Friday, October 1, 1999, at 2 p.m.

Our guest today is Henry J. Aaron, a senior fellow in economic studies at the Brookings Institution. He is the author of 15 books and the editor of 11 more, including his most recent work, Behavioral Dimensions of Retirement Economics, which he edited.

Studies by psychologists, economists and sociologists suggest that most people either don't plan effectively for retirement or procrastinate so long that their economic losses are substantial. And some people already in their fifties haven't thought clearly about retirement at all. Meanwhile, Congress continues to pass laws that affect how and when people can retire.

Since joining Brookings in 1968, Henry J. Aaron has been assistant secretary for planning and evaluation at the Department of Health, Education and Welfare as well as a Guggenheim fellow at Stanford University's Center for Advanced Studies in the Behavioral Sciences. He also chaired the Advisory Council on Social Security and directed Brookings' economic studies program.

Please submit your questions about retirement and public policy now and during the discussion.

Montreal, Quebec: Hi Mr. Aaron,

I wonder if you'd comment on the hodgepodge of fereral government programs for retirement savings. I moved to Canada three years ago, and we have just one tax-deferred system -RRSPs- for individual retirement savings. In the US, you have IRAs, 401Ks, 403bs, Keoghs, Roth IRAs, etc. How much you can save for retirement depends on who you work for, etc? Why not have just one plan with the same rules for everybody?

Thanks.

Henry J. Aaron: People have a hard time making long term plans even when the choices are relatively straightforward. When their choices are complicated and diverse, real problems arise. One of the chapters in the book, Behavioral Dimensions of Retirement policy makes this point. Matt Rabin and Ted O'Donoghue point out that procrastination in planning for retirement can impose serious costs. The complexity of tax-sheltered saving plans is confusing and abets procrastination. Simplication of these laws should be high Congressional priority.

washingtonpost.com: Please try to confine your questions to the area of retirement and public policy rather than requesting specific retirement advice. Mr. Aaron is a specialist in economic issues and policy, not a retirement planner.

Washington, DC: Aged 54, I consider myself in the prime of my life, professionally savvy, and have a lot to offer to society. As much as I would like to think I could retire, the notion of being idle and aging depresses me to the point of experiencing anexiety attack. I don't know why should I be expected to retire at this age. I would further like to see changes in the Human Resources Management philosphy to elightent those who are just as old as many of us in midlife, but prefer to hire and promote younger employees. This I find very depressing and difinetly discouraging to one growth and conctibutes to one's early prematurely demise.

That said, I definitely would like changes favoring older persons for some or specific jobs, espcially those that have shown willings and skills to make it at that age and beyond.
Unless "early" retirement is imposed for economic reasons, I would like to see someways or options to ease the burden of these folks whol could retire early or retirement under age.

Henry J. Aaron: The problem of planning for a stage of life that one has not experienced and cannot experience until you enter it is very serious. This very question happens to have been the central subject of a chapter entitled "What Me Worry? A Psychological Perspective on Economic Aspects of Retirement" (long title, but fun to read!) in Behavioral Dimensions of Retirement Policy. The major finding is that people are not good at anticipating what retirement will be like, and retirees are not good at remembering what they expected. But the good news is that retirees are about as happy on the average as people who have not retired, although they derive satisfaction from different things.

Alexandria, VA: Mr. Aaron -

Do you have a sense of whether the federal government will finally either set up guidelines for or actually regulate long-term care insurance programs? If so, when and in what form? I have heard of much churning in the industry and am reluctant to invest in such a plan until some stability is developed.

This is an important issue for my retirement planning as I feel the need for such coverage but am scared to contract for it at this time even though the premiums will be lowered than later on. By the way, I am 58, healthy and considering retirement in late 2000.

Thanks

Henry J. Aaron: Your concern about long-term care insurance reflects two important facts. Long-term care insurance is complicated and hard to understand. And it usually doesn't provide full protection against some risks, such as large and unexpected jumps in costs. But the simple fact is that the decision about whether to buy such insurance is about as complicated a question as any of us has to solve, even if the choice--buy/don't buy--is straightforward. I cannot advise anyone on their personal decisions, because I don't know you or your situation. There is not much early prospect, I think, of significant changes in federal policy in this area, as Congress seems to focused more on the budget, social security, and medicare (which, contrary to what most people think, doesn't cover much long-term insitutional care.

washingtonpost.com: As Americans live to increasingly older and presumably healthier old ages, many will not want or expect to retire in the classic sense of the word. Will there be a place for older Americans in the work force or will policy and practices force them out?

Henry J. Aaron: Probably. But the more immediate problem for those young workers--who happen to be the large majority--who think they will want to retire in their mid-50s or early 60s. That problem is to save enough now to support themselves whenever they retire in the style they expect. Annamaria Lusardi in "Information, Expectations, and Savings for Retirement" in Behavior Dimensions of Retirement Policy reports that at least a third of older workers have not thought seriously about saving for retirement. And most have very little in the way of savings. So, even before worrying about what labor markets will look like in the future, younger workers should focus on saving today.

Alexandria, VA: My father just died at the age of 66 and did not leave my mother -who is 58- much in the way of retirement savings. I suspect they were not very wise investors or savers, though I don't know for sure because they were always uncomfortable discussing money with their children. I'm 32, single and make a decent -though not luxurious- living. What are the best ways for me to help out my mother at a time like this?

Henry J. Aaron: A surprising but important finding is that income and consumption drop sharply when people retire, but they are about as happy as are people before retirement. They derive more satisfaction from personal and family contacts and from use of their leisure time. That does not mean, of course, that financial support is unimportant--it is very important, especially when personal resources are demonstrably inadequate. But, I suspect, that the most important gifts are your personal attention and your time.

washingtonpost.com: You mentioned the poor saving and retirement planning practices of the young. Why is this so? Is it because young people cannot focus on the fact that they will eventually grow older? Or does it have more to do with American culture and attitudes?

Henry J. Aaron: You've got me. All I can tell you is that the failure to save is not new. The same failure to save that Annamaria Lusardi documents has been true, as far as the much poorer data we used to have indicated. That is why programs to encourage people to save (tax incentives) or to force them to save (Social Security) play such an important role in assuring adequate retirement income--that is, for all but the vary wealthy.

washingtonpost.com: So let's look at a worst case scenario: America has millions of workers who don't plan for retirement. At some point, huge numbers of them are going to reach a point of financial difficulty ranging from problems paying their bills to near-poverty, correct? Or is this being too pessimistic? What do you see in your crystal ball?

Henry J. Aaron: The evidence is pretty clear that many people clearly anticipate future events and plan for them. They will save and buy insurance for retirement, disability, or premature death. Unfortunately, many people do not plan so well for the future or lack the income to save enough or buy insurance. What this fact underscores is the continuing need for a public mandate that forces people to save for these contingencies in one way or another. Right now, that program is Social Security. Some people would like a different sort of system. If you want a review of the varioius plans, you might want to take a look at Countdown to Reform: The Great Social Security Debate, which Robert Reischauer and I co-authored and that is available from the Century Foundation in New York city and Washington, D.C.

Fort Washington, MD: I will have a large amount of savings bonds when I retire-I bonds and EE bonds-. Is there any way that I can buy an annuity-for retirement- with the savings bonds without paying taxes on the interest from the bonds?

Henry J. Aaron: I don't know the tax law on interest from series E bonds. But it is worth noting that you are both prudent and rare in your interest in buying an annuity. Fewer than 5 percent of the elderly voluntarily buy annuities. They tend to be rather expensive, in large part because insurance companies know that people who expect to live a long time are more likely to buy annuities than are people who expect not to live a long time. So, they boost prices. That is one of the reasons why a program, such as Social Security, which mandates annuitization is so important for the economic security of the elderly and disabled. Robert Reischauer and I examine this question at some length in Countdown to Reform: The Great Social Security Debate. On tax matters, you need to consult a tax lawyer or accountant.

Washington, DC: Perhaps I may respond to concerns about saving among the young while posing my own question. As a young--I am 24 years old--employee who only recently finished graduate school and began to earn a regular salary, I have not been able to save a great deal. Though I hope to begin saving soon, I am overwhelmed by the initial costs of adult independence -though I live very modestly- and by student loans and must merely work to create my "nest egg" of emergency savings before contributing to my retirement. I'm curious to hear whether Mr. Aaron has noted a correlation between the inability to save and the growing cost of college tuition-popularity of student loans. Are current policies organized to provide "relief" to those with student loans a viable answer?

Henry J. Aaron: This is a very good question. It is certainly true that many people leave college or graduate or professional school deeply encumbered by debt. Paying off that debt as well as setting up an independent household will cut deeply into all but the most munificent starting salaries and make it hard to save. The problem with this explanation, however, is that young people have never been very good at saving. Current needs have a way of overwhelming needs that will not show up for perhaps forty years. The result is procrastination, as in: "It can't matter much if I put off my saving plan for a few months. I will save later." The problem, as Rabin and O'Donoghue (see earlier answer) point out, many people will find the same logic compelling after a few months have elapsed and put off saving still longer. The point is: start early. Keep in mind that paying off debt is actually saving--one's net worth is one's assets less one's debts. Just to underscore the importance of early saving--if the interest rate is 8 percent and one saves a constant amount each year, the amount one saves from age 25 to age 35 will contribute more to retirement income (at age 65) than will all of the saving one does after age 35. Hard to believe, but true. Do the math!

washingtonpost.com: Our time is up. Thanks today to Henry J. Aaron for his views on retirement and public policy.

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