Data and Research September 1, 2017

Older Workers Not Saving Enough for a Secure Retirement

A new study suggests that without a universal supplement to Social Security, many of the 24 million workers ages 55 to 64 will face declining living standards or poverty in just 10 years.

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One-third of working Americans between the ages of 55 and 65 have no retirement savings, and they are at risk of declining living standards and even poverty within the next decade, according to a study published by the Schwartz Center for Economic Policy Analysis.

The outlook for workers saving in defined contribution plans, defined benefit plans and individual retirement accounts (IRAs) is not bright either, the study finds. The median account balance for older workers with at least one of these accounts is $92,000. Based on this finding, the Schwartz Center projects that income from retirement savings would replace a median 14% of pre-retirement income for these workers, which the organization says is inefficient to maintain pre-retirement living standards.

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The study notes, “The small minority that also has DB pension coverage is better prepared with a median 20% replacement rate from their retirement savings.”

The median account balance for workers with at least a DC plan and earning less than $40,000 a year is $35,000. But even among the top 10% of earners, that rate is only $250,000.

Income seems to play a role in access to retirement savings vehicles. The study finds that 50% of older workers earning less than $40,000 have no savings. That rate drops to 20% for workers making between $40,000 and $115,000. Still, 15% of earners making more than $115,00 are not saving in these accounts.

However, the study also factors in Social Security earnings projections.

The organization notes that targets are typically lower for higher earners, because Social Security replaces less of their pre-retirement earnings.  In this sense, “The study assumes a replacement rate target of 85% for workers earning below $40,000, a 75% target for workers earning between $40,000 and $115,000; and a 65% target for workers earning more than $115,000.

Still, the study stresses that, “Without retirement savings, workers below median income will be almost entirely dependent on Social Security and will be at high risk of not only downward mobility in retirement, but also falling into poverty. The picture is not much different for the small minority that has retirement savings.”

Taken together, these stats shed light on an underserved portion of the market, particularly among those earning below median income. However, even participants contributing to retirement savings vehicles would need to boost their savings to secure a comfortable retirement. The task won’t be easy for many, especially considering a wealth of studies indicating more Americans are living paycheck to paycheck, and financial stress is eating away at their health and productivity. Sound communication and engagement around financial wellness and proper retirement savings may push the needle in the right direction.

But the report also stressed potential policy changes. The study cites rising Medicare premiums, Social Security benefits cuts, lack of access to DC plans, and leakage as major factors affecting the health of the retirement savings system as a whole. Thus, more American workers are facing the choice between working longer and facing severe reductions in living standards. The study reports, “The far-reaching effects of an increase in downward mobility and old age poverty include pressure on the social safety net and economic stagnation due to weaker consumer spending.”

The researchers suggest regulators should take a closer look at Guaranteed Retirement Accounts (GRAs). The study describes these as individual accounts that require employers and employees to contribute along with a refundable tax credit provided by the government. “GRAs provide a safe, effective vehicle for workers to accumulate personal retirement savings over their working lives,” the researchers noted.

But considering the uncertainty behind federal tax reform, the future tax treatment of retirement plans still is in question.

The full report “Inadequate Retirement Savings for Workers Nearing Retirement” can be found at EconomicPolicyResearch.org.

Compliance September 1, 2017

PBGC Offers Financial Assistance to Union Plan Approved for Benefits Reductions

The agency says the financial assistance, together with benefit reductions that are required as a condition for receiving PBGC assistance, will help the United Furniture Workers Pension Fund A to avoid insolvency and to pay benefits to participants.

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The Pension Benefit Guaranty Corporation (PBGC) announced it has approved a partition application and will provide early financial assistance to the United Furniture Workers Pension Fund A, a Nashville-based multiemployer pension plan that covers nearly 10,000 participants.

The early financial assistance from PBGC, together with benefit reductions that are required as a condition for receiving PBGC assistance, will help the plan to avoid insolvency and to pay benefits to participants, the agency says.

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The U.S. Department of the Treasury approved a related application submitted by the plan for the required benefit reductions and certified the results of a participant vote on the plan’s benefit reduction proposal. PBGC’s approval of the partition and early financial assistance is the first under the Multiemployer Pension Reform Act of 2014 (MPRA), which rewrote the rules for partition. 

Under MPRA, troubled multiemployer pension plans that face insolvency are permitted to apply for benefit reductions and, if necessary, early financial assistance from PBGC to extend their financial viability. In its applications to Treasury and PBGC, the plan trustees said that the fund was in critical and declining status, that the plan’s assets and future income are insufficient to pay promised benefits, and that the plan would run out of money in 2021.

Under the partition, PBGC provides early financial assistance by moving a portion of the plan’s guaranteed benefit obligations to a new, separate plan that will have its costs reimbursed by PBGC. This will relieve some of the financial burden on the United Furniture Workers Fund and enable it to avoid insolvency. Plan participants whose benefits are moved to the new plan will be treated the same as participants whose benefits remain entirely in the original plan.

Under the law, benefits of 7,100 participants will not be reduced, because the participant is aged or disabled or has benefits that are not more than 10% greater than PBGC guarantees would provide. The remaining 2,800 participants will see future benefit reductions to 110% of the PBGC guaranteed amount, averaging a 12.7% cut in benefits.

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