tag:theconversation.com,2011:/id/topics/pension-plan-45755/articlespension plan – The Conversation2020-09-22T12:20:13Ztag:theconversation.com,2011:article/1456032020-09-22T12:20:13Z2020-09-22T12:20:13ZRetiring early can be bad for the brain<figure><img src="https://images.theconversation.com/files/359152/original/file-20200921-14-1aribee.jpg?ixlib=rb-1.1.0&rect=0%2C35%2C7873%2C5205&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Continuing to engage in mental challenges keeps the brain from deteriorating in early retirement. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/grandfather-and-grandson-playing-chess-in-living-royalty-free-image/694034157">Westend61/Getty Images</a></span></figcaption></figure><p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take about interesting academic work.</em> </p>
<h2>The big idea</h2>
<p>People who retire early suffer from accelerated cognitive decline and may even encounter early onset of dementia, according to a <a href="https://cdn.theconversation.com/static_files/files/1229/Nikolov-cognitive-decline.pdf?1600106282">new economic study</a> I conducted with my doctoral student <a href="https://sites.google.com/binghamton.edu/alan-adelman/home">Alan Adelman</a>. </p>
<p>To establish that finding, we examined the effects of a rural pension program China introduced in 2009 that provided people who participated with a stable income if they stopped working after the official retirement age of 60. We found that people who participated in the program and retired within one or two years experienced a cognitive decline equivalent to a drop in general intelligence of 1.7% relative to the general population. This drop is equivalent to about three IQ points and could make it harder for someone to <a href="https://doi.org/10.1017/S0033291700008412">adhere to a medication schedule</a> or <a href="https://doi.org/10.1111/j.1475-%205890.2007.00052.x">conduct financial planning</a>. The largest negative effect was in what is called “delayed recall,” which measures a person’s ability to remember something mentioned several minutes ago. Neurological research <a href="https://doi.org/10.1001/archneur.1991.00530150046016">links problems in this area to an early onset of dementia</a>.</p>
<h2>Why it matters</h2>
<p>Cognitive decline refers to when a person has trouble remembering, learning new things, concentrating or making decisions that affect their everyday life. Although some cognitive decline appears to be an inevitable byproduct of aging, faster decline can have profound adverse consequences on one’s life.</p>
<p>Better understanding of the causes of this has powerful financial consequences. Cognitive skills – the mental processes of gathering and processing information to solve problems, adapt to situations and learn from experiences – are crucial for decision-making. They influence an individual’s ability to process information and <a href="https://www.jstor.org/stable/1818642">are connected to higher earnings</a> and a <a href="https://www.doi.org/10.1257/jep.25.1.159">better quality of life</a>.</p>
<p>Retiring early and working less or not at all can generate large benefits, such as reduced stress, better diets and more sleep. But as we found, it also has unintended adverse effects, like fewer social activities and less time spent challenging the mind, that far outweighed the positives.</p>
<p>While retirement schemes like the 401(k) and similar programs in other countries <a href="https://www.doi.org/10.1023/B:PUCH.0000035859.20258.e0">are typically introduced to ensure the welfare of aging adults</a>, our research suggests they need to be designed carefully to avoid unintended and significant adverse consequences. When people consider retirement, they should weigh the benefits with the significant downsides of a sudden lack of mental activity. A good way to ameliorate these effects is to stay engaged in social activities and continue to use your brains in the same way you did when you were working. </p>
<p>In short, we show that if you rest, you rust.</p>
<h2>What still isn’t known</h2>
<p>Because we are using data and a program in China, the mechanisms of how retirement induces cognitive decline could be context-specific and may not necessarily apply to people in other countries. For example, cultural differences or other policies that can provide support to individuals in old age can buffer some of the negative effects that we see in rural China due to the increase in social isolation and reduced mental activities. </p>
<p>Therefore, we can not definitively say that the findings will extrapolate to other countries. We are looking for data from other countries’ retirement programs, such as India’s, to see if the effects are similar or how they are different.</p>
<h2>How I do my research</h2>
<p>A big focus of the <a href="https://scholar.harvard.edu/pnikolov/my-research-group-1">economics research lab</a> I run is to <a href="http://www.nber.org/%7Enikolovp/research.html">better understand</a> the causes and consequences of changes in what economists call <a href="https://www.britannica.com/topic/human-capital">“human capital”</a> – especially cognitive skills – in the context of developing countries. </p>
<p>Our lab’s mission is to generate research to inform economic policies and empower individuals in low-income countries to rise out of poverty. One of the main ways we do this is through the use of randomized controlled trials to measure the impact of a particular intervention, such as retiring early or access to microcredit, on education outcomes, productivity and health decisions.</p>
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<p class="fine-print"><em><span>Plamen Nikolov is affiliated with The Harvard University Institute for Quantitative Social Science, The University of Chicago's Human Capital and Economic Opportunity Global Working Group, a Research Fellow of the Global Labor Organization, and a Research Fellow of the IZA Institute of Labor Economics.</span></em></p>A study of a retirement program in China found that people who retired early suffered significant cognitive decline that put them at risk of early onset of dementia.Plamen V Nikolov, Assistant Professor of Economics, Binghamton University, State University of New YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1392622020-06-16T11:51:38Z2020-06-16T11:51:38ZCOVID-19 will turn the state pension problem into a fiscal crisis<figure><img src="https://images.theconversation.com/files/341933/original/file-20200615-65925-1mid95.jpg?ixlib=rb-1.1.0&rect=0%2C171%2C5098%2C3035&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Most states struggle to meet pension funding needs -- and the pandemic will make it worse.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/stethoscope-on-us-dollars-isolated-on-white-royalty-free-image/157739826?adppopup=true"> hudiemm/Getty</a></span></figcaption></figure><p>You may be wondering why, over the last few months, the state pension problem – normally not a subject of widespread discussion – <a href="https://thehill.com/homenews/house/496735-house-gop-urge-trump-against-supporting-additional-funding-for-state-and-local">has been in the news</a>. </p>
<p>In fact, you may be wondering just what the state pension problem is. </p>
<p>The problem – and it’s a big one – is that many of the public employee <a href="https://money.cnn.com/interactive/economy/pension-crisis-retired-workers/index.html">pension plans run by states don’t have enough money in them</a> to make upcoming pension payments to retired state workers.</p>
<p>The first time the subject came up recently was toward the end of February. That’s when teachers in Kentucky called a sick-out and <a href="https://www.courier-journal.com/story/news/education/2019/02/28/kentucky-teacher-sickout-strike-due-to-pension-system-bill/3012091002/">protested various pension changes</a> advocated by the state legislature. </p>
<p>Kentucky’s public pension plans are among the worst-off financially of all the state systems, <a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017">with only enough money in them to cover 34% of future pension payments</a> as of 2017.</p>
<p>Then, in late April, <a href="https://www.rickscott.senate.gov/senator-rick-scott-and-colleagues-president-trump-reject-state-bailouts">five GOP senators wrote to the president</a> to say they didn’t want the federal government to give additional aid to states hard-hit by COVID-19. “We believe additional money sent to the states … will be used to bail out unfunded pensions, reward decades of state mismanagement, and incentivize states to become more reliant on federal taxpayers,” they wrote. </p>
<p>The senators’ sentiments were echoed by many in the Senate Republican leadership, including <a href="https://www.mcconnell.senate.gov/public/index.cfm/pressreleases?ID=221B54C6-B84F-413B-8765-D0026E879BA7">Senate Majority Leader Mitch McConnell, who said</a>, “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”</p>
<p>The problem has been a long time coming, but COVID-19 may make it into a crisis.</p>
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<h2>Shifting risk</h2>
<p>Historically in the United States, <a href="https://eh.net/encyclopedia/public-sector-pensions-in-the-united-states/">pensions for both the public and private sector were so-called “defined benefit plans</a>.” With those, the state or corporation and the employee both made contributions to the plans. </p>
<p>Retirement payouts were set based on a formula of age, years of service and amount paid during some peak earnings period. The employee was guaranteed the pension benefit amount when they retired and thus had little uncertainty about what they would get. </p>
<p>The state, on the other hand, faced all of the uncertainty of how to manage the investment and the state contribution in order to be able to make those future payments. </p>
<p>These kinds of plans were expensive for employers, who might have to pay more into the plan when investment yields went down. So during the early 1980s, the private sector began to <a href="https://www.investopedia.com/articles/retirement/06/demiseofdbplan.asp">freeze their defined benefit plans</a>. </p>
<p>Instead, they would offer <a href="https://www.dol.gov/general/topic/retirement/typesofplans">defined contribution plans</a>. In those, both employee and employer contributed money, but there was no guaranteed payout of retirement benefits. </p>
<p>The uncertainty regarding future benefits and how their money was invested was now shifted to the employee. So if your plan’s investments did well, you would get a higher payment than if the investments did poorly. </p>
<p>In 2018, only 16% of private sector employees were in plans where they know precisely <a href="https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/projects/state-and-local-backgrounders/state-and-local-government-pensions">how much money they will get in their pensions</a>.</p>
<h2>No money for one-third of future pension payments</h2>
<p>Some states have one pension plan for all public employees; others have as many as 14. There are also thousands of small <a href="https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/projects/state-and-local-backgrounders/state-and-local-government-pensions">local and municipal employee pension plans</a>.</p>
<p>Some plans have enough money in them to cover future pension payments; some don’t. Several states, including Wisconsin, South Dakota and Tennessee, have managed to keep their unfunded liabilities – the portion of future pension obligations they don’t have money to pay for – <a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017">close to or about zero</a>. </p>
<p>On the other end of the spectrum are <a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017">Illinois, New Jersey and Kentucky</a>, which all have less than 45% of the funds they’ll need.</p>
<p><a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017">In 2017, total pension liabilities</a> for all states was US$4.1 trillion and assets were $2.9 trillion. That means collectively, state pension funds would need $1.3 trillion to be able to make payments to everyone promised a pension. This represents about 9% of the U.S. GDP.</p>
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<img alt="" src="https://images.theconversation.com/files/341882/original/file-20200615-65956-fzudwa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/341882/original/file-20200615-65956-fzudwa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=429&fit=crop&dpr=1 600w, https://images.theconversation.com/files/341882/original/file-20200615-65956-fzudwa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=429&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/341882/original/file-20200615-65956-fzudwa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=429&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/341882/original/file-20200615-65956-fzudwa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=539&fit=crop&dpr=1 754w, https://images.theconversation.com/files/341882/original/file-20200615-65956-fzudwa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=539&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/341882/original/file-20200615-65956-fzudwa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=539&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Unclear public pension benefits make retirement planning difficult.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/meridian-retirement-residence-members-and-rockies-fans-news-photo/161318622?adppopup=true">Diego J. Robles/The Denver Post via Getty Images</a></span>
</figcaption>
</figure>
<h2>How did this happen?</h2>
<p>There is a lot of blame to go around for this problem. </p>
<p>Unions often pushed for <a href="https://crr.bc.edu/briefs/unions-and-public-pension-benefits/">increased benefits</a> in terms of health care and pensions as opposed to increased wages and salaries – because the former are not taxed.</p>
<p><a href="https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/06/the-state-pension-funding-gap-2017">Governors and legislators often did not have the political will</a> to set aside the amount of money their analysts told them the state would need to add into the pension funds.</p>
<p>This failure to contribute happened especially when budgets were tight – as they have been over the last decade – and where there was <a href="https://www.nationalaffairs.com/publications/detail/how-congress-can-help-state-pension-reform">no state law that required the state</a> to set aside the money their analysts told them the state would need to add into the pension funds. </p>
<p>In fact, the pension contribution by the state was often the first item <a href="https://www.illinoispolicy.org/unions-supported-skipping-pension-payments">dropped when cutting budgets because there were few political consequences</a>.</p>
<p>Pension fund investments often did not meet the return targets due to poor financial management; some states like California budgeted for unrealistic <a href="https://www.forbes.com/sites/andrewbiggs/2018/12/04/public-sector-pensions-assume-record-high-investment-returns/">8.25% returns, when the market was only delivering 7% returns.</a> The Great Recession and the slow recovery substantially affected the return on investment to pension funds, too. And key assumptions by state analysts about how long people would live (and thus require pension payments) as well as future costs of living <a href="https://www.investopedia.com/articles/retirement/10/demise-defined-benefit-plan.asp">were often flawed</a>.</p>
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<h2>COVID-19 and the state pension crisis</h2>
<p>Given all of the <a href="https://theconversation.com/plummeting-tax-revenues-will-put-governors-in-tough-budget-situations-135981">fiscal uncertainty in states due to the fallout of COVID-19</a> – from exploding Medicaid and other health care spending to the collapse of state revenues – it is most likely that many states will again fail to make their full contribution to pensions over the next two years.</p>
<p>As a longtime <a href="https://batten.virginia.edu/people/raymond-scheppach">observer of state government</a> as the previous head of the National Governors Association, I believe that after COVID-19 there will be a restructuring of state governments to maximize the use of technology and substantially reduce the number of full-time workers. </p>
<p>This means lower pension contributions by public employees. And that means less money that can be used to pay current obligations and obligations into the near future.</p>
<p>Finally, with interest rates at all-time lows and the stock market unlikely to make normal returns <a href="https://www.vox.com/2020/5/21/21263934/economy-reopening-stock-market-v-shape-recovery-jerome-powell">until the economy fully recovers</a> in two to three years, the rate of return on investments will be much lower than commonly projected by pension analysts. </p>
<p>The combination of the failure to contribute the state portion into pension funds, the reduced pension contributions from fewer full-time workers, and lower rates of return on investment over the next several years will turn the pension problem into a fiscal crisis for states. </p>
<p>States will be obligated to pay pensions, but won’t have the money to pay for them. So that will require shifting state spending over to pensions – and away from schools and all the public services that state residents expect their tax dollars to pay for.</p>
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<p class="fine-print"><em><span>Raymond Scheppach does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Many of the public employee pension plans run by states don’t have enough money in them to make upcoming pension payments to retired state workers. The pandemic could make that problem much worse.Raymond Scheppach, Professor of Public Policy, University of VirginiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/993592018-11-26T11:36:19Z2018-11-26T11:36:19ZSocial Security helped slash elderly poverty to 9.2 percent in the 20th century – that triumph is now in jeopardy<figure><img src="https://images.theconversation.com/files/247141/original/file-20181125-149326-8rpn68.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">More elderly people may soon be pinching pennies.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/old-couple-small-coin-poverty-senior-623466419?src=aI8oTOP6bdRMtaa0CeyMnw-1-7">docent/Shutterstock.com</a></span></figcaption></figure><p>In 1959, <a href="http://www.nber.org/aginghealth/summer04/w10466.html">more than a third of all elderly Americans</a> lived in poverty. Slashing that number to under 10 percent by the late 1990s was among the great U.S. triumphs of the 20th century. Social Security deserves a large share of the credit.</p>
<p>I believe eliminating old-age poverty entirely could one day be deemed a triumph of the 21st century. Even sustaining it at 10 percent would be a significant achievement. </p>
<p>But that meager goal is in serious jeopardy. <a href="http://dx.doi.org/10.2139/ssrn.3172935">My research shows</a> more Americans are increasingly struggling to save enough for their later years. And one of the main ways they have left, Social Security, is just 15 years away from going broke. </p>
<p>This leads me to ask one question: Do Americans want to return to a time when so many of their elders died in poverty?</p>
<h2>A wobbly retirement</h2>
<p>Since its <a href="https://www.ssa.gov/history/hfaq.html">advent</a> in 1935, Social Security has been one leg of Americans’ <a href="https://www.ssa.gov/history/stool.html">three-legged retirement stool</a>. The other two have been the wide availability of defined benefit retirement plans and personal savings supported by broadly shared economic prosperity. </p>
<p>This stool turned out to be remarkably successful by reducing the poverty rate among Americans aged 65 and older from as high as 78 percent in 1939 to 35 percent in 1959 – as Social Security benefits began kicking in – to 10 percent by 1995. </p>
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<p>But in recent decades, the defined benefit plans and worker savings legs have become increasingly wobbly. If they break entirely, saving Social Security becomes even more vital. </p>
<h2>Businesses shed pension risks</h2>
<p>For much of the 20th century, <a href="https://www.gao.gov/products/GAO-15-419">defined benefit plans</a> promised an annual lifetime payment determined by salary and played an important role in the financial security of many households with residents over 65. </p>
<p>Rising life expectancies required companies to pay out benefits for much longer, making them more expensive and risky. Coupled with uncertain investment returns, <a href="https://www.bls.gov/opub/mlr/2012/12/art1full.pdf">companies have been getting rid of them</a> in a hunt for savings and more profits for shareholders. Only 16 percent of Fortune 500 companies <a href="https://www.marketwatch.com/story/another-company-just-cut-its-pension-plan-what-to-do-if-it-happens-to-you-2018-07-11">offered</a> such plans in 2017, compared with 59 percent just two decades ago. </p>
<p>The Department of Labor <a href="https://www.dol.gov/sites/default/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf">reports</a> that the number of active participants in these pension programs as a percent of the labor force peaked in 1981 at 28 percent. Only about 9 percent participated in 2015. </p>
<p>Instead, they’ve shifted to defined contribution plans like the 401(k), placing the financial risk of retirement on workers. </p>
<p>That might have been OK, had working and middle-class Americans continued to share in the nation’s prosperity. </p>
<h2>The American dream fades for many</h2>
<p>But increasingly, that is not happening. </p>
<p>That’s in part because employment growth in the U.S. is now concentrated among highly skilled workers and low-paying service sector jobs, leaving fewer and fewer positions that provide enough income to set aside money for savings. </p>
<p>My research shows job opportunities <a href="http://dx.doi.org/10.2139/ssrn.3172935">are increasing most rapidly</a> in positions that pay less than US$30,000 thanks to automation as well as the growing demand for personal services – and the accompanying low wages. <a href="http://dx.doi.org/10.1257/aer.103.5.1553">These types of jobs</a> do not share as much in the fruits of economic growth. </p>
<p>In short, the <a href="http://science.sciencemag.org/content/early/2017/04/21/science.aal4617">American dream</a>, characterized by the hope that children will have a higher standard of living than their parents, is fading. <a href="http://doi.org/10.1126/science.aal4617">Ninety percent</a> of children born in 1940 made more than their parents at age 30, but only 50 percent of those born in 1984 had higher income at that age.</p>
<p>This means many more Americans will not be able to set aside much money for retirement, whether in terms of personal savings or a plan like a 401(k) or an IRA. And it’s why <a href="https://www.gao.gov/products/GAO-15-419">personal savings</a> is the shortest leg on the retirement financial stool and it will become shorter as a result of widening income inequality. </p>
<p>Without more revenue, Social Security will have to cut benefits by 2034. Even if current benefits are sustained, increasing low wage employment will result in lower benefits because they are determined by lifetime earnings.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Social Security checks may get a lot smaller down the road.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Social-Security-Good-Deal/c2dcb5c2421f4efaa8b8d40142fa5319/129/0">AP Photo/Bradley C. Bower</a></span>
</figcaption>
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<h2>How not to save Social Security</h2>
<p>That brings us back to Social Security, perhaps the <a href="https://news.gallup.com/poll/182921/nonretirees-expect-rely-social-security.aspx">last leg still standing</a> for tens of millions of Americans as they head toward their twilight years in the coming decades. Increasing benefits for some Social Security recipients is required to avoid increasing poverty among retirees.</p>
<p>The system was designed so that today’s workers pay for today’s retirees. Back in 1960, there were 5.1 workers for every recipient. That ratio is projected to fall to 2.6 in 2020. </p>
<p>This fact, coupled with increasing life expectancy, is behind the system’s impending fiscal crisis, putting the Social Security Trust Fund into deficit. </p>
<p>Republicans have typically argued that the best way to fix the system is to <a href="https://mic.com/articles/188861/a-brief-look-back-at-paul-ryans-crusade-to-cut-benefits-to-the-poor">cut benefits</a> and encourage more workers to save through through savings plans like 401(k)s and IRAs. A bill that would erase the Social Security deficit for the rest of this century <a href="https://www.congress.gov/bill/114th-congress/house-bill/6489">would cut benefits for 75 percent</a> of recipients – requiring them to save on their own, which is not an option for workers stuck in low-wage employment.</p>
<p>The only alternative for those financially unprepared for retirement will be to continue to work into their 70s and beyond. But substantial evidence has shown that <a href="http://webarchive.urban.org/UploadedPDF/411705_aging_boomers.pdf">opportunities to work</a> in the retirement years are greatest for the best-educated and highly skilled. That leaves the rest – the vast majority – in dire straits. </p>
<p>The result seems inevitable: More Americans will grow old in poverty.</p>
<h2>A commitment to retirees</h2>
<p>Whether Americans will tolerate more poverty among retirees is a political question. And I believe this debate should be about values as much as affordability. </p>
<p>The fact that <a href="https://www.cnbc.com/2017/07/18/the-us-is-losing-ground-to-other-nations-on-retirement-security.html">other highly developed countries</a> spend more to support their retirees makes clear the reducing poverty among retirees is a matter of commitment, not affordability. </p>
<p>So if Americans agree that our elders should never again return to having to age in poverty, there are several ways we can shore up the Social Security system. </p>
<p>One involves extending the Social Security tax to include all earnings: In 2018 it was levied on <a href="https://fas.org/sgp/crs/misc/RL32896.pdf">only the first $128,000</a> of income. Another is more controversial but may be necessary: use general government revenue, financed by higher taxes on the wealthy, to permanently ensure Social Security remains a bedrock of retirement. </p>
<p>While increasing taxes is hard, the only question is whether we have the political will to do so.</p><img src="https://counter.theconversation.com/content/99359/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David W. Rasmussen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Americans are increasingly struggling to save enough for retirement. If Social Security isn’t saved, growing old in poverty will likely become more common.David W. Rasmussen, James H. Gapinski Professor of Economics, Florida State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/860672017-11-09T05:04:43Z2017-11-09T05:04:43ZCould we nationalise the superannuation system even if we wanted to?<figure><img src="https://images.theconversation.com/files/193330/original/file-20171105-1055-5eu954.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Australian superannuation system was never meant to be privatised.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Two decades of reforms, reviews and inquiries <a href="https://flr.law.anu.edu.au/flr/article/accountability-regulatory-reform-australias-superannuation-industry-paradox">appear</a> to have better served the financial sector than the interests of super fund members. </p>
<p>At first glance <a href="http://www.apra.gov.au/Super/Publications/Documents/2017QSP201706.pdf">Australia’s 214 major superannuation funds</a> are performing well, giving a healthy 9.2% return on the A$1.4 trillion we have deposited with them. But there are issues with our publicly mandated but privately controlled superannuation system. </p>
<p>Admittedly, our current system provides a range of benefits - increasing retirement incomes, giving us plenty of choice between funds (in theory if not in practice), and investing in the Australian economy.</p>
<p>But the operating expenses for Australian funds <a href="https://grattan.edu.au/wp-content/uploads/2015/04/821-super-savings2.pdf">consistently and significantly outstrip</a> those in other OECD countries. Fees are high and there is little evidence that higher fees lead to better services. </p>
<p>In 2009 the <a href="http://www.aph.gov.au/binaries/senate/committee/corporations_ctte/fps/report/report.pdf">Inquiry into Financial Products and Services in Australia</a> recommended there be an annual check on the quality of advice. The only <a href="http://asic.gov.au/about-asic/media-centre/find-a-media-release/2012-releases/12-55mr-asic-releases-full-report-on-retirement-advice-shadow-shopping-research/">superannuation-related survey</a> that has been undertaken to date found that 39% of advice was poor and only 3% was good quality. No further surveys have been conducted. </p>
<p>Australians are forced to contribute to superannuation funds, without the right of exit, but they aren’t protected from high fees or bad investment strategies. A nationalised superannuation system, or one that combines private and public super funds, could simplify the system and reduce costs. </p>
<h2>Baked in problems</h2>
<p>Australia’s system wasn’t originally intended to be entirely privately-run, which has left us without many necessary protections (such as appropriate disclosure of fees and charges). </p>
<p>Australia was almost alone among OECD countries in reaching the 1980s with no national employment-related retirement income scheme. There had been <a href="https://archive.treasury.gov.au/documents/110/PDF/round4.pdf">at least ten attempts</a> to set one up between the 1890s to the 1970s. All failed to win support from employers, existing superannuation funds, life offices and state governments.</p>
<p>An additional attempt was made in the last Parliament of the Liberal government in 1972. The incoming Whitlam Labor government also tried to introduce a national superannuation scheme in 1973, establishing <a href="https://catalogue.nla.gov.au/Record/1826590">the Hancock inquiry</a>. </p>
<p>Consistent with its recommendations, the Hawke/Keating Labor government intended to move forward with a national scheme. However, against the backdrop of past nationalisation failures, recession, high inflation, a wage freeze, strikes, declining union membership, and the increasing discontinuation of superannuation products, the government instead privatised it. </p>
<p>Thus, the Hawke/Keating Labor government was a major winner of a privatised scheme gaining electoral support from a coalition of private interests. </p>
<p>Absent from this coalition were the fund members. There is <a href="https://www.taxandsuperaustralia.com.au/Documents/Governance/TRFL/Tax-Policy-Journal-2016.pdf">no evidence</a> of any consultation process with either the fund members themselves and/or any consumer representative groups prior to the development of our present, privatised regime.</p>
<p>The <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/0910/ChronSuperannuation">Superannuation Guarantee scheme</a> introduced a minimum employer contribution to superannuation for most employees. This scheme was a windfall for the financial sector, as they received a guaranteed, trillion-dollar stream of superannuation contributions to look after with no exit rights for members. </p>
<p>The union movement would also appear to be a winner from privatisation. The privatised system allowed the unions to expand the number of their existing industry funds to earn more administration and investment-based fees. The 41 industry funds <a href="http://www.apra.gov.au/Super/Publications/Documents/2017QSP201706.pdf">currently hold</a> A$545.2 billion, compared to the A$587.8 billion held by the 128 for-profit retail funds.</p>
<p>It could be argued that the losers in this mandatory regime are the fund members who were marginalised from the outset. As it was originally intended to be a government-run system, many of the administrative processes necessary for an efficient and effective privatised system <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1835-2561.2011.00142.x/abstract">were originally absent</a>. </p>
<p>For example, there were no codified accounting, reporting and disclosure requirements. No mandatory requirements for the disclosure of fees and charges. No codified audit report requirements. And, for nearly a decade, the regulator did not have appropriate constitutional powers to enforce civil and criminal penalties against non-complying trustees. </p>
<p>Two-decades of reforms have remedied the constitutional, auditing and accounting issues. But significant issues remain, including limitations in the disclosure of fees and charges and the <a href="https://flr.law.anu.edu.au/flr/article/accountability-regulatory-reform-australias-superannuation-industry-paradox">related issue of conflicted payments</a>. </p>
<h2>Alternative super systems</h2>
<p>In theory, there are alternative superannuation models for Australia to consider. For example, there are nationalised schemes such as the government-run Canadian Pension Plan.</p>
<p>All of the funds from the Canadian Pension Plan are invested by Canada’s Pension Plan Investment Board, which operates with a <a href="http://www.cppib.com/en/who-we-are/our-mandate/">clear mandate</a> to maximise returns, without undue risk of loss. </p>
<p>Nationalising the superannuation industry in this way <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Significant_Reports/superctte/suprep02/index">appears to have benefits</a> - members would receive the same return for equal contributions, employers and employees would only have to deal with one fund, and the amount spent on running the fund (for example on administration, marketing) would be reduced. </p>
<p>There is also the option of adopting a combined system, as in <a href="http://www.pensionfundsonline.co.uk/content/country-profiles/norway/112">Norway</a>, which features both national and privately-run superannuation funds.</p>
<p>In reality however, given the coalition of vested interests that have forged Australia’s existing, publicly mandated, privatised system, only the voice of the members themselves can force an honest and open debate on this important issue.</p><img src="https://counter.theconversation.com/content/86067/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Suzanne Taylor does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Australian superannuation system was originally meant to be government-run, and so many necessary protections weren’t included.Suzanne Taylor, Lecturer/Co-Ordinator, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/865872017-11-07T23:11:28Z2017-11-07T23:11:28ZSears Canada tarnishes the gold standard of pensions<figure><img src="https://images.theconversation.com/files/193684/original/file-20171108-6725-j9aom9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Shoppers browse at a Sears Canada store in Toronto in October after the company began liquidation sales. Its retirement funds are short $308 million, forcing a 19 per cent cut to employee pensions. </span> <span class="attribution"><span class="source"> (THE CANADIAN PRESS/Nathan Denette)</span></span></figcaption></figure><p>Like many <a href="https://theconversation.com/history-says-department-stores-will-struggle-in-the-future-85527">department stores</a>, Sears Canada has struggled with competition from specialty stores and <a href="https://theconversation.com/tailoring-the-customer-experience-boosts-online-sales-84941">online retailers</a>. Its bankruptcy will eliminate some <a href="https://globalnews.ca/news/3797128/sears-canada-ontario-quebec-job-losses/">12,000 jobs</a> and leave <a href="http://www.cbc.ca/news/canada/ottawa/legislation-bills-protect-pensioners-sears-corporate-bankruptcy-1.4367739">16,000 retirees worried</a> about their pensions. </p>
<p>It’s just the latest signal that employees and regulators should rethink their approaches to defined-benefit pensions.</p>
<h2>Pensions are promises</h2>
<p>Pensions represent deferred wages, money promised to employees in the future. With defined-contribution plans, employers make short-term promises to invest each year in their pension accounts. The eventual pension cheques depend on how the investments perform.</p>
<p>With defined-benefit plans, employers also promise to invest more if investment returns are poor. That reassurance makes those plans the “gold standard.”</p>
<p>However, such top-ups may be needed decades after the promises were made. If you start work at 25 and retire at 65, your first pension cheque arrives 40 years after your first paycheque. That very long-term promise presents two risks for employees.</p>
<h2>Funding shortfalls</h2>
<p>First, the money might not be there when needed. Defined-benefit plans should pay better than defined-contribution plans during recessions. But that’s when employers are least able to invest.</p>
<p>For the private sector, 40 years is roughly six economic cycles of boom and bust. Will your employer survive that?</p>
<p>Consider Sears. Its retirement funds are <a href="http://www.benefitscanada.com/news/sears-canada-faces-300m-retirement-shortfall-as-talk-of-court-filing-heats-up-99867">short $308 million</a>, forcing a <a href="http://www.cbc.ca/news/business/sears-pension-reduced-1.4289380">19 per cent pension cut</a>. That may be partly replaced if liquidation sales go well.</p>
<p>(Incidentally, consulting firm <a href="http://cfcanada.fticonsulting.com/searscanada/updates.htm">Morneau Shepell now administers the impoverished plan</a>. That indirectly connects federal Finance Minister <a href="http://www.cbc.ca/news/politics/morneau-charity-shares-1.4373653">Bill Morneau’s name to another pension controversy</a>.)</p>
<p>Or look at ex-telecom Nortel. Its 2009 bankruptcy cut pensions 30 per cent. <a href="http://www.cbc.ca/news/canada/ottawa/nortel-pensioners-meetings-1.3790751">Twenty thousand pensioners</a> waited <a href="http://business.financialpost.com/investing/market-moves/nortel-networks-cleared-to-end-bankruptcy-distribute-us7-billion-to-creditors-after-years-of-litigation">eight years</a> to see how much might be restored. That’s not very “defined.”</p>
<p>Unfortunately, pension underfunding is common. In Ontario, single-employer defined-benefit plans are short $37 billion in total. <a href="https://www.fsco.gov.on.ca/en/pensions/actuarial/Pages/solvency-funded-estimate-reports.aspx">Only 18 per cent are fully funded.</a> Those numbers exclude plans serving multiple employers, like the Ontario Municipal Employees Retirement System.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/193629/original/file-20171107-1068-1e9tne1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/193629/original/file-20171107-1068-1e9tne1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/193629/original/file-20171107-1068-1e9tne1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/193629/original/file-20171107-1068-1e9tne1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/193629/original/file-20171107-1068-1e9tne1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/193629/original/file-20171107-1068-1e9tne1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/193629/original/file-20171107-1068-1e9tne1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Total obligations and assets for single-employer defined-benefit pension funds in Ontario. The gap between the lines represents the overall funding shortfall. Data is from https://www.fsco.gov.on.ca/en/pensions/actuarial/Pages/solvency-funded-estimate-reports.aspx.</span>
</figcaption>
</figure>
<p>Public sector plans face other risks. Forty years is about 10 election cycles. Will all those politicians keep their predecessors’ promises?</p>
<p>They didn’t in Detroit. To escape bankruptcy in 2014, <a href="https://www.reuters.com/article/us-detroit-bankruptcy-pensions/detroit-defeats-pensioners-appeal-over-bankruptcy-cuts-idUSKCN12322F">the city cut pensions</a> by 4.5 per cent. Some cuts were retroactive – <a href="https://www.bloomberg.com/news/articles/2015-02-05/detroit-pension-cuts-from-bankruptcy-prompt-cries-of-betrayal">retirees had to give money back</a>.</p>
<p>And they didn’t in Rhode Island. In 2011, that state had <a href="https://beta.theglobeandmail.com/globe-investor/retirement/how-the-rhode-island-treasurer-slayed-her-state-pension-dragon/article15225383/?ref=http://www.theglobeandmail.com&">only 56 per cent of the pension money needed</a>. To avoid disaster, it reduced retirees “defined” benefits.</p>
<h2>Transient employees</h2>
<p>The second risk with defined-benefit pensions is employee turnover. Plans typically calculate payments based on age and years of service. If you work there longer, you’ll receive more.</p>
<p>But quitting sooner gets you less. Depending on where you work and how long, you may get only your contributions back, plus interest. In effect, the defined-benefit plan becomes a defined-contribution one.</p>
<p>Or you’ll receive a deferred pension based on your salary when you quit, say at age 35. That’s likely much lower than your final salary 30 years later at age 65. So, it’s “defined” smaller.</p>
<p>Defined-benefit pensions are nicknamed “golden handcuffs.” They penalize people who switch employers.</p>
<p>But people do switch. Professionals change companies for career advancement. Temporary workers struggle from contract to contract.</p>
<p><a href="https://www.bls.gov/news.release/tenure.nr0.htm">Half of U.S. workers</a> have been with their current employer less than 4.2 years. For those aged 55 to 64, 14 per cent have been there less than two years. That jumps to 38 per cent for those 25 to 34. For them, defined benefits are no better than defined contributions.</p>
<p>I’m not suggesting employees should abandon defined-benefit plans. They’re great if employers and employees are stable. But they aren’t risk-free, so some unions might consider bargaining for other benefits instead.</p>
<h2>Government action needed</h2>
<p>Meanwhile, governments should increase pension protections. For example, Ontario’s Pension Benefits Guarantee Fund will soon <a href="https://beta.theglobeandmail.com/report-on-business/ontario-eyes-new-rules-for-pension-funding/article35067299/?ref=http://www.theglobeandmail.com&">protect up to $1,500</a> of monthly pension payments. Other provinces should follow suit.</p>
<p>Unfortunately, Ontario is also letting pension funds become 15 per cent underfunded before requiring employer top-ups. Currently, 58 per cent of plans fit that category. That allows employers to ignore temporary investment downturns. But it also risks greater shortfalls during bankruptcies.</p>
<p>Sears pensions are 19 per cent underfunded, despite the company making top-ups. Imagine a future company bankruptcy with 19 per cent underfunding below the 15 per cent allowance. Retirees would lose 34 per cent of their pensions.</p>
<p>The federal government should also act. It could ban dividend payments whenever pensions are underfunded. Some corporate loan agreements already <a href="https://blogs.wsj.com/cfo/2011/07/25/companies-avoid-restricted-payment-bond-covenants/">contain similar restrictions</a>. That could have helped Sears workers.</p>
<p>Bankruptcy laws need updating too. <a href="http://laws-lois.justice.gc.ca/eng/acts/B-3/page-15.html#docCont">Current rules</a> first pay off secured debts, like mortgages. Underfunded pensions are considered unsecured debts. They get paid last with whatever money is left.</p>
<p>A <a href="http://www.cbc.ca/news/politics/government-pension-protection-ndp-sears-1.4371220">Bloc Québécois proposal would put pensions before secured debts.</a> As an employee, I find that tempting. But as a business professor, I think it’s extreme. Instead, I prefer the <a href="https://www.parl.ca/LegisInfo/BillDetails.aspx?Language=E&billId=9204842">NDP proposal to make pensions equal to secured debts</a>. That would improve pensioners’ prospects while respecting mortgagees’ rights.</p>
<p>The <a href="http://www.cbc.ca/news/canada/ottawa/nortel-pension-deal-approved-1.930687">Liberals advocated for similar changes</a> while in opposition, and federal Innovation Minister Navdeep Bains says he’s open to discussions now. Is he open to action?</p><img src="https://counter.theconversation.com/content/86587/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael J. Armstrong does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Sears Canada’s bankruptcy should alert employees and regulators alike to rethink defined-benefit pensions.Michael J. Armstrong, Associate professor of operations research, Brock UniversityLicensed as Creative Commons – attribution, no derivatives.