more. Across the border in Germany, the recent increase of the retirement age to 67 is being challenged (The Economist on 10/11/07, reported that 80% of the German voters want to roll back the government effort to get the retirement age up to 67).

In the United States, The Congressional Research Service , on September 7, reported trends in labor force participation to Congress ( link). the low point for the percent of men and women 65 and over working hit their low points in 1985 (15.8% and 7.3%, respectively). For men 55 to 64 the low point of 66.0% was reached in 1995.

As the CRS report points out, there is no solid statistical analysis that provides solid reasons for this trend development. However, the author (Patrick Purcell) puts forth a hypothesis that one of the reasons is likely to be the significant switch in employer pensions from Defined Benefit to Defined Contribution (largely 401ks). The former is likely to penalize a worker for staying beyond a defined retirement age (differs by plan), while the latter provides more savings for retirement for those who stay on the job.

The author also notes that increasing use of ‘phased retirement’ could be a factor. This is tricky because, as the author points out, “No statutory definition of phased retirement exists.” Yet, several surveys report that what workers would like the most in order to stay on the job is flexibility in work schedules. Employers, on the other hand, are afraid of the statutory uncertainty of phased retirement programs. Therefore, the safest route is often to have employees retire, then apply for work as a consultant or contract worker.

The net is, it is very encouraging that more workers are staying on the job. The AARP surveys indicate that 70-80% of them want to. And that extra work is good for the employers and the economy as well. Employers and government should take advantage of this by ’surfing the trend!’