This single act would help many Americans reach retirement savings goals

It’s true for everyone: despite our best intentions, we often fail to accomplish what we set out to do. When it comes to retirement investing, millions of Americans do not meet their own declared saving goals for retirement.

As a result, almost one-third of the U.S. population has no retirement savings at all, while many others will fall well short of what they will need for their Golden Years.

A solution can be found in the field of behavioral economics, which suggests ways to help Americans start saving. It seems that saving is a lot like dieting — small changes can help you reach your goal.

Read the rest at marketwatch.com…

State Programs to Solve the U.S.’s Retirement Crisis [Real Clear Markets]

The U.S. is facing a retirement crisis. About one third of Americans have no retirement savings, and most don’t have enough savings to retire comfortably. One main cause of this financial shortfall: more than 60 million American workers have no retirement plan offered to them by their employer.

The U.S. Department of Labor (DOL) recently issued a rule proposal intended to encourage more employers to offer a retirement plan to their workers. Specifically, the DOL proposed to exempt from ERISA, the federal pension law, state-sponsored plans for individual retirement accounts (IRAs). These state plans would require employers that do not already offer any retirement program to forward to the plan a state-specified percentage of their workers’ salaries. These monies would be invested as retirement savings, unless workers opted out of this state-sponsored plan.

The DOL proposal is an understandable response to the failure of Congress to pass federal legislation for a similar program called the Automatic IRA — with regular contributions from workers without retirement plans unless they opted out. However, the DOL proposal gives too much leeway to the states in offering their own versions of the Automatic IRA.

Here is the background to the DOL proposal. Most employers without retirement plans run small businesses with fewer than 100 workers. These employers do not want the financial burdens of operating and contributing to a retirement plan.

Read the rest at realclearmarkets.com…

Congress’ bipartisan Christmas gifts will lead to ballooning deficits [The Conversation]

Christmas came early for Congress this year as politicians from both sides of the aisle came together to pass – by wide margins – a US$1.8 trillion package of tax cuts and new spending.

At year end, Washington seemed awash in a spirit of holiday cooperationwith the president praising new Speaker Paul Ryan. But does the bipartisan approval of the budget deal really mean that Democrats and Republicans have learned to play together nicely in the Congressional sandbox?

Definitely not.

This legislative package was adopted with little rancor because both parties agreed to lift existing caps on discretionary spending and to cut taxes without trying to raise offsetting revenues. So both sides got most of their desired list of Christmas presents – increases in defense and domestic spending plus expanded tax incentives for businesses and individuals.

The big losers were future taxpayers who will have to shoulder the burden of higher interest payments. As the size of the national debt balloons and the rate of interest gets back to normal levels, these payments will consume more of the annual budget and leave less room for spending on defense as well as domestic programs (except for entitlements such as Social Security and Medicare).

Even before this year-end legislation, the national debt was already huge relative to the size of the US economy. While declining annual budget deficits in the last few years have created the impression of fiscal responsibility, the U.S. national debt has more than doubled over the last decade.

Read the rest at the conversation.com…

Bob Pozen Knows Retirement [Retirement Income Journal]

Few people in the financial services industry have been more productive and influential than Bob C. Pozen. The 69-year-old Harvard-and-Yale-educated lawyer has served as president of Fidelity Investments, as chairman of MFS Investments, as a presidential adviser and SEC official, as a lecturer at MIT and as a research fellow at the Brookings Institution. He has written books on topics both macro (the mutual fund business, the Global Financial Crisis) and micro (personal time management).

Back in October, Pozen moderated a panel on Innovative Retirement Products at the 2015 Fall Journal of Investment Management conference on retirement at the MIT Sloan School of Management. The panelists included Peggy MacDonald of Prudential Financial’s pension risk transfer business and Tom Reid of Sun Life Financial of Canada.

During the panel discussion, Pozen spoke favorably about the usefulness of annuities in mitigating longevity risk. In a recent phone conversation with RIJ, he expanded on some of his views regarding retirement.

Read the rest at retirementincomejournal.com…

Retiree health care a budget buster [Boston Herald]

Like most American cities, Boston has promised to pay most of the health care premiums for its employees after they retire — which can be as early as age 45 or 50. Boston also subsidizes the Medicare premiums of its retired employees after age 65.

As a result, Boston reported an unfunded liability for retiree health care in 2013 of over $2 billion (that is a B!). This equated to a liability of over $3,000 per city resident — the fifth highest per capita of large American cities. And these figures did NOT include Boston’s share of another almost $2 billion in unfunded health care liabilities
for retired employees from the MBTA.

The good news. In fiscal 2014, Boston contributed $154 million toward retiree health care — more than 10 percent of its total payroll (including schools) for that year. This sum covered its current benefit premiums plus $40 million to help pre-fund its future liabilities for retiree health care. Moreover, Boston committed to keep contributing current benefit premiums plus $40 million to pre-fund such future liabilities.

The bad news. Boston is using two overly optimistic assumptions in estimating what it would take to address its future costs for retiree health care.

Boston is assuming that it can meet its commitment by making large payments out of each year’s budget despite more retirees and rising premiums. This works out to be an average increase of 4.5 percent per year according to Stanford professor Josh Rauh. Can Boston really devote $400 million out of its 2035 budget to retiree health care given competing priorities like police and schools?

Read the rest at bostonherald.com…

China’s pension problems will not be solved by more children [Financial Times]

On October 29, China adopted a policy of two children per family, instead of one. This change is, in large part, intended to mitigate the adverse demographic trend plaguing China’s social security system: the rapidly declining ratio of active to retired workers. The ratio is falling from over 6:1 in 2000 to under 2:1 in 2050.

However, the new two-child policy is not likely to have a big impact on the worker-retiree ratio, so China’s retirement system will remain under stress. To sustain social security, China needs to implement other reforms — moving from a local to a national system and expanding the permissible investments for Chinese pensions.

The one-child policy always had exceptions, such as for rural and ethnic communities. These exceptions were broadened in 2013 to cover couples where both were only children. Yet the birth rate did not take off.

Why? A combination of rising levels of urbanisation and housing costs, more education and jobs for women, and rapidly increasing expenses for child rearing. These factors have driven fertility rates down in other south-east Asian countries, such as Singapore and South Korea, without any government restrictions on family size.

Read the rest at ft.com…

Self-Funding of Health-Care Plans by Small Firms: Risks and Reforms [Risk Management and Insurance Review]

Small employers that offer health insurance have usually offered fully insured products through traditional health plans. Recently, the Patient Protection and Affordable Care Act (ACA) has created new requirements for fully insured products that will entice more small firms to fund their own health-care benefits. However, self-funding poses significant risks to these small firms, their employees, and state exchanges. To mitigate some of these risks within current political realities, we recommend advance disclosures—to small firms of material changes in their stop-loss policies, and to their employees that premium subsidies are available only on ACA exchanges. We also suggest strengthening Small Business Health Options Program exchanges by broadening the availability of subsidies and building partnerships with brokers. Finally, we recommend an expanded role for brokers and third-party administrators in helping small firms improve their choice of health-care insurance.

Read the rest in the Risk Management and Insurance Review

Relief for Cities’ Budget-Busting Health-Care Costs [Wall Street Journal]

Co-authored with Joshua Rauh

The budgets of many cities and states will soon be disrupted by new accounting rules for retiree health plans. Local governments pay most of the health-insurance premiums for their retired employees—for example, from age 50 until Medicare at age 65, and sometimes for life. Nationwide, the total unfunded obligations of these plans are close to $1 trillion, according to a comprehensive recent study in the Journal of Health Economics.

The accounting rules, adopted in June by the Government Accounting Standards Board (GASB), require local governments for the first time to report their obligations for retiree health care as liabilities on their balance sheets. Local governments must also use a reasonable and uniform methodology to calculate the present value of these liabilities. These are both steps forward, enhancing transparency and accountability.

The new rules further provide an incentive for local governments to establish a dedicated trust with assets invested today to help pay health-care benefits in the future. But here the GASB takes one step backward, by allowing local governments to make overly optimistic assumptions, including excessive returns for the trust.

Read the rest at wsj.com…