Nadia Karamcheva Discussing “Trends in Family Wealth, 1989 to 2013”

Join us on Wednesday, January 18th at Noon
with Nadia Karamcheva of CBO discussing “Trends in Family Wealth, 1989 to 2013” in the United States”
Wednesday, January 18th
Noon – 1:00 p.m.
Location:  Cato Institute
Washington, D.C. 20005

Nadia Karamcheva is an economist at the Congressional Budget Office (CBO) in Washington DC. Prior to joining CBO, she worked as a research associate at the Urban Institute. Her research interests span a broad range of topics in labor economics and applied econometrics, with emphasis on retirement and the economics of aging. Her current work explores policy relevant topics related to Social Security, private pension plans, and labor force participation and savings behavior of older adults.

She has a Ph.D. in Economics from Boston College, an M.A. in Economics from the same university and a B.A. in Economics and Business Administration from the American University in Bulgaria.

Retirement Accounts are Leaking

The Senate Health, Education, Labor and Pension (HELP) Committee held a hearing on Tuesday to investigate the causes, incentives, and possible remedies to workers’ withdraws and borrowing of retirement assets for non-retirement costs. There is a large percentage of American workers that are saving for retirement, but they don’t have savings for other milestone “purchases” (ie buying a home or paying for college). These non-retirement withdraws are called “leakage.”

Only two percent of savers withdraw for catastrophic need, this is “leakage”, but wouldn’t be considered as abuse of retirement savings by any reasonable measure. However, borrowing against retirement savings has a varied degree of “necessity,” and preventing the use of these accounts for non-essential borrowing should be a goal of any retirement policy. “Cash outs” during job transitions are the major culprit for mismanagement of retirement finances. Cash outs happen most often when retirement accounts have relatively small investments, leaving workers with frequent job change at a systematic disadvantage for retirement preparedness. Creating incentives to roll-over these accounts, or allowing “cashing in” these withdraws into a new retirement account should be a simple process to avoid liquidation and spending of retirement assets as a result of a job change. Continue reading

Retirement confidence lags leading indicators

Admitting you have a problem is the first step in recovery. It’s not news that people are living longer than they used to, and it’s certainly not news that workers often underfund their retirement expectations. What is news, is workers are starting to realize in larger numbers that they likely won’t be able to afford retirement at 65 if they continue saving–or not saving– as they have in the past. The Employee Benefit Research Institute (EBRI) just released its 23rd annual Retirement Confidence Survey, and it shows worker confidence resting on last year’s record low sentiment.

The economy has shown signs of improvement in the last year–albeit not overwhelming improvement–and one would think that like the stock market, retirement confidence would take the opportunity to show some exuberance. Not the case this time. The poor economy of the past few years seems to have woken up workers to the practical uncertainties of retirement, and its mounting cost. EBRI suggests that regardless of whether the actual savings and investment rate increased or decreased, this lowered retirement confidence is likely a result of the Great Recession as workers faced prolonged periods of unemployment, reduced wages, and lower rates of return (or more likely losses) during that period.

“One reason that retirement confidence has remained low despite a brightening economic outlook may be that some workers may be waking up to a realization of just how much they may need to save. Asked how much they believe they will need to save to achieve a financially secure retirement, a striking number of workers cite large savings targets: 20 percent say they need to save between 20 and 29 percent of their income and nearly one-quarter (23 percent) indicate they need to save 30 percent or more.”

In other words, workers have been badly shaken during this economic doldrums, and the lasting affect is workers rude awakening to previous under-saving. We’ll have to wait and see whether or not the fear translates to long-term improved savings rates.


Non-Sequitors: Catching Up

The Economists‘ Buttonwood blog comments on retirement, longevity, and inherent inequity in a universal pension age.

Michael Barone of American Enterprise Institute foresees an end to the entitlement age, while his AEI colleague Andrew Biggs discussed public pension reform with former San Diego city councilman Carl DeMaio, after San Diego made some painful, but needed reforms.

Some wise words about personal responsibility in planning for retirement from the Wall Street Journal… let’s just say these resolutions are obviously sound practice, but easier said than done.

According to the Washington Post‘s Michael Fletcher the American worker is borrowing from tomorrow to pay for today–which means less leisure, retirement, what-have-you tomorrow.

The Washington Post‘s Jim Tankersley writes that the global economy has pulled American manufacturing into an age of weak labor, and thus weak unions… something to keep in mind during the Social Security and pension reform discussion.

Video with Chuck Jaffe of WSJ‘s MarketWatch in re avoiding the Personal Retirement Cliff.

NPR finds that the government isn’t only struggling with the question of homo sapien retirement as a growing population of research chimps are hanging up their lab coats for country living.


Americans Save on Rainy Days, Not for Them

The latest data released by the Bureau of Economic Analysis shows that the US savings rate—as a percent of disposable income—was 3.6 percent in the third quarter of 2012.  This is down from a 3.8 percent rate in the second quarter.  The post-recession savings rate peaked at 6.2 percent in the fourth quarter of 2009.

Between Q1 2008 and Q3 2012, the quarterly US savings rate averaged 4.7 percent.  Though the average is nearly twice as high as the 2.8 percent average between 2001 and 2007; it is half the 7.7 percent average between 1970 and 2001.

The data from BEA also signals a recovery of disposable personal income (DPI).  Third quarter 2012 data shows that DPI increased 2.1 percent from the second quarter.  It was the twelfth consecutive quarter of positive growth.  During the depth of the recession, DPI fell 18.2 percent.

It is common during and right after a recession—especially one financial in nature—for consumers to reduce spending and pay down debt.  This is what happened in late 2008 and early 2009.  In the span of just three quarters, the US savings rate increased from 2.1 to 6.2 percent.

What is of concern is that as the growth in disposable income has recovered, the savings rate is falling back toward pre-recession levels.  US consumers do not seemed to be troubled about the looming “Fiscal Cliff”, which has the potential to greatly reduce disposable income.  Common sense would dictate that Americans should be saving more to prepare for this.  Nor do they seem to be concerned about having adequate resources for retirement.  The Economist reported last week that corporate defined-benefit pension plans had a deficit of $619 billion and had the ability to fund only 72 percent of future obligations.

It doesn’t help that the near zero interest rates engineered by the Federal Reserve over the past three years has reduced the incentive to save.  At some point Americans will need to save more if they expect to have any type of secure retirement.  The recent data seems to indicate they have yet to get the message.

A Foreign Reason to Reform Social Security

Reuters has an article by Aileen Wang and Koh Gui Quing called Analysis:  China Slides Faster into Pension Black Hole.  The problem facing China in terms of pension obligations will have an impact on the US as well.  The authors write:

Policy makers and economists have long been worried about the financial burden of China’s expanding patchwork of pension schemes, but those concerns have recently escalated as its rural pension scheme took off in the past three years.

The funding shortage is daunting: economists say it could blow out to a whopping $10.8 trillion in the next 20 years from $2.6 trillion in 2010, towering over China’s $3 trillion onshore savings, the biggest hoard of domestic savings in the world.

This is bad news for the US.  The federal government has been able to incur trillions of dollars in additional debt over the past four years at very low rates for two reasons:  (1) the willingness of high-saving countries like China to finance the debt; and (2) the Federal Reserve’s readiness to purchase government securities.

In a recent report by the Congressional Budget Office (CBO), outlays for Social Security will exceed revenues by ten percent over the next decade and reach twenty percent by 2030.  Under current conditions, Social Security will exhaust its “trust fund” in 2038.

The US can’t expect to continue to borrow trillions of dollars at near zero interest rates.  If this article is true about the $10.8 trillion shortfall, it means China will need to start to look inward, using its vast savings to cover the retirements of its own citizens.  If this happens, interest rates in the US will need to increase substantially in order to attract the financing needed to cover the government’s shortfall—adding tens of billions of dollars each year in interest payments.  Nor can the Fed continue to finance the debt without severely downgrading the value of the dollar and sparking large increases in inflation.

Thus, it is more imperative than ever for the US to reform today both Social Security and private pension plans.