The Sufficiency of Retirement Savings: A Comparison of Two Cohorts of Retired Workers at the Time of Retirement

1. The Sufficiency of Retirement Savings: A Comparison of Two Cohorts of Retired Workers at the Time of Retirement Robert Haveman, Karen Holden, Barbara Wolfe, and Andrei RomanovUniversity of Wisconsin–Madison Presentation at APPAM, November 2nd, 2006 Robert M. La Follette School of Public Affairs

2. Goal of Paper • Assess the adequacy of resources at the point of retirement for two cohorts of retirees • Early 1980s • Mid 1990s • Compare adequacy and sources of change in adequacy • Use a socially defined concept of adequacy • Retirement is defined as the date of take-up of Social Security Retirement Benefits • Only those eligible for SS are included in sample. Robert M. La Follette School of Public Affairs

3. Related Literature • Will those near retirement have adequate resources? • Bernheim 1992 – simulation model of optimal savings over life cycle. • Moore and Mitchell 1997, 2000- simulation model of needed savings assuming retirement at 62 and 65 • Gustman and Steinmeier 1998 – calculate annuitized wealth at date of expected retirement • Engle, Gale and Uccelo 1999 – stochastic life-cycle model to geenrate optimal wealth which is then compared to actual wealth. • Wolff 2002 – expected retirement income based of annuitized wealth using CSF. • Butrica, Iams and Smith 2003 – Simulation model using Social Security's MINT model Robert M. La Follette School of Public Affairs

4. Related literature continued • How adequate are savings at actual retirement and how adequate are they as retirement continues? • Munnell and Soto 2005 – important role for pensions • Cole and Milligan 2005- changes in wealth portfolios • Johnson, Mermin and Uccello 2005- changes in wealth due to shocks • Haveman, Holden, Wolfe and Sherlund 2006 –adequacy at retirement for cohort retired in early 1980s. • Haveman, Holden, Wolfe and Romanov 2005 --Change in adequacy over the first decade of retirement for cohort retired in early 1980s. Robert M. La Follette School of Public Affairs

5. DATA-1 • New Beneficiary Survey (NBS) • Our sample: Retired-Worker Social Security Beneficiaries (62-72) • Applied for/received benefits 1980-1981 • Interviewed in 1982 • Follow-up interview in 1991 • Large sample (Number of observations = 5,579) • Full linkage to Social Security Records • Covered Earnings Records and Benefits Records • Comparable data on both spouses including record linkage Robert M. La Follette School of Public Affairs

6. Data- 2 • Health and Retirement Study • Our sample – original sample first interviewed in 1992 and every two years thereafter and Children of the Depression Age first interviewed in 1998. • Minimum age = 62 at time of retirement; maximum age 72 • Receive Social Security by 1998 • Plan to do a follow-up study of adequacy over retirement • Adjust age profile to mimic that of the NBS in analysis of distribution • Linkage to Social Security Records • Covered Earnings Records and Benefits Records • Where individual did not grant permission, use self-reported Social Security information. Robert M. La Follette School of Public Affairs

7. Comparison of Characteristics of Samples from NBS and HRS (age-standardized) Robert M. La Follette School of Public Affairs

8. Available Resources: Total resources of households at the age of “retirement” equal to the sum of: • financial and property wealth, • net value of own home, • the present discounted value of current and future expected pension benefits, and • the present discounted value of current and future expected Social Security retirement benefits. Robert M. La Follette School of Public Affairs

9. Two measures of resources Wealth: present value in 2004 dollars at time of retirement of all resources over expected remaining lifetime • Discount inflation-indexed Social Security benefits by 2.75% to capture individual time preference. • Assume annual inflation rate = 4% over lifetime • Assume pension streams only partially adjust for inflation (known nominal growth = 3.25% or an erosion rate of .75 percent) so use 3.50% to discount pensions. • Incorporate value of survivor benefits and survivor lifetimes into wealth calculation Annuitized Net Wealth (ANW): annual steady income stream paid from wealth as calculated above • over expected life of the respondent and spouse, if married • use life expectancies: by age, gender, race • assume total wealth annuitized over lifetime of respondent (and surviving spouse) even if survivor benefits not actually taken • Assume an equivalent scale such that couple needs = 1.66 of single person Robert M. La Follette School of Public Affairs

10. Composition of average wealth at retirementNBS mean = $553,967 (all) $582,786 (whites) $236,832 (Nonwhites)HRS mean = $890,918 (all) $962,547 (whites) $402,290 (Nonwhites) Robert M. La Follette School of Public Affairs

11. Distribution of ANW Robert M. La Follette School of Public Affairs

12. Comparison of ANW by age Robert M. La Follette School of Public Affairs

13. Comparison of ANW by Race Robert M. La Follette School of Public Affairs

14. Comparison of ANW by Marital Status and Sex Robert M. La Follette School of Public Affairs

15. ANW by Education Robert M. La Follette School of Public Affairs

16. Now turn to issue of Adequacy • Ask question: Do newly retired workers have sufficient ANW to enable them to escape poverty or near poverty during retirement? • Use two standards • Poverty line and Twice Poverty Line • Employ PL suggested by NRC study of poverty. Single = $9060; couples = $12,649 Robert M. La Follette School of Public Affairs

17. ANW Relative to Standards (actual life expectancy) NBS HRS ANW/Poverty line 3.52 5.40 ANW/2 x Poverty line 1.76 2.70 Percent not meeting Poverty line standard 4% 8% Twice poverty line standard 23 23 Robert M. La Follette School of Public Affairs

18. Those who do not meet poverty standard by education Robert M. La Follette School of Public Affairs

19. Nonwhites much more likely to not meet poverty standard than whites. • Percent not meet poverty standard by race • White Nonwhite All • NBS 3% 16% 4% • HRS 6% 25% 8% Robert M. La Follette School of Public Affairs

20. Correlates of Retirement Resource Adequacy (see Table 4 regressions) • More likely to have adequate resources if • White vs. nonwhite • More educated (if married, have more educated spouse) • Retired at later age (except single men in HRS) • If respondent does not have a health condition ( if married, spouse does not have a health condition) • If have private health insurance • If have pension • If own home Robert M. La Follette School of Public Affairs

21. More likely to fail to meet poverty standard of adequacy if (see Table 5 probits) • Nonwhite • Did not graduate high school • Have more children if a married couple • Longest job uncovered by Social Security in NBS • A Never married single woman • Respondent had a health condition Robert M. La Follette School of Public Affairs

22. Conclusions • Using the poverty line, 4% of the NBS cohort did not meet this adequacy standard but for the later cohort, this had percentage had nearly doubled. This suggests increasing inequality. • Using the twice poverty line or near poverty standard the percentage failing to meet the standard was stable but high at more than 20 percent. • Those failing to meet the standards are concentrated among women, singles, nonwhites, those with low education and those who retire at early ages. • Vulnerability in working years tied to vulnerability in retirement. • The situation at retirement did not improve for these vulnerable individuals comparing 1980s to 1990s and may indeed have gotten worse. • Policy makers would do well to focus on how any change in Social Security would influence persons in these vulnerable groups. Robert M. La Follette School of Public Affairs