The State of US Retirement Plans

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• The State of US Retirement Plans
• Dallas L. Salisbury
• President and CEO
• Employee Benefit Research Institute
• Maxwell MPA, 1973 and ABD, 1976
• www.ebri.org
• NPF September 18, 2007

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EBRI

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

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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 Just the Facts
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The EBRI Difference

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

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Agenda

• Public Policy Influence
• Demographic Influence
• Employer Directions
• Implications
• Can DC Plans Provide Adequacy?

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Public Policy Influence

• PPA of 2006 and shift from government desire for
  DB plans to neutral
• Government focus on the individual
• ownership society
• SSA IAs
• universal IRA
• PPA automation of plans

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Demographic Influences
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Population 2000
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Population 2100
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Labor Force New Young Entrant Decline (Average
Annual Gain)
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U.S. Job Growth vs. Workforce Growth
2006 (per BLS projection)
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Percentage of Older Long Tenure Workers Drops
From 23 to 19 -Gold Watches?
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Longevity Builds on Longevity
85
92
95
90
100
Male Age 65
Age
50 chance
25 chance
88
94
90
85
100
Age
Female Age 65
50 chance
25 chance
97
92
95
90
85
100
Couple (Both Age 65)
Age
50 chance of one survivor
25 chance of one survivor
Source Annuity 2000 Mortality Table, American
Society of Actuaries. Figures assume you are in
good health.
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Employer Directions
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Health Spending Up Retirement Contributions Down
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High Job Turnover Economy Participation Gaps
No plan available
Not participating
Participating
Employee Benefit Research Institute
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Pension Participation Rates by Firm Size
Source March 2005 Current Population Survey
tabulations.
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(No Transcript)
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Labor Market Trends Mean Future Decline
Source Bureau of Labor Statistics
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Individual Implications
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And increased health care costs have caused many
to have financial difficulties.
Percentage Saying Yes
Decrease your contributions to other savings
Have difficulty paying for other bills
Use up all or most of your savings
Decrease your contributions to a retirement plan,
such as a 401(k), 403(b) or 457 plan, or an IRA
Have difficulty paying for basic necessities,
like food, heat, and housing
Borrow money
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Fixed 4.43 of Pay Plan Cost -Entry age 30 The
Price of pay Equity
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How much do you need to save if you work until 67?

• Starting at age 20 and saving consistently for 47
  years will support a long life at rates some are
  now saving, without annuity purchase.
• Waiting until 40 or 50 moves the numbers up.
• A life income annuity helps keep them lower as
  you only need enough to get you to average life
  expectancy.

Source Ballpark Etimate Worksheet,
www.choosetosave.org
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Individual savings shortfalls for meeting basic
expenses

• 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 50/50
  chance of having sufficient retirement income
  to cover basic expenses
• Model both a 75 and 90 percent confidence level

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Median Percentage of Compensation That Must Be
Saved Each Year Until Retirement For a 75
Confidence Level For Funds To Cover Basic
Expenses When Combined With Simulated Retirement
Wealth by Birth Cohort and Income
Quartile(Limited to 25 assumes current Social
Security and housing equity is never liquidated)
Income quartile
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.
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Median Percentage of Compensation That Must Be
Saved Each Year Until Retirement For a 90
Confidence Level For Funds To Cover Basic
Expenses When Combined With Simulated Retirement
Wealth by Birth Cohort and Income
Quartile(Limited to 25 assumes current Social
Security and housing equity is never liquidated)
Income quartile
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.
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Percent of 65 With Pension and Annuity Income
1988-2002
Source EBRI CPS tabulations, EBRI Notes v24n12,
12/03 13 are from Public Employers
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SSA Income DominatesSources of retiree income by
age (2004)
Source Current Population Survey, Bureau of the
Census
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SSA Grows in Importance With Age Income from
Work PersistsPercentage of total income by age
for the retired population (2004)
Source Current Population Survey, Bureau of the
Census
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Public Policy Implications

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

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Can DC Plans Provide Adequacy?
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Average Participant Before-Tax Contribution Rates
by Age and Salary, 1999(percent of salary)
Source EBRI/ICI Participant-Directed Retirement
Plan Data Collection Project (see Holden and
VanDerhei (October 2001))
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Average Account Balance Among 401(k) Participants
from Year-End 1999 Through Year-End 2006 by Age
Source "401(k) Plan Asset Allocation, Account
Balances, and Loan Activity in 2006, August 2007
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Heres the retirement income the current DC
system may replace by the 2030sfor continuous
participants
56
43
33
23
LowestIncome
Quartile 2
Quartile 3
HighestIncome
All Eligible Workers (Without Automatic
Enrollment)
Sources Tabulations from Holden and VanDerhei
(2005)
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Here is what might be achieved -- with two key
reforms auto-enrollment and lifecycle funds
63
58
55
7
52
15
22
29
56
43
33
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LowestIncome
Quartile 2
Quartile 3
HighestIncome
Sources Tabulations from Holden and VanDerhei
(2005)
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Combined with SSA- Continuous Participation and
Preservation
104
86
79
81
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Median Replacement Rates for 401(k)
Accumulations for Participants Reaching Age 65
Between 2030 and 2039(percent of final five-year
average salary)
39.4
Income Quartile at Age 65
The 401(k) accumulation includes 401(k) balances
at employer(s) and rollover IRA balances. Source
Tabulations from the EBRI/ICI 401(k) Accumulation
Projection Model
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Drivers of Gridlock

• Concern over future funding and benefit levels of
  Social Security and Medicare and Medicaid LTC
• Long term fiscal imbalance and its implications
  for tax levels and for tax incentives for health
  care and retirement savings
• Decline of employer provision of retiree life
  income annuity streams and retiree health
• Implications for competitiveness of mandates on
  employers
• Implications for economic growth and consumer
  spending of mandates on employees
• Lack of individual understanding of the magnitude
  of the savings needed for retirement and the
  resulting lack of preparation
• Absence of employee/employer/voter support for
• Mandated savings
• Mandated life income streams
• Increased taxes on me/us to pay for programs
  (existing or new)
• Absence of public trust in government or
  special interests to be honest

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What Does The Future Hold?
Applies to firms, families, nations.
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www.ebri.org and www.choosetosave.org
Dallas L. Salisbury President and CEO Employee
Benefit Research Institute www.ebri.org and
www.choosetosave.org