Retirement Issues 2013 National Press Foundation Washington, D.C. April 8, 2013 Diane Oakley Executive Director National Institute on Retirement Security Can We Afford Public Pensions?

Overview State of U.S. Retirement Economics of Pensions Close Up on Public Pensions 2

The Quiet Crisis: Retirement Deficit Massive wave of Baby Boomers retiring and majority ill-prepared, especially late boomers. Insufficient 401(k) savings, private pensions disappearing, Social Security cuts, plus increase healthcare costs. Half workforce has no workplace retirement plan – women and minorities particularly vulnerable. What are costs of broken system? Financial strains on families to support parents, pressure on public assistance, reverting to elder poverty. 3

Shifting Retirement Infrastructure Shifts Risk to Individuals Source:, Center for Retirement Research at Boston College, National Retirement Risk Index ( 1983 – 2010) Working Households at Risk of Falling Short of Pre- Retirement Living Standard Source: DOL, PBGC and EBRI Private Sector Workers Participating in Employer Based Retirement Plan by Plan Type, (all workers)

5 23 Million Americans 60+ Received DB Income, but Boomers Trend Downward Source: The Pension Factor, Table 1.

What Do Americans Think About Retirement? 6

Anxiety Not Dissipating How concerned are you about current economic conditions affecting your ability to achieve a secure retirement? 7 Source: NIRS Pensions & Retirement Security 2013

It’s Only Getting Harder to Prepare for Retirement Do you feel that – compared to today – it will be easier or harder for Americans to prepare for retirement in the future, or will there be no difference? 8 Source: NIRS Pensions & Retirement Security 2013

High Support for Pensions How would you describe your overall view of a pension? 9 Source: NIRS Pensions & Retirement Security 2013

Disappearance of Pensions an Impediment to “American Dream” To what extent do you agree/disagree that the disappearance of pensions has made it harder for workers to achieve the “American Dream?” 10

Pension Bigger Employer Draw Than 401(k) Accounts Let’s say you’re taking a new job and considering two employers – one offered a pension and the other a 401(k). How likely would you be to choose the employer with the pension or 401(k)? 11 Source: NIRS Pensions & Retirement Security 2013

Economics of Pensions Pensions are unique in that they: Avoid the problem of “over-saving” by pooling the longevity risks of large numbers of individuals – resulting in a 15% cost savings. Are ageless and therefore can perpetually maintain an optimally balanced investment portfolio rather than the typical individual strategy of down-shifting over time to a lower risk/return asset allocation – resulting in a 5% cost savings. Achieve higher investment returns as compared to individual investors because of professional asset management and lower fees – resulting in a 26% cost savings. 12

Economics of Pensions Economies of scale enable group pensions to provide same retirement benefit at half the cost of individual 401(k)-type account. DB pensions cost 46% less than DC accounts for the same benefit. Conversely, DC system costs 83% more than DB system. Source: NIRS, Better Bang for the Buck,

What About Public Pensions? Source: Center for Retirement Research at Boston College (data not provided for 1995, 1997, 1999) Strong Position Going Into Financial Crisis Aggregate State and Local Pension Funding Levels Assets as a Share of Trust Fund Liabilities (percent) 14

NIRS “On The Right Track?” Recent Reforms Closing a DB pension can incur unfunded liability growth and large transition costs. Substituting DB pensions with DC accounts is inefficient. Most states have pursued changes to DB plans to make them more sustainable. 15

Aggressive Reforms In Virtually All States to Ensure Sustainability of Public Pensions Source: Author’s analysis of NCSL data. Changes affect some or all members of state-run plans in each state. Types of Changes Enacted 16

States Adjusted DB Plans Rather Than Wholesale Switch to DC Plans Types of Changes to New Hire Benefits Source: Author’s analysis of NCSL data. Changes affect some or all members of state-run plans in each state. 17

Example 1: Minnesota Statewide Retirement Systems Medium term cost decrease; dramatic short term cost increase. Long term: DC plan less efficient than existing DB in cost-benefit terms $2.8B transition cost, mostly from accelerated amortization of unfunded liabilities 18

Example 2: Texas Teachers Retirement System Study $11.7 billion/49% increase in closed DB plan liability due to a more liquid asset allocation Cost comparison of multiple plan design options –DC most expensive –DB least expensive 19

Simulations to realistically measure probable outcomes for workers in DC system: –lower returns –higher fees –market volatility Workers would have only a 50% chance of reaching 60% of the benefit provided by the DB plan, at the same cost. Example 2 (continued): Texas Teachers Retirement System Study 20

Recent Reforms Projected to Work Boston College Center for Retirement Research: For most plans, reforms “fully offset or more than offset the impact of the financial crisis on the sponsors’ costs.” Normal cost for employer will be halved, from 8.2% to 4.5% of payroll. Pension costs as a share of state-local budgets will fall below pre-crisis levels over long run. Munnell et al., Feb

Strong Support for Public Pensions Because Employees Pay To what extent do you agree/disagree that state/local employees deserve benefits because they finance cost by contributing from every paycheck? 22 Source: NIRS Pensions & Retirement Security 2013

American Believe Public Pension Benefits Levels Just Right The average retirement benefit for public workers is $2150/month. Some may be more or less. Is that too high, low, about right? 23 Source: NIRS Pensions & Retirement Security 2013

Police/Fire Deserve Pensions to Compensate for Risk To what extent do you agree/disagree that police/fire have agreed to take jobs that involve risk and therefore deserve pensions that will afford a secure retirement? 24 Source: NIRS Pensions & Retirement Security 2013

Teachers Deserve Pensions to Compensate for Pay To what extent do you agree/disagree that public school teachers deserve pension to compensate for lower pay? 25 Source: NIRS Pensions & Retirement Security 2013

Americans Want Pensions for All To what extent do you agree/disagree that all workers, not just those employed by state/local governments, should have a pension? 26 Source: NIRS Pensions & Retirement Security 2013

Retirement Needs Reform (89%) To what extent do you agree/disagree that the retirement system in this country is under stress and needs reform? 27 Source: NIRS Pensions & Retirement Security 2013

What do Americans think about at “new” pension system for all? Suppose Congress were considering a bill that would provide all workers access to a new type of privately-run pension plan. All Americans could participate and make contributions along with their employer. Like a traditional pension, the money would be professionally managed. At retirement, those who participate would get a check every month for as long as they live. But unlike a traditional pension, the benefits would be portable so that people can take their money with them as they change jobs. This retirement plan would also be easy for employers, because they wouldn’t be responsible for administering the funds or managing the money. Those tasks would all be handled by an independent board of trustees. Employers would just have to enroll their employees and make sure that their contributions go into the plan. Is this a good idea? 28

Strong Support for “New” Pension System for all Americans 29 Source: NIRS Pensions & Retirement Security 2013

High Appeal: Portable, Monthly Income, Available to All How appealing are each of the following aspects of this plan? 30 Source: NIRS Pensions & Retirement Security 2013

Economic Imperative for Retirement Security To what degree do you agree/disagree that increasing numbers of Baby Boomers retiring without pensions & inadequate savings is putting stress on families and the economy? 31 Source: NIRS Pensions & Retirement Security 2013

Pensions Ensure Self-Reliance To what extent do you agree/disagree that all workers should have a pension to be self-reliant, independent in retirement? 32 Source: NIRS Pensions & Retirement Security 2013

Washington Must Give Retirement Higher Priority To what extent do you agree/disagree that leaders in Washington need to give a higher priority to ensuring more Americans can have a secure retirement? 33 Source: NIRS Pensions & Retirement Security 2013

Key Take-Aways Quiet Crisis – most Americans not prepared to be self-sufficient in retirement retirement. High cost for retirement insecurity – for individuals, families, public assistance, broader economy. Americans see pensions as solution to relieve high retirement anxiety. Public pensions recovering from impacts of financial crisis, continuing pensions.

Questions? Diane Oakley NIRS Executive Director