Worries and plans as individuals approach retirement

The primary objective of an employment-based retirement plan is to provide a secure and adequate income for workers throughout retirement. In the defined contribution (DC) framework, asset accumulation is a means to the end, but not the end. Drawing retirement income from savings and paying for health care expenses in retirement are the two issues that concern individuals the most as they approach retirement. This article examines the attitudes of near-retirees regarding these risks and their plans for managing them. The author discusses how DC plan design can have a major impact on how individuals convert their retirement savings to retirement income; differences in survey responses between those who have consulted a financial advisor or other financial professional and those who have not; and the role of trust in implementing advice.     

Negative Effects of the Canadian GIS Clawback and Possible Mitigating Alternatives

Abstract

In Canada there are three main sources of government-provided retirement income: the Canada/Quebec Pension Plans (C/QPP), which have benefits and contributions based on earnings up to the Yearly Maximum Pensionable Earnings; Old Age Security (OAS), which is a fixed amount for most but does include a “clawback” of benefits for high-income individuals; and the Guaranteed Income Supplement (GIS), which is designed to supplement those persons with extremely low income. The annual GIS benefit is reduced, or clawed back, by 50 cents for every dollar of annual income the person has in retirement, including C/QPP and income from Registered Retirement Savings Plans (RRSPs) and other savings. OAS benefits are not included in determining the GIS clawback.

The result of this is that low-income individuals who attempt to enhance their retirement replacement ratio actually see a decrease in government-provided support the more they save for retirement. Savings in an RRSP can effectively be taxed at more than 100% through corresponding reductions in the GIS, social housing, home care, GAINS (Ontario’s Guaranteed Annual Income Supplement), and other benefits that are based on one’s personal retirement income.

This paper explores alternatives to the 50% GIS clawback, including a basic GIS exemption, a GIS clawback rate lower than 50%, and a combination of the two. The goal is to improve the fairness of the GIS and reduce the disincentive to save for retirement, without increasing the overall cost of the program significantly.     

Medical savings accounts: why do they work?

This article analyzes and reviews the cost and design characteristics of medical savings accounts (MSAs). By placing premium savings from high-deductible health insurance in medical savings accounts, individuals have an incentive to shop for medical services. A more market-oriented health insurance and delivery system results, as individuals are now both users and buyers of health care. Data show that most families would accumulate balances in their MSAs that may be used for future medical expenses or savings. Through program design, the potential problems of adverse selection and cost to risk can be greatly reduced.     

TAX AND SAVINGS IMPLICATIONS OF THE CANADIAN REGISTERED RETIREMENT SAVINGS PLANS

This paper shows that the net effective tax rate on the Registered Retirement Savings Plans (RRSPs) in Canada has not been inflation non-neutral because of the combination of the non-neutrality of various sources of retirement income and the progressivity of the personal tax system. The paper also shows that although the RRSPs provide some tax arbitrage opportunities, these opportunities in Canada are limited due to the non-tax-deductibility of interest on mortgage and consumer credits. Finally, on theoretical grounds, the paper argues that the RRSPs may not have provided any incentives for personal savings in Canada.     

Improving the Equity-Efficiency Trade-Off: Mandatory Savings Accounts for Social Insurance

In the modern welfare state a substantial part of an individual's tax bill is transferred back to the same individual taxpayer in the form of social transfers. This provides a rationale for financing part of social insurance through mandatory savings accounts. We analyze the behavioral and welfare effects of compulsory savings accounts in an intertemporal model with uncertainty, involuntary unemployment, endogenous retirement decisions, credit constraints, and heterogeneous agents. We show that the introduction of (early) retirement and unemployment accounts generates a Pareto improvement by enabling the government to provide lifetime income insurance and liquidity insurance in a more efficient manner.     

Communicating the need for additional savings in the face of retiree health benefit cutbacks.

In preparing for retirement, employees need to consider not only their pension benefits but also the challenge of financing their retirement health care needs. Various trends evolving in our society indicate that future retirees will be increasingly dependent on their own retirement savings. Evidence suggests that employees are not fully aware of the significance of health costs in retirement and must be educated to the need to save for retiree health care expenses. This article discusses the issues of Medicare reduction and retiree health benefit cutbacks and the relative communication and education challenges such issues pose to employers.     

Private retirement savings and mandatory annuitization

The present paper studies the growth, welfare, and efficiency consequences of tax-favored retirement accounts in a general equilibrium overlapping generations model with idiosyncratic lifespan and labor income uncertainty. We focus on the implicit differential taxation of savings motives and the mandatory annuitization of withdrawals after retirement. The simulations performed for the German economy indicate that the differential taxation of savings motives has only modest efficiency effects but especially low-income households benefit. On the other hand, mandatory annuitization improves overall economic efficiency significantly by about 0.4% of aggregate resources, but future generations are hurt due to intergenerational income effects from reduced accidental bequest.     

The silver tsunami: an enquiry into the financial needs,preferences and behaviours of retirees

Understanding the financial needs and preferences of retirees is critical for retirement income policy and product design. Today, Australian retirees are accumulating record levels of retirement savings in order to generate retirement income. Using qualitative and quantitative research methods, we find that retirees value leisure spending, but do not plan for long‐term health and care needs. Moreover, retirees value risk protection but are unwilling to forgo potential investment gains. The differing levels of importance that retirees attach to aspects of retirement, health, intergenerational planning and family dynamics suggest that retirement income products cannot be ‘one‐size‐fits‐all’.     

Affordable retirement: light at the end of the tunnel

Compared to previous studies, the 2004 Replacement Ratio Study from Aon Consulting/Georgia State University shows an increase in the amount of income today's workers need at retirement to maintain their preretirement standard of living. After describing the study's replacement ratio findings, the authors estimate lump sums needed at retirement and required adjustments for both nonincreasing annuities and retiree medical expenses. They then describe steps innovative plan sponsors can take to encourage participants to understand and undertake their responsibility to acquire the substantial personal savings needed for a comfortable retirement.     

Effects of risk tolerance,financial literacy,and financial status on retirement planning

In this study, we investigate the effects of retirement planning on the economic and psychological factors of consumers using a large sample drawn from the 2012 National Longitudinal Survey of Youth. Specifically, we examine the combined impact of risk tolerance, financial literacy, savings, income, and debt on consumers’ retirement planning behavior. Risk tolerance, financial literacy, income, and savings are all found to have positive relationships with retirement planning, though debt has no significant relationship with retirement planning. Also, higher levels of risk tolerance weaken the relationship between savings and retirement planning. Implications of these findings for the literature and the financial planning industry are provided as well as directions for future research.

     

Accounting and the construction of the retired person

This paper seeks to describe the constitutive role played by accounting in the social safety net for the elderly, and its effects on the individual preparing for retirement. The paper documents the effects of accounting on life-long behaviours, through the objectivization of the individual as a worker, saver, and pensioner. It shows how accounting has, by capturing measures of individual earnings, by enlisting the individual in the preparation of tax returns, and by reflecting back to the individual various accumulations of lifetime savings, attempted to transform that individual not just into a saver who can continue to consume long after ceasing to produce, but into an investor whose interests are aligned with the financial markets. The focus of the paper is the Canadian retirement income system. Starting with an early attempt at retirement income protection, the 1908 government annuities program, the paper develops a genealogy of Canada’s present comprehensive retirement income system. By examining the succession and accumulation of retirement income programs introduced since 1908, the study shows how accounting has functioned as a dividing practice, separating citizens into categories wherein they can be subjected to particular programs. The paper suggests that the accounting technologies used in constructing the Canadian system have fallen short as tools for governing retirement and retirement savings, largely due to their inadequacy as technologies of the self. The paper is of particular relevance to accounting scholars because the aging population in many countries is putting tremendous pressure on retirement income programs. The paper helps us to understanding the role of accounting in shaping political policy on the aged and in preparing citizens for old age.     

Financial literacy and voluntary savings for retirement: novel causal evidence

ABSTRACT

We utilise recent Household Finance and Consumption Survey microdata to report first causal effects of financial literacy on voluntary private pension schemes participation for a Central and Eastern European (CEE) country, namely Slovakia. Savings for retirement in the supplementary pension schemes are positively associated with financial literacy after controlling for a set of relevant socio-economic variables. One additional correctly answered financial literacy question leads to a 5.6 percentage points increase in the probability of having a voluntary pension savings plan in our ordinary least squares estimates. The causal impact of financial literacy increases to 19.5 percentage points when we address potential endogeneity problems by novel to the literature instrumental variables.     

Optimal and Simple,Nearly Optimal Rules for Minimizing the Probability Of Financial Ruin in Retirement

Abstract

The increasing risk of poverty in retirement has been well documented; it is projected that current and future retirees’ living expenses will significantly exceed their savings and income. In this paper, we consider a retiree who does not have sufficient wealth and income to fund her future expenses, and we seek the asset allocation that minimizes the probability of financial ruin during her lifetime. Building on the work of Young (2004) and Milevsky, Moore, and Young (2006), under general mortality assumptions, we derive a variational inequality that governs the ruin probability and optimal asset allocation. We explore the qualitative properties of the ruin robability and optimal strategy, present a numerical method for their estimation, and examine their sensitivity to changes in model parameters for specific examples. We then present an easy-to-implement allocation rule and demonstrate via simulation that it yields nearly optimal ruin probability, even under discrete portfolio rebalancing.     

Who Receives Medicaid in Old Age? Rules and Reality

Medicaid is a government programme that also provides health insurance to the elderly who have few assets and either low income or catastrophic health care expenses. We ask how the Medicaid rules map into the reality of Medicaid recipiency, and we ask what other observable characteristics are important to determine who ends up on Medicaid. The data show that both singles and couples with high retirement income can end up on Medicaid at very advanced ages. We find that, conditioning on a large number of observable characteristics, including those that directly relate to Medicaid eligibility criteria, single women are more likely to end up on Medicaid – so are non‐white people, but, surprisingly, their higher recipiency is concentrated in the higher income percentiles. We also find that people with low incomes who have a high‐school diploma or higher degree are much less likely to end up receiving Medicaid than their less‐educated counterparts. All of these effects are large and depend on retirement income in a very non‐linear way.     

The smart money is in cash? Financial literacy and liquid savings among U.S. families

Most financial advisors recommend storing three to six months of expenses in liquid assets in case of an emergency. Yet we estimate that more than half of U.S. families do not have at least three months of their non-discretionary expenses in liquid savings. We find that financial literacy is strongly predictive of having three months of liquid savings, controlling for income, income variability, and even parental resources. We also find that financial literacy predicts liquid savings across the income distribution. These results indicate that accumulation of an emergency fund is not simply a function of income. Finally, financial literacy is predictive of liquid savings even among high illiquid wealth households. This suggests that the phenomenon of “wealthy hand-to-mouth” families may reflect financial mistakes rather than portfolio optimization. Our paper highlights the importance of financial knowledge in explaining families’ preparedness to deal with unexpected expenses or disruption in their income.     

Beliefs and actions: expectations and savings decisions by older Americans

To understand the interaction of savings behavior, pension fund participation and expectations of retirement well being, we ask two questions. Are expected pension benefits a substitute for accumulated savings in replacing preretirement income? Are individuals’ expectations concerning their retirement standard of living realistic based on their accumulated savings and pension plan participation? First-wave data from the Health and Retirement Study (HRS) are analyzed using a probit regression. The results are consistent with the idea that pension benefits are substitutes for saving and that accumulated savings have a significant impact on the expected standard of living but pension plan participation does not.     

Retirement income adequacy: good news or bad?

Estimating replacement rate targets, and using them to assess the current state of retirement savings adequacy, has been the focus of much attention and analysis. Building on his earlier work published in Benefits Quarterly, the author conceptually defines retirement income adequacy, estimates replacement rate targets and reviews research on the current state of baby boomers' retirement savings. He concludes that, despite existing data limitations, researchers have made considerable strides in recent years in thinking about saving for retirement and the adequacy of workers' preparation for it. These advances suggest that singular rules of thumb for replacement rates are naive and that estimates should take into account the unforeseen risks that individuals face.     

A practitioner's perspective: Comments on “Analysis of U.S. savings bonds”

In this issue, Potts and Reichenstein describe features of U.S. savings bonds and discuss their evaluation. The article can serve as a reference for busy practitioners who may not follow changes in the savings bond market closely, especially those who tend to rely on product-related education for updates on financial instruments.Savings bonds remain an important investment for individuals; on March 31, 1994, individuals held $174.9 million in U.S. savings bonds, a 7% increase from one year prior (Williams, 1994). Further, as Table 1, “Demographic Characteristics of Individual Savings Bond Holders,” indicates, the holding of savings bonds is not exclusive to any particular age group or income level (Federal Reserve Bulletin, 1994).     

High-age implications of postretirement risks

The retirement world of the future is challenging because of the decline in defined benefit plans, low savings rates in the United States, increased longevity and the failure of many people to effectively plan for retirement. Drawing on a variety of studies and public opinion surveys, the authors of this article explain why a system that relies too much on people providing for themselves will have segments of the population who have inadequate retirement incomes due to a number of gaps, which pose the most risk at advanced ages. These gaps can occur because of difficulties in managing postretirement risk, acquiring inadequate savings in the first place and problematic public perceptions about retirement income risks.     

Major Changes for Super, but Women are Still Ms … ing Out

Recent major legislative and regulatory changes to superannuation have brought improved equity to Australia's superannuation system, but women are still missing out when it comes to the adequacy of their retirement savings. The reasons are women's continuing marginal attachment to the labour force and their attendant low level of lifetime income in the paid workforce, which translates to low levels of accumulated occupation-linked superannuation savings. This paper argues that gender-based disparities in adequacy of superannuation persist, and that the prospects for retirement lifestyles for most older women continue to be dismal.