The Boston College Center for Retirement Research (link) (along with a partner  RRC at the U. of Michigan) is an outstanding source for great, in-depth studies of retirement issues. The Director of BCCRR, Alicia Munnell, frequently testifies before congress and is quoted in leading publications. She and Steven Sass have a just-published book on ‘Working Longer’ published by the Brookings Institution Press (link). 

This book should be on the bookshelf of anyone involved in the issues of working later in life and/or retirement. The 52 pages of notes and references at the end of the book alone represent a great resource for understanding the dynamics of those issues.

Many politicians and commentators talk about worries that Social Security will disappear in the future. Many politicians say that they are going to “save Social Security.” What they seldom address is the fact that Social Security has already been significantly eroded. Munnell and Sass do a great service by quantifying the fact that “the full retirement age is being increased from 65 to 67,”…” Medicare part B premiums are slated to increase sharply,” and “SS benefits will be taxed more….as the benefits are not indexed to inflation.” The net of these changes will “reduce the net replacement rate for the average worker who claims at age 65 from 39 percent (of pre-retirement income) in 2002 to 30 percent in 2030.” To compensate for just these factors “workers will need to extend their work lives by about four years.”

A very important part of the book addresses the even more difficult time that women will have.

The only issue that I have with the book is that there are many references to problems that employers and workers have with working later in life. However, they do not give enough focus to the Towers-Perrin study (link) that delineated the fact that older workers do not cost more. Their higher health costs are offset by less job switching, less absenteeism, etc. As Bill Novelli, CEO of AARP and the sponsor of this study, told me, “This is the seminal study regarding the value of older workers.”

The older workers could be even more valuable if, as Munnell and Sass point out, “Most older workers have sufficient mental agility to learn and adapt if given the necessary training, but few get trained and many fail to learn and adapt on their own.”

This is a major contribution. Read it!

The New York Times did a fantastic service regarding raising the awareness of the demographic crisis by having a front-page article in its Sunday NY Times Magazine focussing on Europe’s problem with reduced fertility. You will probably have to register, but the link is (http://www.nytimes.com/2008/06/29/magazine/29birth-t.html?_r=1&oref=slogin&ref=ma).

The author is very articulate in describing many of the reasons for the birth dirth in Europe, and especially the Eastern and Southern parts of Europe. However, he does not recognize that the trend to lower fertility has been going on for two centuries. Napoleon worried about it. So did Teddy Roosevelt. Allan Greenspan told Congress that this has been going on for “at least 150 years.”

We must recognize this new demographic reality. The only reasonable solution is to create a paradigm shift regarding the potential of older workers.

The University of Michigan Retirement Research Center just published a Policy Brief by Sylvester Schieber called ‘Beyond the Golden Age of Retirement (link). First of all you should be aware that Schieber is one of the great authorities on benefits. He was on the President’s Commission on Social Security, was a Vice President for Benefits at Watson Wyatt, and his book, ‘Private Pensions’ is probably the authoritative work on that subject. How many books make it to an Eighth Edition (or more - that was just my copy in 2005).

Schieber analyzes the cost to have a hypothetical worker (starting to work at 22, $30,000 per year, continuous employment and salary increases) receive retirement income (combination of private and government benefits) that is 75 percent of preretirement earnings. A top-line summary that does not do justice to his work is that the total cost of the ‘own retirement saving and health insurance’ for someone who wanted to retire at 65 in 2005 would be ‘approximately 14% of their pay’ and that would go to 23.6 percent in 2030. Add government programs to that and the cost goes from 31.3% of pay to 52.4 percent of pay in 2030.

You get the picture. It is going to be impossible to continue with a 19th century definition of when workers should expect to retire (thanks to Count von Bismarck). We need more efforts like those of Senators Kohl, Smith, and Conrad (mentioned here in the last post) so the many who want to stay on the job can do so, and hopefully, over time, bring the median age of retirement up to a more realistic level. 

Carol Orsborn, in The Boomer Blog (link), points to a potentially tragic trend in workers claiming Social Security at the earliest opportunity. She quotes a USA Today article (link) that points to the fact that “about half” of the earliest Boomers will file for Social Security at 62. In addition to “conventional wisdom” that this is a good idea, the article notes that many Boomers are claiming because they are afraid that the government will be reducing benefits. One individual assumed that “those cuts won’t affect people already receiving benefits.”

This could be disastrous for efforts to keep Boomers on the job. Social Security benefits are taxed, except for the lowest income level workers. To workers debating whether it is worth it to stay employed, if they have claimed Social Security early, seeing those tax dollars being taken out of each check could be the final straw in pushing them into retirement.

If such a trend becomes widespread among Boomers, their actions will only compound the entitlement crisis budget woes. As I have noted in earlier posts, the recent trend to later retirements was encouraging, because later retirements could help reduce the staggering deficits projected for Social Security and Medicare. The “bird in the hand” attitude pointed out by USA Today, could turn the trend, with disastrous consequences for GDP and government budgets.

USA Today does a great service by including interactive graphs from the American Academy of Actuaries. Rather than rely on (incorrect) conventional wisdom, workers should consider their health, and, while it is something many people have a very difficult time addressing, assess their likely life expectancy. For healthy people, taking Social Security early is an extremely bad bet. The cumulative loss in benefits reaches tens of thousands in your 80’s and hundreds of thousands in your 90’s, as is clear in the American Academy of Actuaries tables. As the article points out, “there’s a 58% chance that (for a couple) one of them will live to 90 and a 29% chance that one will reach 95.” If you, and even moreso you and your spouse, are healthy in your 60’s, why would you give away that money to the government?

A primary concern of those looking at impending old age is that of not having to be dependent. Social Security is an inflation-adjusted (most private pensions are not) monthly check that, if maximized by later claiming, can help provide at least a partial guard against dependency.

Finally, the risk of the government cutting the benefits for those already in their 60’s is very unlikely. Politicians going back to the Greenspan Commission in 1982 have stated a precedent that reducing benefits at a time when it is too late for individuals to do anything about it would be extremely unfair. Add that to the political clout of the senior citizens and cuts to those in their 60’s are just not likely to happen.

 USA Today has made it a policy to regularly deal with key issues on the important subjects of population aging, and this is one of their best. We regularly check those out, but thanks to BoomerBlog for the heads up on this one.

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).