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Lecture 2: The Changing U'S' Retirement Landscape

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Explain why retirement income has become major issue in ... Backdrop: high unemployment (25% in 1932) and stock market crash of 1929. Social Security Today ... – PowerPoint PPT presentation

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Title: Lecture 2: The Changing U'S' Retirement Landscape


1
Lecture 2 The Changing U.S. Retirement Landscape
  • Monday, August 28 2006

2
By the end of this lecture, you should be able to
  • Explain why retirement income has become major
    issue in private and public sector
  • Describe current sources of income for the
    elderly
  • Describe major trends facing retirement landscape
    in the US
  • Discuss rationale for public concern over
    pensions
  • Explain why employers might offer pensions out of
    self-interest

3
Demographic Shifts
  • Life expectancy (at birth)
  • 1900 male 51.5, female 58.3
  • 2000 male 79.6, female 84.3
  • Fertility declines
  • Work patterns
  • In 1900, 2/3 of those who reached 65 continued
    working
  • Today, only 1/8 continue working after 65
  • Living arrangements
  • Nearly 3 out of 4 retired men in 1900 lived with
    adult children
  • Today, fewer than 1 in 5 do

4
Source Fast Facts Figures about Social
Security, August 2004
5
Social Security Act of 1935
  • Social Security as a national retirement system
  • Championed by FDR to offer some measure of
    protection to the average citizen and to his
    family against poverty ridden old age
  • Backdrop high unemployment (25 in 1932) and
    stock market crash of 1929

6
Social Security Today
  • In 2005, more than 48 million Americans will
    receive approx. 518 billion in benefits
  • Approx 40 million of these are retirees, or their
    dependents and survivors (rest is for DI)
  • More than 9 of every 10 individuals over age 65
    receive SS benefits
  • About 2/3 of elderly receive 50 or more of their
    income from Social Security
  • SS is the only source of income for 22 of elderly

7
Employer Sponsored Pensions
  • Largely gained popularity in post WWII period
    often driven by unionization
  • Savings accumulated in employer plans is growing
    fast
  • 1.6 trillion in 1985
  • 5.5 trillion in 2003
  • Pronounced shift away from defined benefit to
    defined contribution plans
  • Much more to come on this topic!

8
Individual Savings
  • Accounts for 15 of all retirement income, but is
    highly skewed
  • More than half of households report income from
    assets, but many have none
  • Line between personal saving and pension saving
    is getting increasingly blurry

9
Labor Earnings
  • In 1962, 36 of households age 55 received labor
    earnings
  • In 2002, only 22 do
  • Choosing retirement date is an important
    adjustment mechanism for those who have over- or
    under-saved
  • Ability to contribute to workforce much greater
    today
  • Better health than elderly of 50 years ago
  • Job skills not as tied to physical prowess

10
Public Assistance
  • Programs such as SSI (Supplemental Security
    Income)
  • 5 of elderly households receive some form of
    public assistance
  • For 25 of recipients, it is sole source of income

11
What are the Big Trends?
  • Continued aging of the population
  • Shift towards more self reliance
  • DB to DC
  • Debate over personal accounts
  • Rising health care costs

12
Population Aging
  • Ratio of individuals age 20 64 to individuals
    age 65
  • 1950 gt7
  • 1975 5.3
  • 2000 4.8
  • 2025 3.3
  • Today, 1 in 8 citizens is age 65
  • By 2050, 1 in 5 will be age 65

13
DB vs. DC Plans
  • Defined Benefit
  • Defined Contribution

14
The Shift from DB to DC
  • 1980 38 million DB participant
  • 20 million DC participants
  • 1999 41 million DB participants
  • 60 million DC participants
  • Source U.S. DOL Private Pension Plan Bulletin

15
Health Care
  • U.S. spent 14.1 of GDP on health care in 2001,
    or about 1.4 trillion
  • Up from 8.8 of GDP in 1980
  • Likely to reach 16 by 2010
  • Growth in costs expected to accelerate some
    estimates that it will be 38 of GDP in the
    long-run!!!
  • Disproportionately large fraction of health care
    expenditures incurred by the elderly

16
A Model of Individual Retirement Savings Behavior
  • The Life Cycle Model
  • Individuals like to smooth consumption over their
    lifetime
  • But income is not even over lifetime
  • What do you do?

17
A Simplified Life Cycle Model

Income
save
Consumption
borrow
Spend down wealth
Age 62
Age 22
death
18
A Simplified Life Cycle Model

Income
save
Consumption
borrow
Spend down wealth
Age 62
Age 22
death
19
The Rational Case Against Public and Private
Pensions
  • If individuals were behaving rationally and with
    perfect foresight, they should be saving enough
    today to take care of their retirement
  • Attempts to force savings through public or
    private pensions will be
  • At best, redundant and unnecessary
  • At worst, harmful, by making people save too
    much, etc.

20
The Case for Public Support of Retirement Pensions
  • Inadequate foresight or planning
  • Uncertainty and imperfect insurance markets
  • How long will I live?
  • What will my expenditure needs be?
  • Income Redistribution

21
The Value of Pensions to Employers
  • Tax deferral
  • The three Rs
  • Recruiting
  • May help sort out type of applicant that you
    want
  • Retention
  • Vesting rules, back-loaded compensation plans
  • Retirement
  • Influence choice of retirement date
  • Encourage Productivity
  • Discourage collective bargaining
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