{"id":1695,"date":"2015-04-06T22:36:46","date_gmt":"2015-04-07T04:36:46","guid":{"rendered":"http:\/\/admin.patheos.com\/blogs\/janetheactuary\/?p=1695"},"modified":"2016-08-16T09:55:59","modified_gmt":"2016-08-16T15:55:59","slug":"from-the-library-falling-short-by-charles-d-ellis-alicia-h-munnell-and-andrew-d-eschtruth","status":"publish","type":"post","link":"https:\/\/www.patheos.com\/blogs\/janetheactuary\/2015\/04\/from-the-library-falling-short-by-charles-d-ellis-alicia-h-munnell-and-andrew-d-eschtruth.html","title":{"rendered":"From the library: Falling Short, by Charles D. Ellis, Alicia H. Munnell, and Andrew D. Eschtruth"},"content":{"rendered":"\n<\/head>

This book, subtitled \u201cThe Coming Retirement Crisis and What to Do About It,\u201d was published back in December, at which time it was reviewed in the Economist, and I summarized their prescription<\/a>, as presented: \u00a0\u201cwork, save, move,\u201d that is, work longer, save more, and tap into home equity.<\/p>\n

Now, the \u201cmove\u201d part really doesn\u2019t get much airtime in the book itself; it\u2019s largely about working longer and saving more. \u00a0As to the working longer, they emphasize that there is no real meaning to the \u201cSocial Security Normal Retirement Age\u201d any longer, because, once one hits eligibility to begin collect benefits at age 62, those benefits increase in an actuarially equivalent way until age 70, a relatively recent change that, they say, most people don\u2019t understand. \u00a0They offer some modest strategies for how to make \u201cwork longer\u201d work, such as communicating with your employer, when you\u2019re in your 50s, that you intend to stick around for quite some time yet, and, in fact, staying with your current employer rather than trying to do something new in your later years (quite the opposite of the approach of \u201cUnretirement<\/a>\u201c), because there\u2019s no fallback if your entrepreneurial \u201cencore career\u201d is a bust \u2014 but don\u2019t really acknowledge that, rather often, early retirement isn\u2019t voluntary but the result of unemployment or disability. \u00a0And they encourage readers to maintain their health, and build up their skills \u2014 but even as we\u2019re working in offices rather than factories, our cognitive abilities decline, too.<\/p>\n

As to saving more, they don\u2019t really break new ground. \u00a0Why don\u2019t people save, and what could influence them to save more? \u00a0In addition to the usual suspects, the authors point to student loans as a culprit, as well as a general lack of knowledge of what savings rate is really required \u2014 and the difficulty is that required savings rate varies so wildly depending on the inputs into your model: \u00a0retirement age, assumed asset return, approach to asset-spending in retirement, etc. \u00a0(Here I\u2019d add that the benefit formula of Social Security itself is a culprit; the progressive formula has a philosophical justification, but it leaves us unable to really estimate, for our individual income levels, how much income Social Security will provide.) \u00a0The answers? \u00a0No new ground here. \u00a0Autoenrollment, yes, and at higher levels than the 6% rate. \u00a0Preventing \u201cleakage\u201d when moving jobs.<\/p>\n

But here\u2019s what\u2019s really more interesting: their breakdown of why we\u2019ve got a problem \u2014 why there\u2019s more reason for concern now than a generation ago.<\/p>\n

With respect to employer-provided benefits, it\u2019s clear that the change from Defined Benefits to 401(k)s has been rapid and thorough. \u00a0A generation ago, roughly half of private sector workers had Defined Benefit plans; the numbers have dropped substantially (though, flipping through, I can\u2019t find a specific number) as they\u2019re replaced by 401(k) plans. \u00a0One data point I\u2019d like to see is this, though: \u00a0are employers spending less on their employees than in the past? \u00a0DB plans rewarded long-service employees, with smaller accruals for younger employees than older ones, and, at the same time, used to be viewed as cheaper for employers, when they were able to assume higher asset returns and lower life expectancies than is currently the case.<\/p>\n

Anyway, that\u2019s just one piece: \u00a0the other issue is that Social Security provides lower benefits, in a couple respects: \u00a0not just anticipated future benefit reductions, but also the already-reduced benefits due to the increased Normal Retirement Age, the fact that benefits are taxable at a given income level, the fact that Medicare premiums reduce checks, and the shift to two-earner households. \u00a0 This last item is interesting: \u00a0a worker and a never-employed spouse, as a household, receive a total Social Security benefit of, say, not 40% of preretirement income but 60%, when adding in a spouse\u2019s benefit at 50% of the primary earner\u2019s benefit. \u00a0For a two-earner household, there is no \u201cextra\u201d benefit; each spouse simply receives their own benefit based on their own earning records.<\/p>\n

So my first thought here was, \u201cwow, this is really interesting\u201d \u2014 and it is actually ironic that this two-earner couple, financially better off than the one-earner couple, has a more difficult time reaching their target pay replacement ratio (which the authors suggest should be 75%). \u00a0But this is the difficulty with \u201creplacement ratio\u201d approaches to retirement planning and policy discussions. \u00a0They further address the suggestion by some that, because couples become empty-nesters before they retire, they really only need an income equivalent to what they were accustomed to spending during their parenting years, less the expenses\u00a0of raising their children<\/em>, which, of course, they no longer have. \u00a0Data is scarce, they say, but what data there is suggests that couples boost their consumption in the years after their children more out, and become accustomed to more luxuries than during their child-rearing years. \u00a0 And that further suggests that our public policy priority should not be replacement rates at all but simply doing what we can to enable more Americans to have retirement income that moves beyond basic needs but is more in line with middle-class expectations.<\/p>\n

Second observation is that this is not a \u201cpig in a python\u201d issue; that is, the funding issues in Social Security are not simply baby-boomer related, and everything settles down into a \u201cnormal\u201d adequately-funded state after they die off. \u00a0Rather, Social Security\u2019s funding issues are long term, based on lower birth rates and greater longevity than when the benefit formulas and contribution rates were settled on. \u00a0They don\u2019t, however, discuss the issue of whether the Trust Fund is \u201creal\u201d \u2014 but I\u2019ll throw my two cents in here and say that the \u201creality\u201d of the Trust Fund, or lack thereof, is irrelevant: \u00a0yes, there are \u201cbonds\u201d that the Social Security Administration can \u201credeem,\u201d but each such bond has to be covered by the government by, surprise!, issuing more debt, so the larger issue is the ability of the economy to sustain increased levels of government debt. \u00a0If this were a nonissue, if the government could just issue as much debt as it pleases with no ill-effects, then none of this is a worry at all. \u00a0And, of course, back when the \u201cTrust Fund\u201d began to be built up, the decision should have been made to build it up in a true Investment Fund, however great the concerns about politicized investing may have been. \u00a0But it\u2019s too late now, isn\u2019t it?<\/p>\n<\/body><\/html>\n","protected":false},"excerpt":{"rendered":"

This book, subtitled \u201cThe Coming Retirement Crisis and What to Do About It,\u201d was published back in December, at which time it was reviewed in the Economist, and I summarized their prescription, as presented: \u00a0\u201cwork, save, move,\u201d that is, work longer, save more, and tap into home equity. Now, the \u201cmove\u201d part really doesn\u2019t get […]<\/p>\n","protected":false},"author":2209,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[450],"tags":[],"class_list":["post-1695","post","type-post","status-publish","format-standard","hentry","category-actuarial"],"yoast_head":"\nFrom the library: Falling Short, by Charles D. Ellis, Alicia H. Munnell, and Andrew D. 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