Whither Retirement Strategies? Discussion of Byrne & Reilly and Fitchner & Seligman papers PENSION RESEARCH COUNCIL 2017 CONFERENCE

Emily Kessler, FSA, Society of Actuaries

04 May 2017

How do you prepare for retirement in a low interest rate environment?• Don’t have the power of compounding: have to take

a lot of risk to get a little return

• Fitchner & Seligman show how households fared post-2008 Financial Crisis

• Byrne & Riley test sensible solutions, including• Save longer/save more/retire later

• Link Social Security claiming to years of work

• Allow partial payments/later claiming ages for Social Security

2

Will these solutions work?

• Solutions assume few market shocks• Structural flaw in the DC system: no cushioning against

market shocks

• If the new normal is working longer, retiring later, saving more, what happens when there’s a market shock?

• Long-term trends of increasing disparity• Some accelerated by great recession/market downturn

of 2008

• Have to think of solutions that will work GIVEN widening disparities

3

Wealth Evolution Among the Retired

For HRS households with a retired person; 2015 dollars ( = 2008 wave)

4

-100,000

0

100,000

200,000

300,000

400,000

500,000

-2 0 2 4 6 8 10 12 14 16 18 20

Average Years Since Retirement

below median

bottom 10-percent

all but top 10 - percent

all but top 1 - percent

75 - percent

25 - percent

-100,000

900,000

1,900,000

2,900,000

3,900,000

4,900,000

5,900,000

6,900,000

7,900,000

8,900,000

-2 0 2 4 6 8 10 12 14 16 18 20

Average Years Since Retirement

top 10 - percent

top 1 - percent

Source: Fitchner & Seligman presentation to Pension Research Council on 4 May 2017; 1 May 2017 draft provided by authors

Loan to Value

For HRS households with a retired person; percentage of home’s worth ( = 2008 wave)

5

Note: it is possible to break out changes in mortgage balances and home values. home values have declined and mortgage values have increased among the bottom 10 percent of the wealth distribution

Source: Fitchner & Seligman presentation to Pension Research Council on 4 May 2017; 1 May 2017 draft provided by authors

10%

20%

30%

40%

50%

60%

70%

80%

90%

-2 0 2 4 6 8 10 12 14 16 18 20Average Years Since Retirement

below median

bottom 10 - percent

75- percent

25- percent

0%

5%

10%

15%

20%

25%

30%

-2 0 2 4 6 8 10 12 14 16 18 20

Average Years Since Retirement

top 10 - percent

top 1 - percent

Widening wealth gap

3.4

Data not available

4.2

3.6 3.6

4.14.4

5.0

4.5

6.26.6

0

1

2

3

4

5

6

7

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Ratio of wealth of upper income households to middle income households

6

Source: http://www.pewresearch.org/fact-tank/2014/12/17/wealth-gap-upper-middle-income/ accessed 19 April 2017. Pew Research Center tabulations of Survey of Consumer Finances public-use data

Widening wealth gap

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000

All families

Lower income

Middle income

Upper income

Only upper income households gained wealth post-2007

2013 2010 2007

7

Widening income gap (Example: PA)

• Study of total employment in Pennsylvania, 2008-14

• Over 190,000 jobs were lost, 2008 - 2009.

• 2010-2014: Job growth in private sector (2010-14).

• Total employment changed (0.3) percent (declined) during 2008-14.

• “Bottom line: Minimal change in total employment during 2008-14 suggests a static, no growth Pennsylvania economy - Great Recession to recovery.”

8

Source: http://aese.psu.edu/research/centers/cecd/publications/market-trends/pennsylvania-great-recession-to-recovery, accessed 19 Apr 2017, page 3

Widening income gap (Example: PA)

40,866

95,233

(68,291)

13,904

(120,000) (90,000) (60,000) (30,000) 0 30,000 60,000 90,000 120,000

Total

Low

Middle

High

Pennsylvania Private Sector Employment Change (Net): By Industry Wage Groups 2008-2014

Total Low Middle High

1.4%

(3.2)%

6.2%

0.9%

9

Source: http://aese.psu.edu/research/centers/cecd/publications/market-trends/pennsylvania-great-recession-to-recovery, accessed 19 Apr 2017, Table 1 & Figure 9

2014 Average Annual Weekly Wage

High $1,293 and over

Medium $651 – $1,292

Low $0 – $650

Widening work experiences near retirement: Employment Status Age 60 – U.S. White Males

10

0%

20%

40%

60%

80%

100%

1960 1970 1980 1990 2000 2010

All Males

Full-time Part-time Retired

0%

20%

40%

60%

80%

100%

1960 1970 1980 1990 2000 2010

Lowest Income Quintile

Full-time Part-time Retired

0%

20%

40%

60%

80%

100%

1960 1970 1980 1990 2000 2010

Highest Income Quintile

Full-time Part-time Retired

Source: Gordodnichenko, Y. et al “Macroeconomic Determinants of Retirement Timing,” 2013, Institute for the Study of Labor (IZA), Bonn, Germany. Data estimated from Figure 2 graphs.

Widening life expectancy

11

CAVEAT: Proportion of population with high school diploma or greater has significantly increased over this period.

-2

-1

0

1

2

3

4

5

6

7

All education levels less than HighSchool

High SchoolDiploma

College graduate orgreater

Change in Male Age 65 Life Expectancy – 1990 to 2008

Non-Hispanic White

Black

Hispanic

Source: Olshansky, J et al, “Differences In Life Expectancy Due To Race And Educational Differences Are Widening, And Many May Not Catch Up” Health Affairs, August 2012 vol. 31,no. 8 1803-1813, accessed 20 April 2017 at http://content.healthaffairs.org/content/31/8/1803.full; Exhibit A10 data

12

Source: The Health Inequality Project, https://healthinequality.org/

Life expectancy income gap“The Health Inequality Project”

Women

Men

Women, Bottom 1%: 78.8Women, Top 1%: 88.9

Men, Bottom 1%: 72.7

Men, Top 1%: 87.3

70

75

80

85

90

0 20 40 60 80 100Household Income Percentile

Expected Age at Death vs. Household Income

Percentile - By Gender at Age 40

Expecte

d A

ge a

t D

eath

for

40 Y

ear

Old

s in Y

ears

(Maybe) Widening savings behavior

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ratio of average employee-effective deferral rate by income to average overall deferral rate

<30,000 30,000 - 49,999 50,000 - 74,999 75,000 - 99,999 100,000+

13

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Average deferral rate 7.3 7.3 7.0 6.8 6.9 6.9 6.9 7.0 6.8 6.8

Source: https://pressroom.vanguard.com/nonindexed/HAS2016_Final.pdf accessed 19 April 2017, Figure 33

So what does this have to do with low interest rates?• Solutions to work longer/save more/delay claiming

Social Security don’t work for well for populations who• Are losing access to well paying jobs

• Are starting from a lower level of employment (have already lost access to jobs)

• Have not seen life expectancy gains of more well-educated peers

• Have not recovered lost wealth from great recession

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Get more creative

• Better leverage Social Security • Allow partial claiming

• Increase progressivity

• Widen early retirement reductions to account for widening life expectancy • By benefit size or average lifetime income

• Leverage annuitization (preferably group) • Cut annuitization costs by accounting for substandard

mortality, writing simple life annuities

15

Caveat: Acknowledging difficulty of realization of some of these ideas

Thank you