Data and Research February 27, 2017

Only 38% of American Households Meeting Their Savings Needs

More than one-quarter, 27%, are not making any progress at all.
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Two-fifths (38%) of American households feel they are making good or excellent progress in meeting their savings needs, the 10th annual America Saves Week survey found, while more than one in four (27%) aren’t making any progress at all.

This is according to research sponsored by the Consumer Federation of America and the American Savings Education Council. The two organizations looked at data from the past 10 years and found that savings efforts have worsened. For example, in 2008, 53% of the population saved 5% or more of their income. That has continued to steadily tick down to 48% in 2017.

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The percentage of people who save no income (23% in 2008) rose in the interim to a high of 29% in 2013 but has returned to 23%. Ten years ago, 71% of the population reported having sufficient emergency savings, but that is only 65% today. And the percentage of people who believe they have or will have sufficient retirement funds has declined from 58% to 54%.

In addition, during this time, the percentage of those who know their net worth declined from 54% to 47%, while those with a savings goal sank from 62% to 52%. Participation in workplace retirement plans dropped as well (55% versus 49%).

“The most surprising result was the continuing decline in those who have a goal,” said Stephen Brobeck, executive director of the Consumer Federation of America, speaking during a webcast on the survey findings. “This is one of the sharpest declines I have seen, and the long-term trend is unmistakable.”

NEXT: Saving outside of work

The percentage of those who automatically save outside of their workplace retirement plan, however, ticked up from 42% to 43%.

Brobeck attributed these slightly more dismal results to the Great Recession of 2008. He pointed to the Federal Reserve Board’s Survey of Consumer Finances, which shows that between 2007 and 2013, Americans’ median net worth declined by 40% from $135,400 to $81,200.

Brobeck noted that in the 10 years since the Great Recession, the economy has improved—but Americans’ savings habits have not, which the Federation finds surprising.

The survey also found that as income rises, so does savings progress. Only 14% of those making less than $25,000 a year have good or excellent savings progress, and this rises to 52% for those making $75,000 to $100,000 a year.

As to what Americans can do to improve their savings, Brobeck said: “We strongly encourage all Americans to save at work—and at your bank or credit union. Also, when you are maintaining your bank account, tell your bank or credit union that you want to automatically transfer a certain sum from checking to savings every month. Those with modest incomes should focus first and foremost on building emergency savings.”

ORC International conducted the telephone survey of 1,007 adults in late January for the two trade groups.

Administration February 27, 2017

The Challenge in Lowering Public Pensions’ Return Assumptions

Public plans that reduce their return assumption in the face of diminished near-term projections will experience an immediate increase in unfunded liabilities and required costs, according to NASRA.
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In the wake of the 2008-09 decline in capital markets, and Great Recession, global interest rates and inflation have remained low by historic standards, due partly to so-called quantitative easing of central banks in many industrialized economies, including the U.S., the National Association of State Retirement Administrators (NASRA) notes in an Issue Brief.

Now in their eighth year, these low interest rates, along with low rates of projected global economic growth, have led to reductions in projected returns for most asset classes, which, in turn, have resulted in an unprecedented number of reductions in the investment return assumption used by public pension plans. Among the 127 plans NASRA measured, nearly three-fourths have reduced their investment return assumption since fiscal year 2010, resulting in a decline in the average return assumption from 7.91% to 7.52%.

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NASRA says one challenging facet of setting the investment return assumption that has emerged more recently is a divergence between expected returns over the near term (the next five to 10 years) and over the longer term (20 to 30 years). A growing number of investment return projections are concluding that near-term returns will be materially lower than both historic norms as well as projected returns over longer timeframes.

According to the Issue Brief, if near-term rates do prove to be lower than historic norms, plans that maintain their long-term return assumption are likely to experience a steady increase in unfunded pension liabilities and corresponding costs. Alternatively, plans that reduce their assumption in the face of diminished near-term projections will experience an immediate increase in unfunded liabilities and required costs. “As a rule of thumb, a 25 basis point reduction in the return assumption, such as from 8.0% to 7.75%, will increase the cost of a plan that has a COLA, by three percent of pay (such as from 10% to 13%), and a plan that does not have a COLA, by two percent of pay.

“The investment return assumption is the single most consequential of all actuarial assumptions in terms of its effect on a pension plan’s finances,” the Issue Brief says. NASRA suggests, “The process for evaluating a pension plan’s investment return assumption should include abundant input and feedback from professional experts and actuaries, and should reflect consideration of the factors prescribed in actuarial standards of practice.”

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