Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model®
Measuring retirement security -- or retirement income adequacy -- is an extremely important topic. EBRI launched a major project to provide this type of measurement in the late 1990s for several states concerned whether their residents would have sufficient income when they reached retirement age. After conducting studies for Oregon, Kansas, and Massachusetts, a national model -- the EBRI Retirement Security Projection Model® (RSPM) -- was developed in 2003, and in 2010 it was updated to incorporate several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans, and the recent crises in the financial and housing markets. EBRI has recently updated RSPM for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010 (based on a database of 23 million 401(k) participants). This paper provides updates for the previously published EBRI Retirement Readiness Ratings™ as well as the Retirement Savings Shortfalls. EBRI’s updated 2012 Retirement Security Projection Model® finds that for Early Baby Boomers (individuals born between 1948-1954), Late Baby Boomers (born between 1955-1964) and Generation Xers (born between 1965-1974), roughly 44 percent of the simulated lifepaths were projected to lack adequate retirement income for basic retirement expenses plus uninsured health care costs. These “at-risk” levels are some 5-8 percentage points LOWER than what was found in 2003, largely due to the growing adoption of automatic enrollment by 401(k) plan sponsors. Eligibility for a workplace defined contribution retirement plan has a significant positive impact on “at-risk” levels. The aggregate retirement income deficit number, taking into account current Social Security retirement benefits and the assumption that net housing equity is utilized “as needed,” is currently estimated to be $4.3 trillion for all Baby Boomers and Gen Xers. The PDF for the above title, published in the May 2012 issue of EBRI Notes, also contains the fulltext of another May 2012 EBRI Notes article abstracted on SSRN: “Trends in Employment-Based Coverage Among Workers, and Access to Coverage Among Uninsured Workers, 1995-2011.”
The Declining Role of Private Defined Benefit Pension Plans: Who is Affected, and How
This chapter analyzes the impact of future freezes among corporate defined benefit (DB) pension plans. We simulate the impact on expected future pension wealth by assuming all existing private DB plans immediately freeze accruals for new employees. While this indicates the potential reduction in retirement wealth attributable to such plans, it does not recognize that sponsors freezing accruals may increase employer contributions to existing defined contribution (DC) plans or establish new DC plans. Using an empirical distribution of enhanced contributions to DC plans from sponsors freezing their DB plans, we simulate the nominal annuity that could be purchased at retirement age from these enhanced contributions. We then back out the net pension loss experienced by employees in the future.
Saving or Retirement on the Path of Least Resistance
Over the last 20 years, employers have increased dramatically their offering of 401(k) plans as a vehicle for retirement income support. As of year-end 2000, there were over 325,000 401(k) plans with more than 42 million active participants and $1.8 trillion in assets invested. Because of their similarity in structure and purpose, the recent experience of 401(k) plans is a natural laboratory for considering a private account component to Social Security. The experience of 401(k) plans is particularly useful for this research, because there is substantial variation in design from one 401(k) plan to another, and within plans over time. This enables us to relate plan design features to the saving decisions of people who are eligible for the plans. In this study, we explore the influence of such features as automatic enrollment, employer matching, the default contribution rate, the investment options available, the default allocation of savings among these options, cash distributions for employees leaving their jobs, precommitment strategies, and other interventions to increase contributions.