RetireSecure Blog

March 23, 2015

The Lump of Labor: Is it Still a Fallacy?

Filed under: Planning for Retirement,PRC Partners — The Pension Research Council @ 10:14 am

by Mike Orszag, TowersWatson

Some of the key questions people must ask themselves when planning for retirement include how long they can continue to work, how much they can earn, and whether they can count on their job still being around. In this day and age, these worries are compounded by a concern that older individuals could be ‘forced out’ by the younger generation. That is, even if someone is not ready to retire, he or she might feel pressured to leave “to give the young folks a chance.”

This perspective arises from a belief that there are only so many jobs than can be filled in the economy – the so-called “Lump of Labor” view. In fact few arguments irritate mainstream economists more, as history has shown that there’s not a fixed demand for a set lump of labor. Instead, over our history, when labor supply has changed, wages adjusted and the economy grew.

A related argument is that people’s skills become obsolete over time, so technological change dooms us to ever-higher un- and under-employment. Certainly technological change has forced re-invention of the workplace time and again, so it’s critical to invest in one’s knowledge to avoid job loss. But the productivity improvements flowing from new technology do not lead to aggregate job loss; rather they produce job evolution. Of course the adjustments can take a long time and may be painful for some, but a more productive economy will float many boats.

Nevertheless, there’s good reason to worry that the lump of labor ‘fallacy’ may now be more right than wrong, due to the changing nature of skill revolution. In the old days, there were always some jobs that unskilled workers could take, but this may not be true in the future. For instance, during the industrial revolution, machines took the place of many simple and repetitive tasks. Yet there were plenty of other jobs where people were more productive than machines. Additionally, new jobs appeared that had not been anticipated previously, as a result of the new technologies.

What seems different today is that machines are now growing smarter than people. What this implies is that the range of alternative jobs which people can do better will shrink. This could make labor market adjustment more painful and longer for the individuals involved.

The reality that our human capital is increasingly risky is rarely acknowledged by financial advisers and pension sponsors. Yet most people are unable to accurately estimate how likely it is that their own skills will be relevant a decade or two hence. Nevertheless, the nature of technological change should make human capital risk more important for those looking ahead and planning for retirement. Not only is obsolescence a bigger risk, but mitigation steps are far less clear.

Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania

March 11, 2015

International Foundation of Employee Benefit Plans Joins Wharton’s Pension Research Council

Filed under: PRC Partners — The Pension Research Council @ 1:22 pm

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that the International Foundation of Employee Benefit Plans has rejoined the Council for 2015. Read the full press release here.

February 26, 2015

Mutual of America Joins the Pension Research Council

Filed under: PRC Partners — The Pension Research Council @ 10:52 am

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that Mutual of America has rejoined the Council for 2015. Read the full press release here.

January 27, 2015

MetLife Inc. Joins Wharton’s Pension Research Council

Filed under: PRC Partners — The Pension Research Council @ 4:57 pm

Olivia S. Mitchell, Director of the Pension Research Council, is pleased to announce that MetLife, Inc. has rejoined the Council for 2015. Read the full press release here.

January 22, 2015

Lump Sums Could Mean Longer Worklives

Filed under: New Research,Planning for Retirement,PRC Partners — The Pension Research Council @ 4:14 pm

Eligible individuals can start receiving Social Security benefits as young as 62 but if they waited until age 70, monthly benefits would rise 76%.  Yet most Americans retire before the age of 65.

In their new paper “Will They Take the Money and Work? An Empirical Analysis of People’s Willingness to Delay Claiming Social Security Benefits for a Lump Sum” Raimond Maurer, Ralph Rogalla, Tatjana Schimetschek, and Olivia S. Mitchell, Wharton Professor of Insurance/Risk Management & Applied Economics/Policy, and Director of the Pension Research Council, found that people would claim Social Security benefits later by about half a year if they could get a lump sum equal in actuarial value to their future benefit increases. This would rise to two-thirds of a year if they could only get a lump sum after age 67, their Full Retirement Age. Moreover, those who currently claim at the youngest age would also delay the most.

One pundit predicted that the US could expect an increase in GDP due to increased labor force participation as a result of lump sum incentives.

To read more about this story click here.

January 14, 2015

Pension Developments in 2014

Filed under: Uncategorized — The Pension Research Council @ 3:57 pm

As 2015 unfolds, let’s recall some of the major retirement-related news items from 2014:

January: The federal government announced myRAs, a new Roth IRA permitting workers without employer-sponsored retirement plans save for retirement cost-effectively.

July: The Treasury Department and IRS issued long-awaited rules on the use of longevity annuities.

October: The Treasury Department and IRS approved the use of deferred-income annuities in target-date funds (TDFs) in 401(k) plans, including as a default investment. “One aspect of defined contribution plans which many have critiqued in the past is their inability to protect against longevity risk,” said Olivia S. Mitchell, Wharton Professor of Insurance/Risk Management and Applied Economics/Policy and Director of the Pension Research Council. “Allowing deferred annuities to become a permissible component of these plans is a long-due innovation.”

November: A divided government will continue for at least the next two years making “disruptive tax and design changes to retirement saving and retirement income and health programs unlikely,” according to Dallas Salisbury, president and CEO of the Employee Benefit Research Institute (EBRI).

December: The government approved legislation to revamp the multiemployer pension insurance program. The measure raises premiums owed to the Pension Benefit Guaranty Corporation from $13 to $26 for each participant, and permits benefit cuts under certain circumstances.

To read more retirement related news from 2014, click here.

January 9, 2015

Retirement in Baby Steps

Filed under: Planning for Retirement,Retirement Research — The Pension Research Council @ 10:48 am

Many older Americans are electing to downsize from their full-time careers and neighborhoods in steps, rather than abandoning work all at once.  Olivia S. Mitchell, Wharton Professor of Insurance/Risk Management & Applied Economics/Policy, and Director of the Pension Research Council, predicts that two-step retirement will become increasingly popular among Baby Boomers.

In previous generations, even when wives worked outside their homes, people expected that they would quit when their husbands retired. Now, more women hold jobs they find “aspirational,” Professor Mitchell said, so they want to delay a major downsizing. Furthermore, as people live longer, they must work longer to afford to retire.

To read more click here.

November 26, 2014

Delaying Social Security Benefits for a Lump Sum

Filed under: New Research,Planning for Retirement — The Pension Research Council @ 10:55 am

Olivia S. Mitchell, Wharton Professor of Insurance/Risk Management & Applied Economics/Policy, and Director of the Pension Research Council, has a new study on how to get people to claim Social Security later. Her coauthors are Raimond Maurer, Ralph Rogalla, and Tatjana Schimetschek of the Goethe University in Frankfurt.

The authors show that people would voluntarily claim about half a year later if they received a lump sum for claiming after their Early Retirement Age, and about two-thirds of a year later if the lump sum were paid only for those claiming after their Full Retirement Age (as defined by Social Security). Overall, people would work more by one-third to half of the extra months.  While the government would not necessarily save a great deal of money, the labor force participation rate would be higher and the tax base would be larger while these individuals remain employed.

A news item about the paper can be found here, and the paper is available for download here.

October 29, 2014

Time to Change the Conversation on Social Security

Filed under: New Research,Planning for Retirement — The Pension Research Council @ 12:59 pm

Many people thinking about Social Security benefits focus only on how soon they can file. But in a new research study, Olivia S. Mitchell, Wharton Professor of Insurance/Risk Management & Applied Economics/Policy and Director of the Pension Research Council, along with colleagues Jingjing Chai, Raimond Maurer, and Ralph Rogalla of Goethe University, have come up with a plan to change the conversation.

“By permitting people to delay their retirement dates with a lump sum option, workers would continue to pay Social Security payroll taxes for more years, which could help return the system to solvency via additional payroll tax collections,” the scholars write. See an article about their study here.

October 23, 2014

Cities Thinking of Dumping Retiree Healthcare Benefits

Filed under: Uncategorized — The Pension Research Council @ 8:25 am

Public employers across the country are following Detroit’s lead by withdrawing health insurance coverage for retirees and sending them to healthcare exchanges set up under the Affordable Care Act.

Olivia S. Mitchell, Executive Director of Wharton’s Pension Research Council, notes that “since the passage of the Affordable Care Act, … every public-sector employer is looking at the exchanges as a potential way to get out of the unfunded liabilities that the public sector is bearing.” She adds: “Older people’s healthcare is much more expensive.”

In 1988, two-thirds of private-sector employers offered retiree health care; by 2013, fewer than one-quarter did so. The public sector has been slower to do away with retiree healthcare, in part because unions have continued to negotiate for the benefit. Nearly 80 percent of state and local government organizations still offer retiree healthcare, though the prognosis is not good.

See an article about this study here.

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