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.”
Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans
A rapidly growing public policy concern facing the United States is whether future generations of retired Americans, particularly those in the Baby Boomer and Gen X cohorts, will have adequate retirement incomes. There have been several policy studies in recent years that suggest that the decreasing relevance of defined benefit (DB) plans relative to defined contribution plans (such as 401(k)s) since the 1980s will have a negative impact on the percentage of future retirees who will achieve a specified level of retirement income adequacy. This paper provides a direct comparison of the likely benefits under specific types of defined contribution (DC) and DB retirement plans. The DC plans modeled in this analysis represent voluntary enrollment (VE) 401(k) plans, while the DB plans are represented by two stylized plans: a high-three-year, final-average defined benefit plan and a cash balance plan. The results presented in this paper show that if historical rates of return are assumed as well as annuity purchase prices reflecting average bond rates over the last 27 years, the median pairwise comparisons result in a strong outcome advantage for VE 401(k) plans over both the stylized, final-average DB plan and the stylized cash balance plan. When the robustness of these findings are subjected to various "stress tests" by reducing the rate of return assumptions by 200 basis points and increasing the annuity purchase price to reflect today’s bond rates, results show that in many cases the VE 401(k) plans lose their comparative advantage to the stylized, final-average DB plans (at least at the median) for lower-paid employees; however, VE 401(k) plans’ median advantages over the stylized cash balance plans remain in force. When the simulation results are subjected to both stresses simultaneously, virtually all of the median differences between the VE 401(k) plans and the stylized, final-average DB plan are reversed, regardless of income quartile. However, even in this scenario, based on the median differences, virtually all of the participants will do better in the VE 401(k) plans than the stylized cash balance plan.
The Impact of Modifying the Exclusion of Employee Contributions for Retirement Savings Plans from Taxable Income: Results from the 2011 Retirement Confidence Survey
In recent years proposals have surfaced to reform the 401(k) system based on the assumption that higher-income individuals receive more tax-related benefits from these programs than do individuals in lower marginal tax brackets (as well as those who may pay no federal income taxes in a particular year). Some of these proposals have included modifications of the current federal income taxation treatment that excludes some or all of the contributions employees make to tax-qualified defined contribution plans. This paper provides some stylized examples of how the total tax advantage of some defined contribution plans varies by marginal tax rate and contrasts these values with the potential reduction in defined contribution balances if contributions were no longer “deductible.” This is followed by an analysis of two new questions from the 21st wave of the Retirement Confidence Survey (RCS) showing how workers would likely react if they were no longer allowed to deduct retirement savings plan contributions from taxable income. Results from EBRI modeling from the 2011 RCS find that these proposals may have unintended consequences. Instead of reducing the contribution levels of those with larger taxable incomes (and hence higher marginal tax rates), the RCS results suggest that the categories of full-time workers most likely to reduce (in some cases completely) their contributions are those with the lowest household income; the lowest current amounts in savings and investments (not including the value of their primary residence or the value of defined benefit plans); the lowest educational levels; those who are single, never married or not married, or living with a partner; and those who work for small private organizations. The PDF for the above title, published in the March 2011 issue of EBRI Notes, also contains the fulltext of another March 2011 EBRI Notes article abstracted on SSRN: “Employer and Worker Contributions to Account-Based Health Plans, 2006-2010.”