Comments for: What Determines End of Life Assets? A Retrospective View by James Poterba, Steven Venti, and David A. Wise John Sabelhaus Federal Reserve Board These comments were prepared for the Retirement Research Consortium annual meeting in Washington, D.C., August 8th and 9th, 2015. The analysis and conclusions set forth are those of the author and do not indicate concurrence by other members of the research staff or the Board of Governors of the Federal Reserve System. Main Takeaways • For most people, LYO assets ≈ FYO assets • Often b/c financial assets very low o 25% zero or less, next 35% less than $50k o Did not run out of assets, never had any! • Given FYO assets, as likely to rise as fall • Observed asset declines for those with money associated with health shocks, spousal exits • No systematic consumption spend down 2 Lack of Consumption Spend Down? • Builds on/confirms earlier PVW papers • Love, Palumbo, Smith (2009) create broad “annuitized” wealth (DC, DB, Social Security) o Decumulation in DB and SS is systematic o Standard model: medical cost risk, uncertain lives o Still need bequest motive to explain patterns • PVW add 2 to 1 person household transitions, lack of decumulation probably still a mystery 3 Implications for Standard Lifecycle Model • Utility functions should include health o Health evolves with age (gradually or all at once) o Utility of some consumption declines with health o Health maintenance also involves labor input • Bequests have value in some states of the world o Savings is BOTH insurance and a possible bequest • Young and middle age people have the option to work more/longer when bad events happen o Saving is retirees’ only protection against some shocks 4 Lack of Retirement Assets for Many? • Many people retire with low financial assets o Social Security + Medicare/Medicaid enough? o Depends on retirement age, in turn on health • Employment-based voluntary retirement saving programs are incomplete/getting worse o Auto enrollment and defaults do help o Argento, Bryant, Sabelhaus (2014): Pre-retirement leakage from IRAs and DC plans is substantial o SCF shows low-to-middle income losing coverage 5 Retirement Plan Coverage by Birth Cohort, Bottom 50% 100% 90% 80% 70% 1941-1950 60% 1931-1940 1951-1960 50% 1961-1970 40% 1971-1980 30% Notes: Each line represents a ten year birth cohort. The circles are SCF observations for that cohort, centered on the middle of their age range in the year when the SCF was conducted. Families are sortedSource: by the SCF “usual” income measure avoid distortionary Survey of Consumer Finances,to1995-2013 effects of transitory income on classification by income. 20% 10% 1981-1990 0% 20 25 30 35 40 Source: Devlin-Foltz, Henriques, Sabelhaus (2015) 45 50 Age 55 60 65 70 75 80 6 Retirement Plan Coverage by Birth Cohort, Bottom 50% 100% 90% 80% 70% 1941-1950 60% 1931-1940 1951-1960 50% 1961-1970 40% 1971-1980 30% Notes: Each line represents a ten year birth cohort. The circles are SCF observations for that cohort, centered on the middle of their age range in the year when the SCF was conducted. Families are sorted by the SCF “usual” income measure to avoid distortionary Source: Survey of Consumer Finances, 1995-2013 effects of transitory income on classification by income. 20% 1981-1990 10% 0% 20 25 30 35 40 Source: Devlin-Foltz, Henriques, Sabelhaus (2015) 45 50 Age 55 60 65 70 75 80 7 Retirement Plan Coverage by Birth Cohort, Next 45% 100% 1951-1960 90% 1941-1950 1961-1970 1931-1940 80% 70% 1971-1980 60% 50% 40% 1981-1990 30% Notes: Each line represents a ten year birth cohort. The circles are SCF observations for that cohort, centered on the middle of their age range in the year when the SCF was conducted. Families are sorted by the SCF “usual” income measure to avoid distortionary Source: Survey of Consumer Finances, 1995-2013 effects of transitory income on classification by income. 20% 10% 0% 20 25 30 35 40 Source: Devlin-Foltz, Henriques, Sabelhaus (2015) 45 50 Age 55 60 65 70 75 80 8 Retirement Plan Coverage by Birth Cohort, Top 5% 100% 90% 1961-1970 1951-1960 1931-1940 1941-1950 80% 70% 1981-1990 1971-1980 60% 50% 40% 30% Notes: Each line represents a ten year birth cohort. The circles are SCF observations for that cohort, centered on the middle of their age range in the year when the SCF was conducted. Families are sorted by the SCF “usual” income measure to avoid distortionary effects of transitory income on classification by income. 20% 10% 0% 20 25 30 35 40 Source: Devlin-Foltz, Henriques, Sabelhaus (2015) 45 50 Age 55 60 65 70 75 80 9 Cohort Home Ownership Rates, Bottom 50% 100% 90% 80% 70% 1951-1960 1931-1940 1941-1950 60% 50% 1961-1970 40% 1971-1980 30% Notes: Each line represents a ten year birth cohort. The circles are SCF observations for that cohort, centered on the middle of their age range in the year when the SCF was conducted. Families are sorted by the SCF “usual” income measure to avoid distortionary effects of transitory income on classification by income. 20% 10% 1981-1990 0% 20 25 30 35 Source: Devlin-Foltz, Sabelhaus (2015) 40 45 50 Age 55 60 65 70 75 80 Improving Social Security in Theory • Focus on why the voluntary employmentbased system is only part of the solution o Voluntary choice is a desirable feature o Employment-based aspect problematic? o Focus on more choice within Social Security? • Eliminate real and imagined impediments to work, retirement gradual for more people • Preserve within/across-generation fairness in the system, change both taxes and benefits 11 Improving Social Security in Practice • Add voluntary actuarially-fair buy-down of FRA, people age 50+ can save more in Social Security • Eliminate behavioral (it’s my money) bias against delayed claiming: guarantee some payout • Eliminate Retirement Earnings Test • Eliminate employee share of payroll tax after (say) age 62 for people with long work histories • Raise taxes now, tie future benefits to longevity 12 Thanks! john.sabelhaus@frb.gov Cites • Argento, Robert, Victoria L. Bryant, and John Sabelhaus. 2015. “Early Withdrawals from Retirement Accounts in the Great Recession,” Contemporary Economic Policy, 33(1): 1-16. (January) • Devlin-Foltz, Sebastian, Alice Henriques, and John Sabelhaus. 2015. “The Evolution of Retirement Wealth,” Federal Reserve Board: Finance and Economics Discussion Series 2015-9. (January) • Devlin-Foltz, Sebastian, and John Sabelhaus. 2015. “Heterogeneity in Economic Shocks and Household Spending,” Federal Reserve Board: Finance and Economics Discussion Series 2015-49. (June) 14