Good read on DB/DC plans and poverty

[Big_Hitter]

"The results indicate that households with pensions that are annuitized with the joint-and-survivor life option and that do not take lump-sum distributions before age 55 are best able to avoid income and asset poverty."

The Transition from Defined Benefit to Defined Contribution Pensions: Does It Influence Elderly Poverty? | Center for Retirement Research

 

[samclem]

I don't doubt that families with at least one DB pension check coming in suffer lower rates of poverty in retirement, but there seem to be some problems with this study. For example:
1) There could be a considerable difference in total household savings between families with at least one DB plan and families with only DC plans. They say they controlled for "poverty status" at ages 65-69, but it's unclear what that means, it does not sound like they controlled for "assets available on day 1 of retirement" -- poverty or no.
2) Couples in which one member had a DB pension were lumped into the DB category (even if the spouse had a DC pension). If the spouse had no work history or retirement savings, then the couple falls into the category of the working spouse (DB or DC). Assuming there are more DC than DB spouses, and we've already lumped the spouses with either DB or DC plans into the DB category, a disproportionate number of single-income households will fall into the DC category. That has got to skew the size of the starting assets in retirement between the two groups.

3) Those who >did< take a lump sum distribution--it seems very likely that at least some of these people took a lump sum because they were in trouble and needed the money. The study only controls for those who took the lump sum before age 55. It looks like if they took it at age 55 or after, they were classified as DC retirees. Again, a bunch of people self-selected for financial problems are dumped into the DC pile, which hurts their numbers.

Again, I think it is highly likely DB retirees are less subject to poverty in old age, but this study has some problems. These and other things would have turned up during a peer review, but this appears to be an unpublished study so it wasn't subjected to that.

 

[clifp]

I am waiting for their next exciting paper. Jackpot lottery winners also less likely to be in poverty in old age.

 

[Gatordoc50]

"The results emphasize the importance of making DC plans operate more like DB plans,..."
If that were possible, they would already be available.

 

[soupcxan]

Jackpot lottery winners also less likely to be in poverty in old age.

You're being a smartass, but you're also wrong. Large lottery winners were more likely to file for bankruptcy.

The Ticket to Easy Street? The Financial Consequences of Winning the Lottery by Scott Hankins, Mark Hoekstra, Paige Marta Skiba :: SSRN

 

[clifp]

You're being a smartass, but you're also wrong. Large lottery winners were more likely to file for bankruptcy.

The Ticket to Easy Street? The Financial Consequences of Winning the Lottery by Scott Hankins, Mark Hoekstra, Paige Marta Skiba :: SSRN

I stand corrected, I knew a lot of them blew their money, but I didn't realize it was that many.
I guess lotteries should really insist that winners take the money over 20 years at least that way people could delay bankruptcy for 20 years.

 

[Independent]

They say they controlled for "poverty status" at ages 65-69, but it's unclear what that means, it does not sound like they controlled for "assets available on day 1 of retirement" -- poverty or no.

Right. I'd guess it means an on-off switch. You were either "in poverty" or not at 65-69. All those "not" are included in one group.

I expect that people who had higher incomes while they were working were also more likely to have DB pension plans. So the better condition of DB retirees isn't about DB vs. DC, but about higher incomes vs. lower incomes.

It makes a lot of intuitive sense that taking lump sum withdrawals and single life pensions aren't good choices for avoiding a SS-only retirement. But, I just don't see this as proving that case*. The underlying data just doesn't look detailed enough to get to that.

For that, you'd need parallel people - similar in total income, similar in life events (divorce, serious disease, etc), but differing only in the extent to which their employers provided DB, DC, or both. By "extent" I mean for how many years and how generously funded.

You'd also have to ask them why they took that early distribution, or got the single life pension. And, you might want to look at those who died "young", and how their survivors fared.


* much less the case that the gov't should somehow restrict the choices of people who have DC plans

 

[Greencheese]

So basically people within a society that has typically been poor with savings do better when someone else is essentially handling their money? Who would have imagined that

 

[Independent]

You're being a smartass, but you're also wrong. Large lottery winners were more likely to file for bankruptcy.

The Ticket to Easy Street? The Financial Consequences of Winning the Lottery by Scott Hankins, Mark Hoekstra, Paige Marta Skiba :: SSRN

That depends on how you define "jackpot" and when you measure "more".

The paper compares "small" winners who got $600 to $10,000 lump sums to "large" winners who got $50,000 to $150,000 lump sums.

The results show that giving $50,000 to $150,000 to people only postpones bankruptcy.
Specifically, while these individuals are 50 percent less likely than small winners to file for
bankruptcy immediately after winning, they are equally more likely to file for bankruptcy three
to five years after winning. Furthermore, bankruptcy cases filed in the 5 years after winning
reveal that the net assets and unsecured debt of large winners are no different from those of
small winners.

I couldn't access the paper with the first link, but I could here: https://ideas.repec.org/p/pit/wpaper/344.html

 

[Spanky]

Does the article identify the percentage of lottery winners filing bankruptcy within five years? I heard that the percentage is small, like 5.5%.

 

[hnzw_rui]

So basically people within a society that has typically been poor with savings do better when someone else is essentially handling their money? Who would have imagined that

Lol, my thoughts exactly. I doubt it's really DB vs DC that's the issue. Rather, it's enforced savings/contributions and annuitized payments for DB versus not enough savings and burning through the savings quickly for DC/lump-sum.

I reckon what's really needed is financial literacy and education rather than a change of government policy. And perhaps tightening requirements for obtaining credit. I mean seriously, how are college students with no jobs qualifying for their own credit cards?

 

[Fishingmn]

So I guess we would be defined as having a DB plan since my DW will start getting her non-Cola pension of $440/mo at age 55. That should make all the difference for us avoiding poverty!

 

[soupcxan]

Does the article identify the percentage of lottery winners filing bankruptcy within five years? I heard that the percentage is small, like 5.5%.

The average in this study is 5%. But I bet if you looked at larger lottery winners over a longer horizon, that number would increase.

 

[Ed_The_Gypsy]

So I guess we would be defined as having a DB plan since my DW will start getting her non-Cola pension of $440/mo at age 55. That should make all the difference for us avoiding poverty!

I started getting mine (our only DB pension), about the same amount, at 65.

If we could live on $15/day, we would be financially secure!

 

[pb4uski]

Lol, my thoughts exactly. I doubt it's really DB vs DC that's the issue. Rather, it's enforced savings/contributions and annuitized payments for DB versus not enough savings and burning through the savings quickly for DC/lump-sum.

I reckon what's really needed is financial literacy and education rather than a change of government policy. And perhaps tightening requirements for obtaining credit. I mean seriously, how are college students with no jobs qualifying for their own credit cards?

+1. Its not like it is a deep, dark secret that it is unwise to raid your retirement account and blow the money on a shiny new car or truck or extravagant vacation and that you should save for retirement. While I'm not a big fan of Voya, I do love their 'orange money" commercials.

I think that by and large people know what to do and what not to do but the just lack the discipline to do it (in this case save for retirement and not raid their retirement savings). While I prefer natural consequences (they then end up in poverty in retirement) I'm betting that the nanny state will eventually come to the rescue to save the lowest common denominator from themselves and in the end we will all suffer the consequences.

 

[Walt34]

+1. Its not like it is a deep, dark secret that it is unwise to raid your retirement account and blow the money on a shiny new car or truck or extravagant vacation and that you should save for retirement. While I'm not a big fan of Voya, I do love their 'orange money" commercials.

I think that by and large people know what to do and what not to do but the just lack the discipline to do it (in this case save for retirement and not raid their retirement savings).....<snip>

Sadly, I think you are entirely correct. We are slightly acquainted with some people like that - can't stand to see a dollar in the bank and think the solution to every impulsive "I wanna..." is charge it or take out a loan.

Frankly I will have no sympathy for them when they're living under a bridge because a van down by the river is unaffordable for them.

 

[soupcxan]

Frankly I will have no sympathy for them when they're living under a bridge because a van down by the river is unaffordable for them.

You may not care, but the politicians who tax you will probably care...and then they will start eyeing your IRAs...

 

[Walt34]

You may not care, but the politicians who tax you will probably care...and then they will start eyeing your IRAs...

I know, and that's the troubling part....

 

[fritz]

I have been successful with 401Ks and retirement savings (DC plans), and have shunned any annuitization scenarios as not in my best interest. We are retired (5+ years now @ 58/56) and have no DB pensions (did cash in a small one and turned it into a future income stream via rollover IRA) Guess that doesn't bode well for me with this report.

I don't see where going back to the DB plans in most cases would provide the general public with acceptable retirement plans. I also don't see business embracing the old DB plans as they were quick to throw their employees and those DB plans under the bus. Many pulled bankruptcy and left employees holding the bag as they moved on. DB plans appear to still be available mostly in Govt. and large corporations. Believe this is why the IRA and Roth were brought about...

Social Security is a form of DB plan that most everyone (with some exceptions) can get in on, but I don't believe anyone would hold it up as a shining example of a DB plan. I don't like the idea of the Federal Govt. and insurance companies managing my retirement income, and don't imagine most would either. I do believe most would do better if DC plans were handled better by both businesses and employees. Better education in this area would go a long way to improving this problem.

 

[pb4uski]

You may not care, but the politicians who tax you will probably care...and then they will start eyeing your IRAs...

And the politicians will craft some bleeding heart story explaining why it isn't the fault of the people living under the bridge and that they deserve better than [-]to live with the consequences of their poor decisions [/-]where they have put themseives and that it needs to come from the [-]people who were prudent[/-] rich.

 

[daylatedollarshort]

We're the outliers. It isn't a small minority in vans down by the river who haven't prepared for retirement. It seems to be the majority of Americans approaching retirement age.

It will probably be more reasonable to eventually legislate some type of enforced retirement savings or resurrect DB plans than it will be to try to change human nature. Most people just aren't wired to plan for 40 years into the future.

 

[RetireBy90]

Doesn't it come down to DB is guaranteed (to some extent) and DC is not. With a DC the outcome will be better for some and worse for some. I must disclose my DW and I are both retired Army, and DW took a second DB retirement from the county school system. My current employer offers 401K and we have IRAs we funded several years ago.


My advice to anyone with a lump sum and no DB would be to fix some income with an immediate annuity and invest the rest for remainder of your income needs. With an annuity you can make your own DB COLA adjusted, dual lifespan, what ever you want. So while we NEED to be kind and understand the position of those with a DC that are hurting, the options were there for them in the contribution phase and plan for the draw level.


When you allow people to take individual control of anything (retirement, health care, who they marry) some will do better than the pack, some about the same and some will trail. In the Army, we had to do ratings of our charges such that there were ahead of the pack, with the pack and trailing the pack. That is the real world facts. We get in trouble when we give people choice then complain about the choices they make.

 

[NoiseBoy]

In my personal social circle of family and friends, I don't know of any household that has retired without a DB pension + SS. The fact that all the major employers in my area offer pensions is certainly a factor. What I find worrisome is the fact that in a number of cases, the retiree households spend their pension + SS checks and have very little savings. They are annuity rich enough to go new car shopping, but struggle to come up with 20% to put down on a new home (downsizing/moving.) Does anyone else see this sort of behavior?


Edit to add -- They do have home equity, but that is hard to get at.

My megacorp froze their DB plan some years back. I've always viewed it as a cost savings measure. The company took a look around, and decided that offering a DB pension wasn't helping them recruit talent. Also, the accountants love DC plans because the vesting is done at the end of the year so no need to "worry" about having to make extra contributions in the future if the markets don't cooperate. IMHO it is a giant risk shift and we don't have enough data yet to know how the shift to DC plans will play out.

 

[Big_Hitter]

IMHO it is a giant risk shift and we don't have enough data yet to know how the shift to DC plans will play out.

The authors of that paper may disagree with you.

 

[fritz]

We're the outliers. It isn't a small minority in vans down by the river who haven't prepared for retirement. It seems to be the majority of Americans approaching retirement age.

It will probably be more reasonable to eventually legislate some type of enforced retirement savings or resurrect DB plans than it will be to try to change human nature. Most people just aren't wired to plan for 40 years into the future.

Doesn't it come down to DB is guaranteed (to some extent) and DC is not. With a DC the outcome will be better for some and worse for some. I must disclose my DW and I are both retired Army, and DW took a second DB retirement from the county school system. My current employer offers 401K and we have IRAs we funded several years ago.


My advice to anyone with a lump sum and no DB would be to fix some income with an immediate annuity and invest the rest for remainder of your income needs. With an annuity you can make your own DB COLA adjusted, dual lifespan, what ever you want. So while we NEED to be kind and understand the position of those with a DC that are hurting, the options were there for them in the contribution phase and plan for the draw level.


When you allow people to take individual control of anything (retirement, health care, who they marry) some will do better than the pack, some about the same and some will trail. In the Army, we had to do ratings of our charges such that there were ahead of the pack, with the pack and trailing the pack. That is the real world facts. We get in trouble when we give people choice then complain about the choices they make.

Be careful what you wish for - Federal Govt. regulations paint with a broad brush. "Everyone" will be subject to that legislation. Would most likely lose everything gained with IRAs and ROTHs as a DB replacement in an effort to pay for those that have chosen to ignore saving for retirement. I don't imagine those with nice Govt. pensions would like to be subjected to legislated DB plans of the Federal Govts. doing to be implemented for all U.S. workers. That could be a possibility.

In my earlier post, I mentioned that some on DB plans lost their retirement programs when their companies went bankrupt. This scenario still takes place today. You also lost your DB benefits in the past if you did not meet the minimum vesting time (nothing was given to an employee who left the company or was fired before meeting that time frame). There were people who were fired as they approached vesting in the past (could have been +/- 10 years - company choice). The Federal Govt. stepped in and shortened the time frame to try to get around that scenario. The Federal Govt. also ate (still does) a lot of DB plans of bankrupt companies. IRA and ROTH became the way out for businesses/Feds.

As for annuities - no financial advisor worth his salt would recommend putting all your retirement investments in them. Most people have more than enough annuity style retirement income in the form of Social Security.

It is a given that something will most likely be legislated into law. It would be my hope that 401Ks, IRAs and ROTHs remain as they are currently, as they work. What needs to happen IMHO, is that employees need to be mandated to contribute to a 401K that is National in scope (like your SS is now) to eliminate all the bad plans businesses select for your retirement (choices, fees, security). This should be a mandated minimum % of one's salary. Employers (optional) matching should be mandated to be placed in employees natl. account, and not in their own stock. The funds should not be available for borrowing except in extreme emergencies - determined by process. Retirement funds of this type would be managed like a guaranteed investment account.

You should also be allowed to contribute (B4 tax) to your Natl. 401K, (B4 and after tax) IRA, and (after tax) ROTHs at levels above that mandated minimum. These additional retirement funds should be allowed to be managed by employee (investment options) and borrowed against under certain conditions.

Retirement income should not be taxed at ordinary income levels if taken in annuity style payments over the retiree's lifetime (but "should not" have to annuitize retirement funds - optional). We do favored tax status now with qualified dividends and capital gains for the wealthy.

All monies should be the property of the contributors and their heirs - to be paid out and not forfeited to the govt. upon one's death.

Huge incentive for people to save for retirement, and still give the government tax revenue. Might even go as far as to suggest this replace Social Security, but this would make the Federal government nervous - losing future forfeited revenue streams