Savings Plans Increasingly Focused on Behavioral Economics

Economists and employers alike are increasingly embracing the field of behavioral economics as a means of increasing retirement savings. Whereas old models tended to focus on education as a way to increase the financial literacy of workers, new techniques recognize that people respond to incentives and that emotional investment in the savings process plays a key roll in encouraging success.

A new retirement tool known as Retiremap was released last year by the San Francisco-based firm, Boulevard R, a software program that allows workers to become more actively involved in their savings. Research on Retiremap reveals that this new approach results in increased saving rates for 53 percent of participants, with 88 percent saying the plan to save more as a result of using the program.

Behavioral economics offers a way to better understand the psychology of workers and what induces savings, rather than simply relying on passive policies such as education, and with increases in these sorts of programs, we may soon see nationwide spikes in savings rates.

Washington Senate Considering Retirement Savings Bill

The Washington Senate is holding a hearing to consider a new bill under the title “Save Toward a Retirement Today,” or STaRT. The bill would create voluntary retirement accounts for employees of small businesses, with the aim of increasing participation and access to savings plans.

Washington’s aging population is placing increased demand on the state’s social services, and the bill’s sponsor, Rep. Larry Springer, says that he wants Washingtonians to start thinking about their retirements at an earlier age.

Springer says, “If you don’t start to save immediately when you go to work, you find that when you reach age 35 and 40 or so, either you’re going to have to sharply change your expectations or you’re going to have to save a substantially higher proportion of your paycheck.”

Investment Firm Uses Social Pressure to Spur Savings

Putnam Investments is trying a new strategy to encourage people to save more for retirement: social pressure. The company has added a new feature to its 401(k) management system call ed”How Do You Compare?” which allows participants to see how much others are saving, with the aim of fostering a sense of competition between participants.

Putnam’s research indicates that comparisons are strong motivators of people who do not want to feel like they are doing worse than others. If this model turns out to be effective, it could serve as an important lesson for public policy makers seeking to address the retirement crisis.

Misplaced Confidence Can be Dangerous for Workers

A new survey by the National Association of Retirement Plan Participants found that, among participants in defined contribution retirement plans, 20 percent are overconfident about their level of financial savvy, while 23 percent are underconfident.

While the overconfident workers take an active role in investing for their retirement, they tend to set aside less money than necessary, trusting instead to their level of financial literacy, whereas the underconfident tend to be more passive and let indecision prevent them from making good investment choices. The lesson from this survey is that workers need to have realistic expectations about what they can and cannot accomplish on their own in terms of investing for retirement.

Puerto Rico Supreme Court Blocks Pension Reform

The Puerto Rico Supreme Court has put the brakes on a new effort to reform teachers’ pensions, as it prepares to hear a lawsuit alleging that the reform is unconstitutional.

The pension program in question is currently underfunded by $10 billion and, unless action is taken, will be bankrupt by 2020. The reform proposal, passed in December, would increase employer contributions and attempt to preserve Puerto Rico’s credit rating, already just a step above junk bond status. The reform would also raise the retirement age to 62 (from as low as 50) for new employees, and raise the age from 55 to 60 for current employees.

The teachers’ organization bringing the suit argues that due process was not followed, and that the reform is not permitted under the Constitution.

Global Savers Confident, but See Need for Change

A new study by Nielsen found that 69% of global respondents feel confident that they will meet their savings goals, but only 28 percent think that their current savings strategies will be sufficient to make that happen.

Across the board, participants’ plans for future saving are greater than their current saving behavior. Whether this indicates unrealistic optimism or produent planning is difficult to determine at this point.

The survey studied 30,000 participants from 60 countries.

Rise of Freelancers May Lead to Retirement Crisis

As the American economy shifts from being dominated by traditional, salaried positions to greater a proportion of freelance and self-employment jobs, experts are worried that the impact on the nation’s retirement savings will be catastrophic. Without the benefit of employer-sponsored retirement plans such as 401(k)s, freelance workers are not savings at the rates necessary to retire at age 65.

According to a recent TD Ameritrade survey, 28 percent of self-employed Americans aren’t saving at all, and another 40 percent are only saving on an occasional basis. And according to a study by Intuit, freelance workers are expected to account for 40 percent of the labor force by 2020.

If these trends continue, we will be left with a large number of workers unprepared for retirement, putting a drain on federal entitlement programs that they may not be able to bear.

ObamaCare May Lead to Earlier Retirements

While most analyses of retirement trends are pointing towards Americans working longer and retiring later, one study from Boston College finds evidence that we may soon be seeing the opposite. The Center For Retirement Research examined the tendency for workers to retire at age 65, as linked to eligibility for Medicare and Social Security. Since private health insurance plans can be expensive for older workers, due to preexisting conditions and the general health problems that accompany old age, people who would have liked to retire earlier often put off that decision until they can be sure of acquiring Medicare to cover their post-retirement health care needs.

Now, the paper argues, the Affordable Care Act’s provisions prohibiting discrimination based on preexisting conditions may change all that, making health insurance more affordable for younger retirees. If the primary barrier to early retirement is health care cost, then a law that reduces those costs should be accompanied by a corresponding change in retirement behavior. It will be interesting to see whether the data bear out this hypothesis once the Affordable Care Act has had a few years to affect the economy.

Indiana Considers State-Assisted Retirement Plan

The Indiana State Senate is currently considering a bill that would create a state-assisted retirement plan to encourage more savings among residents who are not eligible for employer sponsored retirement plans. The plan offers a $250 tax incentive for those who sign up and who have not participated in such a plan in the past.

Supporters of the plan argue that it will reduce dependence on Social Security and help Indiana workers enjoy safer retirements. The cost of getting the plan off the ground is estimated to be $500 million. The bill will now proceed to the Tax and Fiscal Policy Committee before continuing on to a vote in the State Senate.

The New Wave of Senior Entrrepreneurs

As Baby Boomers reach their 65th birthday, many are finding they lack the savings necessary for a long a long and prosperous retirement. Yet employment opportunities are far from plentiful for this older demographic, so many are seeking to supplement their savings in another way: starting their own businesses.

Of all the new businesses started in 2012, 23.4 percent were created by Americans aged between 55 and 64. Back in 1996, that number was just 14.3 percent, a dramatic increase. A survey in 2011 also found that about 25 percent of Americans between the ages of 44 and 70 were interested in starting their own business.

Older entrepreneurs have the benefit of more experience and confidence, crucial attributes when it comes to starting a business. As inadequate savings leaves more older workers looking for options, we should expect to see a new wave of start-ups coming from seniors looking to continue their careers.

401(k) Saving Declines as Insurance Premiums Rise

The recent release of the annual Mercer Workplace Survey reveals that Americans are not planning to contribute more to their employer sponsored, defined contribution retirement plans next year, largely as a result of the sluggish economy and higher health insurance premiums.

While Americans as a whole are more optimistic about the state of the economy this year, that optimism has so far not transferred into increased savings, and in fact those workers closest to retirement are actually planning to save less. Workers over the age of fifty now expect to save 18 percent less than they have in previous years.

The authors of the survey worry that commonly touted reforms such as automatic enrollment will not address the underlying concerns of workers worried about rising costs, and stress education by plan sponsors as one of the key motivators of increasing savings in the future.

Illinois Pension Plan Draws Increased Scrutiny

The pension reforms enacted by the state of Illinois last month were passed with promises of substantial cost savings over the next thirty years, with number projected to be as high as $160 billion. Now that the law has passed, this theoretical savings is coming under increased scrutiny by financial ratings agencies to see if the reality matches up with the promises.

Moody’s, Standard & Poor, and Fitch are currently examining the program to see whether the reforms justify a reevaluation of the state’s credit rating, currently the worst in the United States. If Illinois’ reforms turn out to deliver what they promise, they could serve as a model for other financially troubled states. If the ratings agencies choose to stand by their earlier evaluation, however, the state will have to rethink its plans and start the long, politically arduous path to pension reform all over again.

Retirement Savings Situation Largely Unchanged in 2014

It’s a new year, but for investors and plan sponsors alike, not much has changed from 2013. A number of promised reforms from the previous year have still yet to be realized, as employers try to plan for changes in the tax code that have never arrived. Comprehensive tax reform was a priority for 2013 that never materialized, and is on the table again this year, leaving employers unsure of how exactly to plan their retirement programs.

For savers, the new year is not offering significant change either, as the official measure of inflation for contribution limits, the CPI-U, has remained almost flat, meaning that workers who wanted to boost their IRA or 401(k) savings to keep pace with rising prices may find their efforts frustrated. While contribution limits did increase modestly along a number of dimensions, many feel that these increases do not adequately reflect changes in the cost of living for most Americans.

Court Overrules San Jose Pension Reform

A superior court ruling in San Jose, California overruled plans to reform the pension system for current employees by reducing the benefits they would receive in the future. The court rules that the pension promises made at the time of employment constituted a binding contract, and that those terms to not be unilaterally altered now without violating the legal rights of city employees.

San Jose has struggled with large deficits for some time, and was attempting to rein in costs by reforming pensions. This ruling could set an important precedent that would make other cities’ pension reform efforts more difficult going forward. If the court’s ruling holds, the city of San Jose will have to either fulfill its pension obligations or offset them with a benefit of comparable value in order to avoid default.

Americans’ Desire to Save Exceeds Their Ability to Do So

According to a new survey, Americans of every demographic now say they would prefer to save money than to spend it. This marks a dramatic change from pre-recession attitudes, when more people expressed a desire to spend than to save. While it is encouraging to see attitudes shifting in the right direction, the fact is that actual observed savings behavior is not corresponding with what people say they want, or even moving in the same direction.

The savings rate in 2013 is lower than it was in 2012, and that number is in turn lower than the 2009 rate. So why are people saving less when they want to save more?

One possible answer is that they simply lack the means to save as much as they would like. The economy’s recovery has been, and remains, slow, and good jobs are hard to find. Another possibility is that as Americans become increasingly aware of reports of a global retirement crisis, they are saying they want to save more because they believe it is what they should say.

Whatever the reasons, until savings behavior begins to more closely align with savings goals, American workers are in for a rocky retirement.