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.”
Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances
Analyses of recent proposals to change the tax preferences for employment-based 401(k) retirement programs have often assumed status quo in plan design (by plan sponsors) and contribution flows (by both individual participants and employers) in response to those changes. Surveys of both individual participants and plan sponsors suggest, however, that some would change -- and in many of those cases, reduce -- their contributions. Recent surveys of plan sponsors also suggest that not only would some matching contributions be changed in response, but that some employers would cease offering these retirement plans altogether. Smaller employers were more likely to respond negatively to the proposed changes than larger employers. Integrating new data from plan sponsors, this paper provides a perspective on the impact of a scenario where the current tax treatment of employer and worker pre-tax contributions was modified such that workers would have to pay federal taxes on these amounts currently, rather than on a deferred basis, as under current law, and participants would receive an 18 percent government match (as contemplated in the Gale proposal, 2011, a plan that would modify the existing tax treatment of both worker and employer 401(k) contributions and introduce a flat-rate refundable credit that serves as a federal matching contribution into a retirement savings account). EBRI baseline analysis indicates that plan-sponsor modifications, combined with individual participant reactions, would result in an average percentage reduction in 401(k) balances of between 6-22 percent at Social Security normal retirement age for workers currently ages 26-35. These responses are strongly tied to plan size; EBRI baseline simulations show that 401(k) plans with less than $10 million in assets would experience average reductions in participant balances at retirement age of between 23-40 percent (depending on plan size and income quartile) for workers currently ages 26-35.The PDF for the above title, published in the March 2012 issue of EBRI Notes, also contains the full text of another March 2012 EBRI Notes article abstracted on SSRN: “Trends in Health Coverage for Part-Time Workers.”
The Impact of Auto-enrollment and Automatic Contribution Escalation on Retirement Income Adequacy
The results in this paper demonstrate the profound influence of plan design variables, as well as assumptions of employee behavior in auto-enrollment 401(k) plans. Even with a relatively simple definition of "success," large differences in success rates can be seen, depending on which plan design factors and employee behavior assumptions are used: The probability of success for the lowest-income quartile increases from the baseline probability of 45.7 percent to 79.2 percent when all four factors are applied. The impact on the highest-income quartile is even more impressive, with an increase in the probability of success from 27.0 percent to 64.0 percent. When viewed in isolation, it is clear that the impact of increasing the limit on employee contributions is much greater than any of the other three factors. However, the importance of including one or more additional factors, along with the increase in the limit on employee contributions, can more than double the impact of increasing the limit by itself. This suggests that additional analysis of the influence of plan design variables on optimizing employee results is warranted. The next step in this project will include development of a plan-specific simulation model that will allow additional plan design variables.