Review of Previous Summits

and Current Status

of Retirement Savings
Saving for Your Golden Years:
Trends, Challenges and Opportunities
Sylvester J. Schieber
Vice President and U.S. Director of Benefits Consulting
Watson Wyatt Worldwide
Arlington, Virginia
Overview

● Broad conclusions from prior summits and recent

savings experience
● Saving for our “golden years”: theory and reality
● Populations particularly at risk
● Focus of the sessions during this summit
Conclusions from Summits I and II

● “Americans must save more today if they are to

realize the dream of a financially secure retirement”
(Summary report from the first summit)
● “Americans are saving too little—often
dangerously too little… This problem is especially
acute for women and minorities.” President George
W. Bush
Personal Saving Rate as a Percentage of
Disposable Income in the United States
Since the Passage of ERISA
Percentage
12
10
8
6
4
2
0
-2
   1974       1979       1984       1989       1994       1999       2004   

Source: US Department of Commerce, Bureau of Economic Affairs, National Income and Product Accounts.
What Is Golden?

● Older American’s Act (P.L. 89-73, 1965) states that older

people should enjoy “an adequate income in retirement in
accordance with the American standard of living.”
● President’s Commission on Pension Policy (1981) held that
“pretirement living standards should be measured in terms
of preretirement disposable income.” This takes into
account
» Work-related expenses including taxes
» Different expenditure needs while working versus the retirement
period—e.g., educating children, health consumption, and so forth
Modern Day Analysts and Retirement Planners
Put Target Retirement Income at Around 70 to
80 Percent of Preretirement Earnings for People
to Maintain Living Standards

Retirement income goal relative to earnings Social Security

100%

80%

Social Security, as currently structured, fills a considerable

60%
part of the income goal. Still, there is a considerable gap.

40%

20%

0%
15,000 35,000 55,000 75,000 95,000
Preretirement earnings level
Modern Day Analysts and Retirement Planners
Put Target Retirement Income at Around 70 to 80
Percent of Preretirement Earnings for People to
Maintain Living Standards
Retirement income goal relative to earnings Other sources
100% Social Security

80%

60%

40%

20%

0%
15,000 35,000 55,000 75,000 95,000
Preretirement earnings level
Annual Retirement Income Required to Live
Comfortably in Retirement Anticipated by
Those 50 and Older and Participating in a
Retirement Plan

Percentage of Annual Pay of $35K

Income Pay of <$35K to $75K Pay of $75K+
Less than 40% 1.8% 1.3% 1.7%
40 to 59% 10.0 14.9 18.9
60 to 79% 20.7 36.4 45.1
80 to 99% 21.1 25.6 22.1
100% or more 29.8 13.0 7.0
Don’t know 16.7 8.8 5.1

Median estimate by
those responding 88.7 76.2 71.9

Source: Watson Wyatt Worldwide, 2004 Retirement Attitude Survey.

The Mechanics of Retirement Saving

● Assume this worker knows what the future holds

● Consider a 25-year-old worker
● Earning $35,000 per year
● Expects pay raises of 4 percent per year until
reaching age 65 when she retires
● Will live to age 81½
● Needs to save to provide a benefit in retirement
equal to 35 percent of earnings
The Mechanics of Retirement Saving

Accumulated wealth
800,000

600,000

400,000

200,000

0
25

29

33

37

41

45

49

53

57

61

65

69

73

77

81
The Mechanics of Retirement Saving

● We know that workers don’t know the future with

certainty
● They don’t all start working at 25 and saving
● Some earn a lot, others a little
● Pay raises are irregular
● Retirement ages, life expectancies and consumption
needs vary
● But this worker may be about average in many regards
Given Our National Demographics and the
Mechanics of What We Should Be Saving, We
Can Estimate What Savings Rates Should Be
Retirement saving rate as percentage of personal income

10%

8%

6%

4%

2%

0%
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
The Reality

In 2005, for the first time since the

Great Depression (1932-1933)
the personal savings rate in the
United States was negative!

At the individual level the picture is

more varied.
Workers’ Accumulating
Retirement Assets
Billions of dollars
14,000
IRAs
12,000
Federal gov't
10,000 S&L gov't
Private DC
8,000
Private DB
6,000

4,000

2,000

0
1985 1988 1991 1994 1997 2000 2003

Source: Federal Reserve Board, Flow of Funds Accounts.

Pension Participation Rates
by Workers’ Ages

70% Full time

Part time
60%
50%
40%
30%
20%
10%
0%
25-34 35-49 50-59 60-64 65+

Source: March 2005 Current Population Survey tabulations.

Savings Rates Required to Fill Income Target Gap
Given Current Social Security Law by Age at Which
Savings Commences Assuming DB Pension
Assumes age 65 retirement.
Percent of earnings to be saved each year Age 30
40% Age 40
Age 50
30%

20%

10%

0%

0
0
0

0
00

00

00
00

00

00
00

00

00

00
,0

,0

,
5,

5,

5,

5,
5,

5,

5,

05
5

5
$1

$2

$5

$6

$7

$8

$9
$3

$4

$1
Preretirement earnings level
Source: Dan M. McGill, Kyle N. Brown, John J. Haley and Sylvester J. Schieber, Fundamentals of Private
Pensions, eighth ed. (Oxford: Oxford University Press, 2005), p. 432.
Pension Participation Rates by Workers’
Annual Earnings Levels
80% Full time
Part time
60%

40%

20%

0%
< $15k $15-35k $35-60k $60-90k $90k +

Source: March 2005 Current Population Survey tabulations.

Social Security Financing
Under Current Law
Percent of covered pay
25

20

15

10
Income
5 Expense

0
2000 2010 2020 2030 2040 2050 2060 2070
Distribution of Financial Wealth
Among Near Elderly in 1994*

Wealth Retirement Purchasing Power

Holding Personal Social Pension
Distribution Assets Security Wealth

Bottom 10th 3% 94 % 3%
*
Note: Does not include housing.

Derived from James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Savings
Adequacy,” in Mitchell, Hammond, and Rappaport, eds., Forecasting Retirement Needs and Retirement
Wealth (University of Pennsylvania Press, 2000).
Distribution of Financial Wealth
Among Near Elderly in 1994*

Wealth Retirement Purchasing Power

Holding Personal Social Pension
Distribution Assets Security Wealth

Bottom 10th 3% 94 % 3%

At 1/3 up 18 63 19
*
Note: Does not include housing.

Derived from James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Savings
Adequacy,” in Mitchell, Hammond, and Rappaport, eds., Forecasting Retirement Needs and Retirement
Wealth (University of Pennsylvania Press, 2000).
Distribution of Financial Wealth
Among Near Elderly in 1994*
Wealth Retirement Purchasing Power
Holding Personal Social Pension
Distribution Assets Security Wealth
Bottom 10th 3% 94 % 3%
At 1/3 up 18 63 19
At 2/3 up 30 36 34
Top 10th 65 10 25
*
Note: Does not include housing.

Derived from James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Savings
Adequacy,” in Mitchell, Hammond, and Rappaport, eds., Forecasting Retirement Needs and
Retirement Wealth (University of Pennsylvania Press, 2000).
Pension Participation Rates
by Firm Size

80% Full time

Part time
60%

40%

20%

0%
1-9 10-24 25-99 100-499 500-999 1000+

Source: March 2005 Current Population Survey tabulations.

Distribution of Wealth Holding
by People Ages 53 to 63 in 1994
Accumulated wealth not including Social Security Wealth
Percentile
1,200,000
1,000,000

800,000
600,000
400,000 50th

200,000
0
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Lifetime earnings decile
Source: Steven F. Venti and David A. Wise, “The Cause of Wealth Dispersion at Retirement:
Choice or Chance,” American Economic Review (May 1998), vol. 88, no. 2, pp. 185-191.
Distribution of Wealth Holding by People
Ages 53 to 63 in 1994 Based on Lifetime
Earnings Level
Accumulated wealth not including Social Security Wealth
1,200,000
Percentile
90th
1,000,000

800,000
70th
600,000

400,000 50th
30th
200,000
10th
0
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Lifetime earnings decile
Source: Steven F. Venti and David A. Wise, “The Cause of Wealth Dispersion at Retirement:
Choice or Chance,” American Economic Review (May 1998), vol. 88, no. 2, pp. 185-191.
Distribution of Non-Pension Financial Wealth
Held by People Ages 53 to 63 in 1994 Based
on Lifetime Earnings Level
Financial wealth not including Wealth
pensions, IRAs, 401(k)s Percentile
250,000

200,000 90th

150,000

100,000 70th

50,000 50th
30th
0
10th
-50,000
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Lifetime earnings decile
Source: Steven F. Venti and David A. Wise, “The Cause of Wealth Dispersion at Retirement:
Choice or Chance,” American Economic Review (May 1998), vol. 88, no. 2, pp. 185-191.
Saving for Our Golden Years

● How do we get younger people engaged in saving

sooner and more?
● How do we get more retirement savings
opportunities for low-wage earners?
● How do we offer greater retirement savings
opportunities to workers with small employers?
● How can we facilitate extended working
opportunities to those nearing retirement ages who
need to work or want to work?