Retirement Research: Is There a Retirement Crisis?
Is There a Retirement Crisis? An Exploration of the Current Debate
Many quantitative empirical studies of retirement preparedness find that a substantial number of US households face a potential financial crisis at some point in the future. This monograph provides a critical survey of the most important and best-known of these studies, and it also examines the prospects for other countries.
Studies of retirement preparedness vary in complexity and sophistication, and as a result, researchers offer a wide range of forecasts, with some warning of a severe crisis and others being more skeptical about the likely scale of the problem. This monograph appraises the quality of surveyed studies by determining how well each deals with key conceptual issues and how adequately each addresses principal risks.
Going beyond the circumstances in the United States, the monograph also provides international perspective by comparing the “macro” and institutional aspects of pension and health systems in a group of eight industrialized countries, including the United States.
How Accurate Are Retirees’ Assessments of Their Retirement Risk?
Abstract: Retirees with limited financial resources face numerous risks, including out-living their money (longevity risk), investment losses (market risk), unexpected health expenses (health risk), the unforeseen needs of family members (family risk), and even retirement benefit cuts (policy risk). This study systematically values and ranks the financial impacts of these risks from both the objective and subjective perspectives and then compares them to show the gaps between retirees’ actual risks and their perceptions of the risks in a unified framework. It finds that 1) under the empirical analysis, the greatest risk is longevity risk, followed by health risk; 2) under the subjective analysis, retirees perceive market risk as the highest-ranking risk due to their exaggeration of market volatility; and 3) the longevity risk and health risk are valued less in the subjective ranking than in the objective ranking, because retirees underestimate their life spans and their health costs in late life.
Financial Knowledge Overconfidence and Early Withdrawals from Retirement Accounts
Abstract: Early distributions from retirement accounts could endanger future retirement income security, and the U.S. has restrictions to discourage them, including possible tax penalties. On the other hand, tapping one’s retirement assets may be rational when an individual encounters financial hardship. With the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act), early distribution from retirement accounts became an even more attractive option to individuals. In this study, we examined factors related to individuals’ decision of taking hardship withdrawals and plan loans, focusing on financial knowledge and overconfidence in financial knowledge, using the 2018 National Financial Capability Study dataset. We found evidence that people may be making early withdrawals without understanding possible consequences. Objective financial knowledge was negatively related to hardship withdrawals and plan loans, but the subjective assessment of financial knowledge was positively related to hardship withdrawals. Respondents with financial knowledge overconfidence (high subjective and low objective knowledge) were more likely to take early withdrawals than those with other combinations of objective and subjective knowledge. We discuss implications for public policy and financial education and advice.
Does Working Longer Enhance Old Age?
Abstract: Understanding the link between retirement and health is crucial for both improving people's wellbeing and for designing optimal public policy around retirement. Yet, to date, the economics literature has been inconclusive about whether retirement causes improvements or deterioration in health. The lack of consensus is likely driven by differences in study design, population, and the age of workers and set of health outcomes studied. In this paper, the author explains and distills the literature, highlight patterns in the highest-quality studies, and discuss the implications of the findings for longevity risk management and worker and retiree health going forward.
CARES Act: Implications for Retirement Security of American Workers
Abstract: Many provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act were designed to provide relief to those American workers who do not have sufficient emergency savings to weather the current storm. These include increasing defined contribution plan loan limits to the greater of $100,000 or 100 percent of the vested account balance; suspending loan payments due on or before December 31, 2020, and deferring loan payments for up to one year; allowing distributions until December 31, 2020, of the lesser of 100 percent of the vested account balance or $100,000; and allowing repayment of coronavirus-related distributions (CRDs) over a three-year period. The question, however, is as follows: What is the cost of effectively using defined contribution plans as emergency savings vehicles in this way when it comes to the future retirement security of American workers? Using the Employee Benefit Research Institute’s (EBRI’s) Retirement Security Projection Model® (RSPM), we simulate the impact on retirement balances as a multiple of pay at age 65 for scenarios where employees take full advantage of the CARES Act flexibility to access their defined contribution plan. We generally find:
• There are limited reductions in projected retirement balances as a multiple of pay at age 65 in scenarios where employees pay back CRDs within the prescribed three-year timeframe or take new loans — even when workers reduce future contributions dollar for dollar in order to repay those loans.
• However, we see potentially significant reductions in retirement balances as a multiple of pay at age 65 when employees take full CRDs and fail to pay them back. This is especially true for older age cohorts.
• The most catstrophic scenario is one in which workers are provided CARES-Act-like access to withdrawals time and again as various crises occur. In other words, this is a scenario in which policymakers essentially turn defined contribution plans into de facto emergency savings vehicles. In this scenario, the overall median reduction in retirement balances as a multiple of pay at age 65 is 54 percent.
• Still, further analysis is warranted. In our preliminary analysis of potential actual aggregate utilization of CARES Act provisions based on employer responses to a Plan Sponsor Council of America (PSCA) survey, we find that reductions were very small. Even in the scenario in which employees fail to pay back CRDs, the aggregate impact — because of low estimated actual implementation and utilization of CARES Act provisions — is estimated to be less than one-half a percent.
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