The Four Pillarsof Retirement Security
Social SecuritySocial SecurityPensions & SavingsPensions & Savings
EarningsEarningsHealth InsuranceHealth Insurance
Who gets benefits?
63%
13.5%
5.5%
18%
Social Security
Disabled Workers
Retired Workers
Spouses
Survivors[widow(er)s, children]& children ofRetired/Disabled Workers-
Sou
rce:
Jan
200
6 M
onth
ly B
enef
its S
tats
SS
A
How much is the average Social Security benefit?
Retired worker $1004
Retired spouse $ 500
Widowed mother/father $ 714
Surviving child $ 658
Widow(er) of retired worker $ 950
Disabled worker $ 938
Sou
rce:
Jan
200
6 M
onth
ly B
enef
its S
tats
SS
A
Social Security: MAIN retirement income for 4/5 of economic brackets
0%
20%
40%
60%
80%
100%
Lowest 1/5 Second 1/5 Middle 1/5 Fourth 1/5 Highest 1/5
Social Security
Pensions/Annuities
Public AssistanceAssets
Misc. Other
Wages
Sour
ce: M
arch
200
4 C
urre
nt P
opul
atio
n su
rvey
Perc
ent o
f ret
irem
ent i
ncom
efro
m a
ll so
urce
s
Key measure of adequacy: “Income Replacement Rate”
Current Social Security benefit formula ensures lower-wage workers receive a higher replacement relative to their earnings
• 57% low-wage workers• 42% average-wage workers• 35% high-wage workers• 24.8% consistent max-taxable wages
Center for Retirement Research, November 2005, Munnell, “Just the Facts on Retirement Issues”
African-American and Hispanic Workers
Minorities make up a disproportionate segment of low and moderate wage earners
Social Security benefit formula ensures all lower-wage workers receive a higher replacement relative to their earnings
Women’s Equity Issues
Women more than men concentrated in low-wage workMedian weekly salary = $585 vs $722 for men (81%)Over half of beneficiaries are womenFor 1 in 4 unmarried women, sole source
of income is Social SecurityWomen live longer after age 65: 3 more yearsCOLA crucial to well-being of longest livedWomen (and men) get the higher of:
• Spousal benefit• Or, own work earnings
Source: 2005 Full-time Wage and Salary Workers
0
2000
4000
6000
8000
10000
Male Female Male Female
Single
Divorced
Widowed
Married
Source: Table 51, Statistical Abstract of the United States 2003, U.S. Census Bureau
Age 65-74 Age 75+
Marital StatusBy Age and Sex, United States 2003
Num
ber o
f peo
ple
(thou
sand
s)Most women widowed by 75+
Women compared to Men
*Source: Institute for Women’s Policy Research for 2004
**Source: Center for Retirement Research, Why Are So Many Older Women Poor?, by Alicia H. Munnell, April 2004
***Source: Preliminary figures for 2003 – National Center for Health Statistics - CDC
Men WomenMedian earnings of year-round full-time workers*
$40,798 $31,223
Median years of covr’d emplymt by workers retiring**
44 32
Life expectancy at age 65*** 16.8 19.8
Poor & Near Poor, 2001(within 150% of Poverty)
60-64 15% 20%65-74 17% 24%75+ 20% 33%
% Male % Female
Source: U.S. Census Bureau, Current Population Survey 2004
Poverty Status
Age
Social Security: Cash Flow
Estimated OASDI and Cost Rates, 2001-50[as a % of taxable payroll]
8
9
10
11
12
13
14
15
16
17
18
19
2001 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Perc
ent o
f Tax
able
Pay
roll
2018
Social Security: Projected Trust Fund Assets
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
2001 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Year
Bill
ions
of D
olla
rs
Assets at end of year,including interest
2042
2028
We are here
in current dollars
CBO/SSA Projections of Trust Fund Assets Compared
0
1
2
3
4
5
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2015
2020
2025
2030
2035
2040
2041
2042
2045
2046
2047
2048
2049
2050
2051
2052
2053
2054
2055
2042 2052
Trus
t Fun
d R
atio Congressional
Budget OfficeSocial Security
Trustees
Numbers as a ratio of balance to outlays
Implications of CBO Projections
• Long-term problem looks only half as big• Short-term cash flow the same• More modest changes would be sufficient
Options to StrengthenSocial Security
POLICY OPTIONS %(Shown on the next two slides)
Percent by which option would reduce
the 75-year actuarial deficit
Raise payroll tax ½ percentage point 24%Include newly-hired State/Local workers 9%Raise max. wages subject to Soc Sec tax 43%Gradually raise age of full benefit to 70 38%Increase calculation period to 38 years 16%
. . . continued on next slide
Options to StrengthenSocial Security
More Options to Strengthen Social Security
Index benefits for “average longevity” 25%Reduce benefits for new retirees (5%) 26%Diversify 15% of Trust Fund investments 15%Slightly lower the COLA calculation 14%Raise the earliest eligibility age from 62 10%
Private Accounts
Shift risk to the individual
Require deep cuts in future benefits
Necessitate added government borrowing for transition; interest obligations increased for taxpayers
Expensive to administer, fees would reduce earnings
The Other Pillarsof Retirement Security
Pensions & SavingsPensions & SavingsEarningsEarnings
Health InsuranceHealth Insurance
Source: Surveys of Consumers; analysis by AARP Public Policy Institute 2004.
Scor
e
6757
6277
63
8174
52
70
46
5955
0
25
50
75
100
OverallScore
Other Credit Savings Investment Mortgage
All AgesAge 65+
Consumers Age 65+ score even Lower than General Population onFinancial Knowledge Tests
Source: Surveys of Consumers- uses Federal Reserve Board types of money managers; analyses by AARP Public Policy Institute, 2004.
Types of Money Managers
HIGH financial product ownershipHIGH in prudent financial behaviorVery Good
LOW financial product ownershipHIGH in prudent financial behavior
LOW financial product ownershipLOW in prudent financial behavior
HIGH financial product ownershipLOW in prudent financial behavior
Good
Bad
“Lost”
Source: Surveys of Consumers; analysis by AARP Public Policy Institute 2004.
13%
19%23%
30%18%
48%38%
11%
0%
25%
50%
75%
100%
All Ages Age 65+
Very Good
Good
Bad
Lost
Consumers Age 65+:
More Likely to be “Lost” Money Managers
Factors that Increase Difficulty of Information Gathering and Financial Management for ALL Today’s Consumers
Time pressures
Working more
Increased individual responsibility
More decisions/choices
Complexity of products and services
Pricing not clear
Difficult to comparison shop
Low levels of financial literacy
Financial Disclosures
Fail to provide complete information on costs
Do not make consumer aware of seller compensation arrangements
Not provided in a timely fashion
SimplicityPlain English, no legalese,lay termsClarification of financial terms, definitionsPreferably 1 pageLarger font size, more white space (esp. around fees)Glossary800 # for assistanceColor coding who gets $Standardization for comparison shopping
What Consumers Want
Clarity in FeesTotal feesDifferentiate between mutual fund fees, broker fees, others Charts, tablesExamples, numericAnnual costsHow much money brokers may receive as incentiveInformation on difference between back-end & upfront charges
Source: A Public Assessment of the Proposed Mutual Fund Disclosure forms. AARP 2004.
Defined-Benefit PensionsDisappearing
0%
10%
20%
30%
40%
50%
60%
70%
1981 1991 2001
Defined Benefit Only
Defined Contribution Only
Source: Alicia H. Munnell, Kevin E. Cahill, and Natalia A. Jivan, An Issue In Brief, Number 13, Center for Retirement Research at Boston College, September 2003.
% of Wage & Salary Workers Covered by Plan Type, 1981-2001
United Airlines (parent UAL Corp.)International Business Machines Corp (IBM) Verizon Communications Inc.Hewlett-Packard Co.Sprint Nextel Corp.Tribune Co.Lexmark International Inc.Alcoa Inc.Russell Corp.
All have terminated or frozen traditional pensionsor announced plans to do so.
As of September, 2005, 627 of Fortune 1000 companies sponsored traditional pensions, and of those, 115 have been terminated, frozen or closed to new workers.
Source: Benefits consulting firm Watson Wyatt Worldwide Inc.,
What do these companieshave in common?
Half of workers have no access to pension plans, defined benefit or defined contribution
Even for those who do have 401(k)-type plans, balances are low, and withdrawals before retirement are common
How widespread are pensions?
Labor Force participationcontinues to rise for older workers
43.0%
30.2% 29.8% 29.5% 30.1% 30.0% 30.3% 30.9% 31.3% 31.8% 32.3% 33.1% 34.5% 35.7% 36.2%
29.70%
0%
10%
20%
30%
40%
50%
1950 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: U.S. Bureau of Labor Statistics, Handbook of Labor Statistics, 1985; Employment and Earnings, January issues, 1986-2005
Labor Force Participation Rates, Age 55+ 1950 and 1990-2004
26.7%
11.9% 11.6% 11.3% 12.4% 12.1% 12.1% 12.2% 11.9% 12.3% 12.8% 13.1% 13.3% 14.0% 14.4%11.6%
0%
10%
20%
30%
40%
50%
1950 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: U.S. Bureau of Labor Statistics, Handbook of Labor Statistics, 1985; Employment and Earnings, January issues, 1986-2005
Labor Force Participation Rates, Age 65+ 1950 and 1990-2004
Labor Force participationup for 65+ also
What do older workers want?
Flexible job optionsPhased retirementRecognition of the worth of older workersHealth care benefits
Most Boomers’ Net Worth Low
Med
ian
Net
Wor
th
Income Quartile
$2,504
$42,866
$229,560
$0
$50,000
$100,000
$150,000
$200,000
$250,000
Low 25% Mid 50% Top 25%
Sou
rce:
Fed
eral
Res
erve
Boa
rd,
Sur
vey
of C
onsu
mer
Fin
ance
s 19
98
Minus home equity Age 50-61
30%
12%
38%
56%
0%
20%
40%
60%
Prime SubprimeType of Loan
45+ more likely to have subprime loans
Source: AARP Mortgage Borrower Survey, 2001.
18-34 18-3445+ 45+
Source: Dēmos’s calculations from Federal Reserve Board Survey of Consumer Finances, 1992 and 2001
$2,608
$4,088
$1,626
$4,041
$ 0
$ 1,000
$ 2,000
$ 3,000
$ 4,000
$ 5,000
1992 2001
Families 55–64
Families 65+
Average Credit Card Debt of Older American Families 1992- 2001
65+credit card debt tripled in a decade
1992 2001
Average Medicare Out-of-Pockettakes 22% of Income
30%24%
33%
22%
29%
0% 10% 20% 30% 40%Percent of Income
Figures are for non-institutionalized Medicare beneficiaries only. “Out-of-Pocket” includes payments for Medicare cost-sharing, Part B & Private insurance premiums, physician balance billing, and goods & services not covered by Medicare. It excludes the cost of home care and long-term nursing home care.
Sourc
e: A
ARP P
ublic
Polic
y In
stitute
pro
ject
ions
usi
ng M
edic
are
Ben
efits
Model
, v5
.306.
Under 135% Poverty
People in “Fair” or “Poor” health
Women
85+ only
ALL 65+
Average Out-of-Pocket Health Care Spending 2003
Four priorities:
Strengthen and protect Social Security
Give all workers a means to save through payroll deduction
Reform health care to keep affordable
Give consumers better decision tools
Empower consumers with new tools & technology
Focus on outcomes that lead to improved money management
Increase financial literacy
Consumer Public Policy Recommendations
Make. . .Product informationLabelingDisclosures
. . .easier to understand& more accurate
(Continued)
Consumer Public Policy Recommendations
Improve information quality
Increase quality & integrity of advice to consumers
Increase consumer product & services evaluation sources
Improve information quality
Consumer Public Policy Recommendations
Strengthen Community Reinvestment Act
Encourage increased basic banking and credit services
Consumer Public Policy Recommendations
Increase options for underservedpopulations and communities
(Continued)
Eliminate predatory financial practices
Increase options for underservedpopulations and communities
Consumer Public Policy Recommendations