1. Workforce Planning: Aging and Employment Module 7: Economic Uncertainty Barbara McIntosh, Ph.D.

2. Economic Uncertainty: Overview Reasons for working rest on economic uncertainty. Traditional sources of income in retirement:  Pensions.  Retirement savings.  Social Security. Total income of older Americans. Key cause of uncertainty – health care costs. How much money is needed in retirement?

3. Reasons to Work (AARP, 2002) Need the money:76% Enjoy the job/enjoy working:76% Being productive is a way I can help others:68% To save for retirement:67% It makes me feel useful: 66% Need to maintain health insurance coverage: 65% People have an obligation to work if they can:59% Need to pay health costs for self and family: 56% Pension requirements/qualify for pension: 49% To qualify for Social Security: 48% Need to support other family members:46%

4. Employment Driver: Economic Uncertainty Major questions:  How long am I going to live?  How long am I going to remain healthy?  Is health care going to be affordable? - Shortages of providers - Increasing costs  How much will cost of living increase?  Can I depend on my family/others?  Is my family going to depend on me (sandwich generation)?

5. Economic Uncertainty Income in the Retirement Years The Three-Legged Stool of Supported Retirement –Pensions –Savings –Social Security

6. Pensions Shift in form: defined benefit to defined contribution > Employer: accountability issue > Employee: short time to take advantage of compound interest Importance to the individual: > 20 percent of total wealth of middle-income households > Few workers are covered by pension plans > More important for higher-income workers > All workers need more than Social Security

7. Pensions: Employers’ Concerns Employers still offering defined benefit, but employer liability is a major concern. At risk for employee: Underfunding. New recruiting tool: Aerospace.

8. Current Employer Reactions to Defined Contribution Plans IBM started automatic enrollment after it closed its cash-balance plan in 2005. They offer a 6 percent company match. A 2005 Hewitt report found that 59 percent of plan sponsors elected automatic enrollment in defined contribution plans. Concerns: > Paternalistic. > Firms choose funds (IBM is very conservative-- won’t outpace inflation).

9. Reversing the Benefit Trend? Aerospace Corp.: > Brought back defined benefit plans in order to recruit and retain highly qualified talent (Ph.D.- level scientists and engineers). > Turnover was higher than acceptable before retirement plan change: - Defined Benefit = Golden Handcuffs - Full benefits at 65 (not 62). > Firm also uses a phased retirement plan and flexible scheduling.

10. Retirement Savings Savings Accounts: More than one-third of American households have no retirement savings. Median balance of those with accounts is $27,000. This includes IRA, Keogh and 401(k) accounts. Investments: Housing, real estate. Stock market. BOTTOM LINE: Individuals may need to work longer for financial reasons.

11. Poor Track Record Increased credit card debt among those aged 65-69: > 1992: $1,800 > 2002: $5,884 Number of bankruptcy filers over age 65: > 1991: 23,890 > 2001: 82,207 Source: AARP, 2002

12. Start Saving Early: Example $5,000 engagement ring at age 25: > Penalty if withdrawing from 401(k). > Must take out $7,142 to clear $5,000. At age 60: opportunity cost? > The ring reduced retirement security by $76,252 (based on a 7 percent annual rate of return). > The ring reduced retirement security by more than $200,000 (based on a 10 percent annual rate of return).

13. Social Security As income source: 100 percent of income for 20 percent of older Americans. More than 90 percent of income for 33 percent of older Americans. More than 50 percent of income for 65 percent of older Americans. Income redistribution: > Poverty. > Income replacement. Low-income earners vs. high-income earners. Gender. Occupational differences.

14. Social Security Pressures for change: > Ratio of workers per beneficiary: 1960: 5.1 workers per beneficiary. 2004: 3.3 workers per beneficiary. 2031: 2.1 workers per beneficiary. > Financial sustainability: In 2018: dip into trust. In 2042: system is broken. > Support: 55 percent want the system fixed now; 35 percent do not (results of a March 2005 poll).

15. Income Sources for the Aged 90 percent:Social Security benefits 50 percent+:Asset income 40 percent:Retirement benefits other than SS 20 percent:Have earnings/savings 5 percent:Public assistance 4 percent:Veteran’s benefits Source: Income of the Aged Chart Book (2002). Social Security Administration.

16. Total Money Income of Older Americans Median = $18,938 (2002). 21 percent have income under $10,000. 18 percent have income between $10,000-$14,999. 13 percent have income between $15,000-$19,999. More than 50 percent have income less than $20,000. 15 percent have income of $50,000 or more. Source: Income of the Aged Chart Book (2002). Social Security Administration.

17. Financial Uncertainty Key to Working Longer

18. Health Care Benefits: Elephant in the Living Room Private plans: > Cost increases by double-digits each year. > Increased premiums. > Reduced coverage, or employers drop coverage. Medicare (a hospital insurance trust fund which pays for inpatient hospital care for those over age 65): > Funds will be exhausted in 2019. > Drug benefit costs are skyrocketing.

19. Real Costs Approximately 30 percent of Social Security income went to Medicare costs in 2007. For 30-year-olds, half of Social Security benefits will go to Medicare. For children born this year, all Social Security benefits will be needed to pay for health care costs.

20. How Much Is Needed? 66 percent of retirees said their expenses either went up or stayed the same in retirement. 50 percent of the retirees were expecting their expenses to decline in retirement. 55 percent of retirees reported that they stopped working earlier than they'd planned. 25 percent of those who were pushed into early retirement stopped working because of poor health or disability. Source: Orman, S. Retirement news is mixed, Detroit Free Press.com, October 22, 2007.

21. How Much Is Needed? Family support needs in expected retirement years: > Later childbearing years means later college expenses. > Parents living longer may mean long-term care support of them. Lifestyle? Retirement plans? RISK! Sources of income? Personal health care? Family responsibilities? Increasing costs and lifestyle?

22. How Much Is Needed? How much is enough? Consider expense profile. $1 million doesn’t go as far. $1 million in 1957 = $7.3 million today (Federal Reserve). 99 percent of Americans don’t have $1 million.

23. Challenges: Some Examples Primarily in areas of health and benefits. Flexibility in hours: non-discriminatory given Fair Labor Standards Act. Innovative non-discriminatory practices and policies in multigenerational workplaces. Alternative approaches to employment transitions for aging workers: > Lifelong learning accounts. > Private/public collaborative/exchange programs.

24. Economic Uncertainty: Summary Reasons for working rest on economic uncertainty. Traditional sources of income in retirement: > Pensions. > Retirement savings. > Social Security. Total money income of older Americans. Key cause of uncertainty: health care costs. How much money is needed in retirement?