Getting the “S” Right: It Stands for Spending in FSAs and Saving in HSAs

On a vintage “Weekend Update” segment on Saturday Night Live, Emily Litella expresses outrage about trying to limit violins on television: “Why don’t parents want their children to see violins on television?” Litella says. “I say there should be more violins on television.” It’s up to Chevy Chase to gently explain to her that the concern is not violins, but violence, on television. “Oh, that’s different.” Litella concludes.

As the Employee Benefit Research Institute (EBRI) rolls out its new FSA Database, we hearken back to this skit for a reason: Much like Litella confused violins and violence, people have long confused FSAs and HSAs.

Image courtesy of http://401kcalculator.org

HSAs, or health savings accounts, are savings vehicles. Balances can accrue in HSAs over time, allowing owners to use them as a type of retirement vehicle if they so choose. In contrast, FSAs — or flexible spending accounts — are a type of benefits cafeteria plan. They are meant to be spent down every year, and, in fact, monies not used to pay out-of-pocket health care expenses each year from FSAs are forfeited.[i]

The reason many believe that “optimal” HSA usage involves maximizing HSA wealth at retirement is because HSAs benefit from a triple tax benefit: Employee contributions to the account are deductible from taxable income, any interest or other earnings on assets in the account build up tax free, and distributions for qualified medical expenses are excluded from taxable income to the employee. For years, however, EBRI’s database has suggested “sub-optimal” utilization of HSAs — possibly, in part, because of the HSA/FSA confusion.

The EBRI HSA Database was started in 2014 and contains 10.5 million accounts accounting for $28.1 billion in assets, or 40 percent of the HSA universe as of 2019. The database allows EBRI to examine individual and employer HSA contributions, balances, distributions, transfers, and investments.

What have we learned? In our report on 2019 HSA utilization, we found that nearly 40 percent of accountholders in EBRI’s HSA Database withdrew more than they contributed. Very few accountholders contributed the statutory maximum in 2019, and only 7 percent of accountholders held assets other than cash in their HSAs. These are not the behaviors of individuals seeking to maximize HSA wealth for retirement.

Of course, there are many reasons people may choose not to use HSAs as retirement vehicles, including the fact that they may not be able to afford to pay health expenses out of pocket without tapping their HSA. But the HSA data did lead us to conclude that there are opportunities to improve accountholder engagement with HSAs. For instance, because accounts with employer contributions tended to have higher total contributions and more frequently contained investments other than cash, we were able to conclude that employers can play a crucial role in fostering employee engagement with their HSAs.

So, what does the new FSA Database tell us so far? A representative repository of information about individual FSAs, the database includes 460,000 flexible spending accounts with $563 million in contributions. According to the inaugural Fast Fact from the database, the average worker contributed $1,179 to their FSA in 2019 — which is below the $2,700 limit. Nonetheless, 44 percent of workers forfeited part or all of their contributions in 2019. Among those forfeiting part or all of their contributions, the average forfeiture was $339 and the median forfeiture was $157. As such, one clear conclusion is that there are opportunities for employers to better educate and facilitate fully spending down FSA contributions and avoiding forfeitures.

It is EBRI’s hope that the new FSA Database, along with EBRI’s existing HSA Database, will allow us to continue to shed light on how these vastly different accounts are being utilized. This will allow plan sponsors, providers, and policymakers to better understand how these vehicles are providing benefits to employees — as well as identifying any Emily Litella-like mistakes that may be occurring in their utilization with a goal of improving outcomes.

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[i] Employers can let workers roll over $500 of their FSA.  It is also worth noting that the December 2020 stimulus bill gives employers options to give workers more flexibility to get around the “use-it-or-lose-it” rule. 

Translating Motivation to Action: The True Challenge of Financial Wellness Initiatives

I’ll never forget my very first iPod: the Shuffle. I received it as a gift, and when I first tried to use it, I was perplexed. Where was the screen?  Where were all the buttons? How was I supposed to find the songs I wanted to listen to? How did you plug it in?

The iPod Shuffle’s elegant and minimalist design is now iconic. But the lesson from the creation of the iPod is even more impressive: Its designers had hit upon an amazing recipe to make customers embrace a product they didn’t know they wanted by effectively tapping into their psyche.

For employers offering financial wellness initiatives, such a recipe apparently remains elusive: despite a proliferation of such programs, the path to their adoption by workers is still a bit rocky. At least, that’s the message from a recent virtual American Savings Education Council (ASEC) meeting held by the Employee Benefit Research Institute (EBRI). The conversation started when EBRI Senior Research Associate Craig Copeland unveiled the results of EBRI’s 2020 Employer Financial Wellbeing Survey. According to the survey, which was fielded in July of this year, more than half of the employers currently offer financial wellness initiatives, with companies reporting currently offering an average of 4.9 benefits. Companies also said they were spending more money on financial wellness initiatives than in prior years: In 2020, 44 percent of companies said they spent more than $50 per employee annually. This was 33 percent in 2019.

However, employees aren’t necessarily getting the message about their employers’ commitment to workplace financial wellness. EBRI’s Director of the Health Research and Education Program Paul Fronstin showed that, in a Workplace Wellness Survey fielded in the very same timeframe, 7 in 10 employees agreed that they need their employer’s help in ensuring they are financially secure, and just over 6 in 10 said it is their employer’s responsibility to do so. However, only 4 in 10 employees rated their employer’s efforts to improve their financial well-being as very good or excellent.

Elizabeth Perry, Social Scientist with the Federal Thrift Retirement Board, suggested that the disconnect between how much effort employers are putting into workplace financial wellness and employees’ faint praise could be explained by cognitive overload. Original research on cognitive overload established that people can typically only hold seven thoughts in their head at any time. New thinking on this topic, Perry says, suggests it might actually be closer to four today. With so many benefits to choose from, in other words, people might simply be overwhelmed.

Creating a clear path between workers’ financial wellness needs, their desire for help, and the solutions available can help greatly. Perry demonstrated the importance of making it easy for people to take action on their intentions by citing a study that examined factors that drove students to get recommended tetanus shots.

According to the study, simply motivating students to get their recommended shots by explaining the nightmarish effects of tetanus was not enough. Showing photographs of bedridden patients motivated students and made them fearful. However, few got the shots until such photographs were combined with specific steps that needed to be taken. These included where to go to get the shot, the times the health center was open to provide the shot, and even how getting the shot could fit into students’ school schedule. In fact, 10 times as many students actually got a tetanus shot when the action steps were included vs. when they were left out.

For the Thrift Savings Plan, Perry replicated the approach to increase savings rates by combining motivating messages such as “You’re Missing Out On Free Money” with a specific plan of action for participants concerning what they needed to do to increase plan contributions. Perry found that three months after the communication, savings increased for approximately a quarter of people receiving the communication.

Gary Mottola of FINRA echoed Perry’s observations at the ASEC meeting, noting that “the thing that makes the most difference is — is it easy to do … People can get lost, run out time.  The easier you can make it, that is great … It is tempting to overestimate how intuitive things are.  We’ll tell them just to go here and they can figure it out. A lot of times these systems are not intuitive.” 

This concept was central to the U.S. Financial Literacy and Education Commission’s (F­LEC) recently released “U.S. National Strategy for Financial Literacy, 2020.” In this report, the Treasury identified eight best practices for effective financial literacy and education programs. I’d like to highlight four of them that relate most specifically to our discussion at the ASEC meeting:

1. Know the individuals and families to be served.
2. Build on motivation.
3. Make it easy to make good decisions and follow through.
4. Evaluate for impact.

Often, as we saw with the tetanus example, a lot of effort goes into Best Practice Two — building motivation to take action — without factoring in Best Practice Three: the need to make that motivation actionable. This is done, according to the FLEC’s report, by “removing hassles and barriers, and adding supports [that] can help people bridge the gap between their intentions and what they actually do.” The FLEC report further notes that the best practice of making it easy to follow through “highlights that programs can be designed to make it easier for people to get financial education, for example, by integrating financial education into programs and places where people already are, like their job or a higher education institution.” In other words, success in behavior change relies not just on making sound financial wellness programs available but on integrating these programs effectively into individuals’ day-to-day environment.  In the tetanus shot experiment, a map was presented to the students of the campus with the university health building clearly circled. Also, a request was made that each student review their weekly schedule to locate a time when they would pass by the university health building so that they could stop in to be inoculated. Yes, evidently, this is level of detail needed in successful action plans for financial wellness initiatives.

And clearly, this level of detail around action steps can only be accomplished by knowing those being served: in other words, the FLEC’s Best Practice Number One. Simply put, if employers aren’t familiar with action steps that will resonate with their employees, they cannot provide employees with a valid plan that will translate motivations around financial wellness into action.

With this in mind, EBRI will be devoting both our 2021 Retirement Confidence Survey and our 2021 Workplace Wellness Survey to understanding the unique retirement, financial wellness, and health benefits considerations of African-American and Hispanic workers, along with their White counterparts. This is the type of knowledge that can help employers, providers, and policymakers better understand how to tailor solutions — and delivery — to these individuals and their families.

Finally, with respect to Best Practice Number Four — evaluating for impact — 2021 will also see the release of EBRI’s inaugural research that will measure the impact of financial wellness initiatives on workers’ retirement savings. By combining the EBRI/ICI 401(k) Database with EBRI’s financial wellness and consumer databases, we’ll be able to understand which financial wellness approaches — both the initiatives and their delivery — move the needle when it comes to improving retirement savings outcomes. That brings me back to the iPod Shuffle. The product was successful because it understood its consumers — perhaps better than they understood themselves. If you’d asked me if I cared about playing certain songs at certain times before the Shuffle, I probably would have said “yes.” But the reality is, I — and millions of consumers — actually preferred an elegant, inexpensive solution more. We were willing to adopt a surprising new product as a result.

Exploring the Effects of a Medicare Buy-In Policy

Recently, EBRI hosted a webinar exploring the potential ramifications of a Medicare buy-in policy on employers. Such policies have been periodically floated as a means to expand coverage and wrangle health care costs and may very well emerge as a palatable bipartisan reform of the health care industry. Essentially, a Medicare buy-in would allow older people under the age of 65 (proposals have ranged from those 62–64 to those 50–64) to enroll in Medicare. Such a system has the potential to transfer a good deal of spending from private employment-based insurance plans to Medicare. But exactly how much health care spending shifts critically depends on who ends up switching.

A Medicare buy-in policy has two likely outcomes, each with drastically different implications for employers. First, only workers who spend a lot on health care would switch. Since Medicare features lower payment rates for medical care than private insurance, high spenders could be tempted to switch to Medicare if their expenditures are minimized. Should that scenario play out, the impact on employer spending on health care could be large. The second likely outcome is if only workers who spend very little on health care switch; in this scenario, high spenders could prefer to remain in the employer-based plan in order to benefit from defined out-of-pocket spending maximums. Conversely, low spenders would not be concerned about Medicare’s lack of an out-of-pocket maximum. In that scenario, the impact on employer spending on health care would be quite small.

EBRI built a simulation model to better understand which workers would be tempted to switch to Medicare and to quantify the impact on employers. In the model’s baseline simulation, we found that the median employer would experience about a 20 percent reduction in total health care spending. The workers who switched to Medicare tended to be lower spenders who did not bump up against their plan’s out-of-pocket maximum. We also found that more generous employment-based insurance plan design — that is, lower deductibles, lower premiums, and lower out-of-pocket maximums — tended to induce more buy-in-eligible workers to stay on their employment-based insurance, and vice versa.

Over the course of the presentation, we received many astute questions from the audience, sparking lively discussion. Alas, given time constraints we weren’t able to fully answer each question. One attendee asked us what might happen to the cost per health plan participant after eligible and interested workers switched to Medicare. Since our model indicated that switchers tended to be healthier, the result is that the cost per remaining plan participant increased, which could manifest in higher premiums. Of course, employers could divert some of the cost savings from workers who switched to Medicare to blunt those cost increases.

Another attendee asked us about what the impact might be on workers who decided to retire early. These workers would not be deciding based on the employer-sponsored plan but rather plans from the individual exchanges. [JA1] The calculation changes somewhat among this segment of the population, and the model in its current form does not specifically address this issue. However, a Medicare buy-in policy could be attractive to early retirees, depending on their situation. Subsidies are available for people earning less than 400 percent of the federal poverty limit and could make plans purchased from an individual exchange appealing compared with a Medicare buy-in. However, for people who are not otherwise eligible for subsidies, the Medicare buy-in would likely be a more appealing choice.

Additionally, we received useful feedback on the model, and if momentum behind a Medicare buy-in builds during a new legislative session, we will plan to continue iterating on the model. A Medicare buy-in has the potential to dramatically alter the health care market, particularly for employers, and understanding its costs and benefits is critical.

A replay of the webinar is available here.

Want to Become Financially Resilient? Hit the Financial Resources Gym

If Time Magazine had a word of the year, a good candidate in 2020 might be “resilience.”

This year has called upon many Americans to find the strength to bounce back from the health care effects of COVID-19 and the economic impact of job loss and financial duress, not to mention the emotional and mental toll of social distancing, isolation, and civil unrest. Many have. But among those that struggle to adapt, the toll can be high. According to Morneau Shepell’s Mental Health Index^™ Report, people who report that they are undecided or feel that they are adapting poorly to changes in their personal, work, or financial lives have significantly lower mental health scores than those reporting adapting well.

What is the difference between those who adjust to adverse circumstances poorly vs. well? Psychology literature suggests that resilience is an intentional behavior that can be adopted and developed. In other words, rather than simply being a certain trait or characteristic that some people have and other don’t, resilience can be embraced — much like a healthy lifestyle of eating well and exercising.  

The healthy lifestyle analogy resonates with me. I started weightlifting more than two decades ago, and it was transformative. Not only does weightlifting make you stronger, but going to the gym several times a week creates discipline; watching the results and progress you make in lifting weights is emotionally rewarding and satisfying; and, perhaps most important of all, weightlifting is a commitment to health that permeates the rest of one’s lifestyle. Since I started weightlifting, I am inclined to spend more time on other physical activities such as kayaking, hiking, skiing, yoga, etc.

So what equipment do people need in order to adopt a lifestyle of financial resilience? This is the question EBRI explored as we redesigned the American Savings Education Council’s (ASEC’s) re-envisioned web site.

For those who are unfamiliar with ASEC, it is a program of EBRI that is dedicated to educating the public about all aspects of financial security. ASEC does so through a coalition of public- and private-sector partners that share ASEC’s mission of making saving and retirement planning a priority for all Americans. As we redesigned ASEC’s website, we realized that our partners are key; many of them have vast troves of financial wellness resources. By assembling them in one place — on ASEC’s website — we could create a financial resilience hub where people could find tools, information, education, and other resources that would help them achieve their goals, meet the financial needs of various life stages, and face the challenges of circumstances such as caregiving, disability, loss of partner/spouse, and supporting adult children or elders.

Given today’s environment, the website has an entire section devoted to COVID-19 resources such as coronavirus advice for consumers, information on why some communities of color have been hit so much harder by COVID-19, and how the Coronavirus Aid, Relief, and Economic Security (CARES) Act works. Meanwhile, our “Traps & Pitfalls” section covers a broad range of threats to overall financial wellness beyond the pandemic, including coronavirus scams, phishing ploys, predatory lending, and telemarketing fraud.

ASEC‘s website is not the only way EBRI is seeking to address financial resilience. In its upcoming virtual meeting on October 14, ASEC is featuring a session called “Views from the Front: Insights on Guiding Employees Through the Turbulence of the Current Environment.” We’ll hear from those in the trenches — from workers who are struggling with emotional and financial challenges to the employers and financial advisers who are helping them navigate both the financial and the emotional toll the pandemic has taken.

I’m excited about the contribution that ASEC — through such initiatives as its redesigned website and October meeting — can make to the topic of resiliency. Another thing I’ve learned from working out with weights is that muscles have memory. In other words, even those of us who feel that COVID-19 has challenged our resiliency can gain that resiliency back by taking advantage of the proliferation of resiliency resources that are available on ASEC’s website and elsewhere.

Getting to the Whys of Spending in Retirement

It is one thing to understand how people spend their money in retirement; it is another thing to know why they do so.  For example, through its Retirement Security Research Center (RSRC), the Employee Benefit Research Institute found that retirees:

• Are more often interested in preserving or even growing their retirement savings than spending them down.[1]
• Often resort to required minimum distributions as their spending plan.[2]
• Have widely varying spending patterns.[3]
• Change their spending patterns over time.[4]

Regarding the last two observations, new work within the RSRC based on the Health and Retirement Study Consumption and Activities Mail Survey (HRS/CAMS) data shows that spending declines as people enter retirement and progress through it.  The data show that the average individual aged 55–64 spent $54,500 in 2017. By ages 65–74, spending had decreased on average to $50,300 however, and by ages 75–85 it came in at around $38,500.

But not only does the amount of money being spent decreases, the propensity for people to spend heavily in certain areas also changes. According to HRS/CAMS, the proportion of people who heavily spend on housing in retirement tends to decline over time: from 21 percent for those ages 55–64 to 17 percent for those 65 and older. In contrast, the proportion of those spending heavily on health care increases: from 10 percent at ages 55–64 to 20 percent for those ages 75–85. Interestingly, the proportion of people who do a lot of “discretionary spending” such as spending on entertainment and contributions increases with age: 13 percent of spenders fall into the category at ages 55–64 while 18 percent do for ages 65 and above. However, discretionary spending becomes proportionally more focused on gifts and contributions for the oldest age cohorts: Gifts and contributions make up about half of discretionary spending for people 55–64 but exceed 60 percent for those ages 75–85.

What we cannot understand from the data, however, is why people are changing their spending as they do. This is critically important in designing retirement spending strategies. For example, before my dad retired, he was a foodie. He always wanted to go to the fanciest restaurants and enjoyed dining lavishly. When he retired, his behavior began to change. The local diner ultimately because his favorite restaurant and fried calamari his favorite meal choice — not exactly upscale. I worried that dad wasn’t enjoying his retirement because, even though he had the money, he didn’t spend it on treats for himself. Was he worried about running out of money? Was he trying to leave a big nest egg to his children? Or was something else at work here? I asked Anna Rappaport of the Society of Actuaries’ Post-Retirement Needs and Risks Committee about it, and she had the following opinion: It was probably indeed something else. Some older people have a hard time hearing and/or lower stamina; they don’t like sitting in noisy restaurants for long periods of time.  Others find that what was exciting and fun a few years ago is no longer engaging. Some find that with changes in health and digestion, the foods that were exciting no longer work for them.  In other words, it may not have been about money at all.  Very possibly, my dad’s priorities and preferences had just changed.

But think about the implications when it comes to spending tools. Consider the possible differences in spending scenarios my dad faced at retirement:

A) He wanted to continue his current foodie lifestyle at first but then later realized he no longer enjoyed it or that his foodie group of friends had disappeared from his life.

B) He continued being a foodie at first, but ultimately other priorities emerged.

C) He wanted to continue to be a foodie but was fearful of spending too much and not having enough for high health care bills.

D) He wanted to continue to be a foodie but also wanted to leave an inheritance.

These are four dramatically different scenarios for my dad as he planned his spending approach in retirement. The first might require education. My dad might have thought at age 65 he would want to be a foodie throughout retirement, but the reality was different: His interest (and spending) waned. This could have been anticipated and planned for accordingly. The second scenario might necessitate a better understanding of what would replace being a foodie.  Perhaps it would be something equally or more costly such as travel.  Or perhaps my dad just wanted to stay at home with his book club (again, with lower spending).  Scenario C might raise the specter of solutions addressing my dad’s concerns about health care bills. Certainly, the least optimal approach would be to try and self-insure out of fear of high out-of-pocket costs. The last scenario might beg the question — if giving is so important, why not do it now as opposed to waiting until the end of retirement?

Clearly the “whys” of spending in retirement can make a large difference in the spending advice given.

With the generous support of the RRF Foundation for Aging and EBRI’s Retirement Security Research Center, we are embarking on a project to understand what drives retirees to spend the way they do.  Our research will include surveys and interviews to gain a better understanding of what drives retirement spending decisions and how to optimize them. Combined with data from our IRA database and HRS/CAMS, this research is intended to provide a holistic view of the whys of retirement spending. If you are interested in joining the RSRC, please reach out to Betsy Jaffe at jaffe@ebri.org to participate in this important initiative.

 

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[1] Sudipto Banerjee, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?” EBRI Issue Brief, no. 447 (Employee Benefit Research Institute, April 3, 2018).

[2] Craig Copeland, “Withdrawal Activity of Individuals Owning Both Traditional and Roth Individual Retirement Accounts,” EBRI Issue Brief, no. 503 (Employee Benefit Research Institute, March 26, 2020).

[3] Forthcoming EBRI Issue Brief.

[4] Zahra Ebrahimi, “How Do Retirees’ Spending Patterns Change Over Time?,” EBRI Issue Brief, no. 492 (Employee Benefit Research Institute, October 3, 2019).

The Future of Employment-Based Benefits — Hard Facts, and Some Bright Spots

The year 2020 will likely go down as one of the most challenging in recent American history: a pandemic, quarantines, rampant unemployment, civil unrest — it may be difficult for many people to find a silver lining right now.

But there are bright spots. On May 30^th, the first American astronauts were launched into space from American soil on an American space shuttle since 2011. Even more amazing, it was the first time any private-sector company in the world had done so. The fact that companies like SpaceX can do great things even in the face of such turmoil reminds me of why I joined the Employee Benefit Research Institute (EBRI) more than two years ago. For American companies to succeed at such momentous endeavors, it takes motivated workers who are healthy and financially stable. Employee benefits can be a crucial part of that equation.

Yet, the availability of health, retirement, and financial wellness benefits may be at a crossroads. As a result of COVID-19’s impact, the American Retirement Association estimates that 42 percent of small businesses may be candidates for 401(k) plan terminations. Using the Retirement Security Projection Model,® Jack VanDerhei, EBRI’s Director of Research, found that if this were true, $31.24 billion would be added to the existing $3.68 trillion U.S. retirement deficit. [1] Further, according to the 2020 Retirement Confidence Survey, more than 6 in 10 workers without a retirement plan have less than $1,000 in savings (vs. just 8 percent of those with a plan).[2]

In that same survey, nearly half of workers reported that their level of debt is a problem, and 77 percent believe it would be helpful to have access to emergency savings accounts or programs. The “Emergency-Fund-Focused Employers: Goals, Motivations, and Challenges” Issue Brief found that — at least in 2019 — employers were stepping up. According to the research, more than 4 in 10 employers expressing at least some interest in offering financial wellness programs said they offer or plan to offer an emergency fund/employee hardship assistance as a financial wellness initiative.[3] Yet, this may be changing. Anecdotally, we are beginning to hear that such programs are being delayed in light of the current crisis. Indeed, we are even re-tooling our third annual Employer Financial Wellbeing Survey — to be fielded in late June and early July — to determine whether employers are actually moving away from programs that are already in place.

Similar concerns exist around health benefits. At a minimum, recent developments like the increased use of telemedicine could change the health benefits landscape, a topic which will be explored in EBRI’s upcoming Consumer Engagement in Health Care Survey. However, EBRI’s Director of the Health Research and Education Program Paul Fronstin—with support from Blue Cross Blue Shield—is also interviewing employers to understand if employer-sponsored health benefits may be on the wane. After all, we now face the first recession since the Affordable Care Act created a marketplace that workers can go to directly, without their employer acting as an intermediary. Could this be a catalyst for employers to reduce or even eliminate their health benefits?

But let’s get back to the idea of bright spots. This week, EBRI and J.P. Morgan Asset Management released a paper based on connecting consumer and 401(k) data on a large scale. The collaboration is intended to develop an understanding of workers’ full financial picture by pairing their 401(k) activity (savings, investments, etc.) with their spending behaviors.  The initial foray into the research collaboration — “The 3% difference: What leads to higher retirement savings rates?” — explores what is driving the savings behavior of 401(k) participants who contribute at low, moderate, or high rates to their plans. It finds that spending patterns do indeed differ among the three groups — most interestingly between low and moderate savers, whose wages are actually very similar. Low savers are more prone to spend on transportation, housing, and food than moderate savers — at the potential cost of being able to save more. But, of course, the question is why? Future research will examine this in greater detail and ideally contribute to greater retirement and overall financial security by adding to a constructive dialogue on the forces behind U.S. workers’ savings habits.

Yes, it’s been a challenging year. But one thing that’s been reinforced by all that is happening is the importance of facts, not just inferred data, when it comes to tackling the most difficult issues we face today. Without facts, we cannot understand how to quarantine and for what length of time. Without facts, we also cannot determine how we can get American companies — and the economy — back on sound footing. EBRI remains dedicated to data and facts. We hope you join us in upcoming webinars and our end-of-month virtual Policy Forum to learn more about what these facts are telling us about the future of employment-based benefits and what policymakers, employers, and providers can do to support the well-being of American workers.

For more about joining EBRI, click here.

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[1] https://www.ebri.org/retirement/publications/issue-briefs/content/impact-of-the-covid-19-pandemic-on-retirement-income-adequacy-evidence-from-ebri-s-retirement-security-projection-model

[2] https://www.ebri.org/docs/default-source/rcs/2020-rcs/2020-rcs-summary-report.pdf?sfvrsn=84bc3d2f_7

[3] https://www.ebri.org/financial-wellbeing/publications/issue-briefs/content/emergency-fund-focused-employers-goals-motivations-and-challenges

https://am.jpmorgan.comus/en/asset-management/gim/adv/insights/what-leads-to-higher-retirement-savings-rates

Is COVID-19 Driving Americans to Retire Early?

One of the most surprising — and potentially puzzling — findings in the 2020 Retirement Confidence Survey (RCS) is how confident people remain even today, during the COVID-19 crisis, about their ability to have enough money to live comfortably throughout their retirement years.

The RCS was fielded twice this year: once in January 2020 before the impact of the pandemic was truly felt in the United States and again in late March as the pandemic was becoming a major factor in Americans’ lives. But if one expected retirement confidence to plummet with the stock market — it didn’t. Indeed, among American workers, 63 percent said in late March that they are somewhat or very confident, down only 6 percentage points from January 2020. For retirees, the change was even smaller: 76 percent said they are confident, down only 1 percentage point from January 2020. So why do people remain so confident?

One clue might be found in questions the RCS posed in March 2020 about employment status change. Eleven percent of survey respondents noted at the time that their employment status had changed in a negative way since February 1^st 2020.  Another 12 percent noted that they expected their employment status to change in a negative way within the next six months. Among workers with a negative current or expected employment status change, retirement confidence was markedly lower. Less than half (47 percent) of this group believed they would have enough money to live comfortably in retirement. In fact, their confidence in everything from Social Security to Medicare to paying for long-term care expenses all tanked. In other words, it seems to be employment status, not stock market volatility, that is a driving force in retirement confidence. Thus, retirement confidence could certainly dive precipitously now that tens of millions of Americans are out of work due to COVID-19.

Logically, one might assume that, as a result of the financial implications of both job loss and market volatility, retirement horizons might expand due to COVID-19. However, there is now evidence showing that the pandemic might actually be causing the retirement horizon to contract. At least, that’s the conclusion of Coibion, Gorodnichenko, and Weber in their working paper, “Labor Markets During the COVID-19 Crisis: A Preliminary View.”[1]

According to the authors: “At the height of the covid-19 crisis with a much larger number of people now out of the labor force, we see corresponding declines in the share of homemakers, those raising children and the disabled. However, we see a large increase in those who claim to be retired, going from 53% to 60%. This makes early retirement a major force in accounting for the decline in the labor-force participation. . . this suggests that the onset of the covid-19 crisis led to a wave of earlier than planned retirements.”

At a recent EBRI Research Committee call, reactions to this conclusion ranged widely.  Some were skeptical about the numbers, questioning whether people would really be in a financial position to retire as COVID-19 continues to ravage their defined contribution plans and emergency savings. Others wondered if people simply wanted to take Social Security payments early — and how detrimental that might be for their long-term retirement financial situation. Some pointed out that people could retire only to decide to jump back into the work force at some later time — the so-called revolving or reverse retirement plan — as they realized they missed the social interactions, etc. of the workplace. Finally, there was the consideration that perhaps COVID-19 really was causing a unique spike in retirement, albeit not for a positive reason: Older workers might simply be afraid of contracting COVID-19 or its variants by being in the workplace and prefer to retire, whether ready or not from a financial standpoint, rather than be exposed.

The RCS actually provides contradictory evidence relative to the findings of the Coibion et al. working paper. According to it, the median expected retirement age is 65 for those both with and without a negative or expected negative job status change. So clearly more research is needed here. In the summer, EBRI will field its Workplace Wellness Employee Survey and its Financial Wellbeing Employer Survey simultaneously to dig deeper into the realities of how COVID-19 might be changing the financial security of workers and the retirement landscape.

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[1] Olivier Coibion, Yuriy Gorodnichenko, and Michael Weber. Working Paper 27017. National Bureau of Economic Research.

Employers Who Help Employees in Need: Valued Employers, Indeed

“When it all closes in, there are only two kinds of people: best friends and everyone else.” — Emery Lord

This quote struck home with me as I thought of employers’ role in helping workers through what is potentially one of the most challenging times in their lives thanks to the current pandemic. The impacts may be emotional, physical, and financial.

Here’s why: A number of years ago, my husband had an accident that put him in the hospital for a week and incapacitated him at home for several weeks after. My colleagues at work and my employer could not have been more supportive. Co-workers covered for me so that I could take care of my husband, and my employer allowed me as much flexibility in my schedule as I needed. After things got back to normal for me, I never forgot how my employer and colleagues helped me out when I needed it most, and I believe it inspired in me greater loyalty and productivity.

Such is the challenge many employers face today: How do they support their employees in the face of a global crisis — show they care — even as they themselves struggle to stay afloat?

The good news is that many employers have already set themselves on the road to help employees by offering financial wellness initiatives and, in particular, emergency savings assistance. That’s because, even before the pandemic, workers demonstrated challenges with affording emergency needs. We know research from the Federal Reserve shows that families with working heads aren’t saving adequately for emergencies. According to EBRI estimates from Fed data, only 20.1 percent of such families had liquid savings of more than three months of their family income. In other words, most workers were struggling with unexpected expenses even before the pandemic.

And employers were taking notice. According to EBRI’s February Issue Brief — from a survey fielded in 2019 — titled “Emergency-Fund-Focused Employers: Goals, Motivations, and Challenges,” more than 4 in 10 (43.6 percent) employers that expressed at least some interest in offering financial wellness programs said they offer (28.2 percent) or plan to offer (15.3 percent) an emergency fund/employee hardship assistance as a financial wellness initiative. Granted, much of what is being offered is in the form of more traditional approaches to emergency help, such as employee relief/compassion funds (44 percent). However, employers expressed considerable interest in more cutting-edge offerings such as sidecar or rainy day accounts. While only 8 percent of the “emergency-fund-focused” employers offered such products, nearly 1 in 5 emergency-fund-focused respondents (19 percent) said they were planning to offer rainy day accounts; another 29 percent expressed some interest in such offerings.

Still, not everyone is on board with employers offering emergency savings help; some have suggested that employers should concentrate on improving job quality and pay and not just on ways to make it easier for workers to save for emergencies. And indeed, the Fed report notes that while only 56 percent of adults with family income less than $40,000 a year said they are doing okay financially, 79 percent of those earning between $40,000 and $100,000 annually reported this to be true, and more than 90 percent of adults with income greater than $100,000 a year reported this. Further, in the current situation, varying income will clearly be a source of financial fragility. According to the Fed report, one-third of those with varying income said they struggled to pay their bills at least once in the prior year due to their varying income.

However, the counterpoint to this is the high incidence of employers who point out that many of their financially strapped workers are earning six-figure salaries. Underscoring this, the Consumer Financial Protection Bureau reports that while income is a predictor of financial behavior, both financial skill and financial self-efficacy are materially more significant predictors. In other words, financial stability is not just predicated on salary level but also on an individual’s skill and confidence in navigating their finances.

As such, employers’ efforts in providing emergency savings help appear well founded. In the “Emergency-Fund-Focused Employers: Goals, Motivations, and Challenges” Issue Brief, the number one reason for offering emergency savings help was improved overall worker satisfaction (44 percent). At a Financial Finesse employer conference, I noted that it was interesting that the primary motivation of employers appears to be altruistic. However, the employers in the room agreed that worker satisfaction is both altruistic and bottom-line oriented: Satisfied employees are loyal and productive employees.

Employee satisfaction can be difficult to measure. In contrast to the more than 4 in 10 employers that listed worker satisfaction as a reason to offer financial security initiatives such as emergency savings help, fewer than 3 in 10 said that employee satisfaction is used to measure their initiatives’ effectiveness. Meanwhile, the majority of emergency-fund-focused employers said they fully or partially pay for employees’ financial wellness initiatives, and they reported the average annual per-employee cost for initiatives to be $110.68. In short, if employers cannot connect the dots between improving overall worker satisfaction and offering emergency savings help, it will be difficult for them to justify paying for such initiatives.

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To learn more about the latest trends in emergency savings help, join us on April 8 for a webinar on this topic.

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The members of EBRI’s Financial Wellbeing Research Center understand this very well and are dedicated to EBRI’s mission of using empirical data to make those connections. Together, we are building a database of employee financial wellness initiatives and will explore how such initiatives move the dial on employee behavior in a variety of different ways. The goal is to provide research for employers as they continue seeking to make the case for assisting workers in need.

One more potentially pertinent quote about the current crisis: “I’ve got some bad news and I’ve got some good news. Nothing lasts forever.” (Kate McGahan). Well, perhaps one thing may last if my experience is any guide: Employees’ view of how their employers helped them navigate this crisis.

Consumers or Patients: The Role of Individuals vs. Employers in Health Care Spending Choices

In a roundtable co-hosted by EBRI and the Midwest Business Group on Health in Chicago last year, Boeing’s Jason Parrott and Walgreens Boots Alliances’ Tom Sondergeld debated how well various aspects of consumer-driven health care — such as deductibles and copays — were helping to control both costs and the value of health care services. The answer was clearly “not as well as we’d like.” And then the entire group challenged whether health care recipients are truly even consumers in the traditional sense at all. Are they not in fact patients? And isn’t there a fundamental difference between a patient and a consumer? This point was intriguing. When people are in need of health care, it’s because they are sick. And anyone who has ever been sick knows that the highest priority tends to be getting well, not shopping around for value-based services.

It’s a point Paul Fronstin and his co-authors underscore in their recent Issue Brief, “Cost Differences for Oncology Medicines Based on Site of Treatment.” Evidence from the data[1] shows that payments for infused cancer medicines in the commercial and employment-based markets are nearly two times higher, on average, when services are provided in hospital outpatient departments vs. physician offices. However, it is arguable whether patients are really getting two times the value. On the surface it seems there would be a difference. After all, someone referred to a hospital outpatient department to receive chemo might assume that this would be a better option than a physician office. What if they had a negative reaction to the chemo and needed emergency care? Wouldn’t it be better to be in a hospital outpatient office where an emergency room would be just around the corner vs. a physician office where it would not?

This thinking, however, is not necessarily on point. It is not correct to assume that hospital outpatient departments are actually located in hospitals. Generally, in fact, they aren’t, often having previously been physicians’ offices that were bought by a hospital. But even when hospital outpatient departments are located on a hospital campus, they can be as far as 250 yards away from the main building and still be considered hospital based. So in many cases, even if a patient receiving chemo in a hospital outpatient department needed emergency services, they would have similar transportation issues — i.e., needing to be transported to an emergency room — to a patient in a physician office.

Differences in pricing that do not necessarily align with quality of care, of course, extend beyond chemo costs, as I recently learned from personal experience. Both my husband and I required the same medical procedure recently, but since we have different primary care physicians, we were offered two very different recommendations for care. I was sent to a physician office; he was sent to a hospital outpatient department. Both procedures went well, with the only noticeable difference from the “consumer’s” perspective — mine and his — being that his procedure took longer and he was required to leave in a wheelchair. The other noticeable difference came when we saw our insurance claims. His was more than three times higher than mine.

Note that because both procedures were covered by our health care insurance, neither of us were particularly motivated to second-guess our doctors’ recommendations based on price. But what about based on quality of service? Perhaps it is lack of transparency that caused me not to question whether I was better off in a hospital outpatient department or a physician office for my procedure. Perhaps I just trust my doctor’s recommendation. But this is definitely not how I behave when I make other consumption choices. For example, I’m in the market for a new health club. So far, I’ve scoured website reviews, measured the distance from my house to health clubs, compared prices, and planned walk-throughs. The other day, in fact, I spotted someone wearing workout clothes near a health club and asked her how she liked the club.

It may be argued that consumerism when it comes to health care choices is evolving. In an EBRIefing on Consumer Engagement in Health Care Among Millennials, Baby Boomers, and Generation X, Paul Fronstin showed how Millennials are more likely than other generations to seek out cost information about health care, check the quality rating of a doctor or hospital before receiving care, talk to doctors about treatment options and costs, and try to find the cost of health care services before getting care. Further, in the recent EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey, members of high-deductible health plans were more likely than members of traditional health plans to demonstrate consumer research patterns such as those described above.

In the meantime, what can employers do to help? In the site of care Issue Brief, Fronstin et al. concluded that employer intervention should be a consideration and that employers could cut their drug costs nearly in half simply by shifting patients to physician office settings or negotiating site-neutral pricing for medicines. This suggests that seeking to turn employees into consumers of health benefits is not the only answer when it comes to controlling costs while maintaining quality.

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[1] The analysis was based on 18,195 users of the top 37 infused oncology drugs prescribed to employment-based and commercially insured patients in 2016.

Lessons From Down Under: The Problem With Getting Half of the Retirement Equation Right

At this week’s Leadership Symposium at the Association of Superannuation Funds of Australia (ASFA) Conference in Melbourne I learned that things really are upside down in this part of the world.

Susan Thorp of the University of Sydney was explaining how successfully Australia’s superannuation system had solved the retirement savings dilemma for Australians. And indeed, the statistics are impressive: According to ASFA, as of the end of June 2019, Australian workers had amassed nearly $3 trillion in the superannuation system.[1] A substantial number of them are beginning to enter retirement with significant balances.

About Australia’s Superannuation System

For those unfamiliar, since 2014, Australia’s superannuation system has required that Australian employers contribute 9.5 percent of workers’ pay into a defined contribution system similar to the United States’ 401(k) system. Workers must keep their money in the system until they retire or are disabled. At that point, individuals generally have tax-free access to their nest egg.

However, as Professor Thorp explained, the superannuation system has really solved only half of the retirement equation: While retirement savings in Australia is strong, “we absolutely haven’t solved the retirement spending dilemma,” she noted. She cited the following research on superannuation drawdown behavior: The majority of retirement withdrawals in the superannuation system are close to the minimum, and most retirees see their superannuation balance actually increase slightly in most years. If this continues, many Australians will die with substantial amounts of their savings unspent — and this is regardless of the size of the superannuation fund balance.[2]

That may sound like a nice problem to have — so much money in retirement that you cannot spend it all. But that’s really not what’s happening here. As EBRI’s research has noted about U.S. retirees in the current environment[3], Australian retirees seem to be hoarding their nest egg not because they want to but out of fear of longevity risk. Essentially, they are self-insuring so that they won’t run out of money as they age. That is suboptimal on many levels.

First, as Moshe Milevsky of York University pointed out in his presentation at the same symposium, the probability that even a healthy person will live beyond age 95 is extremely low, and budgeting for low-probability events isn’t very practical. It would be like setting aside $100,000 just in case someone is injured on your property and sues you.  Think of all the things you’d be giving up — vacations, a better house, a nicer car, higher-quality education for you or your family — in order to have that money sit in a bank account in anticipation of this highly unlikely event.

That’s essentially what these retirees are doing. They are resigning themselves to a lower standard of living in retirement after having accepted a reduced standard of living while working in order to save for retirement. Suboptimal indeed.

At the symposium, we brainstormed ways to help retirees tackle this dilemma. Some suggested it’s a math problem: Retirees are ill-equipped to figure out how to effectively spend their money and need guidance. Others suggested it’s a framing issue: Retirees continue to think of their nest egg as a balance, and when it comes to balances, growth is good. Instead, they should think about their retirement savings as an income stream and consider how sizable that income stream should be. Still others wondered if we were just all making a fuss about nothing. Maybe retirees are just happy having a tidy sum that they can eventually bequeath to their heirs.

One of the superannuation fund administrators pointed out that we tend to oversimplify the process of spending in retirement: Just as people have many needs along the way as they accumulate money for retirement, so the path to decumulation is not likely to be one-size-fits-all but instead quite heterogeneous.

EBRI’s Retirement Security Research Center (RSRC) has identified this exact dynamic as it has explored drawdown behavior in mining its empirical 401(k) and individual retirement account (IRA) databases and in examining data from the Health and Retirement Study. Members of the RSRC have concluded that it could help to develop retirement “personas” in order to identify the finite set of approaches that people take to spending down their assets — and to thereby best identify products, services, education, and policy that can support them. This could also involve adding a qualitative aspect to the research as well by actually talking to retirees about why they engage in the behaviors they do.

This is exciting work and immensely valuable: People both in Australia and in the United States work very hard for their earnings. They deserve to be able to spend it optimally throughout their lifetime. Of course, that also involves developing a consensus around what “optimal” means on an individual/household basis — as well as from a societal standpoint.

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[1] https://www.superannuation.asn.au/resources/superannuation-statistics

[2] Andrew Reeson, Thomas Sneddon, Zili Zhu, Alec Stephenson, Elizabeth V. Hobman, Peter Toscas. “Superannuation drawdown behaviour: An analysis of longitudinal data.” Canberra: CSIRO-Monash Working Paper, May 2016.

[3] More specifically, EBRI’s 2018 Issue Brief found that within the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets; those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent. Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median. https://www.ebri.org/publications/research-publications/issue-briefs/content/asset-decumulation-or-asset-preservation-what-guides-retirement-spending