By James W. Russell

Huffington Post, April 7, 2015

With 401(k)-type plans, participants are supposed to build up savings through stock market investing during their working years that will then support them during their retirement years. Most people, as is well known by now, for multiple reasons including excessive financial service industry fees, have been unable to accumulate enough savings to support adequate retirements. But even those who are able to build up sizable retirement savings are faced with an additional problem: there are currently no good options for spending down those savings to support them in retirement.

The original idea was that the plans would mimic the defined benefit pensions they replaced.  Participants upon retirement would use their accumulated savings to purchase annuities that would support them for the rest of their lives as pensions do.

Life insurance companies and other sellers of annuities use actuarial studies to determine average ages of death. They use these averages to calculate how long they are likely to have to make payments. They calculate the sizes of the promised payments accordingly to make sure that the company on average pays out less than it receives.

An annuity company is a cross between a bank and a casino.  The house wins when annuity purchasers live shorter than average; it loses when they live longer.

Annuities, however, have turned out to not be a very good deal for retirees.  They are expensive in part because of commissions charged for their purchase, administrative fees, and other forms of costs and profit taking from their corporate issuers.

Annuities are also expensive because of the problem of adverse selection. People are more likely to purchase annuities if they think they are going to live for a long time. Not surprisingly, people who think they are going to live long lives do in fact live longer on average than people who don’t.  Because of the increased longevity of annuity purchasers, life insurance companies have to set purchase prices higher.

According to a Congressional Budget Office study, about half of the excess cost of commercial annuities comes from the profit needs of the companies that issue them with the other half coming from the adverse selection problem.

By implication, purchasers of annuities could receive significantly more retirement income if they did not have to support the profit needs of companies that sell them.  By my calculations, they could receive as much as 20 to 30% more.

Continue reading “Nonprofit Annuities: A Fix for the 401(k)”

By James W. Russell

Huffington Post, March 20, 2015

If you thought that the Affordable Care Act, aka Obamacare, completely solved the health insurance problem of the United States, then you will probably be happy with some of the types of reforms that are being crafted to address the retirement crisis.

But if you find disturbing the Congressional Budget Office’s estimate that in 2019, when the ACA is fully implemented, 22 million Americans will still be without health insurance and that there will be a deep inequality of plans for those who have it, you might be wary of what likely retirement reform will look like if it follows a parallel course.

Retirement, like healthcare, is an exceptionally profitable industry in the United States.

The sine qua non of corporate-supported retirement reform, like that of health care reform, is that it must not reduce the profits of the existing system. To get real backing from those who pay the lobbyists, it must increase those profits. The ACA thus gave health insurers more business through the subsidized exchanges.

Continue reading “Obamacare and Retirement Reform.”

Nancy J. Altman and James W. Russell

Huffington Post, March 16, 2015

The nation is facing a looming retirement income crisis.  Average retirees today are not well off.  Tomorrow’s average senior is likely to be in worse shape.

Instead of addressing this looming crisis, too many of the nation’s policymakers and elites propose to make it worse.  They tell the American people that Social Security’s earned benefits must be cut, despite their modest size.  They tell public-sector workers that their pensions are unaffordable, despite the fact that workers have already earned those benefits, indeed foregoing current compensation in the process.

Rather than proposing the expansion of Social Security and fighting for public pensions, these elites complain that Americans are not saving enough.  Americans, they say, need to be more frugal in their habits if they wish to avoid going off their own personal fiscal cliffs when they retire. Spare the lattes; pump up the retirement savings accounts instead, the elites lecture us.

Continue reading “The Great Illusion of Retirement Savings.”

TIAA-CREF, the retirement plan of many university professors and administrators as well as others, has escaped much of the increasing criticism of 401(k)-type plans. A number of academics with TIAA-CREF are even unaware that it is a 401(k)-type plan, thinking that the growing criticisms of 401(k)s don’t apply to their situation.

TIAA-CREF has enjoyed relative immunity from criticism for two reasons. It is a nonprofit company that is presumed to operate exclusively in the best interests of its participants because it does not have shareholders. And precisely because it is the plan of so many highly-educated professors, it is presumed to be good because surely they must know what they are doing.

Yet TIAA-CREF participants fare no better in retirement income than 401(k)-type plan participants with other financial services industry companies such as ING, Vanguard, and Valic. That in turn means that they fare much worse than employees with traditional defined benefit pension plans.

To read more, click here.

 

By James W. Russell

Salon.com, May 10, 2014

On the eve of the Reagan presidency in 1980, Milton and Rose Friedman published “Free to Choose,” a proposal for gradually phasing out Social Security. The entitlements of retirees would be honored as would the accumulated credits of contributors who had not yet retired. But no new payroll taxes would be collected. The final elimination of Social Security would allow “individuals to provide for their own retirement as they wish.” Among the advantages would be that “it would add to personal saving and so lead to a higher rate of capital formation [and] stimulate the development and expansion of private pension plans.” While the Friedmans argued for such a plan, they acknowledged that immediate privatization of retirement was unrealistic in the current political climate, but they would accept incremental reforms with the hope that one day total privatization would become politically feasible.

To read more, click here.

Two days after President Barack Obama announced the establishment of MyRA accounts to help Americans without workplace retirement plans other than Social Security save for retirement, Senator Tom Harkin (D-Iowa) introduced Senate Bill 1979, to establish more ambitious USA Retirement Accounts for the same purpose.

Harkin’s USA Retirement Accounts received endorsement from several liberal retirement reform and labor groups. It faces an uncertain legislative fate.

The problem it seeks to address is real: the Bureau of Labor Statistics reports that 46 percent of Americans are not covered by workplace retirement plans other than Social Security, which was never intended to provide full retirement income.

Continue reading “The Harkin Plan and the Retirement Crisis” »

In his 2014 State of the Union address President Obama announced that that he will direct the Department of Treasury to create a new retirement savings plan for workers who do not have 401(k)s. Called My Retirement Account or MyRA, it will allow them to purchase savings bonds with guaranteed rates of interest through automatic payroll deductions. He introduced the program by enjoining, “let’s do more to help Americans save for retirement.”

Creation of the MyRAs is recognition of the growing retirement crisis facing Americans. But rather than delivering substantive relief, it is at best a token response and in doing so perpetuates the very myths and fallacies that caused the crisis.

Continue reading “Obama’s MyRA: A New Plan That Will Benefit the Financial Services Industry More Than Retirees” »

You may be excused if you failed to notice National Save for Retirement Week, October 22-28. Promoted by the financial services industry, which profits handsomely from each extra dollar placed in 401(k) and similar retirement savings accounts, the week does not exactly compete with Halloween and Thanksgiving for public attention.

The financial services industry would like for us to believe a number of things.

Continue reading “National Save for Retirement Week” »

U.S.News & World Report LP
May 21, 2012

http://finance.yahoo.com/news/poverty-increasing-among-retirees-164453772.html

(Editor’s note:  The following article contains good information about rising poverty among retirees.  This is a predictable result, among other causes, of the  inadequacies of 401(k) retirement plans. JWR)

Growing numbers of older Americans are spending their retirement years in poverty, according to a recent Employee Benefit Research Institute study. The proportion of older people living below the poverty line has been growing steadily since 2005, and many of those people are falling into poverty as they age and spend down their savings.

Poverty rates for people ages 65 to 74 climbed from 7.9 percent in 2005 to 9.4 percent in 2009, according to the EBRI analysis of University of Michigan health and retirement study data. For older retirees ages 75 to 84, there was an even steeper increase, from 7.6 percent to 10.7 percent over the same time period. But it’s the oldest retirees who are the most likely to live in poverty: 14.6 percent did so in 2009.

Many older Americans are falling into poverty as they age. In 2009, the most recent year included in the study, 6 percent of those age 85 older were new entrants in poverty, up from 4.6 percent in 2005. And while 3.3 percent of people ages 75
to 84 fell newly into poverty in 2005, that number increased to 5.6 percent by 2009.

One of the biggest drivers of poverty in old age is failing health and the associated medical costs. Most retirees living below the poverty line (70 percent) have suffered acute health conditions such as cancer, lung disease, heart problems, or stroke, compared with 48 percent for those above the poverty line, according to health and retirement study data. And almost all senior citizens living in poverty (96 percent) have some sort of health condition, such as high blood pressure, diabetes, psychological problems, or arthritis, versus 61.7 percent of retirees with incomes above the poverty line.

“Medical expenditures go up for the elderly as they age and medical expenses have been rising over the past decade very rapidly,” says Sudipto Banerjee, a research associate at EBRI and author of the report. “A lot of people have to move to nursing homes, and nursing homes are very expensive. People who live there, they lose their income and assets very quickly.”

Many people also spend down their retirement savings too quickly, especially during recessions. “As people age, personal savings and pension account balances are depleted,” says Banerjee. “Also, the rising poverty rates noted correspond to the two economic recessions that occurred during the last decade. I would expect that as the economy does better, the rates will go down.”

Once you have spent your nest egg, your only remaining source of income is likely to be Social Security. Social Security payments are based on your earnings during your 35 highest earning years in the workforce. Those who didn’t work for 35 years get smaller payments because zeros are included in the average.

Poverty rates for women were nearly double that of men in almost all years between 2001 and 2009. In 2009, poverty rates were 7 percent for men and 13 percent for women. And both men and women who are single have significantly higher  poverty rates than married couples. When one spouse dies, the total Social Security benefit received by the household often decreases.

The Census Bureau reports that 9 percent of people age 65 and older lived below the poverty threshold in 2010. But there is an incredible amount of geographic diversity in poverty rates, ranging from over 25 percent in Opelousas-Eunice, La., and Gallup, N.M., to less than 2 percent in Pocatello, Idaho, Helena, Mont., and Ames, Iowa.

A recent Urban Institute study predicts that poverty rates for people at age 67 are likely to decline in the future. The analysis projects that 7 percent of Depression-era babies are expected to live in poverty at age 67, compared with 6.1 percent of late baby boomers and 5.7 percent of Generation Xers. However, retirement poverty is expected to increase for people without advanced education. For example, the study predicts that retirement poverty rates for high-school dropouts could increase from 13.5 percent among Depression-era babies to 24.9 percent for the oldest baby boomers.

Older retirees may have few opportunities to pull themselves out of poverty once they have crossed that threshold. The elderly may not have many opportunities for employment, and could be limited by health issues.

The Urban Institute expects retirement income inequality to increase dramatically over time. The study found that among Depression-era babies, the median income in the top income quintile will be 7.5 times higher than in the bottom income quintile. For Generation Xers, the retirement income gap will increase to a factor of 10.4. “More income for boomers and Generation Xers is from retirement accounts and less from defined-benefit pensions, and a larger share of income will be from earnings,” says Barbara Butrica, senior research associate at the Urban Institute and coauthor of the report. “If we look at their [retirement income] replacement rates, Generation Xers and boomers are projected to be significantly worse off on a relative basis.”