Bargain Based

My father had many admirable personality traits, but he also had his quirks. He was buying in bulk at warehouse stores well before it was “cool” to do so (and before many of the current generation of such stores existed), and he was an earlier adopter of generic food brands. And, yes, sometimes he bought generic food and paper stocks in bulk. While the quality of such offerings has doubtless improved dramatically over the years, I still shudder at the memory of my first sip of generic cola.

My childhood encounters with generic products notwithstanding, I’ve generally not been as particular about generic drugs. Oh, sure, when you have a migraine, there’s still something to be said for the confidence (if not reality) in reaching for the name brand pain reliever. But when it comes to prescription drugs, if there’s a cheaper, generic alternative, I’m generally amenable to the switch.

A greater sensitivity to cost is, in fact, one of the aspects of consumer-directed health plans (CDHP) touted by proponents, who contend that providing participants with an account and subjecting their health insurance claims to high deductibles will induce enrollees who would likely be spending more of their own money (than might be the case with traditional health coverage) to make more cost- and quality-conscious health care decisions. On the other hand, CDHP skeptics caution that these individuals lack the kind of information they need to make good decisions—and, worse, might make cost-centric choices that aren’t the best health care choices, and might even prove to be less cost-efficient (and even more expensive) over the longer term.

Using data from a large employer that implemented a CDHP, fully replacing traditional managed-care health insurance with a health savings account (HSA), new research[i], conducted through the EBRI Center for Research on Health Benefits Innovation (EBRI CRHBI)[ii], found that moving to the HSA-eligible plan reduced the number of brand name prescriptions filled. However, it also found that the move reduced the number of generic prescriptions filled. Previous EBRI research showed that while prescription drug use went down, it also resulted in decreased use of maintenance medications for chronic disease and a worsening of adherence.

As the EBRI report explains, while reductions in prescription-drug utilization can result in pharmacy expenditure savings for employer plan sponsors, increases in downstream medical costs may eclipse those benefits. In view of the potential for these kinds of unintended offsets, it notes that CDHPs and other plan designs that raise patient cost-sharing for prescription drugs might want to consider some alternative strategies that can bolster adherence and mitigate the potential impact.

Sometimes less is more – but only after you take into account all the costs. And sometimes you find that “less” is no bargain.

• Nevin E. Adams, JD

[i] “Brand-Name and Generic Prescription Drug Use After Adoption of a Full-Replacement, Consumer-Directed Health Plan With a Health Savings Account” was published in the March EBRI Notes, available online here.

[ii] The following organizations provide the funding for EBRI CRHBI: American Express, Ameriprise, Aon Hewitt, Blue Cross Blue Shield Association, Boeing, Deseret Mutual, Federal Reserve Employee Benefits System, General Mills, Healthways, IBM, JP Morgan Chase, Mercer, and Pfizer.

Security "Blanket"

“How do they expect to retire on THAT?”

In the several days since the 2014 Retirement Confidence Survey(1)  hit the streets, I think I’ve heard that question more than any other. “That” in this case is the widely cited finding of the survey that 36% of respondents have less than $1,000 (aside from home equity and defined benefit plan) saved – and that’s up from 20 percent in that category in 2009 and 28 percent a year ago(2).

So, how does that group expect to retire?

We can’t know for certain, but there are several things that might offer a better understanding. First, many of those probably AREN’T expecting to retire on that, at least not any time soon; many are young (about half of the 25-34 age group are in this savings range).

Second, they may not be “expecting” to retire; about 16 percent of those with less than $15,000 set aside say they’ll “never” retire, compared with 7 percent of total respondents).

Most of the individuals in this group are, as you might expect, lower-income.  More than 60 percent reported household income of $25,000/year or less. 

Even if they are expecting to retire some day, they may have concerns about that reality. This group of low/non-savers, for the very most part, had NO retirement account – 80 percent of the 36 percent were in that category. Respondents with no retirement account not only tended to have much lower confidence levels, they were also more likely to think they needed to be saving 50 percent of their current paycheck to achieve a financially comfortable retirement – a perception that might be a reality for this group, based on their reported savings.

Finally, while the trend line for this particular group isn’t encouraging, it’s worth noting that Social Security was cited as a major source of income for nearly two-thirds of the current retiree respondents to the 2014 RCS (as it has been over the history of the RCS), even though current workers tended to have lower expectations for the primacy of Social Security benefits in their retirement income stream. One need only look to the replacement rates that Social Security is projected to provide to appreciate the significance of that program as a retirement income source for many, particularly low- and middle-income workers(3). In fact, a recent EBRI analysis of data from the HRS indicates that Social Security provides more than half the total household income for more than half those ages 65-74, as it does for roughly two-thirds of the households over that age (4).

Indeed, one might well wonder how people expect to live on savings of less than $1,000 in retirement. However, the data suggest that many – already are.

Nevin E. Adams, JD

(1) The 2014 Retirement Confidence Survey is available here.

(2) The RCS is, of course, a snapshot at a point in time. It’s important to keep in mind that the savings reported are not necessarily what those respondents will have a year from now, or certainly a decade hence. It’s also important that projections about future retirement security consider not just where things stand at a static point in time, but, as EBRI’s Retirement Savings Projection Model (RSPM) does, the impact of future events and changes in behavior.  More information on the RSPM is online here. 

(3) See “Annual Scheduled Benefit Amounts for Retired Workers With Various Pre-Retirement Earnings Patterns Based on Intermediate Assumptions, Calendar Years 1940-2090.”

(4) See “Income Composition, Income Trends, and Income Shortfalls of Older Households” online here.

”Background” Check

We’ve never invested in a vacation home, but for a number of years now, my family has made relatively regular trips to Gettysburg, Pennsylvania. And while we’ve visited many places over the years, Gettysburg remains special, both because there are places that we know, and have visited many times, and because there are (still) things to discover. Over time we’ve also shared that experience with friends and members of our extended family, and their participation adds an additional, fresh perspective, even to sites we have visited many times before.

On March 18, EBRI and Greenwald & Associates will release the results of the 24^th annual Retirement Confidence Survey (RCS). With a perspective longer than many retirements, it’s likely to garner a lot of attention, as well it should. The focus tends to be on retirement confidence (or the lack thereof), specifically at the extremes—those “very” and “not at all” confident in their prospects for a financially comfortable retirement.

Attention will also likely be given to what can be done to improve the levels of confidence. Previous iterations point to some consistent factors: having more retirement savings is perhaps the most obvious connection to retirement confidence, as is participation in a workplace retirement savings plan (which, as you might expect, is linked to having more retirement savings). The RCS has also found that something as fundamental as having taken the time to do a calculation of retirement needs has a positive effect on confidence, even though those who had done such an assessment tend to set higher savings goals.

For this year’s RCS, as we do every year, we make it a point to ask a battery of consistent questions, to develop trend lines that allow us to see how attitudes change over time, throughout a wide variety of market and regulatory cycles, not to mention the advent of transformative technologies such as the Internet. Of course, we also include certain topical questions to get a current sense of worker—and retiree—responses to things such as prospective tax law changes, plan design features like automatic enrollment and contribution acceleration, and the use of various technologies in retirement planning. We’ve asked not only how much they have saved, but how much they think they should have saved, and—more recently—how much they think they should be saving now to provide that financially secure retirement.

Perhaps most importantly, we pose those questions to both current workers and current retirees, so as to gain a unique and informative perspective on the realities of retirement from those already living it, alongside the expectations of those for whom retirement remains a future event.

There’s a particular spot on the Gettysburg battlefield where we always try to take a family picture—the background doesn’t change, but it’s interesting to watch how much we’ve changed over the years.

Similarly, the RCS provides an invaluable and consistent background—along with a fresh and interesting perspective of today’s environment, as well as insights on future trends—that can help us all better prepare for a more financially secure retirement.       

- Nevin E. Adams, JD 

Note: The results of the 2014 Retirement Confidence Survey (RCS) will be available at 8 a.m. ET on Tuesday, March 18, at www.ebri.org.  Information and findings from prior surveys are available at www.ebri.org/surveys/rcs.

Pet "Smart"

I’ve had both cats and dogs in my family over the years, and while each of our individual pets has had a unique personality, there are some attributes that seem to apply to each species, regardless of the individual animal. One of the most obvious is their approach to food.  For example, you can leave your cat alone in an apartment for a weekend with a supply of food and water sufficient to last for a few days, and odds are when you return home, there will still be some left.  But leave your dog alone in the same apartment with the same additional allotment of food and water, chances are it won’t last 30 minutes.  And in those circumstances, if you have both a cat and a dog in that apartment, odds are the latter will eat the former’s food as well.

Animal psychologists have a variety of explanations for why dogs and cats approach food the way they do, generally citing either a confidence of its future availability, or a concern that if it’s not consumed now, it will disappear.

Experts have long been worried about how quickly individuals would spend through their savings in retirement, whether those rates of spending would too rapidly deplete savings, and if those rates would be sufficient to sustain a reasonable post-retirement lifestyle.

A recent analysis[i] of activity within the EBRI IRA database[ii] found that just over 16 percent of traditional and Roth IRA accounts had a withdrawal in 2011, including 20.5 percent of traditional accounts.  The report notes that this percentage was largely driven by activity among traditional IRAs owned by individuals ages 70½ or older where the individuals were required by law to make withdrawals from their tax qualified accounts or pay significant tax penalties.

Significantly, for those at the RMD age, the withdrawal rates at the median appeared close to the amount required by law to be withdrawn, though some were significantly more. And while the highest 25 percent did appear to be taking out amounts in excess of those required by law, the report notes that some of these accounts could be the focus of the owners’ withdrawals instead of other accounts owned by them.

A separate EBRI analysis[iii] of the University of Michigan’s Health and Retirement Study (HRS) found that at age 61, only 22.2 percent of households with an individual retirement account (IRA) said that they took a withdrawal from that account, but that the pace slowly increased to 40.5 percent by age 69 before jumping to 77 percent at age 71.  That EBRI analysis also found that the percentage of households with an IRA making a withdrawal from that account not only increased with age, but also spiked around ages 70 and 71, a trend that, the report explains, appears to be a direct result of the required minimum distribution (RMD) rules in the Internal Revenue Code.

IRAs are, of course, a vital component of U.S. retirement savings, holding more than 25 percent of all retirement assets in the nation, according a recent EBRI report. A substantial and growing portion of these IRA assets originated in other employment-based tax-qualified retirement plans, such as defined benefit (pension) and 401(k) plans.

While the median withdrawal rates evident in the proprietary EBRI IRA database suggest that many individuals are highly likely to maintain the IRA as a source of income throughout retirement, further study is needed to see if these rates hold up over time as their owners age further into retirement, and to evaluate whether those rates, in conjunction with other resources, are adequate to provide a reasonable, if not comfortable, post-retirement lifestyle. 

In the months ahead, we’ll not only be looking at this withdrawal behavior over time, but, as part of EBRI’s Center for Research on Retirement Income (CRI), we’ll be examining how IRA owners with a 401(k) plan draw down those assets across accounts, leveraging the unique ability of EBRI’s databases to link individuals’ IRAs and 401(k) accounts.

After all, it’s not just pets that consume more wisely when they have confidence in the future of that next meal.

Nevin E. Adams, JD

---

[i] See “IRA Withdrawals, 2011” online here.
 

[ii] The EBRI IRA Database, an ongoing project that collects data from IRA plan administrators, contains information for2011 on 20.5 million accounts with total assets of $1.456 trillion.  In this particular analysis, only withdrawals from the accounts identified as traditional or Roth IRAs in the database are examined, a total of 15.3 million accounts with $1.11 trillion in assets.  More information on the database, and EBRI’s research centers is online here.

[iii] See “IRA Withdrawals: How Much, When, and Other Saving Behavior” online here.

Silver Linings

We all know people who manage to find the bright side of things, no matter how dire the situation—the folks who can spot a silver lining in every cloud. Then, of course, there are those who have an uncanny ability of discerning the cloud in every silver lining. In my experience, those in the former category know, and acknowledge, their inclination to accentuate the positive.  

However, I’ve generally found that those in the latter category don’t view themselves as negative or pessimistic. Rather, they are inclined to see their perspective on the world as “realistic.” 

A recent EBRI analysis[1] found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers—between 83 and 86 percent of them, in fact—with an annual income of at least 60 percent of their preretirement pay on an inflation-adjusted basis. Even at an 80 percent replacement rate, 67 percent of the lowest-income quartile would still meet that threshold. Those projections improve even more when you assume automatic enrollment and an annual contribution acceleration of 1 percent in 401(k) plans.

A more recent analysis[2] using EBRI’s Retirement Security Projection Model^® (RSPM) found that, due to the increase in financial market and housing values during 2013, the probability that Baby Boomers and Generation Xers would NOT run short of money in retirement improved—slightly (between 0.5 and 1.6 percentage points, based on the EBRI Retirement Readiness Ratings (RRRs). For early Boomers (those on the brink of retirement), the analysis found that more than half (56.7 percent) were projected not to run short of the funds they need to cover projected retirement expenses. On the other hand, nearly half are projected to run short (though not “out” of money, since Social Security benefits would continue to be paid).

In 2012, EBRI estimated that the national aggregate retirement income deficit number, taking into account current Social Security retirement benefits and the assumption that net housing equity is utilized “as needed,” was $4.3 trillion for all Baby Boomers and Gen Xers.[3]

Now, certainly compared with some of the figures[4] one hears bandied about these days, those might be considered relatively encouraging numbers. Some might even consider them optimistic, a “silver lining” in a looming retirement “crisis”⁵ cloud.

What the EBRI data show is that, based on current trends and savings patterns, many individuals will fare better financially in retirement than the headlines suggest—and a large number will not. Despite the clarion calls for action, and some shifts in the underlying dynamics, this is not a new issue for America:. If a crisis looms, it is surely one of the most widely anticipated, long-standing, and debated issues of the past half-century.

EBRI data and modeling have previously quantified the kinds of plan design and policy changes that can help—and hinder—those results. The true “silver lining” is that there is yet time for many of those currently at risk of running short of funds to remedy that situation[6]. 

- Nevin E. Adams, JD

---

[1] See “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis”  online here. http://www.ebri.org/pdf/notespdf/EBRI_Notes_01_Jan-14_SpslCvg-RetPlns1.pdf#page=8

 

[2] See “What Causes EBRI Retirement Readiness Ratings™ to Vary: Results from the 2014 Retirement Security Projection Model,^®” online here. http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=5351

[3] See “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,” online here. http://www.ebri.org/pdf/notespdf/EBRI_Notes_05_May-12.RSPM-ER.Cvg1.pdf      

 

[4] See “Whether Forecasts” online here. https://ebriorg.wordpress.com/2014/01/03/whether-forecasts/

5 For some perspective on the existence of a retirement “crisis,” see Dallas Salisbury’s keynote address at the Pensions&Investments West Coast Defined Contribution Conference online here. http://www.youtube.com/watch?v=LbmcQa8sbss&feature=youtu.be 

6 Particularly those who Chooseto$ave®org for your future!  Check out the resources at www.choosetosave.org, including the Ballpark E$timate.