A Futurist Past

Salisbury

Salisbury

By Dallas Salisbury, EBRI

At EBRI’s 35th anniversary policy forum last December, it occurred to me that one of the youngest minds in the room happened to belong to the oldest panelist we had invited. Arnold Brown, 87 when he spoke at our forum, was nationally renowned not only for his insightful observations about the future, but his often surprising predictions of how the American labor force—and the employment-based benefits on which they depend—might change in response. How fitting that the forum panel on which he participated was titled “The Road to Tomorrow.”¹

So I was especially saddened to hear of his recent passing, shortly before his 88th birthday. He died surrounded by family, who described him as “brilliant, witty, wise and generous.” Having followed him and his work closely in my own career, I would agree with all that and more.

At a time when news reports warn of the “technological divide” between the young and the old in this country, Brown’s specialty was using hard data to help us understand why and how technology is changing our lives. Ironically for a tech-head, he started out as an English major (he graduated with honors from UCLA), before going on to serve in the Navy.

Arnold Brown

Arnold Brown

His big break on the national stage came when he was vice-chairman of the American Council of Life Insurers, where in 1969 he created ACLI’s Trend Analysis Program. This was the first, and considered among the best, “environmental scanning programs” that focused on long-range business planning and strategy. In 1977, he formed his own company, Weiner, Edrich, Brown, Inc., consultants in strategic planning and the management of change, where many of the biggest companies in the world would become clients. Not surprisingly, he served as board chairman of the World Future Society.

Much of his recent work focused on the trend toward “deskilled workers,” as more and more employers turn to computers, software, and robots to replace both blue-collar and white-collar human employees. He pointed out the many ripple effects that is already having and will have going forward, especially on state and federal social insurance programs that depend on taxes drawn from employment payrolls to survive. As workers are increasingly replaced by robots, Brown asked at the EBRI forum, “Should we require employers of robots to pay Social Security for them?”

Among his other thought-provoking, data-driven points at the EBRI forum:

  • The prolonged recession has masked what he called a “profound transformation of the economy” driven by automation, one that has to do with the very nature of work and jobs as the nation moves into the future. In 2012, he noted, approximately 85 percent of robots were purchased were for manufacturing purposes, and within the next few years 30 percent or more of robots will be for non-manufacturing, white-collar use.
  • Part-time, contract, and temporary workers are becoming the norm worldwide. Brown noted that in France in 2012, 82 percent of the new jobs created were temporary, and in Germany, what are referred to as “mini jobs” (low-paid, short-term jobs) now comprise 20 percent of all jobs in that economy. Another aspect of this job trend: Of the 16-to-25-year-old cohort not currently in school, barely a third (36 percent) have full-time jobs, and a major reason for this is new technology (such as 3-D printing), he said.
  • The upshot is that “The old model of the contract between employer and employee is increasingly obsolete,” Brown said at the EBRI forum, and “more and more, we will need a new model of what the relationship will be between the employer and the employee.” Over the next 35 years, he predicted, there will evolve “an entirely different, unprecedented relationship in the workplace between employers and employees, and what the consequences of that will be are really very profound in terms of what your businesses will be facing.”

Professionally, I greatly admired his acute use of data to make highly informed analysis about the future. Personally, I deeply admired how someone almost in his 90s lived so much in the future.

In Washington, there is naturally great attention given to how federal law (particularly tax law) and regulation affect business and employee benefits. But Arnold Brown’s focus was elsewhere: How the economy—and the underlying technology and skills that drive it—affect not only the business world, but society as a whole, faster and far more powerfully than even government policy.

His keen mind and often accurate predictions will be missed.

Notes

¹ The complete report on the EBRI 35th anniversary policy forum, “Employee Benefits: Today, Tomorrow, and Yesterday,” is published in the July EBRI Issue Brief and is online here.

Sooner or Later?

By Nevin Adams, EBRI

AdamsLast week more than a hundred professionals gathered at the Fall 2013 ASEC Partners’ Meeting to discuss the obstacles to, and possible solutions for, retirement savings.  National Save for Retirement Week is upon us, and America Saves Week will be here before we know it.  So too, retirement – which seems far away to many, and IS far away for some – often seems to be a far off goal, something that can wait for another day, a more “convenient” time, when we have more free time, and perhaps fewer financial demands.

Indeed, it’s easy, in the normal press of life, to put off thinking about retirement, much less thinking about saving for a period of life many can hardly imagine. We all know we should do it—but some figure that it will take more time and energy than they can afford just now, some assume the process will provide a depressing, perhaps even insurmountable target, and others  – well many don’t even know how to get started.

Here are six reasons why you—or those you care about—should save – and specifically save for retirement – now:

Because you don’t want to work forever.

No matter how much you love your job – or love your job today – that might not always be the case, and you might want the flexibility to make a change on your terms; if not to retire, to cut back on your hours, or maybe even to pursue other interests.  The sooner you’ve made those financial preparations, the sooner that decision can be your choice, rather than one forced upon you.

Because living in retirement isn’t free – and it might cost more than you think.

Many people assume that expenses will go down in retirement, and for some they may.  On the other hand, retirement often brings with it changes in how we spend, and on what – and that’s not necessarily less.  For example, research by the Employee Benefit Research Institute (EBRI) has found that health-related expenses are the second-largest component in the budget of older Americans, and a component that steadily increases with age.  Note also that long-term care (LTC) insurance is a growing area of concern for retirees and, according to government estimates, 12 million older Americans will need LTC by 2020. However, in most cases LTC is not covered by Medicare, and this care is expensive and can be indefinitely long or even permanent.

Because you may not be able to work as long as you think.

The Retirement Confidence Survey (RCS) has, over its 23 year history, consistently found that a large percentage of retirees leave the work force earlier than planned—47 percent in the 2013 RCS, in fact—and many retirees who retired earlier than planned cite negative reasons for doing so, including health problems or disabilities (55 percent); changes at their companies, such as downsizing or closure (20 percent); having to care for spouses or other family members (23 percent).

Some retirees do mention positive reasons for retiring early, such as being able to afford an earlier retirement (32 percent) or wanting to do something else (19 percent), but just 7 percent offer only positive reasons.

Because working longer may not be enough.

One of the more recent alternatives proposed is that of continuing to work longer which, if possible, would serve to both postpone the depletion of retirement income resources, and to provide additional time to save.  As noted above, this assumption might not prove to be a viable option for all, and even for those who can and do, EBRI research has found that even working until 70 by itself may not be sufficient for some individuals.

Because you don’t know how long you will live.

People are living longer and the longer your life, the longer your retirement could last, particularly if, as noted above, it begins sooner than you planned. Retiring at age 65 today? How big a chance do you want to take of outliving your money in old age?

Because the sooner you start, the easier it will be.

What are you waiting for? Sooner or later, you know you need to.  And the later you start, the harder it can be.

A good place to start – any time –  is the BallparkE$timate,® and with the other materials available at www.choosetosave.org, as well as www.americasavesweek.org.

For more information on retirement saving and spending, see also:

Income Composition, Income Trends, and Income Shortfalls of Older Households

How Does Household Income Change in the Ten Years Around Age 65?

Spending Adjustments Made By Older Americans to Save Money

Expenditure Patterns of Older Americans, 2001-2009

“After” Images

By Nevin Adams, EBRI

Adams

Adams

“Replacement rates”—roughly defined as the percentage of one’s pre-retirement income available in retirement—arguably constitute a poor proxy for retirement readiness.

Embracing that calculation as a retirement readiness measure requires accepting any number of imbedded assumptions, not infrequently that individuals will spend less in retirement. While there is certainly a likelihood that less may be spent on such things as taxes, housing, and various work-related expenses (including saving for retirement), there are also the often-overlooked costs of post-retirement medical expenses and long-term care that are not part of the pre-retirement balance sheet.

That said, replacement rates are relatively easy to understand and communicate, and, as a result, they are widely used by financial planners to facilitate the retirement planning process. They are also frequently employed by policy makers as a gauge in assessing the efficacy of various components of the retirement system in terms of providing income in retirement that is, at some level, comparable to that available to individuals prior to retirement.

A recent EBRI analysis looked at a different type of measure, one focused on the years prior to the traditional retirement age of 65, specifically a post-65 to pre-65 income ratio. The analysis was intended to provide a perspective on household income five and 10 years prior to age 65 compared with that of household income five and 10 years after age 65, specifically for households that didn’t change marital status during those periods. Note that in some households at least one member continues to work after age 65 (part-time in many cases) and may not fully retire until sometime after the traditional retirement age of 65.

Based on that pre- and post-65 income comparison, the EBRI analysis finds that those in the bottom half of income distribution did not experience any drop in income after they reached 65, although the sources of income shifted, with drops in labor income offset by increases in pension/annuity income and Social Security.

That was not, however, the case for those in the top-income quartile, who experienced a drop in income as they crossed 65, with their post-65 income levels only about 60 percent of that in the pre-65 periods.

This is not to suggest that the lower-income households were “well-off” after age 65. Changes in marital status, not considered in this particular analysis, particularly in the years leading up to (and following) retirement age, can have a dramatic impact on household income.

The current analysis does, however, show that Social Security’s progressivity is serving to maintain a level of parity for lower-income households with household income levels in the decade before reaching age 65, and in some cases to improve upon that result—and it helps underline the significance of the program in providing a secure retirement income foundation.

The EBRI report, published in the September EBRI Notes, “How Does Household Income Change in the Ten Years Around Age 65?” is available online here.

Work to Age 70? For Many, That Still Won’t Pay for Retirement

Contrary to some reports that working just a little bit longer—to age 70—will allow between 80 and 90 percent of households to have adequate income in retirement, new research by EBRI shows that for approximately one-third of the households between the ages of 30 and 59 in 2007 that won’t be enough.

The EBRI research, the latest in a series of detailed analysis of retirement income adequacy by the Institute, stems from projections that large numbers of Baby Boomer and Generation X workers are likely to run short of what they need to cover general expenses and uninsured health care expenses in retirement.

“It would be comforting from a public policy standpoint to assume that merely working to age 70 would be a panacea to the significant challenges of assuring retirement income adequacy, but this may be a particularly risky strategy, especially for the vulnerable group of low-income workers,” noted Jack VanDerhei, EBRI research director and author of the report.

Working longer can, however, have a positive impact. The new research, using results from EBRI’s Retirement Security Projection Model,® shows that nearly two-thirds (64 percent) of households aged 50‒59 in 2007 would be considered “ready” for retirement at age 70, compared with 52 percent of those same households if they were to retire at age 65. Moreover, the research indicates that a worker’s participation status in a defined contribution (DC) retirement plan at age 65 will be extremely important due to the multi-year consequences for additional employee and employer contributions to the plan.

Among the key reasons for the differences between EBRI’s estimates and other models is that EBRI’s research is based on data from millions of actual 401(k) participants and its model incorporates longevity risk, investment risk, and the risk of potentially catastrophic health care costs (such as prolonged stays in a nursing home).

“While workers need to make their own decisions on the correct trade-offs of saving today vs. deferring retirement, they should be able to expect that those presenting alternatives be as accurate and complete as possible, avoiding simplistic ’rules of thumb’ that may result in future retirees, through no fault of their own, coming up short,” VanDerhei observed.

The full report is published in the August 2012 EBRI Notes, “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?” online at www.ebri.org

Home Ownership Trends Among Older Americans

Home ownership peaks at age 65, then falls slowly until the age of 75, when the rate of home ownership declines steadily, according to a new report by EBRI.

The EBRI study finds that owning is the most common housing arrangement for older Americans: At the traditional retirement age of 65, more than 8 in 10 Americans report living in houses they own. After 65, home ownership rates fall and at the age of 90, 6 in 10 Americans report living in their own houses.

“Housing is not only an asset, it also provides housing services,” said Sudipto Banerjee, EBRI research associate and author of the report. “That is why housing wealth does not start to decline until people reach very advanced ages.”

EBRI’s research shows that death of a spouse is the most common factor associated with a housing transition: Almost 42 percent of households that went from owning to renting experienced the death of spouses. The next-most common factor is a drop in household income: 30.5 percent of households that made such transitions also reported drops in household income. Just over 1 in 10 households that shift from owning to renting report nursing-home entry of a family member (self or spouse).

The full report, “Own to Rent Transitions and Changes in Housing Equity for Older Americans,”  is published in the July 2012 EBRI Notes, online here.

The Employee Benefit Research Institute is a private, nonpartisan, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement, and economic security issues. EBRI does not lobby and does not take policy positions. The work of EBRI is made possible by funding from its members and sponsors, which includes a broad range of public, private, for-profit and nonprofit organizations.

Nursing Home Entry Rates Rise, Weigh on Wealth Levels

As more American senior citizens are entering nursing homes they face the likelihood that their household wealth will be quickly depleted, according to new research by EBRI.

The EBRI research notes that nursing home stays among older Americans have increased steadily during the past decade: Nursing home stays increased from 6 percent of those age 65 and older in 2000 to 8.5 percent in 2010.

Seniors face a number of retirement planning uncertainties like longevity risk, inflation risk, and investment risk, but perhaps none as critical to their retirement security as health risk. EBRI’s research also shows dramatic differences in wealth levels between those who enter a nursing home and those who do not, based on data from the Health and Retirement Study (HRS).

For instance, after respondents’ first entries into a nursing home, total household wealth fell steadily over a six-year period. By comparison, household wealth increased steadily over the survey periods for those who never entered a nursing home. The EBRI report notes that the average cost for a semi-private nursing home room in the United States is $207 a day (or $75,555 a year) and between 10–20 percent of those who enter a nursing home will stay there for more than five years.

“Given the potentially catastrophic expenditure shock associated with nursing home stays, it is very important to examine how those who entered nursing homes in the past or those who are still living in those facilities manage their portfolios following a nursing home entry,” said Sudipto Banerjee, EBRI research associate and author of the report. “Almost all types of assets decline fast and steadily for those who enter nursing homes. In contrast, similarly aged people who never enter nursing homes experience a steady increase in their assets.”

The full report is published in the June 2012 EBRI Issue Brief, “Effects of Nursing Home Stays on Household Portfolios,” online here. The press release is online here.

EBRI: More Americans Entering Poverty as They Age

Between 2005–2009, the rate of poverty among American seniors rose as they aged, as did the number of new entrants into poverty, according to a new report published in the April 2012 EBRI Notes.

Poverty rates fell in the first half of the last decade for almost all age groups of older Americans (age 50 or older), though they increased since 2005 for every age group, the EBRI analysis shows.

Press release is online here. Full report is online here.