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  1. Workforce Planning: Aging and EmploymentModule 7: Economic Uncertainty Barbara McIntosh, Ph.D., SPHR 2010

  2. Economic Uncertainty: Overview • Reasons for working rest on economic uncertainty • Traditional sources of income in retirement: • Pensions • Retirement savings • Social Security • Total money income of older Americans • Key cause of uncertainty–health care costs • How much money is needed in retirement? ©SHRM 2010

  3. Specific Reasons to Work (AARP, 2007) • Need the money 76% • Enjoy the job/enjoy working 70% • To save for retirement 64% • Need to maintain health insurance coverage 61% • Need to pay for health costs for self and family 56% • It makes me feel useful 52% • Need to support other family members 46% • To qualify for Social Security 42% • To fulfill pension requirements/qualify for pension 41% Source: www.aarp.org/research/surveys/stats/surveys/public/articles/2007_Staying_Ahead_of_the_Curve.html ©SHRM 2010

  4. Employment Driver:: Economic Uncertainty Major questions: • How long am I going to live? • How long am I going to remain healthy? • Is health care going to be affordable? • Shortages of providers • Increasing costs • Can I afford old age in general? • What about cost-of-living increases? • Can I depend on my family/others? • Is my family going to depend on me? (sandwich generation) ©SHRM 2010

  5. Economic Uncertainty Income in the Retirement Years? The three-legged stool supported retirement: • Pensions • Savings • Social Security ©SHRM 2010

  6. Pensions • Shift from defined benefit to defined contribution • Employer: accountability issue • Employee: short time to take advantage of compound interest • Importance to the individual? • Pensions are not a major source of income for the majority of older persons • Shrinking numbers of workers are covered by pension plans • More important for higher-income workers ©SHRM 2010

  7. Pensions: Employers’ Concerns • Employers still offering defined benefit, BUT employer liability is a major concern • Pensions are at risk of underfunding ©SHRM 2010

  8. Reversing the Benefit Trend? New Recruiting Tool • Aerospace Corp.: • Needed to bring back defined benefit plans in order to recruit and retain highly qualified talent (Ph.D.-level scientists and engineers) • Turnover was higher than acceptable before retirement plan change Defined-benefit = golden handcuffs Full benefits at 65 (not 62) • Firm also uses: phased retirement plan, flexible scheduling Source: Marquez, J. (2008). The New Old Benefit. Workforce Management. Retrieved from www.workforce.com/section/02/feature/25/57/88/index.html ©SHRM 2010

  9. Retirement Savings Savings Accounts: • 1/3 + of American households have NO retirement savings (63% of low-income workers. (GAO Nov. 2007)) • Median balance of those with accounts is $27,000. Includes: • IRA • Keogh • 401(k) • Risky behavior–withdrawing funds with job loss Shrinking Investments: • Housing/real estate • Stock market BOTTOM LINE: Individuals may need to work longer for financial reasons ©SHRM 2010

  10. Poor Savings Track Record • The number of families with a head of household aged 55+ with housing debt has been increasing: • 1992: 24% • 2007: 40% median = $79,000 • Increased credit card debt among pre-retirees (55+) • 1992: 37% of all households • 2007: 50% of all households Source: MacDonald, J. (2009 ) How Housing, Credit Card Debt Have Changed Over Time. Employee Benefit Research Institute. #139. ©SHRM 2010

  11. Start Saving Early: Example • $5,000 engagement ring at age 25 • penalty if withdrawing from 401(k) • must take out $7,142 to clear $5,000 • At age 60: opportunity cost? • ring reduced retirement security by $76,252 if 7% annual rate of return • ring reduced retirement security by $200,000+ if rate of return was 10% ©SHRM 2010

  12. Social Security (1) • As income source: 90%+ of income for 33% of older Americans 50%+ of income for 65% of older Americans Nationally the median recipient age 65+ relies on Social Security for 67% of their income • Income redistribution • Poverty • Income replacement • Low-income earners vs. high-income earners • Gender • Occupational differences Source: Chapman, J. & Ettlinger, M.(2005). Social Security and the income of the elderly. EPI Issue Brief #206. Retrieved from www.epi.org/publications/entry/ib206/. ©SHRM 2010

  13. Social Security (2) • Pressures for change: • Ratio of workers per beneficiary: • 1950 – 16.5 workers per beneficiary • 2004 – 3.3 workers per beneficiary • 2031 – 2.2 workers per beneficiary • Financial sustainability: • In 2016 – Dip into trust • In 2037 – System is broke Source: 2005 OASDI Trustees Report (www.socialsecurity.gov/OACT/TR/TR05/II_project.html) ©SHRM 2010

  14. Income Sources for the Aged* Percentage of 65+ receiving income from specified source in 2006: • 88.5% Social Security benefits • 54.9% Asset income • 41.3% Receive retirement benefits other than SS • 24.6% Have earnings • 3.7% Cash public assistance • 3.4% Veteran’s benefits * Income of the Aged Chart book (2006) from the Social Security Administration. ©SHRM 2010

  15. Total Money Income of Older Americans • Median Income for individuals 65+ is $23,194 • 18.2% have income under $15,000 • 28.5% have income under $20,000 • 41% have income $20,000-49,999 Approx. 80% have income under $50,000 • 6.6% have income of $100,000 or more Source: Income of the Aged Chart book (2006) Social Security Administration. ©SHRM 2010

  16. Financial Uncertainty: Key to Working Longer ©SHRM 2010

  17. Health Care Benefits:(Elephant in the Living Room) • Private plans: • Cost increases double digits a year • Increased premiums • Reduced coverage or • Employers dropping coverage • Medicare (hospital insurance trust fund that pays for inpatient hospital care for those over 65): • Funds will be exhausted in 2019. • Drug benefit costs are sky-rocketing. Source: A Summary of the 2009 Annual Reports,Social Security and Medicare Boards of Trustees (www.ssa.gov/OACT/TRSUM/index.html) ©SHRM 2010

  18. How Much Is Needed? Health Care? Example: Long-term care cost increases from 2008 to 2009 • Private room nursing home rates rose 3.3% to $219 per day or $79,935 per year. • Assisted living also rose 3.3% to $3,131 per month or $37,572 annually. • Home health care jumped 5% to $21 per hour. • Adult day services increased 4.7% to $67 per day. Source: MetLife Mature Market Institute, Oct. 2009 ©SHRM 2010

  19. How Much Is Needed (2)? • 66% of retirees said their expenses either went up (39% on average) or stayed the same in retirement. • 48% of the retirees were expecting their expenses to decline in retirement. • 55% of retirees reported that they stopped working earlier than they'd planned. • 22% of those who were pushed into early retirement stopped working because of poor health or disability. Source: Fidelity Research Institute Retirement Index(SM) Finds Working Americans on Track to Replace 58 (2007, March 12). Business Wire. Retrieved from www.allbusiness.com/services/business-services/4315565-1.html. ©SHRM 2010

  20. How Much Is Needed (3)? • Family support needs in expected retirement years: • Later child-bearing years mean later college expenses • Parents living longer may mean long-term care support of them. • Life-style issues? Retirement plans? • RISK! Sources of income? Personal health care? Family responsibilities? Increasing costs and life style? ©SHRM 2010

  21. How Much Is Needed(4) • How much is enough? Consider expense profile • $1 MILLION doesn’t go as far • $1 million in 1957 = $7.3 million today (Federal Reserve) • 99% of Americans don’t have $1million Source: Brandon, E. (2009). Is $1 million Enough to Retire On? US News and World Reports. ©SHRM 2010

  22. Challenges: Some Examples • Primarily in health and benefit areas • Flexibility in hours • non-discriminatory given Fair Labor Standards Act • Innovative non-discriminatory practices and policies in a multi-generational workplace • Alternative approaches to employment transitions for aging workers • Lifelong Learning Accounts • Private/public collaborative/exchange programs ©SHRM 2010

  23. Economic Uncertainty: Summary This module covered the following topics: • Reasons for working rest on economic uncertainty • Traditional sources of income in retirement: • Pensions • Retirement savings • Social Security • Total money income of older Americans • Key cause of uncertainty–health care costs • How much money is needed in retirement? ©SHRM 2010