Chris Edwards of the Cato Institute touts Canada’s Tax-Free Savings Accounts (TFSAs). This savings account is comparable to the Roth-IRA offered in the United States. What impresses Edwards is that 47 percent of Canadian adults have opened a TFSA; compared with just 16 percent of Americans who have a Roth-IRA. He describes some key features of the program:
Individuals can deposit up to $5,500 after-tax each year. Annual contribution limits accumulate if you do not use them. So if you contribute $2,000 this year, you will be able to put away $9,000 next year ($3,500+$5,500).
All account earnings and withdrawals are tax-free.
Withdrawals can be made at any time for any reason with no penalties or taxes. That greatly simplifies the accounts and increases liquidity, both of which encourage added savings.
There are no income limits and no withdrawal requirements. All Canadian adults can contribute and withdraw at any time during their lives.
TFSAs can be opened at any bank branch or online. They can hold bank deposits, stocks, bonds, mutual funds, and other types of assets.
TFSAs are great for all types of saving, including saving to buy a home, a car, or to start a business, and saving for health expenses, unemployment, or retirement.
Alan Cole of the Tax Foundation expands on research of mine (here and here) on the impact of lower savings and investment on the U.S. economy. Some of his findings: Continue reading
Jason Russell of e21 comments on a recent report which he describes as a “wake-up call for public pension systems.” According to Moody’s Investors Service, the top 25 public pension plans have unfunded liabilities totaling over $2 trillion. The main factors for the increase in liabilities are inadequate contributions and an aging population. Mr. Russell thinks the ideal solution is to move public pension plans to a defined-contribution system. If that can’t be achieved he has some other suggestions: “Benefits could be capped at a maximum amount of salary. Loopholes that allow for double-dipping, where an employee simultaneously collects a pension and works a second government job, could be closed. Retirement ages and employee contributions must both see gradual increases, so as to acknowledge the reality of Americans’ expanding life expectancy and its associated pension deficit.”
According to a report by the Employee Benefit Research Institute, housing and housing-related expenditures was the largest costs incurred by Americans over the age of 50. These expenses accounted for between 40 and 45 percent of their household budget. The second largest expense—as one would expect—was healthcare. Though how much one’s budget was devoted to healthcare varied. For Americans between 50 and 64, health care expenses ate up 8 percent of their budgets; for those over 85, it was 19 percent. The report also found that 65 percent of workers had savings of less than $25,000.
A proposal by the Governmental Accounting Standards Board (GASB) would require state and local governments to include pension liabilities on their balance sheets. Moody’s estimates that state obligations total $530 billion (total local obligations were too difficult to calculate).
A second proposal would require governments to use a lower discount rate when valuing benefits. The impact of this proposal would increase state’s pension obligations.
Of the two proposals, the latter would have the biggest impact on policy-makers. Most investors are aware of the state and local government pension liabilities—this rule just makes them more transparent. The rule to lower the discount rate will mean politicians will have to raise taxes or cut spending to make additional payments to pensions to keep them reasonably funded.
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.
An article in the May 20th issue of the Wall Street Journal described the current trend of investors chasing yield through riskier investments. The reason is the historical low interest rates earned from safer investment vehicles like Treasury securities. With the onset of the 2008 recession, the Federal Reserve reduced short-term interest rates to basically zero. The hope was it would spur personal consumption and business investment and restore the economy to pre-recession employment levels and growth rates. When this did not happen, the Fed resorted to what it called Quantitative Easing, a process in which they purchased billions of dollars in Treasury bonds to reduce long-term interest rates. Continue reading
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.
Robert Pozen of Brookings–an old friend of the Savings and Retirement Foundation who gave one of its first talks–has some reservations about President Obama’s proposal for increasing retirement savings: Why myRA is Not the Way to Save for Retirement. Pozen suggests that a better way to increase savings is require all businesses with more than ten workers to automatically enroll them in a 401k type program.
The objection to Pozen’s suggestion, presumably, is that employees with a marginal attachment to the firm and relatively low wages invariably leave without building much into their account, and they find it easier to cash out that $500 rather than do the paperwork to roll it over.
Making it much easier to roll over 401ks might be a superior solution to MyRAs, but it’s something that would require legislation.
Whether they considered pursuing such legislation will undoubtedly be one of the first questions Deputy Assistant Secretary Mark Iwry of the U.S. Treasury will face when he will discuss myRA at the March 12 lunch hosted by the Foundation.
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 mid-Michigan newspaper Tri-County Citizen offers some sound advice to those looking to catch up on their retirement savings. One tip that is overlooked by many is very simple: reduce unnecessary spending. People say they don’t save because they have no extra money to put away for retirement. That may be true, but too often these same people buy things they can’t afford, using a credit card that charges 19 percent interest on unpaid balances. When someone pays down debt that is charging 19 percent interest, they in affect are making an investment with a 19 percent rate-of-return. One is hard pressed to make that kind of return anywhere else. Cutting back on unnecessary spending and paring debt is just as beneficial to retirement savings as investing in stocks and bonds.
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.
The Committee for a Responsible Federal Budget points out that the President’s upcoming 2015 budget will not propose that he Social Security Administration use the chain CPI index to adjust Social Security benefits. The Committee called this “a mistake.”