Ten Steps to Reforming Baby Boomer Retirement

Studies | Retirement

No. 283
Thursday, March 23, 2006
by John C. Goodman, Devon Herrick, Matt Moore


Notes

  1. Andrew J. Rettenmaier and Thomas R. Saving, “The 2004 Medicare and Social Security Trustees Reports,” National Center for Policy Analysis, Policy Report No. 266, June 4, 2004. Available online here. Also see John C. Goodman, “The Coming Fiscal Deluge,” National Center for Policy Analysis, Brief Analysis No. 502, February 15, 2005. Available online here.
  2. William Ford, “2004 Comparative Study of Major Public Employee Retirement Systems,” Wisconsin Legislative Council, December 2005. Also see Dennis Cauchon, “Public Workers' Pensions Swelling,” USA Today , January 17, 2006.
  3. “2005 Annual Performance and Accountability Report,” Pension Benefit Guarantee Corporation, November 15, 2005. Available online here.
  4. Alix Nyberg Stuart, “Promises, Promises,” CFO Magazine , February 22, 2005. Available online here. About 60 percent of large U.S. employers still offer retiree medical benefits. Few companies have enough assets to offset the liabilities, because they are not legally required to do so. The S&P 500's “other post-retirement employee benefits” obligations were only 12 percent funded in 2003, leaving companies with unfunded liabilities of $339 billion at the end of that year.
  5. See the discussion of this and other examples in Edward J. Harpham, “Private Pensions in Crisis: The Case for Radical Reform,” National Center for Policy Analysis, Policy Report No. 115, January 1984.
  6. The law was the Employee Retirement Income Security Act (ERISA) of 1974.
  7. The existence of federal pension insurance does not guarantee all pension promises will be kept, however. The reason is that the PBGC sets a maximum on the amount it will pay to each retiree. For example, after Braniff filed for bankruptcy in 1982, retired teamsters receiving monthly pension checks of $665 saw their benefits reduced to $434. Retired machinists saw their monthly pension checks cut from $700 to $590. Harding Lawrence, former CEO of Braniff, had been counting on a $306,000-a-year pension. Under the bail-out, his pension was reduced to $16,568 a year. See Harpham, “Private Pensions in Crisis,” page 7.
  8. “The Risk Exposure of the Pension Benefit Guaranty Corporation,” Congressional Budget Office, September 2005. Available online here.
  9. “Testimony of Bradley D. Belt, Executive Director of the Pension Benefit Guarantee Corporation,” U.S. Senate, Committee on the Budget, June 15, 2005. Available online here.
  10. Dennis E. Logue, “Pension Plans at Risk: A Potential Hazard of Deficit Reduction and Tax Reform,” National Center for Policy Analysis, Policy Report No. 119, October 1985. Also see Celeste Colgan and John Goodman, “Saving and Investing: A Challenge for Women,” National Center for Policy Analysis, Policy Backgrounder No. 161, April 13, 2004. Available online here.
  11. Based on William B. Conerly, “The Defined Benefit Pension Crisis,” National Center for Policy Analysis, Brief Analysis No. 540, December 21, 2005. Available online here .
  12. Under current law, workers are subject to one of two vesting schedules: “cliff” vesting, which gives the employee a nonforfeitable right to employer matching contributions after three years, and “graded” vesting, under which employees gradually acquire a nonforfeitable right to employer contributions until finally reaching full vesting after six years. See “What You Should Know About Your Retirement Plan,” Employee Benefits Security Administration, U.S. Department of Labor, October 2003. Available online here.
  13. U.S. Bureau of Labor Statistics, “Number of Jobs Held, Labor Market Activity, and Earnings Growth Among Younger Baby Boomers: Results from More Than Two Decades of a Longitudinal Survey,” USDL 02-497, August 27, 2002, as reported in the Statistical Abstract of the United States : 2004-2005 ( Washington , D.C. : U.S. Department of Commerce, October 2004), Table No. 591, page 382.
  14. “401(k)-Type Plan and IRA Ownership,” Employee Benefits Research Institute, EBRI Notes , Vol. 26, No.1, January 2005. Available online at http://www.ebri.org/pdf/notespdf/0105notes.pdf.
  15. David Wessel, “Rule Keeps Returns Low for Some in 401(k)s,” Wall Street Journal , August 4, 2005. The Hewitt Associates survey included 458 “large U.S. employers.”
  16. “Utilization of Tax Incentives for Retirement Saving,” Congressional Budget Office, August 2003. Available online here.
  17. Well under 10 percent of participants contribute as much as is allowed by law. See Peter R. Orszag, “Progressivity and Saving: Fixing the Nation's Upside-Down Incentives for Saving,” Brookings Institution, Testimony before the House Committee on Education and the Workforce, February 25, 2004.
  18. “Trends and Experience in 401(k) Plans,” Hewitt Associates, 2003.
  19. David Wessel, “Rule Keeps Returns Low for Some in 401(k)s,” Wall Street Journal , August 4, 2005. The Vanguard Associates survey included 1,694 plans.
  20. See Brooks Hamilton and Scott Burns, “Reinventing Retirement Income in America,” National Center for Policy Analysis, Policy Report No. 248, December 2001.
  21. “The 2005 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds,” U.S. Social Security Administration, March 2005.
  22. Hewitt Associates, “Survey Findings: Trends and Experience in 401(k) Plans 2003,” 2003, page 71. Also see “Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy,” National Academy of Social Insurance, Study Panel Final Report, 2005, page 54. Available online here.
  23. For more information, see John C. Goodman and Peter R. Orszag, “Retirement Savings Reforms on which the Left and the Right Can Agree,” National Center for Policy Analysis, Brief Analysis No. 495, December 1, 2004. Available online here.
  24. Brigitte Madrian and Dennis Shea, “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior,” Quarterly Journal of Economics, Vol. 116, No. 4, November 2001, pages 1,149-87. Also see Sarah Holden and Jack VanDerhei, “The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulation at Retirement,” Employee Benefits Research Institute, Issue Brief No. 283, July 2005. Available online here; and William G. Gale, J. Mark Iwry and Peter R. Orszag, “The Automatic 401(k): A Simple Way to Strengthen Retirement Savings,” Retirement Security Project, March 2005.
  25. David Wessel, “Rule Keeps Returns Low for Some in 401(k)s,” Wall Street Journal , August 4, 2005.
  26. The Contract with America was a document released by the Republican Party during the 1994 Congressional elections. The Contract had several provisions, including tort reform, a reduction in the capital gains taxation rate, repeal of taxes on Social Security benefits and elimination of the Social Security earnings limit, among others.
  27. Originally, the Social Security earnings test applied to all beneficiaries who received wage income, regardless of age. In 2000, the law was changed and now applies only to Social Security beneficiaries who have not yet attained normal retirement age and who earn wage income that exceeds a certain threshold (which is adjusted for inflation each year). One of two different thresholds applies, depending on whether or not it is the year in which the worker reaches normal retirement age. Social Security withholds $1.00 in benefits for every $2.00 of earnings in excess of the first threshold ($12,480 in 2006) for people who will attain normal retirement age in a future year. A second threshold applies to the wage income of early retirees who will reach normal retirement age in the current year; in 2006, this threshold is $33,240. Social Security withholds $1.00 in benefits for every $3.00 of earnings above this second threshold in the months prior to the month in which the retiree reaches the normal retirement age. When an early retiree reaches normal retirement age, benefits lost to the earnings test are restored in a manner that is considered actuarially fair by recalculating the retiree's Social Security benefit payments and providing him a higher payment for the rest of his life. Thus, from the government's perspective, regardless of when a person retires, the lifetime Social Security benefits paid will, on average, be the same. However, from the individual's perspective the earnings test can be perceived as a tax: First, many individuals are present-oriented, placing a much greater value on benefits today than benefits promised in the future. Second, many individuals may prefer the certainty of benefits today versus an uncertain stream of benefits stretching over many years. Third, in making the calculation of how much to increase benefits in the future, the government discounts future payments at its own borrowing rate. Since that rate is much lower than the rate at which an individual can borrow in the marketplace, individuals are likely to view benefits forgone today as more valuable than the increased payments in future years. For more information, see “Exempt Amounts Under the Earnings Test,” Social Security Administration Web site feature, October 2005. Available online here.
  28. Alan L. Gustman and Thomas L. Steinmeier, “The Social Security Retirement Earnings Test, Retirement and Benefit Claiming,” National Bureau of Economic Analysis, Working Paper No. 10905, November 2004. Available online here.
  29. Michael V. Leonesio, Denton R. Vaughan and Bernard Wixon, “Early Retirees Under Social Security: Health Status and Economic Resources,” Social Security Administration, Office of Research, Evaluation and Statistics, ORES Working Paper Series Number 86, August 2000. Available online here.
  30. Alan L. Gustman and Thomas L. Steinmeier, “The Social Security Retirement Earnings Test, Retirement and Benefit Claiming,” National Bureau of Economic Analysis, Working Paper No. 10905, November 2004. Available online here.
  31. Stephen J. Entin, “Reducing the Social Security Benefits Tax,” National Center for Policy Analysis, Brief Analysis No. 332, August 10, 2000. Available online here . Also see “Understanding the Benefits,” Social Security Administration, SSA Publication No. 05-10024, January 2006. Available online here.
  32. For the purpose of the benefits tax, modified adjusted gross income includes all ordinary adjusted gross income plus half of Social Security benefits plus income from tax-exempt bonds.
  33. Stephen J. Entin, “Reducing the Social Security Benefits Tax,” National Center for Policy Analysis, Brief Analysis No. 332, August 10, 2000.
  34. Jagadeesh Gokhale and Laurence J. Kotlikoff, “Tax-Favored Savings Accounts: Who Gains? Who Loses?” National Center for Policy Analysis, Policy Report No. 249, January 2002. Available online here.
  35. ESPlanner , the financial planning software developed by Laurence Kotlikoff. The model evens out consumption over a person's lifetime.
  36. Adapted from “Women in Health,” a special online feature of the National Center for Policy Analysis's “Women in the Economy” project.
  37. Kevin T. Stroupe, Eleanor D. Kinney and Thomas J. Kniesner, “Chronic Illness and Health Insurance-Related Job Lock,” Center for Policy Research, Syracuse University, Working Paper No. 19, August 2000.
  38. HIPAA guarantees the right to obtain health coverage to people who have “credited prior coverage.” However, a significant gap in coverage is enough to remove protections and allow insurers to require a waiting period for a pre-existing condition. A significant gap is defined at 63 days or more. State laws may provide longer protections. See “Frequently Asked Questions about Portability of Health Coverage and HIPAA,” Employee Benefits Security Administration, U.S. Department of Labor, February 7, 2006.
  39. For more information, see John Goodman, “A Proposal to Create Personal and Portable Insurance at the State Level,” a special online feature of the National Center for Policy Analysis's “Debate Central” project. Available online here.
  40. Employer-sponsored health insurance is paid with pretax funds. The employee receives a subsidy because health insurance premiums are excluded from the 15 percent payroll tax, an additional subsidy equal to their marginal tax bracket and a subsidy of any state or local income tax. An employee in the 25 percent federal income tax bracket and a 5 percent state and local tax bracket would receive a subsidy of about 45 percent.
  41. Federal law allows all taxpayers to deduct health (and health insurance) expenses above 7.5 percent of adjusted gross income. Although fewer women than men work in small businesses, of those who do, fewer women are given the option of job-based health insurance (44 percent versus 47 percent). See “National Health Care by Type of Expenditure: Calendar Year 2001,” Centers for Medicare and Medicaid Services, November 2003.
  42. Adapted from John Goodman, “A Proposal to Create Personal and Portable Insurance at the State Level,” a special online feature of the National Center for Policy Analysis's “Debate Central” project.
  43. Although all group insurance is guaranteed issue, it is not a requirement for individual insurance in most states.
  44. Firms employing 200 or more workers in 2003. Of small firms with only three to 24 workers, only 9 percent offer retiree benefits. See “Section 11: Retiree Health Benefits,” in “Employer Health Benefits: 2003 Annual Survey,” Kaiser Family Foundation, 2003.
  45. Ibid.
  46. Firms employing 200 or more workers in 2003. See “Section 11: Retiree Health Benefits,” in “Employer Health Benefits: 2003 Annual Survey,” Kaiser Family Foundation, 2003.
  47. Adapted from John C. Goodman, “Ten Easy Health Reforms,” National Center for Policy Analysis, Brief Analysis No. 497, January 14, 2005. Available online here. Also see John C. Goodman, “Prescription Drugs for Seniors: The Roth IRA Solution,” National Center for Policy Analysis, Brief Analysis No. 315, March 16, 2000. Available online.
  48. However, if they have HSA accumulations prior to age 65, Medicare enrollees can use unexpended HSA funds to pay Medicare premiums, deductibles, copays and coninsurance, premiums for an employer's retiree medical insurance, or other out-of-pocket medical expenses. The one restriction is that HSA funds cannot be used to purchase Medicare supplemental insurance, known as “Medigap” policies.
  49. See “State of the Union: Affordable and Accessible Health Care,” Office of the Press Secretary, White House Fact Sheet, January 31, 2006.
  50. Ellen Meara, Chapin White and David M. Cutler, “Trends in Medical Spending by Age, 1963-2000,” Health Affairs , Vol. 23, No. 4, July/August 2004, page 179.
  51. Much of this section is taken from John Goodman et al., “Medicaid Empire: Why New York Spends so much on Health Care for the Poor and Near Poor and How the System Can Be Reformed,” National Center for Policy Analysis, Policy Report, forthcoming.
  52. Statement of Raymond C. Scheppach, Executive Director, National Governors Association, before the Medicaid Commission on Short-Term Medicaid Reform, August 17, 2005.
  53. “Long Term Care,” Centers for Medicare and Medicaid Services, March 31, 2005. Available online here. Access verified January 4, 2006.
  54. Ibid.
  55. Robyn I. Stone, “Long-Term Care for the Elderly with Disabilities: Current Policy, Emerging Trends, and Implications for the Twenty-First Century,” Milbank Memorial Fund, August 2000.
  56. Mark R. Meiners (Director, Partnership for Long-Term Care), University of Maryland.
  57. United States data for 1999. Average length of stay for current residents was significantly longer than for discharged – about 892 days. See A. Jones, “The National Nursing Home Survey: 1999 Summary,” National Center for Health Statistics, Vital and Health Statistics, Series 13, No. 152, June 2002.
  58. Claims include those for nursing home care, assisted living and home care services. See Dawn Helwig, Milliman USA, April 2005. Also see discussion in Susan B. Garland, “Long-Term-Care Insurance: How Much Is Too Much?” New York Times , July 24, 2005.
  59. "The Deficit Reduction Omnibus Reconciliation Act of 2005" allows expansion of Long Term Care Partnership Programs to all states.
  60. Long-term care premiums are a medical expense under section 213(d) of the tax code, but those expenses are only deductible to the extent that they exceed 7.5 percent of adjusted gross income.
  61. “Medical and Dental Expenses,” IRS Publication 502, 2004. Available here.

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