Risk Pooling and the Market Crash: Lessons From Canada's Pension Plan

Defined contribution plans are now the nation’s primary private retirement income program and repository of retirement savings. About two thirds of the assets held in such plans are invested in equities, as is the case in the defined benefit plans they largely replaced. Equities can dramatically reduce the cost of providing retirement incomes, given their high expected returns. But, as illustrated by the recent market crash, equities are also risky. The resulting losses (and gains) in retirement income are also distributed very unevenly in the nation’s 401(k)-IRA system. The crash hardly affected the retirement prospects of the young: the bulk of the retirement income they will draw from 401(k)s and IRAs will come from future contributions and future returns. Those at the cusp of retirement, by contrast, are heavily exposed: retirement savings are then at their peak and there is little time to adjust work, saving, and retirement plans in response to the market crash. This concentration of risk is highly troubling, as the 401(k)-IRA system has become the nation’s primary private retirement income program, and has led to calls to reform. The challenge is to capture the higher expected returns equities offer in a way that provides reasonably secure and reliable incomes in retirement. One approach would make individual retirement accounts more secure and reliable through the use of mandates, defaults, guarantees, or risk-sharing arrangements. This brief offers a different approach, examining the Canada Pension Plan (CPP) and how it manages the risk that comes with investing retirement savings in equities...

What Makes Retirees Happier: A Gradual or 'Cold Turkey' Retirement?

This study explores the factors that affect an individual’s happiness while transitioning into retirement. Recent studies highlight gradual retirement as an attractive option to older workers as they approach full retirement. However, it is not clear whether phasing or cold turkey makes for a happier retirement. Using longitudinal data from the Health and Retirement Study, this study explores what shapes the change in happiness between the last wave of full employment and the first wave of full retirement. Results suggest that what really matters is not the type of transition (gradual retirement or cold turkey), but whether people perceive the transition as chosen or forced.happiness; retirement; gradual; phased; control; work; transition; psychological well-being; policy

Privatizing Railroad Retirement

Sass discusses the evolution of the U.S. Railroad Retirement System and whether its ability to invest its assets in private equities offers any lessons for Social Security.https://research.upjohn.org/up_press/1247/thumbnail.jp

Recessions and Older Workers

With the economy sliding ever deeper into recession, questions arise about how older workers are faring and how their fate relative to younger workers compares to the past. The answer to these questions turns out to be a little complicated. Two forces are at work. On the one hand, labor force participation among older workers has been rising since the early 1990s, a reversal of the long-standing trend toward ever-earlier retirement. Participation rates among older workers have even continued to rise during both of the recessions in this decade – a dramatic change from previous experience. On the other hand, the edge that older workers used to have relative to younger workers when it comes to layoffs seems to have disappeared, so the rise in the unemployment rate for older workers in recessions now looks similar to that for younger workers. Of the two forces, the trend growth in labor force participation appears to dominate, which has helped keep the employment rate of older workers from falling during the current recession. This pattern contrasts sharply with the far more typical decline in employment rates for workers under age 55. This brief is organized as follows. The first section discusses the upward trend in the labor force participation of older men. The second section explores why older men may have lost some of their edge with regard to job security. The third section looks at how these two developments – the secular upward trend in labor force participation and the heightened vulnerability to layoffs relative to younger workers – have affected the employment rates of older men in this recession compared to earlier ones. The fourth section concludes.

Employers' (Lack of) Response to the Retirement Income Challenge

Employers have long had a significant impact on workers’ retirement prospects. Aside from Social Security, employer retirement income plans are the most important source of income for the great majority of retirees. How long workers can stay employed also largely depends on employer hiring and retention and retirement decisions. Both of these functions – retirement income support and the separation process – are now in flux given scheduled declines in Social Security replacement rates, the shift from traditional defined benefit pensions to 401(k)-type defined contribution plans, and the decline in career employment relationships. To assess the employers’ response to changes in retirement income support and the work-separation process, the Center for Retirement Research at Boston College conducted a nationally representative survey of 400 employers. The survey was conducted in 2006 and focused on the employers’ response to the prospects of employees in their 50s. As reported in previous Issue in Briefs, the survey found that employers expect: 1) half these employees will lack the resources needed to retire at the organization’s traditional retirement age; 2) one out of four will respond by wanting to stay on the job at least two years past that traditional retirement age; but 3) the employers are lukewarm about creating opportunities for even half of these employees to work longer. Note that the survey was conducted well before the financial crisis; the retirement preparedness of workers has deteriorated since the survey – making potential employer responses all the more important...

Why Are Older Workers At Greater Risk of Displacement?

The conventional wisdom says that older workers are less likely to be displaced than younger workers. While true in the past, the conventional wisdom is no longer true today; the advantage that older workers had has disappeared. This loss of relative job security is troubling. Once displaced, older workers are less likely to be reemployed, have less time to adjust their retirement plans, and are more likely to retire prematurely. Given the contraction of the nation’s retirement income system and rising longevity, these adverse effects make displacement increasingly injurious to older workers. This brief analyzes changes in the displacement of older and prime-age workers since the mid-1990s and the effect of three factors – tenure, educational attainment, and employment in manufacturing – identified as having a significant effect on displacement risk. The results show that all three factors contributed to the rising dislocation risk older workers face and their rising risk vis-à-vis prime-age workers. The brief proceeds as follows. The first section presents the three factors identified in the literature as affecting displacement. The second section reviews the data and methodology used to analyze the effects of these factors on the changing displacement risk of older and prime-age workers. The third section reports the findings, and the fourth section concludes.

Social Security and the Stock Market: How the Pursuit of Market Magic Shapes the System

Munnell and Sass explore whether equities could help solve the woes facing the U.S. retirement income system in general, and the Social Security shortfall in particular. They examine the experiences of three nations that added equities to the investment mix of their retirement systems—the U.K., Australia, and Canada. As these experiences show, while equities promise higher returns than government bonds, how they are implemented—as add-ons, carve-outs, or as trust fund supplements—matters greatly.https://research.upjohn.org/up_press/1010/thumbnail.jp

A Gradual Exit may Not Make for a Happier Retirement?

This study explores the factors that affect an individual’s happiness while transitioning into retirement. Recent studies highlight gradual retirement as an attractive option to older workers as they approach full retirement. However, it is not clear whether phasing or cold turkey makes for a happier retirement. Using longitudinal data from the Health and Retirement Study, this study explores what shapes the change in happiness between the last wave of full employment and the first wave of full retirement. Results suggest that what really matters is not the type of transition (gradual retirement or cold turkey), but whether people perceive the transition as chosen or forced