In order to offer more options for a public increasingly nearing retirement age, more companies are beginning to offer deferred annuities in lieu of traditional pensions. Similar to life insurance, these annuities offer a way for individuals to bet on their own life span, paying a lump sum for a policy that will return a guaranteed yearly income for life.
As people live longer and retire earlier, the possibility of outliving one’s savings has become a very real one, and deferred annuities protect against that risk in ways that other pension plans don’t.
In 2013, sales of deferred annuities more than doubled from the previous year, reaching a total of $2.2 billion.
A new study by the Employee Benefits Research Institute and Greenwald Associates finds that only 44 percent of workers or their spouses have attempted to calculate how much money they will need to retire. Workers who have done this calculation tend to save more than those who haven’t.
The survey also found that more than a third of all workers – 36 percent – have less than $1,000 set aside for retirement, while fully 60 percent have less than $25,000. Worker confidence that they will be able to retire in comfort has risen slightly in the last five years, but savings behavior will have to improve for these predictions to reflect reality.
The Connecticut State legislature is considering creating a state-sponsored retirement savings program for private sector employees. Arguing that Connecticut workers are relying too heavily on Social Security and not saving enough on their own, the proposal would offer a guaranteed return on investment to all private-sector workers employed at firms with more than five employees, provided they are not already offering a retirement package of their own.
In order for the legislation to proceed, a panel chaired by the Treasurer and Comptroller would first have to establish a trust fund and agree upon an acceptable rate of return to guarantee through private insurance.
A coalition of groups has drafted a letter to Chairman of the House Ways and Means Committee Dave Camp, opposing his recently released comprehensive tax reform package on the grounds that it would negatively impact the nation’s retirement savings.
The letter claims that the proposed new tax on banks and other large financial institutions would reduce flexibility and availability of retirement funds, while over provisions introduce new complexities into the system that would be a disincentive for savings, including a new penalty on retirement plan withdrawals before age 59 and a half.
Camp’s proposal is only a draft, not a fully formed bill, and there is wide skepticism that it will ever reach a vote, at least not in its current form.
A panel at the Society of Actuaries is recommending new disclosure guidelines for pension plans that actuaries have long resisted. Under the new guidelines, pension actuaries would have to disclose the total amount of pension obligations in today’s dollars to the public, increasing transparency and highlighting the need for reform.
Estimates of public pension liabilities are common, but the actual numbers remain privileged information, a practice which economists have long argued is not ideal.
The California State Teachers’ Retirement System is one of the most troubled in the nation, with unfunded liabilities that are growing by $1 million every hour. But despite its problems, legislators in the state do not seem eager to tackle reforms, with the recently unveiled 2014-2015 budget offering no change from the status quo.
On Wednesday, a hearing was held to discuss the pension liabilities and attempt to move towards a solution. In order for contributions to be raised or benefits cut, however, state law would have to be amended, a step that few seem willing to take for fear of alienating a valuable constituency.
A pair of reports from Vanguard and Fidelity Investments reveal that the balances in America’s retirement accounts have surged to higher than ever before at the end of 2013, with Fidelity reporting an average balance of $89,300 and Vanguard reporting $101,650.
These increases are largely driven by the massive gains in stocks over the course of 2013, and could lead to some Baby Boomers who have been delaying retirement finally leaving their jobs. In addition to the gains from stocks, more employers are making greater contributions to workers’ retirement funds, which has helped to drive the increase in balances as well.
While the country still faces a daunting retirement savings deficit, these trends are encouraging and indicate that we may be starting to dig our way out.
The Rhode Island legislature has arrived at a deal to reform the state’s pension funds. This comes in the wake of a landmark 2011 attempt at reform that has been tied up in legal wrangling ever since. To reconcile the need for substantive savings and allay complaints about broken promises, some of the more draconian provisions in the 2011 law were rolled back, but the proposed compromise preserves billions in cost savings over the next ten years.
The major provisions in the settlement include hybrid savings accounts that combine features of pensions and 401(k)s, modest cost of living increases every four years and a requirement for employees to contribute slightly more to their plan than under current law.
A recent survey from Fidelity Investments reveals that alarming numbers of workers are cashing out their 401(k) accounts when leaving a job. Last year, 35 percent of all plan participants cashed out the accounts, a number that was even high for young workers.
It’s a trend that appears to be accelerating, with cash outs on the rise since 2009. Part of the issue i likely due to the continued problem of long-term unemployment and low economic growth, but retirement experts worry that it could be part of a larger trend that could lead severe savings shortfalls in the future.
The Alaska Retirement Board has approved a plan by Governor Sean Parnell to shift $3 billion is savings over to the state’s struggling pension funds. Unfunded liabilities in the Public Employee Retirement Fund and the Teacher Retirement System now exceed $12 billion, and the state recognizes that something must be done to avoid default.
Parnell’s proposal is popular because it helps the state balance its budget, and includes unfunded liability payment caps in the future that will reduce the danger of defaults and make budgets easier to balance for years to come. Parnell has been applauded for acting sooner rather than later so that the money deposited in the trust fund can have a chance to grow with time.
A new survey conducted by Prudential Financial looked at the unique challenges facing Hispanic Americans when it comes to saving for retirement. In addition to having less access to employer-sponsored retirement plans and making lower contributions, Hispanics also have different priorities than the population as a whole.
15 percent of Hispanics say they prioritize caring for elderly relatives compared to 6 percent of the general population, and 31 percent prioritize funding education for children and grandchildren compared to 18 percent of others.
These differences in priorities can make retirement savings especially difficult for Hispanics, since they are more willing to spend their savings on the care of family members rather than retaining it for their own future use.
Coming on the heels of President Obama’s announcement that he would use an executive order to create the MyRA savings program, Sen. Tom Harkin (D-IA) has introduced legislation in the Senate to propose his own solution to the nation’s retirement savings crisis. Harkin, who chairs the committee on Health, Education, Labor and Pensions, offered his “USA Retirement Funds Act” as a way to increase savings rates and expand coverage for those without access to an employer-sponsored plan.
The plan would create privately-managed retirement savings accounts available to all workers, with an automatic enrollment rate of 6 percent, although opting out is possible. These accounts also function like an annuity, with monthly benefits being paid for the entire life of the enrollee.
So far, Harkin’s proposal has drawn praise from the Service Employees International Union and the American Income Life Insurance Company.
In last night’s State of the Union speech, President Obama announced his plans to create a new type of government-backed retirement account which he is calling “MyRA.”
The full details of the plan have yet to surface, but in broad strokes MyRAs would be retirement bonds that workers could invest in by contributing part of their wages. “MyRA guarantees a decent return with no risk of losing what you put in,” the president said, indicating that these accounts would offer some minimum guaranteed interest rate backed by government funds. The president stressed his desire to see more Americans saving proactively for their retirement, and sees MyRAs as a tool to achieve that goal.
As the economy continues to struggle and unemployment remains high, many people are dipping into savings to make ends meet. A new 2500-participant survey asked Americans about their spending in relation to savings from the past year, with the finding that nearly 35 percent had had to dip into savings at some point.
A total of 4 percent of respondents spent down retirement savings only, 20 percent spent personal savings, and 11 percent spent portions of both. This is a worrying trend, but remains an improvement over 2010 according to Census and Federal Reserve data, one in four Americans withdrew savings from retirement accounts to finance current spending.
Two former Social Security executives took to the editorial pages of the Wall St. Journal to contest the findings of many recent studies, representing Americans as woefully underprepared for retirement. They argue that the methodology of these studies, relying on the U.S. Census Bureau’s Current Population Survey, fails to account for additional income retired Americans may be receiveing through programs such as IRAs and 401(k)s.
“The Census Bureau’s definition of income, however, includes only payments made on a regular, periodic basis,” the authors argue. “So monthly benefits paid from a defined benefit pension or an annuity are counted as income, while as-needed withdrawals from 401(k)s or IRAs are not.”
While acknowledging that pension reform is certainly necessary, the authors claim that misrepresenting the actual state of the nation’s retirement programs hinders such efforts and serves the interests of no one.