Middle Atlantic Actuarial Club Strategies for the Future

Middle Atlantic Actuarial Club

Strategies for the Future

R. Scott Gregory, FSA

April 22, 2010

THE FUTURE ISN’T WHAT IT USED TO BE

Lets talk retirement

• Social Security

• Employer retirement plans• DB

• DC

• Hybrid

• Personal savings

Soc Sec is BIG

• 50 million people receive Soc Sec each month

• 1 in 6 Americans get a Soc Sec ben

• Nearly 1 in 4 households get income from Social Security

4NASI SS Brief # 28

The long-range forecast(Best estimate)

• 2016 -- tax revenues forecast to be less than benefits due– Assets and interest will help pay benefits until

2037– Govt must pay Soc Sec bonds and find other

lenders

• 2037 – reserves projected to be depleted– Continuing tax income forecast to cover about

¾ of scheduled benefits5

Why is this happening?

• People are living longer?• We’re not earning enough on the trust

fund?• Illegal immigrants are draining the fund?

• The main reason –

People are having fewer babies

The DB Plan

• Defined Benefit Plan (DB)– Plan defines benefit at retirement– Usually paid as monthly pmts for life

• DB best for:– Providing specific income– Retirement security– Long careers– Cost efficiency

DB plans being terminated

• Plan depends on employer– Bears investment and longevity risks– Must stay in business

• Changes have created burdens– Increased regulation / funding requirements– Changing definition of liability– Increased accounting disclosure– Violent market fluctuations– Pursuit of returns increases risk

The DC Plan• Defined Contribution Plan (DC)

– Plan defines contribution to Ee account– Account is invested– At retirement get account balance– Typically paid as a lump sum

• Best for – Encouraging personal savings– Building personal estate– Enjoying market gains– Portability

DC plans have problems

• Depends on the employee to save

• Ee needs to invest intelligently

• Benefit subject to market fluctuations

• Does not provide lifetime income

• Inefficient

• Costly

DC plans have problems• “Based on the notion that the average

American worker has the time, interest, and ability to fund and invest their way to a secure retirement in their spare time.

It’s akin to asking the average worker to become their own auto mechanic on the side, but with much larger potential social costs. “

moneywatch.bnet.com/investing/blog/fund-watch/time-for-some-intellectual-honesty-from-the-ici-in-the-retirement-debate

Most elderly don’t receive pensions

Percent with Employer-Sponsored Pensions

All age 65+ 41%

Couples 51%

Unmarried men 42%

Unmarried women 34%

13Income of the Population 55 or Older, 2002, SSA

Many rely on SS for most of their income

• 90% of people 65 and older get Soc Sec

• Nearly 2 in 3 (66%) get half or more of their income from Soc Sec

• About 1 in 5 (21%) get all their income from Soc Sec

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Income of the Population 55 or Older, 2004, SSA; Table 9.A.1

What have we done about it?

Retirement finances are shaky

• Soc Sec projected to run out of money

• DB Pensions being terminated

• DC plans shown to be flawed

• We aren’t saving for ourselves

In addition

• We are living longerLife expectancy at 65

• In 1930 (Soc Sec began) 12.4 years

• In 2000 18.0 years

• Cost of medical care rising rapidly

So, what is the outlook for retirement?

The Silent GenerationBorn 1925 to 1945 – now 65 to 85

• Long careers with big organizations

• Heads down

• Worried about their “permanent records”

• Well-behaved, conciliators

• Want to improve institutions without fundamentally changing them

Baby BoomersBorn 1946 to 1964 -- now 46 to 64

• Traditional home • Idealists and moralists • Early – free spirited, experimental • Later -- less optimistic, distrust govt • Ambitious, loyal• Work to the clock

Baby Boomers

“We have managed to take successful programs -- Social Security and Medicare -- and turn them into huge problems by our self-centered inattention. Baby boomers seem eager to "reinvent retirement'' in all ways except those that might threaten their pocketbooks.” Robert Samuelson

Generation XBorn 1965 to 1979 -- now 30 to 45

• Both parents work• Latchkey kids• More broken families• Individualistic, self-reliant• Economically conservative,

pessimistic• Inwardly-focused

Generation X

• Seek balance in their lives now – not when they retire.

• Complain about the boss, but figure its part of the job.

Millennial GenerationBorn after 1980 -- under 30

• Parents tried to avoid errors of their parents.

• Pampered, nurtured, programmed • Trophy kids

• Safety for all, no-risk• Self confidence• Desire to fit in, to be part of a group• Believe change is good• Closer to parents

Millennial Generation• Different workplace values / expectations

• Teamwork, achievement, good conduct

• Work longer and harder -- at any time of day

• High-performance / high-maintenance

• More supportive of labor unions

• Don't waste time complaining about the boss – send resume out and accept best offer

Boomer(1946-1964)

Gen X(1965-1979)

Millennial(1980 and later)

Size 78 million 46 million 76 million

Loyalty To the company To work To self

OutlookSense of

entitlementSelf Reliant, Pessimistic

Self Confident, Optimistic

Work focus Live to work Work to liveWant learning , fun, meaning,

feedback

Technology UnsureCan’t work without it

Masters

Careers 1 3 5

Job changing Sets me back 12 employers 29 Employers

Career paths are changing

• Many of us spent most of our career with one employer

• Today, 1 in 5 workers has been with their current employer for less than a year

• 1 in 2 has been there less than 5 years

• DOL estimates today’s learner will have 10 to 14 jobs

Career paths are changing

• Many of us spent most of our career with one employer

• Today, 1 in 5 workers has been with their current employer for less than a year

• 1 in 2 has been there less than 5 years

• DOL estimates today’s learner will have 10 to 14 jobs – by the age of 38

Jobs are changing - rapidly

• Many of US picked our careers in HS

• The top 10 in-demand jobs in 2010 did not exist in 2004

• We are currently preparing students for jobs that do not yet exist

Retirement is Changing

• In the history of mankind, retirement is a new concept

Life Expectancy

Life Expectancy – Last 10,000 Yrs

Retirement is Changing

• In the history of mankind, retirement is a new concept

• We are inventing “retirement”

• Attitudes are changing

• Retirement age is changing

Definition of Retirement is changing

• Dictionary Definition–To disappear

–To withdraw (from active life)

–To go away

Definition of Retirement is Changing

• The emerging definition–To engage

–To re invent

–Freedom (to do what we really want to do)

Retirement Process is Changing

Traditional Retirement

Emerging Retirement

Another Persepctive

Traditional Stages of Life

Learn

Work

Rest

Die

Ken Dychtwald, Ph.D.

Stages of Life

If I could give you 10 more years of life, where would

you want them?

Stages of Life

If I could give you 10 more years of life, where would

you want them?

At the end of life when you are old and tired?

Ken Dychtwald Ph.D.

What does retirement look like to you?

What does retirement look like to you?

As we age our focus changes

• Concerns about retirement increase

• Emphasis shifts from wealth to security

• Increasing concern we will have to scale

back our lifestyle

The MetLife Survey of American Attitudes Toward Retirement

The current economy increases these changes

Question:

Will today’s problems have a lasting effect, or will they be forgotten when

things get better?

Alternate Retirement Plan

Designs

Current ideas being discussed

• Make 401(k) plans automatic (Obama platform)

• Make 401(k)s more user-friendly.

• Forget 401(k)s, create a Supp to Soc Sec

• More cash balance plans

• Retirement USA

Common Features

• Variations of DC plan

• Required participation

• Contributions from employer and govt

• More cost efficient administration

• Dampen volatility during accum phase

• Lifetime guarantees in retirement

Tension – Required Participation

• If people don’t participate, it won’t work for them.

• Mandating participation is politically sensitive.

Tensions – Guarantee v Control

“People now put a high priority on a guaranteed retirement income,

but surveys say they want to get it as long as they don’t give up anything — as in access to that money and power over it.”

Dallas Salisbury, EBRI

Tensions – Who bears risks?

The employee

The employer

The government

Tensions – Return v Risk

How much risk should there

be?Should it depend on

whose risk it is?

Tensions - Who pays (really)

Employee perspective

Employer perspective

Tensions – Who manages?

• Government

• Social Security

• Non-profit regional cooperatives

• Employers

• Employer / Employee trustees

• For profit administrators

How bad is it?

“The poverty rate for older Americans is now lower than that for children or for other adults, a reversal from four decades ago.”

Pew Research Center , Growing Old in America, June 9, 2009

Retirees are pretty happy?

Pew Research Center, Inside the Middle Class: Bad Times Hit the Good Life, April 89, 2008

IF Survey shows fear subsiding• % who say delayed retirement is top concern

IF Survey, Pension Plans: Impact of the Financial Crisis, Sept 2009

% who think long term impact of financial crisis is “severe”

IF Survey, Pension Plans: Impact of the Financial Crisis, Sept 2009

Other parts of the ret “system”Work in retirement

MedicarePost retirement health benefits

Long term care insuranceFamily (services provided)

FriendsCommunity services for seniors

Discounts

Prediction – The sky will not fall

• Social Security will continue

• Some will save their DB plans

• DC will become the predominant Er plan

• People will continue to work – mainly because they want to.

My Prediction

Next Steps

For you• Care for your health

• "If I knew that I was going to live this long, I would have taken better care of myself.” -- Mickey Mantle

• Save• Don’t wait for retirement to enjoy life• Save• Find your retirement career• Save• Surround yourself with family and friends• Make prudent withdrawals in retirement

For Society

• Participate in the national debate– What should retirement look like in the future?– As life expectancy grows, when should people

retire?– How much do we need in retirement?– Who should be responsible?– Who should pay for it?– How do we get there from here?

Have I Got Your Attention?

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