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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. - PowerPoint PPT Presentation
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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
14
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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