1. Workforce Planning: Aging and Employment Module 7: Economic Uncertainty Barbara McIntosh, Ph.D., SPHR 2010

2. Economic Uncertainty: Overview Reasons for working rest on economic uncertainty Traditional sources of income in retirement: > Pensions > Retirement savings > Social Security Total money income of older Americans Key cause of uncertainty–health care costs How much money is needed in retirement? ©SHRM 2010 2

3. Specific Reasons to Work (AARP, 2007) Need the money 76% Enjoy the job/enjoy working 70% To save for retirement 64% Need to maintain health insurance coverage 61% Need to pay for health costs for self and family 56% It makes me feel useful 52% Need to support other family members 46% To qualify for Social Security 42% To fulfill pension requirements/qualify for pension 41% Source: www.aarp.org/research/surveys/stats/surveys/public/articles/2007_Staying _Ahead_of_the_Curve.html ©SHRM 2010 3

4. Employment Driver:: Economic Uncertainty Major questions: How long am I going to live? How long am I going to remain healthy? Is health care going to be affordable? > Shortages of providers > Increasing costs Can I afford old age in general? What about cost-of-living increases? Can I depend on my family/others? Is my family going to depend on me? (sandwich generation) ©SHRM 2010 4

5. Economic Uncertainty Income in the Retirement Years? The three-legged stool supported retirement: > Pensions > Savings > Social Security ©SHRM 2010 5

6. Pensions Shift from defined benefit to defined contribution > Employer: accountability issue > Employee: short time to take advantage of compound interest Importance to the individual? > Pensions are not a major source of income for the majority of older persons > Shrinking numbers of workers are covered by pension plans > More important for higher-income workers ©SHRM 2010 6

7. Pensions: Employers’ Concerns Employers still offering defined benefit, BUT employer liability is a major concern Pensions are at risk of underfunding ©SHRM 2010 7

8. Reversing the Benefit Trend? New Recruiting Tool Aerospace Corp.: > Needed to bring back defined benefit plans in order to recruit and retain highly qualified talent (Ph.D.- level scientists and engineers) > Turnover was higher than acceptable before retirement plan change Defined-benefit = golden handcuffs Full benefits at 65 (not 62) > Firm also uses: phased retirement plan, flexible scheduling Source: Marquez, J. (2008). The New Old Benefit. Workforce Management. Retrieved from www.workforce.com/section/02/feature/25/57/88/index.html ©SHRM 2010 8

9. Retirement Savings Savings Accounts: 1/3 + of American households have NO retirement savings (63% of low-income workers. (GAO Nov. 2007)) Median balance of those with accounts is $27,000. Includes: > IRA > Keogh > 401(k) Risky behavior–withdrawing funds with job loss Shrinking Investments: > Housing/real estate > Stock market BOTTOM LINE: Individuals may need to work longer for financial reasons ©SHRM 2010 9

10. Poor Savings Track Record The number of families with a head of household aged 55+ with housing debt has been increasing: > 1992: 24% > 2007: 40%median = $79,000 Increased credit card debt among pre-retirees (55+) > 1992: 37% of all households > 2007: 50% of all households Source: MacDonald, J. (2009 ) How Housing, Credit Card Debt Have Changed Over Time. Employee Benefit Research Institute. #139. ©SHRM 2010 10

11. Start Saving Early: Example $5,000 engagement ring at age 25 > penalty if withdrawing from 401(k) > must take out $7,142 to clear $5,000 At age 60: opportunity cost? > ring reduced retirement security by $76,252 if 7% annual rate of return > ring reduced retirement security by $200,000+ if rate of return was 10% ©SHRM 2010 11

12. Social Security (1) As income source: 90%+ of income for 33% of older Americans 50%+ of income for 65% of older Americans Nationally the median recipient age 65+ relies on Social Security for 67% of their income Income redistribution > Poverty > Income replacement Low-income earners vs. high-income earners Gender Occupational differences Source: Chapman, J. & Ettlinger, M.(2005). Social Security and the income of the elderly. EPI Issue Brief #206. Retrieved from www.epi.org/publications/entry/ib206/. ©SHRM 2010 12

13. Social Security (2) Pressures for change: > Ratio of workers per beneficiary: 1950 – 16.5 workers per beneficiary 2004 – 3.3 workers per beneficiary 2031 – 2.2 workers per beneficiary > Financial sustainability: In 2016 – Dip into trust In 2037 – System is broke Source: 2005 OASDI Trustees Report (www.socialsecurity.gov/OACT/TR/TR05/II_project.html) ©SHRM 2010 13

14. Income Sources for the Aged* Percentage of 65+ receiving income from specified source in 2006: 88.5% Social Security benefits 54.9% Asset income 41.3% Receive retirement benefits other than SS 24.6% Have earnings 3.7% Cash public assistance 3.4% Veteran’s benefits * Income of the Aged Chart book (2006) from the Social Security Administration. ©SHRM 2010 14

15. Total Money Income of Older Americans Median Income for individuals 65+ is $23,194 18.2% have income under $15,000 28.5% have income under $20,000 41% have income $20,000-49,999 Approx. 80% have income under $50,000 6.6% have income of $100,000 or more Source: Income of the Aged Chart book (2006) Social Security Administration. ©SHRM 2010 15

16. Financial Uncertainty: Key to Working Longer ©SHRM 2010 16

17. Health Care Benefits: (Elephant in the Living Room) Private plans: > Cost increases double digits a year > Increased premiums > Reduced coverage or > Employers dropping coverage Medicare (hospital insurance trust fund that pays for inpatient hospital care for those over 65): > Funds will be exhausted in 2019. > Drug benefit costs are sky-rocketing. Source: A Summary of the 2009 Annual Reports,Social Security and Medicare Boards of Trustees (www.ssa.gov/OACT/TRSUM/index.html) ©SHRM 2010 17

18. How Much Is Needed? Health Care? Example: Long-term care cost increases from 2008 to 2009 Private room nursing home rates rose 3.3% to $219 per day or $79,935 per year. Assisted living also rose 3.3% to $3,131 per month or $37,572 annually. Home health care jumped 5% to $21 per hour. Adult day services increased 4.7% to $67 per day. Source: MetLife Mature Market Institute, Oct. 2009 ©SHRM 2010 18

19. How Much Is Needed (2)? 66% of retirees said their expenses either went up (39% on average) or stayed the same in retirement. 48% of the retirees were expecting their expenses to decline in retirement. 55% of retirees reported that they stopped working earlier than they'd planned. 22% of those who were pushed into early retirement stopped working because of poor health or disability. Source: Fidelity Research Institute Retirement Index(SM) Finds Working Americans on Track to Replace 58 (2007, March 12). Business Wire. Retrieved from www.allbusiness.com/services/business-services/4315565-1.html. www.allbusiness.com/services/business-services/4315565-1.html ©SHRM 2010 19

20. How Much Is Needed (3)? Family support needs in expected retirement years: > Later child-bearing years mean later college expenses > Parents living longer may mean long-term care support of them. Life-style issues? Retirement plans? RISK! Sources of income? Personal health care? Family responsibilities? Increasing costs and life style? ©SHRM 2010 20

21. How Much Is Needed(4) How much is enough? Consider expense profile $1 MILLION doesn’t go as far > $1 million in 1957 = $7.3 million today (Federal Reserve) > 99% of Americans don’t have $1million Source: Brandon, E. (2009). Is $1 million Enough to Retire On? US News and World Reports. ©SHRM 2010 21

22. Challenges: Some Examples Primarily in health and benefit areas Flexibility in hours > non-discriminatory given Fair Labor Standards Act Innovative non-discriminatory practices and policies in a multi-generational workplace Alternative approaches to employment transitions for aging workers > Lifelong Learning Accounts > Private/public collaborative/exchange programs ©SHRM 2010 22

23. Economic Uncertainty: Summary This module covered the following topics: Reasons for working rest on economic uncertainty Traditional sources of income in retirement: > Pensions > Retirement savings > Social Security Total money income of older Americans Key cause of uncertainty–health care costs How much money is needed in retirement? ©SHRM 2010 23