Reforming retirement systems is a more urgent imperative globally as the coronavirus pandemic claims jobs, lowers economic growth and investment returns, and threatens to choke funding for already underfunded pension plans. The pandemic is also hastening the imminent insolvency of the Social Security Trust Fund in the U.S., a recent report by the Penn Wharton Budget Model has found. In two recession scenarios the report laid out, the trust fund would run out of money in 2032 or 2034—between two to four years earlier than pre-pandemic projections.
But there is still hope for retirees, if policymakers, employers, and plan sponsors can purge retirement systems of their drawbacks and bring new financial products to fund them, according to a recent research paper by Olivia S. Mitchell, Wharton professor of business economics and public policy and executive director of the School’s Pension Research Council. Retirement systems must also provide for the long-term care needs of retirees, and build on recent moves to cover “gig economy” workers or freelancers, part-timers, and temporary workers, her paper stated.
Mitchell’s paper breaks down the to-do list into two broad categories: the “accumulation” state when pensions are funded, and the “payout” stage when retirees can begin to draw from their accounts.
For the accumulation stage, to begin with, Mitchell calls for separating pensions and health care from employment. That would dramatically expand coverage to all citizens, irrespective of whether or not they hold a job.
Next, with retirees living longer, they can better fund their golden years if they also delay their retirement and work longer, she wrote. Retirement plans could be tweaked to incentivize delayed retirement, she adds.
In planning for the payout stage, beneficiaries could convert their retirement accounts into annuities, so that they get a pre-determined annual payout, while also protecting themselves against outliving their pensions, Mitchell notes. She also recommends that integrating annuities be part of plan design from the outset, for instance in the context of a target date fund, as it can be difficult to add annuities after people retire.
Read more at Knowledge@Wharton.
