ƥ The State of US Retirement Plans

ƥ Dallas L. Salisbury
ƥ President and CEO
ƥ Employee Benefit Research Institute
ƥ Maxwell MPA, 1973 and ABD, 1976
ƥ www.ebri.org
ƥ NPF May 23, 2006
c
 EBRI

ƥ Founded 1978
ƥ Current Team of 15 and Budget of $4.5
million
ƥ No Change of Mission Since 1978
ƥ On Sixth Generation of Representatives
from Outside Organizations
ƥ www.ebri.org and www.choosetosave.org


 EBRI Mission: To contribute to, to encourage,
and to enhance the development of sound employee
benefit programs and sound public policy through
objective research and education.

EBRI Methods: Research, Publications,

Education, Web Tools and Dissemination, No Position
Advocacy or Solutions Advocacy ± A Neutral Source
for All Sides of a Debate ± ³Just the Facts´


 The EBRI Difference
ƥ Research and analysis without position
advocacy.
ƥ Primary focus on universe and national
data.
ƥ Use of results by organizations and
individuals on all sides of issues
because of non-
non-advocacy approach.
ƥ Broad
Broad--based financial support from
organizations across the spectrum of
interests/ideologies and all sectors.
þ
 Agenda

ƥ Public Policy Influence

ƥ Demographic Influence
ƥ Employer Directions
ƥ Implications
ƥ Can DC Plans Provide Adequacy?

ß
The President
2003³Ownership Society´
2004 ³Responsibilty Society´
o 2003
o This administration is working hard to promote an ownership
society in America. We want more people owning their own home. ...
We want people owning and managing their own retirement accounts,
owning and controlling their own health care accounts.
o 2004
o We stand for a culture of responsibility in America. We're
changing the culture of our country from one that has said, if it feels
good, do it, and if you've got a problem, blame somebody else, to a
culture in which each of us understands we are responsible for the
decisions we make in life«..The culture of responsibility is growing.´

±
 Demographic Influences

h
Population 2000

¢
Population 2100

'
 `
 
 
 


   






c

c
cc

c

c

c

c


c

c

c

 c

c

ccc

cc

cc
 c

c

ccc

cc

cc
ð
›

   

10
 !"`
!#
 Percentage of Older Long Tenure
Workers Drops From 23% to 19% -
Gold Watches?
Percentage of All Wage & Salary Workers w ith 25+ Years of Tenure,
by Cohort Ages 45+ (1983--2002)

25
23.3
22.7

20.5
20.2 20.1 20.1
20 19.9 19.8
19.4
18.4 18.8 18.7
17.5
17.0

15
Percentage

Ages 45 to 54
12.9 12.6 Ages 55 to 59
11.9 11.6 11.7
11.3 11.4 Ages 60 to 64
10

0
1983 1987 1991 1996 1998 2000 2002
Source: EBRI tabulations of data from the Bureau of Labor Statistics



Life Expectancy: Greater for
Women than Men at All Ages

12
 `
evity Builds
`
evity

Male Age 85 c 92
cc

Age 65
50% chance 25% chance

Fem le Age 
88 c 94 cc

Age 65
50% chance 25% chance

Couple Age 
c 92
97 cc

(Both Age 65)

50% chance 25% chance

of one surv vor of one surv vor

 p


  

 p  
 

  


  

þ
Employer Directions

14
 ealth Spending Up; Retirement
Contributions Down
 

  p  




p p
 !"# $ 
! '

! '
!)(' !*%' "&'
!#)'
%('
( '
' #&' +

!))' *#*' )*'
# '
, 

) '
%"&' # (' - 


%(%'
% ' )#"'
 '

'
!"# !"& !"( !""  
p
 
- .






 
 
/ p
0 

 1 

     National Income and Product
Accounts of the United States

1±
 w gh Job Turnover Econom ± Part c pat on Gaps

1 No p an
ava
ab
e
Percent of Tota

Not
part c pat ng

3
Part c pat ng
1

<1 '1 - ' - '3 - ' - ' + a

1 . . 3 . .

Earn ngs (x$1, )

Emp
oyee Benef t Research Inst tute

h
 Pension Participation Rates
by Firm Size
c  

c

c

c

c
 c

 cc cc ccc


 Source: March 200± Current Population Survey tabulations.
 

2
   
    
 
    
  
    

  !"!#$$%






 

  


 
 
  


  
  
  
  
  
  
  
 
  


 
 
 
 
 
  









&  

 

!   "  #
 $     
 % 
&

 '  ( ) 
   #
 * 



 Labor Market Trends
Mean Future Decline
Class Ret Med Dental Vision Drug
White C 61 58 42 24 52
Blue C 51 61 39 25 56
Service 22 27 17 12 25
FullTime 60 66 45 27 59
PartT 19 12 9 6 11
Union 85 83 67 51 77
Non--U
Non 46 49 33 19 44
1-99 37 43 24 14 37
100+ 67 65 51 32 61
p


 
 p  


Individual Implications

20
 And increased health care costs have caused
many to have financial difficulties.

Percentage Say ng Yes

Decrease your contr but ons to

45
other sav ngs

wave d ff culty pay ng for other b lls 4

Use up all or most of your sav ngs 29

Decrease your contr but ons to a

ret rement plan such as a 40 (k) 26
40 (b) or 457 plan or an IRA

wave d ff culty pay ng for bas c

24
necess t es l ke food heat and hous ng

Borrow money 8



 Pension Plans Being Frozen ƛ
401(k) Growth/Enhancement
ƥ Soft Freeze
ƥ Hard Freeze
ƥ Multiple versions of Ơenhancedơ DC
ƛ Some will come close to keeping many
Ơwholeơ
ƛ Others will leave major shortfalls for most



 r
   
  

    
     ! " 

#  

$ %&  '


c

1

r 
t  f
m 
t 

1c

c
3c - 3 3
- 3 c-
-
c -


-
 c - 


rr r 
l r
 l
 - rr
t
trt rt  l
 - l
 trm
trt rt
 Source: Tabulations from the EBRI/ERF Retirement Income Projection Model (/þ/cch Version)
þ
 r
   
  

    
     ! " 

#  

$ (&  '


c





c

c
c 
 c 

c



 c 



 

 

 Source: Tabulations from the EBRI/ERF Retirement Income Projection Model (/þ/cch Version)
ß
 Fixed 4.43% of Pay Plan Cost -
Entry age 30 ƛThe Price of pay
Equity
B C C t ff y C p
±

±















B C 
RR C 
RR C

RR

  Rp  t




 How much do you need to save if
you work until 67?
ƥ Starting at age 20 
and saving c
consistently for 47 
years will support a c
long life at rates some  c
are now saving, c
c
without annuity c


purchase.

c
ƥ Waiting until 40 or 50
moves the numbers c
up.  c  c 
cc
ƥ A life income annuity
 helps keep them
p
     

h lower as you only

 $$    
% 
&!

Definition of basic expenses
± basic living expenses and any expense associated with an
episode of care in a nursing home or from a home health
care provider

Next two slides shows results by:
± Birth cohort
± Income quartile

Function of all future years of work, not just current
year or year prior to retirement

We assume individuals want a better than ±0/±0 chance of
having ³sufficient´ retirement income to cover basic expenses
± Model both a ¢± and ð0 percent confidence level
2¢
 Median Percentage of Compensation That Must Be Saved Each
Year Until Retirement For a ¢± Confidence Level For Funds To
Cover Basic Expenses* When Combined With Simulated Retirement
Wealth by Birth Cohort and Income Quartile
(Limited to 2±; assumes current Social Security and housing equity
is never liquidated) Income
quartile


c





c

c
     
 
 
 c 

c 

c 

* Basic expenses = basic living expenses and any expense associated with
an episode of care in a nursing home or from a home health care provider
Source: EBRI-ERF Retirement Security Projection Model. 2'
 Median Percentage of Compensation That Must Be Saved Each Year
Until Retirement For a ð0 Confidence Level For Funds To Cover
Basic Expenses* When Combined With Simulated Retirement Wealth
by Birth Cohort and Income Quartile
(Limited to 2±; assumes current Social Security and housing equity
is never liquidated) Income
quartile


c





c

c
     
 
 
 c 

c 

c 

* Basic expenses = basic living expenses and any expense associated with
an episode of care in a nursing home or from a home health care provider
Source: EBRI-ERF Retirement Security Projection Model. 2ð
 Would an additional ± of compensation be sufficient for
most pre-retirees to have ³sufficient´ funds to cover basic
expenses*?

Previous two slides only showed the medians for the various
groups

Also showed results as a function of just age and income
± See figures 2 and 3 in Issue Brief for results that include a
breakout by gender/family status at retirement

Next slide shows the percentage of simulated life-paths in each
cohort that would have ³sufficient´ retirement income if they
saved ± percent of compensation each year until retirement
± This is in addition to any retirement income/wealth
simulated in the mode
* Basic expenses = basic living expenses and any expense associated with
an episode of care in a nursing home or from a home health care provider
30
 0-
0-
-
/-
1-
,-

2-
3-
4-
-
-
1936-1940 1

1936-1940 2

 '% $( 
'%

1936-1940 3

%) " &!*
+
 ,-

.%!  
 %/›'%
1936-1940 4

1941-1945 1

1941-1945 2
„


1941-1945 3

1941-1945 4

1946-1950 1

„


1946-1950 2

1946-1950 3

1946-1950 4

1951-1955 1

1951-1955 2

1951-1955 3




1951-1955 4

1956-1960 1

1956-1960 2

1956-1960 3

1956-1960 4

1961-1965 1

1961-1965 2

1961-1965 3

1961-1965 4
31
 Percent of 65+ With Pension
and Annuity Income 1988-
1988-2002
c


c




c 




cc
c
cc


c

 
 
 c 

c
c

Source: EBRI CPS tabulations, EBRI Notes v24n12, 12/03

þ 13 are from Public Employers

 SSA Income Dominates
Sources of retiree income by ae
(2004)
 c
cc
c
c

c
c
c
c
 c
 c


   55 6 
6    

p

 
 p


 


þ
þ
 SSA Grows in Importance With Age ƛ Income from Work
Persists
Percentage of total income by age for the retired
population (2004)

c
c
c
c

c
c
c
c
c
c
 c
 c


   55 6
6   

p

 
 p


 


þ
ß
 Public Policy Implications
ƥ Social Security Becomes More Important Not Less ƛ
Even for the Havesƞ
ƥ Medicare Becomes Primary Source for the Havesƞ
ƥ Growing Gap Between Public Worker (retiree) and
Private Worker (retiree) Benefits
ƥ As Employer Provision/Payment Declines Pressure on/for
Government Programs Grows
ƥ Re--Regulation? New Paternalism? National Health
Re
Insurance? Mandated Savings? Trade Reversal?

þ


 Can DC Plans Provide Adequacy?

þ
h
 Average Participant Before-Tax Contribution Rates by
Age and Salary, 1ððð
(percent of salary)

2 0 0 0 0 to 0 000 > 0 0 0 0 to 0 000 > 0 0 0 0 to 0 000

20s 0s 0s
Part c p an t e
Source: EBRI/ICI Part c pant-D rected Ret rement Plan Data Collect on Project (see wolden and 3¢
VanDerhe (October 200 ))
 Average Account Balance Among
401(k) Participants from Year-
Year-End 1999
Through Year-
Year-End 2004 by Age
È 
È 
È

È 


È 

È 

È  

È

È







Source: Holden and VanDerhei, "ßc(k) Plan Asset Allocation, Account Balances,
and Loan Activity in ccß,³ forthcoming
þ

 Hereƞs the retirement income the
current DC system may replace by the
2030ƞsƦfor continuous participants

56%
4 %
%
2 %

Lowest Quartile  Quartile þ Highest

Income Income

All Eligible Workers (Without Automatic Enrollment)

þ
Sources: Tabulations from Holden and VanDerhei (cc
)
 Here is what miht be achieved -- with
two key reforms ƛ auto-
auto-enrollment and
lifecycle funds
6 %
55% 58% 7%
52%
5%
22%
29%
56%
4 %
%
2 %

Lowest Quartile  Quartile þ Highest

Income Income
Increase from Automatic Enrollment (h Contribution Rate; Life-Cycle Fund)
All Eligible Workers (Without Automatic Enrollment)
ß
c
Sources: Tabulations from Holden and VanDerhei (cc
)
 Combined with SSA-
SSA- Continuous
Participation and Preservation
cß
h 


± 





±
±





 
    


 
 


 
   !
 
   !
 
 
ß

 Median Replacement Rates for 401(k) Accumulations* for
Participants Reaching Age 6± Between 2030 and 203ð
! +     +

Basel ne on t al ays have a 40 (k)

0 40
4
0 4
4

4
Income Quartile at Age h

ƒThe40 (k) accumulat on ncludes 40 (k) balances at employer(s) and rollover IRA balances 42
Source: Tabulat ons from the EBRI/ICI 40 (k) Accumulat on Project on Model
 ƥ 

Wa
 e f 
fac
ƥ .eb
.
www.ebri.


ƥ
D
 
  
 F
eve

ƥ .C e e.


ß
þ