Data & Research January 18, 2013

Baby Boomer Retirements Affect Entire Economy

The mass of Baby Boomers retiring and their potentially inadequate savings will present challenges for the whole economy.
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Baby Boomers, born between 1946 and 1964, began to reach their full retirement age of 66 in 2012, according to a recent report titled “Potential Macroeconomic Consequences of an Aging Population with Insufficient Savings” by asset management firm Manning & Napier. This generation’s aging will be a central issue over the next several decades, as the Census Bureau projects a doubling of the age 65 and older group between 2010 and 2050.  

The economy’s growth will be hindered as Boomers age and move out of their prime spending years. To compound this problem, many Boomers have insufficient savings, higher health care costs and longer life expectancies. Headwinds resulting from this aging generation could come in the form of decreased economic output and productivity, as well as a strain on government entitlement programs because of an increased demand from the demographic shift, the paper says.

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Medicare as of 2009 only covered 59% of health care services costs for beneficiaries ages 65 and older. Out-of-pocket covered 13%, private insurance 14% and a mix of Medicaid, Tricare and other sources made up the remaining 14%. “Longevity is posing a challenge, and health care costs have been outpacing inflation,” Mary Moglia-Cannon, senior analyst and portfolio strategist at Manning & Napier, told PLANADVISER. “The savings are really needed for long-term care and premiums.”

Manning & Napier’s paper outlines several things to watch for as the Baby Boomers begin retiring:  

  • “Dependency ratio” – As Baby Boomers retire, the dependency ratio (ratio of the retiree-age population to working-age population) will increase as the population of those older than 65 expands more quickly than the working-age population.  
  •  Prime spending years – The number of people entering their prime spending years (ages 35 to 54) does not make up for the number leaving. The 40 to 49 age cohort is projected to have negative growth over the next 10 years. To add to the problem, the Baby Boomer generation leaving their primary spending years may affect the economy more than the generation before them because, as Moglia-Cannon put it, “Baby Boomers were notorious for consumption.”

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  • Labor force productivity - Companies are facing pressures due to the aging Baby Boomers, both in terms of labor force productivity as well as changes in consumer spending patterns. 
  • Economic effects - Although the slower growth in the working age population could lead to wage growth and a decline in unemployment, it also has the potential to lead to inflationary pressures. The upside is that immigration could change what seem to be well-defined demographics for the next few decades. 
  • Investment implications - As the mix of Baby Boomer purchases change, so will the beneficiaries of their spending. Investors need to be mindful of the fact that industries that were beneficiaries of this tailwind in the past are likely going to encounter demographic headwinds going forward. 

The full paper from Manning & Napier can be accessed in the Insights section at www.manning-napier.com.

 

Data & Research January 18, 2013

Employers Making Readiness a Top Priority

More companies are making the financial wellness of their work force a priority in 2013, according to an Aon Hewitt survey.   
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Among the more than 425 U.S. employers, who represent with 11 million employees surveyed, 80% cited financial wellness as a top priority in 2013, and 61% are looking beyond current participation and savings rates and are helping workers evaluate their retirement readiness, up from 50% in 2012.  

Eighty-six percent of companies reported a plan to focus communications initiatives on helping their employees evaluate and understand how much they need to save for retirement. According to Aon Hewitt, workers need 11 times their final pay to meet their financial needs in retirement, but the average U.S. worker has a savings shortfall of 2.2 times pay.  

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“Employers understand that financial wellness is more than what workers are doing today in terms of savings in their retirement programs—that it’s evaluating whether their long-term investment strategies are positioning them to be ready when it comes time to retire and whether other priorities are getting in the way,” said Patti Balthazor Björk, director of retirement research at Aon Hewitt. “Helping workers get an accurate picture of their future needs and whether they are on track to meet those needs, and helping them create a roadmap for achieving those goals is paramount.” 

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Many companies advocate the use of investment advisory tools to support employees’ retirement goals. More than three-quarters (76%) offer target-date funds (TDFs), and of those that do not, 35% will likely add one in 2013. Sixty-four percent now offer managed accounts and online third-party investment advisory services, up from 40% in 2012.  

Employers are also making changes to their defined contribution (DC) plans to help workers better manage their money in retirement. In-plan retirement income solutions—including professionally managed accounts with a drawdown feature, managed payout funds, or insurance or annuity products that are part of the fund lineup—are now offered by 28% of companies. This is nearly double the number (16%) that offered these solutions in 2012, and of those that do not currently offer some kind of annuity, 30% said they are likely to offer them in 2013. 

“Retirement income solutions offer employees a way to receive regular, scheduled payments from their DC plan, much like what they would have seen from a traditional DB [defined benefit] plan,” Björk said. “These solutions have become increasingly attractive to workers because they enable them to manage their retirement income in a predictable way once they reach retirement.”  

Other key findings of the survey include: 

  • 52% of companies will use podcasts and 42% will use text messages to communicate and educate their workers about their retirement benefits in 2013; 
  • The percentage of plan sponsors that plan to use social media channels to communicate with workers has tripled, from 6% in 2012 to 18% in 2013; 
  • 37% of employers have recently reviewed the total defined contribution plan costs (fund, recordkeeping, and trustee fees). Among those who have not, 95% are likely to do so in 2013; 
  • 35% of employers completed a review of DC fund operations, including fund expenses and revenue sharing, and 87% plan to do so this year; and 
  • 31% of employers recently changed their DC plan fund lineup to reduce costs. More than half (52%) of the remaining companies said they may do so in 2013. 

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