Participants June 4, 2019

Aging Global Population Requires a Retirement Rethink

As developed countries around the world, including the U.S., see the average age of their population increase, employers must prepare for an imbalanced workforce.
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Art by Adam McCauley

Few people would argue that greater global longevity is a bad thing, especially given the fact that older people living in developed nations today enjoy a better quality of life than could have been expected by previous generations.

Still, an aging global population presents some clear economic challenges. A 2018 Natixis report on the aging global workforce points to Japan as a bellwether for what other developed economies can expect. In that country, 27% of people are currently over the age of 65, and by 2050, there will be 70 retirees in Japan per 100 workers.

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Ed Farrington, head of retirement at Natixis, says the world can and should celebrate the fact that medical advances and broad-based lifestyle changes are allowing more people to reach older ages and remain healthy. But when it comes to the tricky topic of retirement planning in an aging world, he says, greater longevity is a serious issue to confront.

“It can quickly become very difficult for unprepared countries to support the growing portion of their populations living in retirement,” Farrington explains. “We are talking about retirement systems that were built on the expectation of having somewhere between 15 and 20 people living in retirement for every 100 workers. Seventy retirees per 100 workers simply becomes unsustainable.”

Data from J.P. Morgan’s latest Guide to Retirement shows the U.S. workforce is on a path much like Japan’s. The analysis shows that, for a healthy couple retiring today at age 65, the probability of at least one of the two living to age 75 is 97%. The figure drops only to 90% when the age rises to 80 years, and to 50% for 90 years.

Farrington and others note that, aside from the challenge greater longevity poses to individuals’ savings, this also poses a threat to nationwide systems, including Social Security and Medicare. As a result, employers, governments and individuals must make adjustments now to assure these systems can remain in place and fulfill their promises.

“Are we prepared to have larger portions of our population no longer working, and therefore living off essentially the bulk of either what they saved, or off of the generations that will come after them?” Farrington asks.

Katherine Roy, chief retirement strategist at J.P. Morgan, emphasizes the fact that Social Security and government benefits like Medicare were always intended as supplemental. Such programs go a long way to helping a lot of people, but individuals must understand that these programs will not provide sufficient income or insurance coverage alone. Sri Reddy, senior vice president for retirement and income solutions at Principal, agrees with that assessment. He adds that Social Security will be around once Millennials reach retirement, but policy adjustments must be enacted for the system to remain viable over the long-term.

“Social Security is a foundation, but there needs to be small fixes to keep the system healthy,” Reddy says. “Changes could include increasing the retirement age to 70 years old, or making a greater portion of Social Security income taxable.”

For their part, says Reddy, employers can make changes today to help older individuals continue working longer. This could mean allowing for phased retirements, or providing programs to help older workers keep their skillsets current. 

Plan design solutions

The experts agree that employers can take immediate steps in their retirement programs to address the challenge of greater longevity. Counterintuitively, they say, some of the most powerful steps to take today actually involve the youngest workers. For example, automatically defaulting new workers into a high savings rate and embracing automatic deferral escalations and reenrollments will position people for a stable retirement.

“Implementing these automatic features is one of the first and best solutions for employers,” Farrington says. “Auto-enrollment and auto-escalation can help a lot, along with a well-designed defined contribution plan put together with strong incentives and communication. If we can get workers early in their career to save 10% of their income or more, we will end up in a much better place.”

According to Aron Szapiro, director of policy research at Morningstar, employers should make it easier for workers to make systematic withdrawals from defined contribution plans, rather than only permitting retiring workers to make a lump-sum withdrawal.

“Having a system where you have people take out lump sums is not a good idea,” he says. “Any policy development that could encourage structured withdrawals and promote longevity insurance could be really valuable.”

Roy and Farrington also point to the importance of shorter-term financial stability as a keystone to successful retirement planning. Individuals must have sufficient emergency savings, for example, before retirement can become a realistic priority.

“You have to have a little wiggle room and be able to handle situations that change in the U.S. economy, and also in your personal situation,” Roy explains. “Emergency savings is one way we are trying to engage younger individuals. From here, we can figure out the level of savings they’ll need to have to achieve a successful retirement.”

Farrington concludes that employers, employees and policymakers all have a role to play in this discussion.

Benefits May 29, 2019

Offering Short-Term Stability to Help Employees Have Long-Term Security

The ability to handle short-term financial goals—or shocks—can improve an employee’s ability to save for the future.
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Art by Dadu Shin

Most—if not all— employees have short-term financial goals or face financial shocks during their careers.

 

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College graduates want to work on eliminating their student loan debt; a young couple may be saving for a wedding or their first child; a Generation Xer may be saving for a child’s college education or an employee may face a major home repair or a major medical set back.

 

But, managing short-term and long-term financial goals doesn’t have to be separate, notes a recent report by the Aspen Institute Financial Security Program (Aspen FSP), “Short Term Financial Stability: A Foundation or Security and Well-Being.” “Stability promotes security because financial buffers protect consumers from shocks that would detract from progress toward their long-term goals, act as material foundations for growing assets, and reinforce the financial actions that move people towards broader well-being,” the report says.

 

“Short-term financial stability means having enough of a financial buffer—a cushion—to be able to cope with everyday financial stress, while still progressing towards longer-term financial goals,” says Sheida Elmi, research program manager at Aspen FSP. “People need both. They need that short-term stability but also that long-term security. Having that kind of buffer allows them to continue on to their goals and financial path.”

 

Employers are in a good position to help employees with short-term financial stability, through either education or benefits.

 

Benefits to help with short-term financial stability

 

Among one way to assist, mentions Elmi, is by offering hardship funds. The way that most of these funds work is that workers and the company contribute into a fund, and workers can then apply for cash grants from the fund.

 

“Workers that have better pay and better benefits end up having more financial stability, and so those hardship funds are able to help them as intended. It helps them return to normal after an unexpected crisis, and it helps them not have to [dip into] long-term assets,” she says.

 

A short-term savings vehicle can also help achieve an ultimate goal or address a financial shock.

 

Offering these types of benefits helps workplace productivity while boosting financial confidence. It should be of primary importance to plan sponsors, says Elmi. Just as a sick worker would concern an employer, a financially struggling employee should also be carefully noted. 

 

Another Aspen FSP report described employee satisfaction with hardship funds as a seven or higher out of 10, but only 21% said it had a great financial impact. According to Elmi, this shows that plan sponsors can’t expect to achieve short-term financial stability with one or two benefits.

 

Sarah Newcomb, a behavioral scientist at Morningstar, describes how most employees struggling with short-term goals fall victim to predatory payday lenders. These lenders, while offering loans to those with falling credit, will also charge excessive interest fees, essentially creating a financial nightmare for those who take the loan but are then forced to pay high interest rates. Newcomb says, workers should have the opportunity to take out regular loans from their employers.

 

“Employers should make short-term loans against future income available to their employees confidentially, so they don’t have to report to predatory lenders,” she says. While employer-sponsored loans come with fiduciary responsibilities of its own, offering these benefits allows workers to borrow wages at lower interest rates, which can alleviate the stress of financial hardships through confidential and safe means.

 

Newcomb adds that offering a student loan repayment benefit—a benefit with amplified popularity given the number of younger workers graduating with large student loan debt—helps workers with short-term financial stability.

 

Educating about financial stability

 

One of the most important benefits, say Elmi and Newcomb, is creating personalized, educational awareness participants can understand.

 

One of the best paths to create this awareness is utilizing stories to illustrate lessons, according to Newcomb. Adding a picture to a number, either via visuals or stories, can significantly impact the way a participant thinks about his short-term spending, and eventually, long-term saving, Newcomb clarifies.

 

“It’s easy to think that we’re working for that day where we’re not working anymore, but it’s less common for us to think through, ‘If I’m dependent on someone’s salary, what happens if that person dies unexpectedly and that money is gone?’” she says. “For every financial story, coming up with a simple story or a real-life scenario is far more powerful than showing numbers.”

 

According to Elmi, employees should also be taught how to get from just getting by to getting ahead. And, she queries, “What are employers doing to help employees to grow their income so that they can get ahead?”

 

Employers should educate employees about the parallel relationship between short-term stability and long-term security, as well as advocate for employees’ financial stability through benefits and financial education. “[Both goals] are intricately connected,” says Newcomb. “Understanding the implications of short-term goals and how they relate to their financial future will lead employees to success, all they need is their employer’s help to connect the dots.”

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