Data & Research February 1, 2016

Are Americans Healthy Enough to Retire Later?

Is it realistic to expect that older individuals will be able to work longer?
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Public programs such as Social Security and Medicare might change in ways that reflect popular beliefs that people will work beyond traditional retirement ages of 65 or 67. But a paper from the National Bureau of Economic Research (NBER) sets out to analyze whether older Americans actually have the health capacity to work longer.

To put it bluntly, are older workers healthy enough to retire later? “Health Capacity to Work at Older Ages: Evidence from the U.S.” uses two methods to assess capacity to work at older ages. The first asks: if people with a given mortality rate today were to work as much as people with the same mortality rate worked in the past, how much could they work?

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The paper’s authors make two calculations based on plots of the relationship between employment and mortality over time, using data from Current Population Survey and the Human Mortality Database from 1977 to 2010. They focused on men, as sharply increasing rates of women’s labor force participation over time make it difficult to interpret the results for women.

The second method asks: if people with a given level of health were to work as much as their younger counterparts in similar health, how much could they work?

The method is built on research that explores the ability of workers just over the age of 62—the Social Security Early Eligibility Age (EEA)—to work, based on the relationship between health and retirement or disability status for slightly younger workers, those age 57 to 61.

They used data from the Health and Retirement Study (HRS) to estimate the relationship between health and employment for a sample of younger males and females, age 51 to 54.

They use those estimates along with the actual characteristics of older individuals, age 55 to 74, to project the latter’s capacity to work based on health.

NEXT: What part does education play in health and retirement?

They also explore whether health capacity to work varies by education group, as averages for the population as a whole may mask substantial heterogeneity in workers’ ability to extend their work lives.

They explored how self-assessed health, a broad summary measure of health, has evolved over time by education. One challenge with such an analysis is that average levels of education are rising over time. Relying on fixed education categories, such as high school dropout, may be problematic when the share of the population in this category is changing substantially. They overcome this challenge by creating education quartiles and exploring how health by education quartile has changed over time.

Their central finding is that both methods suggest significant additional health capacity to work at older ages. They estimated that men would work an average of 4.2 additional years between the ages of 55 and 69 if the employment mortality relationship that existed in 1977 were in effect today. This is an increase of more than 50% relative to the average 7.9 years currently worked in this age range.

This estimate reflects substantially higher employment—16 percentage points higher at ages 55 to 59, 27 points at ages 60 to 64, and 42 points at ages 65 to 69—relative to actual 2010 employment rates. Results using this method depend on the base year used for comparison, as both employment and mortality are changing over time—for example, estimated additional work capacity is 1.8 years when using 1995 (roughly the trough of employment in recent years) as the base year.

In interpreting these results, they caution that this method implicitly assumes that all gains in life expectancy can translate into longer work lives. If one instead uses the NCFRR’s logic that a year of additional life expectancy might translate into eight additional months of work and four additional months of retirement, for example, these values could be multiplied by two-thirds.

The paper can be downloaded free of charge online.

Data & Research February 1, 2016

Inside the Mind of a TDF Portfolio Manager

Like any challenging labor in life or business, running a target-date fund portfolio successfully requires careful attention and a keen sense of balance.
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It takes a lot of experience and conviction to feel confident in running a multi-billion dollar target-date fund (TDF) series. 

A skilled team of investment researchers and on-demand technical support from one of the world’s largest investing institutions doesn’t hurt either, says Dan Oldroyd, portfolio manager and head of J.P. Morgan’s target-date strategies.

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Speaking recently with PLANADVISER, Oldroyd suggests it’s an engaging and challenging time to be running a large, name brand target-date fund series—and on that note, it’s also an interesting time to be invested in such a product. The industry is closing in on the 10-year anniversary of the Pension Protection Act (PPA), which effectively set the stage for widespread automated investing within retirement plans in the interest of preventing poor decisionmaking by uninformed investors. At the same time, geopolitical and economic forces are trying investment strategies up and down the markets, testing the resolve of sophisticated institutional investors and novice TDF owners alike.

Add to the soup the latest thinking on behavioral finance and the wide embrace of goals-based investing, and one can see some of the powerful countercurrents that must be considered in building out a TDF strategy.

“In the initial years following the enactment of the PPA, the industry was more focused on testing and proving the basic TDF glide path concept and teasing out key similarities in investment outlook among seemingly diverse retirement plan populations,” Oldroyd explains, citing his firm’s own decade-old “Ready! Fire! Aim?” research program. “This played out in the to-versus-through debate and the related debate about how much equity to have in the glide path, for example. More recently, I think we have started to move on to think about how things like cash flows, participant loans, the timing of withdrawals and the variability of inflows all combine to impact TDF performance.”

Oldroyd likens the effort to “bringing the theoretical effort of building and implementing a portfolio glide path into the real world setting of a retirement plan,” where people do not behave exactly the way mathematical models would suggest. He says the “equity versus fixed-income question will obviously remain important,” but he is particularly interested in emerging questions around how the variability of cash flows into a TDF portfolio can significantly impact performance over time, and whether the effect is significant enough to impact glide path construction and other elements of TDF strategy.

NEXT: Tips for plan fiduciaries 

“Participant behavior remains incredibly important even in a post PPA-world where many people are using target-date funds and other aspects of automation,” Oldroyd continues. “It’s another side of the argument that investment allocation is only one piece of the puzzle in building a successful retirement.”

Oldroyd feels some of the key questions for plan sponsors and advisers to consider in picking and monitoring a TDF are fairly obvious: “Should the role of a TDF be to earn as high a return as possible? Or, should it be to secure a minimum level of success for as many people as possible? Do you protect what you have, or do you try to grow to make up the gap?”

But others are more esoteric: “What is the impact of the timing of inflows on an individual’s short- and long-term performance in the TDF? How long after making their first investment into a TDF is a given investor reaching an appropriate deferral level of at least 8%? What about 10%? Is this happening quickly enough to ensure retirement readiness? What impact does current salary and potential raises have on deferrals? Are people still getting raises so they can keep ramping up their contributions in the way your TDF model says they need to in order to reach retirement readiness?”

Sadly, Oldroyd says the latest data shows sponsors’ answers to this second batch of questions might actually be getting worse post-PPA. “In our original ‘Ready! Fire! Aim?’ research from a decade ago, for example, we saw people reaching sustained 8% salary deferrals around age 40 on average, but today this doesn’t happen until very close to age 50. Even worse, a decade ago people were peaking at about 10% of salary contributions on average by age 55 and holding there for a time before retiring, but these days most people aren’t even getting there pre-retirement.”

In short, Oldroyd says TDF managers and owners are realizing that these challenges all have to be factored into both plan design and investment design. Given the fact that raises are only very modestly outpacing inflation, for example, it's not likely TDF owners will be able to pour more money into their retirement accounts late in their careers to make up for lower contributions today. Nor is it likely a good move to ramp up equity exposures right now to cover potential income gaps in retirement. 

“That would simply require too much risk at this point,” Oldroyd warns. “Any real solution is going to have to be holistic and look across all these elements.”

NEXT: What the next 10 years of PPA could bring 

Oldroyd goes on to explain that “PPA has driven so many more people into plans via auto-enrollment, and that is a great thing.”

“But what we are starting to see clearly now is that auto-features are seemingly more helpful for new employees, as is auto-escalation,” he warns. “Increasingly we have a big swath of employees who haven’t been caught up in all the automation and who are being left to their own devices.”

Plan sponsors should understand whether their plan is being divided into these two populations, Oldroyd suggests. Recordkeepers should be ready and eager to help here, supplying any necessary data about how participants are invested and whether this has any noticeable impact on loans, timing of withdrawals, the timing of the increases in deferrals, etc. If the answer is yes, action should be taken to ensure everyone in the plan is getting a fair shot at success.

“A simple way to explain this issue is to think about the difference between retirement projections and the reality participants experience,” Oldroyd concludes. “It’s pretty easy to imagine a retirement plan in which an individual would be projected to do well given a certain set of data (say, salary and age) but would actually fail to reach retirement readiness—perhaps through a combination of poor financial decisionmaking and bad luck in the markets. It’s important for plan sponsors to understand this possibility and how to address it through plan design, benchmarking, reporting, etc.”

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