How financial security issues should be addressed

Many risks challenge individuals as they plan for retirement.  Individual and societal strategies are needed for a better future.

While men and women are generally covered by the same systems with the same rules, the result is not the same due to differences in life circumstances.  Both men and women are disadvantaged because Americans are not very good savers. A retirement program can be viewed as consisting of two time periods: a period when assets are accumulated and a period when assets are used. Careful planning is needed for both periods. Effective response requires a combination of individual action based on today’s opportunities, employer action, societal action and policy initiatives that will lead to good opportunities in the future. Actions throughout life affect people as they reach the highest ages.

The fundamental reasons for the differences in pension and Social Security benefits between men and women are differences in work histories, types of jobs and earnings’ levels.  They are discussed in detail in the papers posted on this site. The differences in Social Security benefits also link to the interaction of the system structure with family and work patterns.  Benefit designs need to work well for married couples, widows, single persons, divorced persons, individuals with multiple marriages and unmarried couples. We must look broadly to find avenues to better security for women.

Pensions and employment

Retirement security issues are far-reaching and extend to many different areas in people’s lives. Addressing them requires considering a combination of policy, employer, and individual initiatives.

From an individual point of view, enhancing retirement security can come from actions at different points in the life cycle:

• Selecting a job with good pension benefits.

• If the family makes choices that mean that the husband’s job is the one with better pension benefits, remember that those benefits need to provide for both spouses.

• Not retiring too early. If assets or benefits are not adequate, keep working longer to build up benefit rights.

• Carefully focus on payout options. For married couples, remember that survivor benefits will be important to the widow in many families. Where a lump sum is selected, roll it over into an IRA or other tax-qualified plan and do not use the funds too early.

Broadly from a policy perspective, there are critical things to keep in mind:

•  Create enhanced options for future employment of Americans as they age with work options that fit the needs and preferences of maturing workers.

• Facilitate phased retirement and clarify the rules with regard to bona fide termination of employment so as to make easier to rehire retirees.  Offer safe harbors for rehire of retirees.

• Recognize the value and importance of employer-sponsored pension plans (both defined benefit and defined contribution plans), encourage employers to offer pension plans and maintain a strong private pension system.

• Develop a sound national retirement security policy. As part of this policy, it is important to build and maintain a strong private pension system by supporting employers who offer pension plans, and by encouraging other employers to offer pension plans.

• Encourage employers to offer savings plans as individuals are much more likely to save when their employer sponsors a program, and even more likely to save if a match is included. Design these plans so that they will work well for people who let automatic choices apply. Automatic provisions to be considered include automatic enrollment, automatic increases in savings, default investment options, and methods of distribution of benefits.

• Reduce burdens on employers. The system is under a lot of strain because of instability and complexity of the requirements imposed on plan sponsors today. Adding requirements which may weaken the system overall are not helpful on balance.

• Disability before retirement age is a barrier to retirement. Many people do not have adequate disability coverage, and there are particularly likely to be gaps in total disability coverage when primary retirement coverage is through a defined contribution plan.

Social Security

From an individual point of view:

• Carefully review the strategy with regard to the timing of benefit claiming. Later claiming is a better strategy for many people.

• For a couple with very unequal earnings, test various combinations of benefit claiming. The best strategy may be late claiming for the high earner and early claiming for the low earner.

From a societal perspective, a multi-faced approach is needed for Social Security.

• Make the changes needed in Social Security to assure that we will have a strong Social Security system going forward.

• As a parallel step, focus on spousal rights and modify Social Security so that it will better handle a variety of family patterns, with particular attention to see that the needs of two-earner families and of divorced women are handled reasonably.

• Increase survivor benefits for dual earner couples, probably trading off for lowered spousal benefits while both spouses are alive.

• Remember that Social Security is the basic source of income for most retired Americans and for many who are disabled.

• If individual accounts were a part of Social Security, many decisions would be needed to determine how to handle spousal benefits and whether to require that benefits be paid in the form of an annuity.

• Decouple benefits to divorced persons from continued benefits to married couples.

My preference for changes to the Social Security system is to start by increasing retirement ages.  My preference is to limit individual accounts to supplemental accounts.

Other benefits

On an individual level, it is important to have a plan for financing health expenses and long-term care. For many people this will be an area where the use of risk protection products is particularly important.

From a societal point of view, in addition to pensions, savings plans and Social Security, other public and private programs are important for women.

• Ensure that the social safety net programs are strong and serve as a way to protect those Americans, many of them women, who will be poor in old age and do not have the family earnings history to secure either pensions or Social Security.

• Reform health care to guarantee access to coverage to the uninsured.

• Ensure that the Medicare and supplemental health programs are on a strong footing. Medicare does only part of the job of providing health care for America’s seniors and it has serious financial problems. Health care is a major need in retirement.

• Facilitating a strong long-term care system is very important for women. Continued focus is needed on the system for financing and providing long-term care.

Housing wealth

Many Americans entering retirement now and in the future will have a considerable part of their assets in the form of housing values. While relatively few Americans have directly tapped these values for retirement in the past, more are likely to do so in the future. Housing costs are also the largest expense for many individuals and families, and for those who need to cut costs, represent the best opportunity to do this.

There is a need to better define and analyze the options with regard to how housing wealth can support retirement and provide the public with good information about this area.

This is potentially also an area for product improvement, both in housing itself, in financial vehicles, and in care and housing combinations. Housing options often combine some care and services with housing. In the case of the Continuing Care Retirement Community, it also combines care and some financing of care with housing. Reverse mortgages combine housing and financing. Paying off a mortgage is a way to reduce spending in the future. Home equity loans also permit the use of housing assets as a source of financial liquidity. For many Americans, housing is one of their largest assets as they reach retirement age.

Public education

Personal decisions are very important for security in old age. Decisions made long before old age is reached can be very important in security later. In spite of this, many people are unaware of how decisions will affect them and are ill equipped to make needed decisions. Education will be critical in helping prepare Americans to make decisions about when to retire, how to use assets, what financial security products to buy, whether they need to save more now, etc. There are big gaps in knowledge.

• Increase public awareness of the importance of saving, increase savings levels and improve the financial literacy of the savers.

• Provide better public education in financial planning including planning for contingencies such as death and divorce.

• Provide information to help individuals understand the impact of decisions about taking jobs, leaving jobs, getting married, getting divorced, etc.

• Going beyond those in mid and retirement ages, start education early so that financial literacy including basic math, household finance, and the time value of money are part of getting a high school diploma.

Holistic focus on security for widows and divorced women

Many widows need better protection and planning for the time they will be alone. There are tradeoffs between different methods of providing protection to surviving spouses including the use of survivor benefits in pensions, setting aside assets, providing life insurance, and providing long-term care insurance. To enhance this protection:

• Help women understand these opportunities and use them well.

• Encourage employers to support these benefits.

• Focus on these issues in public policy.

Women moving into retirement today and in the future are more likely to be divorced than the women before them. Comments with regard to spousal rights are important to this group. Generally, women also need to focus on longer as well as shorter term issues in divorce planning and implementation.

Addressing these issues