Retirements ‘At Risk’: The Changing Landscape of Retirement in the U.S.
Alicia H. Munnell Peter F. Drucker Professor, Boston College Carroll School of Management Director, Center for Retirement Research at Boston College
“Joint Colloquium of the IACA, PBSS and IAAHS Sections” International Actuarial Association Boston, MA May 6, 2008 Retirement resources are decreasing.
Retirement Income
Employer-Sponsored Social Security Pensions Individual Saving
Defined Contribution Defined Benefit Plans - 401(k) - Plans
1 Social Security is really important.
Sources of Non-earned Income for Households by Tercile, Age 65 and Over, 2006
Bottom Tercile Middle Tercile Top Tercile
6% 3% 3% 4% 9% 6%
29% 36 % 19 %
69%
85% 32% Social Security Pensions Assets Other
Source: Author’s calculations based on the U.S. Bureau of the Census. 2007. Current Population Survey. Washington, DC: U.S. Government Printing Office.
2 Social Security will replace less pre-retirement income in the future.
Social Security Replacement Rates for Average Earner Retiring at Age 65, 2002 and 2030
50 % 40.8% 38.8% 40% 36 .3% 30 .9 % 28.2% 30 % 20% 10 % 0% 2002 2030 Reported replacement rate (2030 incorporates extension of normal retirement age) After Medicare SMI premiums (2030 incorporates both Part B and Part D) After personal income taxation
Source: Alicia H. Munnell. 2003. “The Declining Role of Social Security.” Just the Facts on Retirement Issues. Chestnut Hill, MA: Center for Retirement Research at Boston College, and author’s updates
3 Pensions have shifted decisively to 401(k)s.
Workers with Pension Coverage by Type of Plan, 1983, 1992, 2004
70 % 63% 62% 19 8 3 60% 19 9 2 50 % 44% 2004 40% 40%
30 % 26% 17% 20% 20% 16 % 12 % 10 %
0% Defined benefit only Defined contribution only Both
Source: Author’s calculations based on U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances (various years). Washington, DC.
4 In theory, 401(k)s could work well, but to date they have not.
401(k)/IRA Actual and Simulated Accumulations, by Age Group, 2004
$25,000 Actual 35 to 44 $63,500 Sim ulated
$49,000 45 to 54 $169,300
$60,000 55 to 6 4 $314,000
$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
Source: Alicia H. Munnell and Annika Sundén. 2006. “401(k) Plans Are Still Coming Up Short.” Issue in Brief 44. Chestnut Hill, MA: Center for Retirement Research at Boston College.
5 People make mistakes at each step along the way. Percent of Individuals, 2004
10 0 % 89%
80%
60% 49% 45% 40% 21% 20%
0% Don't Don't Don't diversify Don't rollover participate in contribu te the their 401(k) maximum investments
Sources: Author’s calculations based on U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, 2004. Washington, DC; and Sarah Holden and Jack Vanderhei. 2005. “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2004.” Issue Brief 285. Washington, DC: Employee Benefit Research Institute.
6 And outside of 401(k)s, Americans save virtually nothing. NIPA Personal Saving Rate: Working-Age Population with and without Pensions, 1980-2003
12 % 10 % Saving Rate: Working Age 8% 6% 4% 2% 0% -2% Saving Rate: Working Age, less Pension Saving -4% -6 %
4 6 2 82 92 98 19 8 0 19 19 8 4 19 8 6 19 8 8 19 9 0 19 19 9 19 9 19 2000 200
Source: Alicia H. Munnell, Francesca Golub-Sass, and Andrew Varani. 2005. “How Much are Workers Saving?” Issue in Brief 34. Chestnut Hill, MA: Center for Retirement Research at Boston College. Earnings
7 And people will need more in retirement because retirement periods are increasing…
Retirement Period* of Males, 1980-2050 26
21 22 22 21 19 20 19 18 18 17 Year s
14
10 1980 1990 2000 2010 2020 2030 2040 2050
*Retirement period is calculated by subtracting the average retirement age from the average mortality age for individuals age 65. Sources: U.S. Bureau of Labor Statistics and U.S. Census Bureau. Current Population Survey, 1962-2005. Washington, DC; and 2006 Social Security Trustees Report. Table VA.4. Washington, DC.
8 …real asset returns have fallen…
Real Interest Rate, 1980-2007 (10-year Treasury Bond Yields Less Anticipated Inflation)
10 %
8%
6%
4%
2%
0% 19 8 0 19 8 3 19 8 6 19 8 9 19 9 2 19 9 5 19 9 8 2 0 0 1 2 0 0 4 2 0 0 7
Sources: U.S. Department of the Treasury, Bureau of Public Debt. 2007. 10-year Treasury Bond Yields. Washington, DC; and Federal Reserve Bank of Philadelphia. Survey of Long-term Inflation Forecasts 2007. Philadelphia, PA.
9 …and out-of-pocket health care costs will rise. Medicare Out-of-Pocket Expenditures as a Percentage of the Average Social Security Benefit, 1980-2030
50 % 46%
40%
29% 30 %
20%
10 % 7%
0% 1980 2007 2030
Source: Centers for Medicare & Medicaid Services (CMS), Office of the Actuary. 2007. “SMI Out-of-Pocket Expenses as a Percentage of Illustrative Social Security Benefit.” Washington, DC.
10 National Retirement Risk Index quantifies the impact of the changing landscape.
Nationally Projected Replacement representative Rate sample at Age 65 of households from 2004 SCF NRRI Percentage of Households with Projected Rate == < Target Life-cycle savings model Target Replacement Rate
11 Index shows 43 percent of households will be ‘at risk.’ Percent of Households Unable to Maintain Pre-Retirement Living Standard, by Birth Cohort 100%
80%
60% 49% 43% 44% 40% 35%
20%
0% All Early Boomers Late Boom ers Generation Xers (19 46 -19 54) (1955-1964) (196 5-1972) Source: Center for Retirement Research at Boston College. 2006. Retirements at Risk: A New National Retirement Risk Index. Chestnut Hill, MA.
LIMRA International. 2002. The 2001 Individual Annuity Market: Sales and Assets. Windsor, CT. 12 Our latest Index analysis explicitly incorporates rising retiree health costs.
Total Consumption Health Costs and Non-Health Costs Separated
Original NRRI NRRI Including Health Costs Explicitly
LIMRA International. 2002. The 2001 Individual Annuity Market: Sales and Assets. Windsor, CT. 13 Health costs drive up the percent of households ‘at risk.’
Effect of Health Care on the National Retirement Risk Index, 2006
80% 68% 61% 61% 60% 50 % 44% 44% 48% 40% 35%
20%
0% All Early Boomers Late Boomers Generation Xers (1948-1954) (1955-1964) Original NRRI NRRI including health care expenses
Source: Alicia Munnell, Mauricio Soto, Anthony Webb, Francesca Golub-Sass, and Dan Muldoon. 2008. “Health Care Costs Drive Up the National Retirement Risk Index.” Issue in Brief 2008-3. Chestnut Hill, MA: Center for Retirement Research at Boston College.
LIMRA International. 2002. The 2001 Individual Annuity Market: Sales and Assets. Windsor, CT. 14 A powerful antidote to inadequate retirement income is working longer.
Change in Percent of Households ‘At Risk’ by Assumed Retirement Age
+10% Age 63
Age 67 -11%
-15% -10% -5% 0% 5% 10% 15% Age 65 base case
Source: Center for Retirement Research at Boston College. 2006. Retirements at Risk: A New National Retirement Risk Index. Chestnut Hill, MA. Source: Sheena S. Iyengar and Mark R. Lepper. 2000. “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?” Journal of Personality and Social Psychology.79(6): 995-1006 15 Saving more early also makes a big difference.
Change in Percent of Generation Xers ‘At Risk’ by Assumed Saving Rate
Lower saving rate +8% (contribution rates 3% lower)
Higher saving rate (contribution rates -11% 3% higher)
-15% -10% -5% 0% 5% 10% 15% Base case
Source: Center for Retirement Research at Boston College. 2006. Retirements at Risk: A New National Retirement Risk Index. Chestnut Hill, MA.
16 Achieving more work and saving requires a national retirement income policy.
Individuals Employers Government
Retirement Security
17 Individuals need to stick to their plans to work longer.
Retirement Confidence Survey, 1994-2007: Average for Expected Retirement Age of Current Workers and Actual Retirement Age of Retirees 66 65 64.6 64 63
Age 61.8 62 61 60 59 Expected retirement age Actual retirement age
Source: Employee Benefit Research Institute. Retirement Confidence Survey: Summary of Findings 1994-2007. Washington, DC.
18 Individuals need to save more through 401(k)s and IRAs.
Wealth Holdings of a Typical Household Aged 55-64, 2004 Survey of Consumer Finances
$300,000 $252,000 $250,000
$200,000
$150,000 $125,200 $96,700 $100,000 $45,200 $42,000 $50,000 $36,800
$0 Social Primary Defined Defined Financial Other Security house benefit contribution assets assets
Source: Author’s calculations from U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, 2004. Washington, DC.
19 Individuals may need to tap their home equity in retirement.
Percentage of House Value That Could Be Borrowed at Age 65, 1975-2007Q3
60%
40%
20% Percentage of HousePercentage of Value 0% 1975 1979 1983 1987 1991 1995 1999 2003 2007
Sources: Authors’ calculations based on Federal Reserve Bank of St. Louis. 2007. “Series: GS10, 10 Year Treasury Constant Maturity Rate;” U.S. Department of Housing and Urban Development. 2007. “Table of Principal Limit Factors;” and AARP. 2007. “Reverse Mortgage Calculator.”
20 Employers need to revise personnel policies to encourage older workers.
Percent of Employers Citing Positive or Negative Impact of Various Factors on Older Worker Productivity Knowledge of procedures and other job aspects
Ability to interact with customers
Ability to learn new tasks quickly
Physical health and stamina Rank-and-file Expectations of how White-collar much longer workers White-collarRank-and-file will work -40-200 20406080100 Source: Alicia H. Munnell, Steven A. Sass, and Mauricio Soto. 2006. “Employer Attitudes Toward Older Workers: Survey Results.” Work Opportunity Issue in Brief 3. Chestnut Hill, MA: Center for Retirement Research at Boston College.
21 Employers need to make 401(k)s more effective through automatic provisions.
Participation Rate with and without Automatic Enrollment
10 0 % 86% 80%
60% 49%
40%
20%
0% Participation rate without autom atic Participation rate with autom atic enrollment enrollment
Source: Brigitte C. Madrian and Dennis F. Shea. 2002. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior." Quarterly Journal of Economics 116(4).
22 Some progress has been made.
Percent of Large Plans with Automatic Percentage of 401(k) Automatic Enrollment Plans that Enrollment, 2006 Increase Default Deferrals over Time, 2006
With Do increase Without Do not increase 41% 39 %
59 % 61%
Source: Profit Sharing/401(k) Council of America. 2007. 50th Annual Survey of Profit Sharing and 401(k) Plans. Chicago, IL.
23 Pension Protection Act should help.
• Introduced a new safe harbor through automatic enrollment.
• Legitimized automatic increases in deferral rates.
• Shielded sponsors from liability on DOL-sanctioned default investments.
• Preempted state law limits on wage withholding.
• Enabled plan sponsors to “unwind” automatic deferrals within 90 days.
24 But a new 401(k) problem has emerged – borrowing as economy turns down.
Percent of Retirement Plan Participants Taking a Loan from Their Plan, 2004-2007
20% 18 %
15% 12% 11% 10 % 9%
5%
0% 2004 2005 2006 2007
Source: Transamerica Center for Retirement Studies. 2008. 9th Annual Transamerica Retirement Survey. Los Angeles, CA.
25 And decumulation looms as a disaster – people don’t annuitize.
Immediate Annuity Premiums as Percent of Total Annuity Premiums
100%
80%
60%
40%
20% 4.9% 4.5% 4.3% 4.2% 4.6% 5.6% 5.2%5.1% 5.3% 5.3% 5.2%
0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: LIMRA International. 2002. The 2001 Individual Annuity Market: Sales and Assets. Windsor, CT; and updates from LIMRA International.
26 Government could improve 401(k)s with annuity default and inflation-indexed products.
Value of $100 with 3 Percent Inflation after Specified Number of Years
$100 $100
$76 $80
$56 $60 $41 $40 $30
$20
$0 0 years 10 years 20 years 30 years 40 years
Source: Author’s calculations.
27 But government also needs to look at IRAs, where all the money has moved.
Private Retirement Assets, 2007Q3
$5,000 $4,232 $4,000 $3,267 $3,000 $2,258
Billions $2,000
$1,000
$0 Defined Defined IRAs benefit contributiona
a The Flow of Funds data for defined contribution plans include assets held in the Federal Thrift Savings Plan. Source: U.S. Board of Governors of the Federal Reserve. Flow of Funds Accounts, 2007. Washington, DC.
28 Government also needs to help Americans save more.
Percent of Private Sector Workers 25-64 Participating in an Employer-Sponsored Pension, 1979-2006
75%
65%
55%
45%
35%
25% 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
Source: Author’s calculations from U.S. Bureau of the Census. Current Population Survey, 1980-2007. Washington, DC.
29 Government could introduce new tier of funded, privately-managed retirement saving.
10 0 % 401(k) plans 90% New Tier 80% Social Security 70% 60% 50 % 40%
Replacement rate 30 % 20% 10 % 0% Income
Source: Author’s illustration.
30 Candidates have touched on new tier in current campaign.
Senator Clinton: • Establish American Retirement Accounts to provide universal access to a plan. • Match up to $1,000 with refundable tax credits for low- and middle-income families.
Senator Obama: • Require employers without a plan to automatically enroll employees in an IRA. • Match up to $500 for low- and middle-income families.
Senator McCain: • Retain existing tax cuts on capital gains and dividends to promote saving. • Reform entitlement programs to control spending.
31 Finally, government needs to redefine its “age-62” retirement policy.
Percent Distribution by Age of Initial Social Security Benefit Awards, 2005
70% 59 % Women 60% 55% Men 50 %
40%
30 % 22% 20% 17% 10 % 10 % 8% 9% 10 % 6% 4% 0% 62 63 64 65 66 and over Age
Source: Author’s calculations and U.S. Social Security Administration. 2007. Annual Statistical Supplement, 2006. Washington, DC.
32 Conclusion
• Retirement income is contracting. • Retirement needs are expanding. • NRRI shows many ‘at risk.’ • Solution is working longer and saving more. • Individuals, employers, and the government need to combine efforts.
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