HOW PEOPLE BEHAVE: INSIGHTS ON RETIREMENT DECISIONS

Transcription

1 Andrew D. Eschtruth Associate Director for External Relations Center for Retirement Research at Boston College HOW PEOPLE BEHAVE: INSIGHTS ON RETIREMENT DECISIONS 1

2 Center for Retirement Research at Boston College State & Local Project (public pensions) Retirement Research (anything involving money and retirement) Financial Security Project (consumer tools) Mission: help policymakers, practitioners, & households make better decisions. 2

3 A Whitman s Sampler of our findings: I. Retirement anxiety II. Saving behavior: households and public plan sponsors III. Drawdown behavior: the invisible asset IV. Some solutions 3

4 Thinking about retirement causes high anxiety. This is how I felt when the market started to crash I was in the hands of other people and totally powerless. - Male focus group participant I feel like him if I make the wrong choice, I m going to end up hurting myself - Female focus group participant Source: Julie R. Agnew, Lisa R. Szykman, Stephen P. Utkus, and Jean A. Young What People Know About Target-Date Funds: Survey and Focus Group Evidence. FSP Working Paper 2. Chestnut Hill, MA: Center for Retirement Research at Boston College. 4

5 One-quarter of survey respondents said that distress of downturn was at least as bad as 9/11. Distress Levels Caused by the Downturn Relative to 9/11 30% 26% 20% 16% 15% 10% 4% 4% 7% 8% 10% 9% 0% No distress Distress matches or exceeds 9/11 Source: Center for Retirement Research at Boston College CRR 2009 Retirement Survey. Chestnut Hill, MA. Available at: 5

6 State and local plans are widely viewed as in crisis since the financial meltdown. Average Monthly Google News Citations Using Terms State, Local, Crisis, and Pension Fund Source: Google News. 6

7 National Retirement Risk Index suggests good reason for concern about retirement security. Percent of Households Unable to Maintain Pre-Retirement Living Standard, by Birth Cohort, 2007 and % 40% 44% 51% % 37% 48% 43% 56% 49% 20% 0% All Early boomers ( ) Late boomers ( ) Gen Xers Source: Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass The National Retirement Risk Index: After the Crash. Issue in Brief Chestnut Hill, MA: Center for Retirement Research at Boston College. 7

8 People in their 50s often face a fork in the road: control spending or live it up? Keeping spending down is more potent than increasing saving. 8

9 It s hard to ignore pent-up demand; parents splurge when kids fly the coop. 60% 40% Regression-Adjusted Change in Non-Durable Consumption, Relative to Households Without Children, Always with children Children move out 50.5% 20% 0% -20% -5.2%* -5.0%* -6.0%* Household level Per capita level * Not statistically significant. Note: The growth rates in this figure represent changes between , , or both periods. Source: Norma B. Coe, Zhenya Karamcheva, and Anthony Webb Do Parents Live It Up When Children Fly the Coop? Issue in Brief Chestnut Hill, MA: Center for Retirement Research at Boston College. 9

10 For those who do save, asset allocation remains a challenge despite rise of target-date funds. Mixed Investors Response to: Do You Need Other Investments with Target-date Funds to be Adequately Diversified? 80% 75% 60% 40% 20% 20% 0% Yes No Source: Julie R. Agnew, Lisa R. Szykman, Stephen P. Utkus, and Jean A. Young What People Know About Target-Date Funds: Survey and Focus Group Evidence. FSP Working Paper 2. Chestnut Hill, MA: Center for Retirement Research at Boston College. 10

11 Public plans also worry about having enough. 100% State and Local Funding Ratios, % 88% 84% 79% 77% 50% 25% 0% Source: Public Plans Database ( ) and authors estimates. 11

12 Interestingly, the impact of pensions on state borrowing costs has been very modest. Impact of Selected Characteristics on Municipal Yields, Council of economic advisors Consensus revenue forecasting Allowed to carry a deficit Expenditure growth (5 years) Fund balance State unemployment rate Dependency ratio Debt service to revenue Marginal tax rate Percent of ARC paid General obligation Credit enhanced Statistically significant Not statistically significant Note: Yield is the spread between municipal rate and rate on Treasury security of the same duration issued in the same week. Source: Alicia H. Munnell, Jean-Pierre Aubry, and Laura Quinby The Impact of Pensions on State Borrowing Costs. State and Local Pension Plans Brief 14. Chestnut Hill, MA: Center for Retirement Research at Boston College. 12

13 One reason is that pension health has not generally affected bond ratings... Impact of Selected Characteristics on Moody s Municipal Bond Ratings, Council of economic advisors Consensus revenue forecasting Allowed to carry a deficit Expenditure growth (5 years) Fund balance State unemployment rate Dependency ratio Debt service to revenue Marginal tax rate Percent of ARC paid General obligation Credit enhanced Statistically significant Not statistically significant Note: Standard errors have been adjusted for state-level clustering. Source: Alicia H. Munnell, Jean-Pierre Aubry, and Laura Quinby The Impact of Pensions on State Borrowing Costs. State and Local Pension Plans Brief 14. Chestnut Hill, MA: Center for Retirement Research at Boston College. 13

14 as pensions represent a relatively small share of state budgets. Distribution of Plans by Required Contribution as a Percent of Non-Capital State Budget, % 60% 62% 40% 30% 20% 0% 6% 0% 2% Sources: Author s calculations based on Public Plans Database (2007) and the 2007 Census of Governments. 14

15 Since the crash, public plans have adopted riskier investment allocations than private plans. Percent of Private and Public Sector Defined Benefit and Plan Assets Held in Equities, Quarterly, Q3 80% 60% 65.9% 40% 46.1% 20% State and local Private sector 0% Source: U.S. Board of Governors of the Federal Reserve System Flow of Funds Accounts of the United States. Washington, DC. 15

16 Turning to the draw-down phase, the house is a major asset for near retirees. Wealth Holdings of a Typical Household Ages 55-64, 2007 $300,000 $298,900 $200,000 $138,600 $122,100 $100,000 $50,500 $29,600 $36,900 $0 Social Security Primary house Defined benefit Defined contribution Financial assets Other assets Sources: Author s calculations based on U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, Washington, DC. 16

17 2008 dollars But most people do not tap their home equity until very late in life, as downsizing is rare Average Home Equity for Two-Person Households, HRS and AHEAD Cohorts, $300,000 $200,000 $100,000 $ Age Source: Author s calculations from the University of Michigan, Health and Retirement Study (HRS),

18 and reverse mortgages are off the radar screen. Homeowners Who Are Eligible for a Reverse Mortgage, 2008 Have a reverse mortgage, 2% Do not have a reverse mortgage, 98% Source: Author s calculations based on data from U.S. Department on Housing and Urban Development; and U.S. Census. 18

19 In the future, though, ignoring home equity may be a luxury that few can afford. National Retirement Risk Index, With and Without a Reverse Mortgage 80% 60% 40% 51% 61% 60% 69% With a reverse mortgage Without a reverse mortgage 47% 58% 42% 52% 20% 0% All Low income Middle income High income Source: Center for Retirement Research at Boston College The NRRI and the House. NRRI Fact Sheet No. 1. Chestnut Hill, MA. 19

20 People may need to overcome behavioral obstacles to make more effective decisions. Inertia Framing Hyperbolic discounting Unclear view of future self Mental accounting Procrastination Excessive attachment to house 20

21 Even just making trade-offs explicit can help. Percent of Respondents Who Plan to Neither Work Longer nor Save More Before and After Receiving Trade-off Information 50% 40% 43% 30% 20% 10% 0% Before receiving trade-off information 5% After receiving trade-off information Source: Norma B. Coe and Kelly Haverstick Responding to the Downturn: How Does Information Change Behavior? Issue in Brief Chestnut Hill, MA: Center for Retirement Research at Boston College. 21

22 Of course, one proven solution is harnessing inertia through defaults. Percent of Large Plans with Automatic Enrollment, 2008 Percent of 401(k) Automatic Enrollment Plans that Increase Default Deferrals over Time, % 34% 56% 50% 16% With Without Automatic Voluntary increase No Source: Profit Sharing/401(k) Council of America nd Annual Survey of Profit Sharing and 401(k) Plans. Chicago, IL. 22

23 Conclusion Many people are anxious about retirement security and with good reason. Misperceptions and behavioral tendencies can undermine effective retirement decisions. Providing guidance through simple education and defaults can help. 23