What do Americans know about retirement and what do they expect?

The other Franklin signing the Social Security Act

 Joanne Yoong, University of Southern California Center for Economic and Social Research

In a letter to his friend Jean Baptiste LeRoy in 1789, the American Founding Father Benjamin Franklin wrote “In this world, nothing can be said to be certain except death and taxes”. Franklin’s letter far predated the United States’ Social Security Act of 1935, which set up a social insurance programme for American workers, providing them with at least some degree of certainty about income after retirement. But, in today’s environment, to what degree do Americans feel secure about their retirement? How well do they understand their own role and that of Social Security in contributing to retirement security?

Researchers at USC conducted a new study in 2016 to collect data on American’s understanding of retirement preparedness and the perceived role of Social Security. A special-purpose survey was designed and fielded as part of the Understanding America Study (UAS), a panel of approximately 6,000 individuals aged 18 or over representing the entire United States.[1] The  survey results highlight a worryingly-low level of retirement–related financial literacy.

Seventy percent of survey respondents are relatively uncertain about their retirement-related financial literacy, rating themselves either “somewhat” or “not too” knowledgeable. More worryingly, both self-assessed and actual knowledge of retirement-related financial principles are lower compared to the 2009 results. This is consistent with findings reported by Annamaria Lusardi from the US National Financial Capability Study, which found that basic financial literacy has been declining in each survey wave since 2009. Just as worryingly, disparities in knowledge by age, income and education remain present across all our measures of knowledge and preparedness, with Hispanics and Blacks at a particular disadvantage relative to non-Hispanic Whites.

The survey also shows that respondents are more pessimistic about Social Security, in comparison to the 2009 study. In particular, most respondents do not feel confident in the future ability of the Social Security system to pay their promised benefits, and a majority expect the Social Security system to fall short of providing enough for a reasonable standard of living.

Results also suggest a clear gap between respondents’ expectations about Social Security, and their actual understanding of how it works, suggesting that many Americans may not be maximising their benefits, or may not even be aware of their full entitlements.  While most people are able to identify the general features of the Social Security system, a sizable group do not grasp critical details relevant to the impact of their own benefit claiming choices. About a quarter of future beneficiaries mistakenly believe that benefits need to be claimed at the time of retirement, while one in five are unaware that claiming early can reduce benefits. Just over 10% are not aware of disability entitlements, almost 20% are unaware of survivor benefits for children, and almost 40% do not know that spousal benefits can be claimed even if they do not have children.

Combined with the findings of the OECD/INFE Survey of Adult Financial Literacy Competencies on the correlation between financial knowledge and retirement planning, the UAS results suggest the potential for further negative effects.

Previous research has established a causal relationship between financial literacy and long-term planning.[2]  This new study reinforces that becoming and staying informed is a decision in itself that poses its own challenges.

Most UAS respondents feel that it is very important for the Social Security Administration to educate people about how to prepare financially for retirement. When asked to assess different sources of information, UAS respondents were most likely to trust the accuracy of retirement-related information either from Social Security or financial professionals. However, in practice, they most often turn to their social networks or receive information from their employers, rather than proactively seeking information from these trusted sources. A pragmatic and forward-looking financial education policy therefore requires working with diverse groups of both private and public stakeholders, not only to provide the right information but also to prevent the spread of wrong information.

How will policy makers and practitioners know which strategies are most effective at reaching which consumers, and how effective they are at altering behavior or financial outcomes?

Some of the responses to these questions may be found in the 2016 OECD Pensions Outlook. In parallel, recent data collection efforts such as the NCFS and the UAS and, more generally, the OECD/INFE survey that are focused on tracking both financial knowledge and behavior are helping to generate new and relevant findings. The ability to follow individuals over time, and to link financial knowledge to other types of knowledge and behavior is equally essential.  Matching survey responses to actual financial transactions data and re-administering modules regularly will allow assessment of behavioral changes as well as the respondents’ financial status over the longer-term as the economic and policy environment evolves.

For now, it is important to support both initiatives that aim to improve retirement preparedness as well as sustained investments in measurement and evaluation to ensure that such initiatives are effective. It may be impossible to provide absolute certainty about financial well-being in old age, but more can certainly be done to ensure that expectations are properly aligned and that Americans are making informed decisions about retirement, including decisions about their own Social Security benefits.

Useful links

OECD/INFE Survey of Adult Financial Literacy Competencies

2016 OECD Pensions Outlook

US National Financial Capability Study

“ What do people know about Social Security?

The Economic Importance of Financial Literacy: Theory and Evidence

Launch of the OECD PISA financial literacy assessment of students, 24 May 2017

[1] The UAS panel is Internet-based, which means that respondents answer surveys on a computer, tablet, or smart phone, wherever they are and whenever they wish to participate. While most panel members have their own Internet access, those who do not are provided with Internet access by USC. Surveys are designed by research teams around the world and final datasets are posted on the USC website with sample weights. A number of these surveys, including ours, focus on economic and financial decision-making. These areas are also highlighted in the work carried out by the OECD/INFE.

[2] See Lusardi and Mitchell, “The Economic Importance of Financial Literacy: Theory and Evidence,” Journal of Economic Literature, March 2014, vol. 52(1), pp. 5-44.

No Old Person Left Behind?

"Time is on my side" claims Sir Michael Philip Jagger, 71
“Time is on my side”, explains Sir Michael Philip Jagger, 71

Today is the UN International Day of Older Persons and the theme this year is “Leaving No-One Behind: Promoting a Society for All”. Monika Queisser, head of the Social Policy Division in the OECD’s Employment, Labour and Social Affairs Directorate, argues that the best policy for older people must focus on the young.

What will matter to you in old age? A healthy body and mind, above all. But also a comfortable home in a nice place to live. Family and friends close by. And enough money to benefit from all those good things in life, like travel, books, movies and museums and the other pleasures one never has enough time to enjoy while working and bringing up a family.

Chances are that if you were fortunate enough to get good education and the skills you needed, and if you found and kept a good job, both in terms of pay and working conditions, your life in retirement will be pleasant. Even if you need long-term care and personal help, you are likely to have access to good quality services because you are insured and you can pay for them.

But what about those among us who had a less fortunate start to their working lives, who lost their jobs once or more during their active years, who worked part-time and were paid little, who had physically demanding jobs taking a toll on their health? For all these people, retirement and old age risks being much less enjoyable.

OECD data from Pensions at a Glance 2013 show that today, the majority of pensioners enjoy as good living standards as the average population. Of course, this is not the case for everybody, but at the moment, elderly groups are the least unequal part of the population. This is not surprising: most of today’s retirees, at least men, have worked all their lives in stable jobs. However, a “job for life” and even a “career for life” are rare commodities for people starting out today. These future retirees will be a much more diverse group, some will have experienced long spells of unemployment and low wages, while others continue to enjoy stability and higher earnings. Capital income, such as interest from savings, shares and other investments, is more concentrated and the gap between high earners and low earners is widening.

Poorer people are also less healthy and die younger than rich people. Many of the future elderly may move into older ages with disabilities, in bad health, and a limited ability to keep working and contributing to society. The experience of old age for today’s younger generations could change dramatically compared to their parents, with improved living standards and a longer life for some, and a shorter, sicker and more poverty-ridden life for others.

Society should tackle increasing inequality as populations age. Apart from a moral imperative not to leave older persons by the wayside, there are also hard economic reasons why letting unequal ageing happen is bad policy. A growing divide in the well-being of older people will increase the stress on social protection. And it will jeopardize the effectiveness of recent reforms of labour markets, pension and long-term care systems. Governments could make substantial savings if income, wealth and health inequalities were picked up earlier and tackled as they occur.

Today’s young people are the older people of tomorrow. The best policy for older persons is a policy that addresses problems when they start. Asking social protection and health systems to fix the situation late in life is not the best option – systems are ill-equipped to compensate for everything that went wrong during a working life if they wait until the problems have accumulated. Identifying and tackling risks as they arise will enable governments to design sustainable and cost-effective policy approaches towards demographic ageing.

Youth unemployment is at record levels today in many OECD countries. This could have long-term consequences for young people’s future careers and well-being at all ages, including in old age. We need to give young people the best chances to realise their full potential. We need to rethink our systems of social protection to accompany people throughout their increasingly diverse life courses and thus make retirement a well-earned reward.

Useful links

OECD Action Plan for youth

OECD work on ageing and employment

Chapter 8 of OECD’s Health at a Glance 2013 is on Ageing and Long-term Care

Debt – you ain’t seen nothing yet

National debts have risen sharply during the crisis – typically, they look set to hit 100% of GDP in OECD countries. But could they go higher – to 200, 300 or even 400% of GDP? That’s the worrying scenario set out in a paper from three economists at the Bank for International Settlements, the international organisation of central banks. Writing in a personal capacity, the team warns that rapidly ageing populations could lead to huge increases in government borrowing over the coming decades.

Unless action is taken, they say, those rises could eventually dwarf the debt run-up seen during the crisis. Countries in the OECD area, but also the “BRIC” economies, look set to see a growing imbalance in their populations over the coming decades. As people live longer and fewer babies are born, the size of the workforce will shrink and there will be fewer people of working age to support retirees. In the OECD zone in 2000 there were about 27 retirees for every 100 workers, according to the OECD Factbook ; by 2050, the proportion of retirees is forecast to hit 62, and in some countries there will be one retiree for every worker. That combination will hit governments hard: Fewer workers means they’ll be taking in less in tax, while more retirees means higher pension payments and healthcare bills.

The BIS team warns that the cost of fulfilling current government spending commitments means that by 2020 national debt would soar to 300% of GDP in Japan, 200% in the U.K., and 150% in Belgium, France, Ireland, Greece, Italy and the U.S. Their longer-term projections are even more startling, and warn of debt above 400% in the U.S. and 500% in the U.K by 2040. Clearly, such increases would be unsustainable.

For one thing, financial markets would probably stop lending to a country long before debts hit such levels. For another, the cost of paying off the interest on these debts would suck huge sums of productive capital out of the economy in the form of tax. “With a debt level that is two or three or four times your earnings each year, that just won’t work – you won’t be able to service that debt,” the team’s leader, Stephen Cecchetti, told the BBC . “The lesson here is not that this is going to happen – it almost certainly can’t happen,” he added, “the lesson is that something has to change.”

In fact, there are already signs that some change is happening, with a number of countries moving to raise retirement ages. That’s something we’re likely to see more of in the years – and decades – to come.

Useful links

OECD Insights: From Crisis to Recovery

OECD: Ageing and employment policies project – Live Longer, Work Longer

OECD Observer – Ageing

OECD Societies (a chapter from Trends Shaping Education, OECD 2008)

OECD Economic Outlook