Uncertain Outcomes

As the nation enters its third month under the constraints of the COVID-19 pandemic, it seems a dramatic understatement to say we are living in uncertain times.

Let’s face it, even as the nation begins to (re)open, concerns about the coronavirus remain widespread, and the markets, though stabilizing, remain volatile. Unemployment rates, though optimism remains that they will be short-lived, are at levels not seen since… well, at levels never seen before. And then, in the midst of all this, as a nation, we are reeling from a fresh wound—the tragedy and implications of George Floyd’s death—and while many are hopeful that meaningful change can finally come from this, there’s sadness—and anger—that the protests calling for that change have been accompanied by acts of violence.

Amidst all this worry and uncertainty, it’s hard to believe that the CARES Act—and the Payroll Protection Program—have only just been drafted, executed, and implemented to help stave off at least some of the economic uncertainty that currently confronts many. Not to mention that we had only just begun getting our arms around the practical implications of the SECURE Act—which incorporated retirement provisions that purported to stave off future economic disaster.

The mortality and hospitalization projections related to COVID-19 have perhaps provided a fresh appreciation for both the importance, and the limitations, of models as a predictor of the future impact of current decisions. That said, those seeking to forestall problems are generally well advised to rely on something other than a “gut sense” of the potential impact.

Earlier this year the Employee Benefit Research Institute (EBRI) projected the potential impact of the key provisions[i] of the SECURE Act. EBRI projected that those projections could  reduce the U.S. retirement deficit for workers currently age 35-39 by as much as 5.3%—double that if they work for small employers (those less than 100 employees), mostly because those who are in the latter category are so much less likely to have access to a retirement savings plan at work—and, as readers of our publications know, those without access to a plan at work are significantly less likely to save for retirement—12 times less likely, in fact.

However, the overall impact of these SECURE provisions is larger; those specific projections merely quantify the reduction in shortfalls for those who otherwise wouldn’t have enough retirement income.
Among those who were already deemed to have had “enough” retirement income (and EBRI employs a fairly conservative basis for that foundation, one based on actual estimated needs, rather than an ad hoc percentage of pre-retirement income), SECURE almost certainly adds some cushion to those projections. Indeed, the EBRI report differentiates between reductions in deficit and increases in surplus.

When You Assume…

Those are encouraging numbers. But it’s worth acknowledging that there’s a healthy dose of assumptions underlying those projections, as surely there must be in anticipating future human behaviors. EBRI’s Research Director (and data modeler extraordinaire) Dr. Jack VanDerhei takes pains to outline those in the paper, but it’s worth noting that the ranges in assumptions employed are—well, they’re all over the place.

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Visit our SECURE Act resource center!

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Consider that in the EBRI report, the assumptions presented for MEP adoption range from a one-third take-up by employers with no participant opt-out to one in which two-thirds of employers who do not currently offer a plan choose to do so, with a 25% opt-out rate by workers. And, as you might imagine, the results vary widely based on the assumptions used. On the other hand, they’re arguably no different than if you were to ask a random group of advisors how many more employers will now offer plans because of changes like the greatly expanded start-up tax credit, or as a result of the efficiencies resulting from an open MEP.

Now, unlike many of the uncertainties in our lives, when it comes to retirement, advisors can make a difference—and potentially a huge difference in the SECURE Act realities, whether it’s by informing and encouraging employers to take action, nudging them toward positive and proactive plan designs, or simply working with individual workers to help them maximize the expanded opportunities. In sum, we can all have an impact far beyond our immediate circle—and beyond our lifetimes.

We live in uncertain times, after all—but the importance of the role you  play in expanding retirement opportunity and security—and our nation’s future—is anything but…

- Nevin E. Adams, JD

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[i]Specifically, the projections contemplate greater access by allowing providers to offer multiple employee plans (MEPs), and also factor in the impact of raising the cap under which plan sponsors can automatically enroll workers in “safe harbor” 401(k) plans from 10% to 15% of wages, and required coverage of long-term part-time employees.

On Retirement Plans and Plans for Retirement

When is a plan not a plan? When you have a retirement plan at work, apparently.

The good news is that the 2015 Retirement Confidence Survey shows a strengthening of retirement confidence — at least among those who had some kind of retirement plan (DB, DC or IRA). Indeed, among that group, the number saying they were very confident has doubled since 2013.

The bad news? Well, there doesn’t seem to be much in terms of substantive savings accumulations¹ or planning behaviors to account for this uptick in confidence.

Consider that fewer than half (48%) of workers report they and/or their spouse have tried to calculate — even a single time — how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade.

In other words, while many have (or had) a retirement plan, they don’t seem to have a plan for retirement. 

On the other hand, workers reporting that they or their spouse have a DC, DB or IRA plan are twice as likely as those who do not have such a plan (60% vs. 23%) to have tried to do a calculation to estimate what they will need to finance retirement. And despite higher savings goals, workers who have done a retirement savings needs calculation are more likely to feel very confident about affording a comfortable retirement (33% vs. 12% who have not done a calculation). Moreover, worker households with a retirement plan are more likely than those without such plans to report having saved for retirement (90% vs. 20%).

That said, after a quarter century reading and studying the RCS, several things are clear:

Those who have made the effort² — even a feeble one — to figure out how much they need in retirement are more confident, and likely better off in the long run, since they tend to set higher savings goals.

Those who work with an advisor are more confident, and likely better off in the long run, since they also tend to set more realistic (i.e., higher) savings goals.

And perhaps most importantly, those who have access to a retirement plan are not only more confident, they are probably better off, since they tend to have actual sources of income on which to draw in retirement.

But ultimately, while having a retirement plan may provide some quantifiable increase in confidence about retirement, it’s having a plan for retirement — and acting on it — that grounds that confidence in reality.

Nevin E. Adams, JD

Footnotes

1. While much will likely be made of the relatively low/modest savings amounts reported by RCS respondents, without knowing individual factors like age or income, it’s impossible to discern whether those amounts are woefully inadequate, or reasonable. 

2. Those plans for retirement need to be reconsidered on a regular basis, since many are forced (or choose) to leave the workforce earlier than planned.

The Status Quo

While the prospects for “comprehensive tax reform” may seem remote in this highly charged election year, the current tax preferences accorded employee benefits continue to be a focus of much discussion among policymakers and academics.

The most recent entry was a report by the Urban Institute which simulated the short- and long-term effect of three policy options for “flattening tax incentives and increasing retirement savings for low- and middle-income workers.”  The report concluded that “reducing 401(k) contribution limits increases taxes for high-income taxpayers; expanding the saver’s credit raises saving incentives and lowers taxes for low- and middle-income taxpayers; and replacing the exclusion for retirement saving contributions with a 25 percent refundable credit benefits primarily low- and middle-income taxpayers, and raises taxes and reduces retirement assets for high-income taxpayers.”

However, and to the authors’ credit, the report also noted that “the behavioral responses by both employers and employees will affect the final savings outcomes achieved under reform but are beyond the scope of our estimates[i].”

In previous posts, we’ve highlighted the dangers attendant with relying on simplistic retirement modeling assumptions, the application of dated plan design information to future accumulations, and the choice of adequacy thresholds that, while mathematically accurate, seem unlikely to provide a retirement lifestyle that would, in reality, feel “adequate.”

However, one of the more pervasive assumptions, particularly when it comes to modeling the impact of policy and/or tax reform changes, is that, regardless of the size and scope of the changes proposed, workers – and employers – will generally continue to do what they are currently doing, and at the current rate(s), for both contributions and/or plan offerings.  Consequently, there is talk of restricting participant access to their retirement savings until retirement, with little if any discussion as to how that might affect future contribution levels, by both workers and employers, and there are debate about modifying retirement plan tax preferences as though those changes would have no impact at all on the calculus of those making decisions to offer and support these programs with matching contributions.  Ultimately, these behavioral responses might not only impact the projected budget “savings” associated with the proposals, but the retirement savings accumulations themselves.

EBRI research has previously been able to leverage its extensive databases and survey data (including the long-running Retirement Confidence Survey) to both capture  potential responses to these types of proposals and, more significantly, to quantify their potential impact on retirement security today and over the extended time periods over which their influence extends.  In recent months, that research has provided insights on the full breadth of:

• A retirement savings cap[ii],
• The proportionality of savings account balances with incomes[iii], and
• The impact of permanently modifying the exclusion of employer and employee contributions for retirement savings from taxable income, among other proposals[iv].

While we can’t be certain what the future brings, considering the likely responses to policy changes is a critical element in any comprehensive impact assessment – not only because the status quo is rarely a dependable outcome, but because, after all, those who assume the status quo are generally looking to change it.

• Nevin E. Adams, JD

[i] From Urban Institute and Brookings Institution:  Flattening Tax Incentives for Retirement Saving:  “Our findings should be interpreted with caution. Actual legislation for flattening tax incentives requires more than the simple adjustments discussed here. For instance, if a credit-based approach is used, then the laws would need to ensure some recapture of those benefits for those who made contributions one year and withdrew them soon thereafter.

Additionally, the behavioral responses by both employers and employees will affect the final savings outcomes achieved under reform but are beyond the scope of our estimates. For instance, employees may save more in response to improved incentives, in which case the benefits to low lifetime income households would be greater than we find. On the other hand, employers might reduce their contributions in response to some of the policy changes outlined. In this case, the tax and savings benefits we find would be overstated.  While our policy simulations are illustrative, addressing these behavioral responses would be a chief concern in tailoring specific policies to create the best incentives.”

[ii] See “The Impact of a Retirement Savings Account Cap”
 
[iii] See “Upside” Potential
 
[iv] See “Tax Reform Options: Promoting Retirement Security”, and “Modifying the Federal Tax Treatment of 401(k) Plan Contributions: Projected Impact on Participant Account Balances”

"Expected" Values

Over the past several years, a growing amount of attention has been focused on the decumulations of defined contribution plan balances in retirement. Much of that focus has, of course, been driven by concerns that those individuals won’t have enough resources accumulated to fund those retirements. More recently, there has been a sense that one way to help provide a different perspective on these retirement savings would be to provide participants with an estimate of what their current or projected savings would produce in terms of a retirement income stream.

In May 2013, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) published an advance notice of proposed rulemaking (ANPRM) focusing on lifetime income illustrations. Under that proposal, a participant’s pension benefit statement (including his or her 401(k) statement) would show his or her current account balance and an estimated lifetime income stream of payments based on that balance.

As noted in a recent EBRI Notes article[i], there appears to be little empirical evidence on the likely impact of such a lifetime income illustration on defined contribution participant behavior. In an attempt to provide some additional evidence with respect to potential defined contribution participant reaction to lifetime income illustrations similar to those proposed by EBSA, EBRI included a series of questions in the 2014 Retirement Confidence Survey that would provide monthly income illustrations similar in many respects to those provided by the EBSA’s online Lifetime Income Calculator.

Of course, any such projection is necessarily required to make a number of critical assumptions—including future contribution activity, future rates of return, future asset allocation, and future annuity purchase prices. Moreover, the estimates we provided were different in several aspects, notably:

• Rather than using normal retirement age for the calculation, we asked their expected retirement age.
• Since the age of the spouse was not known for married respondents, only the single life annuity income illustration was used.
• Given that the information was being provided to the respondent during a phone interview, only the projected monthly income (based on the projected account balance given the respondents’ reporting of their current balances) was provided.

What we found was that fewer than 1 in 10 (8 percent) of the defined contribution participants said the monthly amount was much less than expected, though another 1 in 5 (19 percent) said it was somewhat less than expected[ii].

However, more than half (58 percent) thought that the illustrated monthly income was in line with their expectations.

Considering those results, it is perhaps not surprising that the vast majority (81 percent) of the respondents indicated that they would continue to contribute what they do now after hearing the projected monthly income amount, while 17 percent replied that hearing this information would lead them to increase the amount they are contributing. Similarly, the vast majority (89 percent) did not believe this information would impact their expected retirement age.

They may not have been much surprised by the results, but the vast majority of respondents said the retirement income projection was useful; more than 1 in 3 (36 percent) respondents thought that it was very useful to hear an estimate of the monthly retirement income they might expect from their plan, and another 49 percent thought it was somewhat useful. Moreover, the utility of the projection appeared to transcend the results; 90 percent of those whose illustrated values were lower than expected found the estimates somewhat or very useful, and nearly as many (86 percent) of those whose values were equal to what they expected also found the estimates somewhat or very useful. Even among those who felt the values were higher than expected, 79 percent found the estimates somewhat or very useful.

I’ve heard from several in the industry since the results were released who were surprised – that the survey respondents weren’t surprised. It is, of course, possible (as the article explains) that these respondents’ current participation in employment-based plans has already provided them the education and information necessary for an appreciation both of the projected total and the monthly income estimate, and thus a greater alignment of those projections with their expectations. It could also be that, having given some thought to the subject of savings and retirement over the course of the interview, they had more realistic expectations.

Of course, whether those expectations about living on those amounts in retirement will turn out to be realistic remains to be seen.

• Nevin E. Adams, JD

[i] The EBRI March 2014 Notes article, “How Would Defined Contribution Participants React to Lifetime Income Illustrations? Evidence from the 2014 Retirement Confidence Survey,” is available online here.

[ii] There were some interesting differences by income level; combining the “much less” and “somewhat less” categories, we found that 42 percent of those in the lowest quartile for illustrated monthly income indicated that the value was less than expected, versus only 9 percent of the highest quartile.

Direction-Less?

Generalizations are often misleading, but I think it’s fair to say that some people (specifically those of the male gender) are notoriously reluctant to ask for directions—even when it’s painfully clear to everyone else traveling in their company that they are “lost.” If you’re not one of those people, I’ll bet you know someone (and probably more than one someone) who is.¹

The rationalizations offered by those refusing to seek help are as varied and variable as the individual circumstances that bring those hesitations to light: a shortage of time; certainty that, however lost they seem, they actually know where they are (or will be shortly); a lack of trust in the reliability of the instructions they might receive; the inconvenience of stopping…this despite the knowledge (frequently even among those reluctant to ask directions) that the modest investment of time to seek assistance will likely be far less than the time (and aggravation) that they will expend trying to find their own way.

When it comes to retirement planning, reluctance to seek help seems even more widespread. In fact, the 2013 Retirement Confidence Survey found that fewer than half of workers surveyed have ever tried to calculate what they need to save for a comfortable retirement (see “Guess Work?”)—and that’s not a new finding in a survey that now spans nearly a quarter-century.

The use of retirement planning “help,” in the form of on-line calculators and professional retirement advisors, has been linked to higher levels of retirement confidence—and with justification, according to new EBRI research.³ Turns out that the respondents to the 2013 Retirement Confidence Survey² in the lowest-income quartile who had sought the input of a financial advisor cited savings goals that, compared with those who did not, would reduce the risk of running short of money in retirement by anywhere from 9 to nearly 13 percentage points, depending on family status and gender. Those in the lowest-income quartile who used calculators chose savings targets that would, if they achieved those goals, decrease their probability of running short of money in retirement by anywhere from 14 to more than 18 percentage points.

Unfortunately, only about one-fourth of the sample studied (25.6 percent) used either of these two methods.

Why, then, have so few sought direction? Doubtless the reasons for not doing so mirror those above: a lack of time, a lack of confidence in the directions, or in the individual providing that assistance. Perhaps in the case of retirement projection calculators, the tools may be too hard to find, too complicated to use, or simply just one thing too much to do in an already too-busy day. This, it seems fair to say, despite the knowledge that seeking help would surely provide a better outcome.

What about those who didn’t seek help, who “guessed” at those retirement savings targets? Well, there were more in that category in the RCS sampling (44.6 percent)—and, perhaps not surprisingly, they tended to underestimate their savings needs—in effect, citing a goal that would leave them short of their projected financial needs in retirement.

Baseball great Yogi Berra once cautioned that “You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” When it comes to retirement, the problem generally isn’t getting there—it’s getting there before you are ready.

Nevin E. Adams, JD

¹ These individuals may be harder to spot these days with the widespread availability of GPS devices, but they can still be found.

² See the 2013 RCS, on-line here.

³ “A Little Help: The Impact of On-line Calculators and Financial Advisors on Setting Adequate Retirement-Savings Targets: Evidence from the 2013 Retirement Confidence Survey” on-line here.

Guess Work?

Last week a reporter asked me what finding in the 2013 Retirement Confidence Survey¹most surprised me, before acknowledging that maybe there wasn’t anything to be surprised about in a survey that has now been conducted for nearly a quarter century.Sure enough, finding that retirement confidence is (still) at an all-time low stands out when you consider that is based on sentiments over a 23-year period.² Of course, you’re also able to note that it wasn’t that long ago (2007) when those sentiments were at an all-time high.

As it turns out, the finding that stood out most to me in this year’s RCS was the response to a new question. While we have long asked about individual savings levels, and how much workers thought they would need to have accumulated by retirement in order to achieve a financially secure retirement, this year we also asked what percentage of their total household income they thought they would need to save each year from now until retirement so that they could live comfortably throughout retirement.

Granted, the most common answer—cited by 23 percent—was “don’t know/refused.” But the second-most common response was….20 percent to 29 percent.

That was an eye-opener to me. Not because we see much evidence that most individuals are actually saving at that rate³—but it does at least suggest that individuals are beginning to take seriously the amount of savings that might be required.

On the other hand, one of the RCS findings that never ceases to surprise me is the percentage of workers who say that they have ever tried to calculate how much they need to save for a comfortable retirement. This year 46 percent had done so—and while that’s less than half, it was higher than we’ve seen the past couple of years, and it was better than we’ve seen in most of the years since 1999 that we’ve asked that question (the all-time high was 53 percent in 2000).

Muting the positive message that trend might imply was the reality that those calculations often aren’t a sophisticated undertaking. Indeed, workers often guess at how much they will need to accumulate (45 percent), rather than doing a systematic retirement-needs calculation. Eighteen percent indicated they did their own estimate and another 18 percent asked a financial advisor, while 8 percent used an on-line calculator. Another 8 percent merely read or heard how much was needed.

Which brings to mind the following: Are the savings projections so high because so many workers hadn’t done a savings needs calculation? Or have they avoided doing a savings needs calculation because they thought the results would be too high?

In either event, it’s likely that their retirement confidence—and their savings goals—would be well-served by taking the time to do an actual assessment. Here’s hoping the release of this year’s Retirement Confidence Survey inspires them to do just that.

Nevin E. Adams, JD

¹ See EBRI’s “2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many,” on-line here.

² For some other interesting RCS trendlines, check out this post.

³ In fact, only 8 percent of the 2013 RCS worker respondents cited as a target the 0–8 percent that many industry surveys suggest is the most common savings rate (though that often doesn’t take into account the impact of the employer match).

"Show" Time

Though there’s precious little worth watching on television these days, I’ll confess to having developed a fondness for the Sunday night shows that have sprung up all over cable television—series like Downton Abbey, Mad Men, Hell on Wheels, and yes, The Walking Dead. These not only keep me up on Sunday nights, but looking forward to the end of the weekend.

The “hiatus” gaps between these cable seasons are long enough that it can be hard to remember where the story line left off, though these days the standard seems to be to pick up the characters’ lives at a different point in time. Downton Abbey closes one season at the start of WWI, and opens the next in the middle of that conflict, for example—or Mad Men closes a season with the key characters having decided to split off from a stifling new British parent firm, and the next season opens with their new venture already operating as a full-fledged advertising firm. These storyline “jumps” can be a bit disorienting, but time (and the storyline) marches on.

A year ago, the Retirement Confidence Survey, conducted by EBRI and Greenwald & Associates, found that Americans’ confidence in their ability to afford a comfortable retirement was weighed down by concerns about the economy and job security, “stagnant” at record low levels. Those who participated in workplace retirement savings plans were more confident, as were those who had taken the time to estimate their retirement savings needs. A growing number of current workers were planning to work past the traditional retirement age of 65—and yet, in reality, most current retirees had left the workforce earlier than planned, usually for reasons beyond their control.

Since then, we’ve had a presidential election, seen the Supreme Court uphold a new federal health care law, crept up to the edge of a fiscal cliff (and stumbled back a bit), seen unemployment rates stabilize, and stock markets gain ground. How might those events impact or influence Americans’ preparations or retirement confidence? Have they sought—and followed—professional guidance? How much DO Americans think they need to save? And how much progress have they made?

For almost a quarter-century now—with no hiatus—the RCS has meticulously tracked the evolving trends in Americans’ confidence about retirement. Next week we’ll unveil the results of the 23rd annual Retirement Confidence Survey (RCS), the longest-running annual retirement survey of its kind in the nation. You can count on it providing some fascinating insights on where workers and retirees are, where they’ve been, and where we all need to be—with a growing sense of where we want to be tomorrow.

- Nevin E. Adams, JD

Note: The results of the 2013 Retirement Confidence Survey (RCS) will be available at 8 a.m. ET on Tuesday, March 19, at www.ebri.org Information and findings from prior surveys are available at www.ebri.org/surveys/rcs/2012/

"Control" Group

Last week I was speaking at a conference on the West Coast when a weather pattern emerged that threatened both my connecting flight, and my arrival at home. Alerted to the potential problem, I began seeking alternatives. Eventually, I was able to reroute my connecting flight—though doing so meant a later arrival at my home airport and, based on the trajectory of the storm, that later arrival increased the likelihood of running into problems there.

I continued to check in back home during the day—trying to gauge the storm’s progress, and to (re)evaluate my alternatives. As I boarded that final leg of the trip home, I knew a couple of things: The flight was (still) departing on time, and while it wasn’t snowing at home (yet) the forecast was now for more snow, starting later. The trip home wasn’t exactly restful (despite the hour), but having done what I could to minimize the impact of the storm on my travel, having attended to the things I could control, I boarded the plane, hopeful that the combination of my new route home, the pilot’s skill, and the storm’s track would result in a satisfactory, if somewhat stressful, conclusion.

Earlier this year EBRI was approached by Money Magazine to use the EBRI Retirement Security Projection Model® (RSPM)¹ to evaluate a number of potential retirement preparation scenarios, taking into account varying levels of household income, debt, marital status, retirement plan participation, health, etc. Selected results from that analysis, published in the March issue (see “Dream Big, Act Now: Six Secrets of Retirement” online here), showed the impact that various factors could have on the chances of running short of money in retirement.

Real as those factors are, many of life’s circumstances are completely beyond our control. However, some of the most important factors—including the decision to participate in a workplace retirement plan, or the amount we choose to save—are not. Consider a 45-year-old female worker who is currently making $50,000/year, with a current retirement savings balance of $50,000. Applying the RSPM model,² we find that if she contributes 1 percent of pay to her retirement savings each year, there is a 61 percent chance that she’ll run short of money in retirement. On the other hand, a 10 percent annual contribution rate (which could be her’s along with an employer match) reduces that probability to 38 percent, while a 15 percent annual contribution rate reduces that risk to just 1 in 4 (see chart below).

My flight home from the conference was never risk-free, even before Mother Nature decided to throw a wrench into my carefully designed itinerary. That said, having the potential problem highlighted early enough allowed me to take steps to avoid the worst of what surely would have been a very long and arduous flight home, arriving home two hours later than I had originally planned, but well ahead of my likely arrival had I stayed on my original flights.

Much of today’s retirement planning tends to focus on things over which we, as individual retirement savers, have no control—things like investment returns. Perhaps those looking for true retirement serenity might, like those who invoke the so-called “Serenity Prayer,” be better advised to seek “the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference.”

- Nevin E. Adams, JD

¹ RSPM grew out of a multi-year project to analyze the future economic well-being of the retired population at the state level. After conducting studies for Oregon, Kansas, and Massachusetts, a national model—the EBRI Retirement Security Projection Model® (RSPM)—was developed in 2003, and by 2010 it has been 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).More information, and a chronology of the RSPM is available online here.

² This application of the RSPM assumed stochastic returns with an average of 8.9 percent for stocks and 6.3 percent for bonds.

Impact "Ed"

Last month, the U.S. Senate Committee on Health, Education, Labor and Pensions (HELP) held a hearing titled “Pension Savings: Are Workers Saving Enough for Retirement?” The answer to that question is, of course, about as varied as the individual circumstances it contemplates, but certainly at a high level, the best answer is, “it depends.”

It depends on your definition of “enough,” for one thing—and it might well depend on your definition of retirement, certainly as to when retirement begins, not to mention your assumptions about saving and/or working during that period.(1) While those are individual choices (sometimes “choices” imposed on us), they can obviously make a big difference in terms of result.

For public policy purposes, EBRI has defined adequate retirement income as having the financial resources to cover basic expenses plus uninsured medical costs in retirement. Working from that definition as a starting point, along with an assumption that retirement represents the cessation of paid employment and begins at age 65, we have projected that approximately 44 percent of Baby Boomer and Gen-Xer households are simulated to be at risk of running short of money in retirement, assuming they retain any net housing equity until other financial resources are depleted. That’s a lot of households, to be sure, but as an EBRI report noted last year, it includes a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars.(2)

However, the focus of the recent Senate HELP hearing quickly turned from an acknowledgement that many workers aren’t saving enough to what to do about it. In a recent response to questions posed at the hearing,(3) EBRI Research Director Jack VanDerhei compiled a list of alternatives that EBRI research has modeled in recent years, some mentioned at the hearing, along with the impact each is projected to have on that cumulative savings shortfall.

Specifically, the impacts quantified on retirement readiness included in EBRI’s response were:

• The availability of defined benefit (pension) plans.
• Future eligibility for a defined contribution (401(k)-type) plan.
• Increasing the 401(k) default deferral rate to 6 percent.
• Job changes and default deferral rate restarts.
• 401(k) loans and pre-retirement withdrawals.

The impacts of these factors vary, of course. Consider that, overall, the presence of a defined benefit accrual at age 65 reduces the “at-risk” percentage by about 12 percentage points. On the other hand, merely being eligible for participation in a DC plan makes a big difference as well: Gen Xers with no future years of DC plan eligibility would run short of money in retirement 60.7 percent of the time, whereas fewer than 1 in 5 (18.2 percent) of those with 20 or more years of future eligibility are simulated to run short of money in retirement.(4)

Ultimately, if you’re looking to solve a problem, it helps to know what problem you’re trying to solve. And you don’t just want to know that a solution will make a difference, you want to know how much of a difference that solution will make.

Nevin E. Adams, JD

(1) Many other projections overlook, implicitly or explicitly, uninsured medical costs in retirement, and many simply publish a projected average result that will be correct only 50 percent of the time, without acknowledging these limitations. Moreover, while various estimates have been put forth for the aggregate retirement income deficit number, when taking into account current Social Security retirement benefits and the assumption that net housing equity is utilized “as needed,” as well as uninsured health care costs, the EBRI Retirement Security Projection Model (RSPM) indicates the aggregate national retirement income deficit to be $4.3 trillion for all Baby Boomers and Gen.

(2) Nearly one-half (49.1 percent) of Gen Xers are projected to have at least 20 percent more than is simulated to be needed, for example, while about 1 in 5 (19.4 percent) are projected to have less than 80 percent of what is needed. See “All or Nothing? An Expanded Perspective on Retirement Readiness,” online here.

(3) The EBRI response to the Senate HELP hearing questions is available online here.

(4) See “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,” online here.

Predict-Able

Retirement planning is a complex and highly individualized process, but many people find it easier to start by focusing on a single, specific target number.

For those interested in a single number for health care expenses in retirement, a recent EBRI report provides that. Among other things, the report noted that a 65-year-old man would need $70,000 in savings and a woman would need $93,000 in 2012 if each had a goal of having a 50 percent chance of having enough money saved to cover their projected health care expenses in retirement. A 65-year-old couple, both with median drug expenses, would need $163,000 in 2012 to have a 50 percent chance of having enough money to cover health care expenses.¹

Determining how much money is needed to cover health care expenses in retirement is complicated. It depends on retirement age, the length of life after retirement, the availability and source of health insurance coverage after retirement to supplement Medicare, the rate at which health care costs increase, interest rates, market returns, and health status, among other things. That said, it is possible to project health care expenses with some accuracy, and EBRI’s recent analysis uses a Monte Carlo simulation model to estimate the amount of savings needed to cover health insurance premiums and out-of-pocket health care expenses in retirement.

However, those recent “single number” projections specifically excluded the financial impact of long-term care.

EBRI has long acknowledged the critical impact that health care expenses can have on retirement finances, and considering that EBRI has long incorporated both the costs of health care and long-term care in its Retirement Savings Projection Model® (RSPM), one might well wonder why this particular report specifically excluded those long-term care projections.

For all the complexity in those calculations, the reality is that everyone won’t have to deal with the expenses associated with long-term care. For those who will, the impact on retirement finances could be significant, even catastrophic.² That’s why EBRI has modeled their impact in the RSPM since 2003.

As noted above, for those interested in a single number, the recent EBRI report provides that, along with variations that permit one to take into account different likelihoods of success and gender/marital combinations. We are able to do that because we treat longevity risk and investment risk stochastically,³ and the fact that those expenses (and the costs of insurance) are, at least relatively, predictable.

But while it is possible to come up with a single number that individuals can use to start setting retirement-savings goals, it is important to bear in mind that a single number based on averages will be wrong for the vast majority of the population—and that those who rely exclusively on that single number run the risk of running short.

Nevin E. Adams, JD

¹ Unlike reports produced by a number of organizations, the EBRI report also provided estimates for those interested in a better-than-50-percent chance of success. See ”Savings Needed for Health Expenses for People Eligible for Medicare: Some Rare Good News,” online here.

² The EBRI Notes article above illustrates the difference: If you ignore the impact of nursing home and home health care expenses, more than 90 percent of single male Gen Xers were projected to have no financial shortfall in retirement—but when that impact was included, just 68 percent of that group was projected to have no financial shortfall in retirement. The error of ignoring nursing home and home health care costs is even more profound if one focuses on the percentage of individuals with shortfalls in excess of $100,000.

³ For an expanded description of the difference stochastic modeling can make, see “Single Best Answer.”
See also: “Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997-2010”, and “Effects of Nursing Home Stays on Household Portfolios.”

“Grayed” Expectations?

Even the best retirement planning requires a fair number of assumptions: the age at which you hope to retire, for one thing; the amount of income that living in retirement will require; the length of time over which your retirement will last; the rate of return on your savings prior to, and following, retirement; the sources of retirement income that will be available to you, and in what amount(s).

Consider that in the 2012 Retirement Confidence Survey while worker confidence in having enough money to pay basic expenses in retirement wasn’t exactly high (only 26 percent were very confident), workers were noticeably less likely to feel very confident about their ability to pay for medical expenses after retirement (13 percent) and even less likely to feel very confident about paying for post-retirement long-term care expenses (9 percent) — levels that have remained statistically unchanged since 2010.

Indeed, the lack of employment-based retiree health insurance may result in unanticipated expenses in retirement. In the 2011 RCS, one-third of workers reported that they expected to receive this type of insurance from an employer (36 percent), though only 27 percent of retirees in that survey actually received it.

Earlier research found little impact of reductions in coverage on retirees, but the report notes that that may be because initial changes employers made to retiree health benefits affected future retirees, rather than those retired at the point of change. A recent EBRI Issue Brief highlights that, over time, more and more retirees have “aged into” those program changes, resulting in the greater impact found in more recent studies. The report also notes that most employers that continue to offer retiree health benefits have made changes in the benefit package they offer, changes that impact both the cost and availability of the benefit, including raising premiums that retirees are required to pay, eliminating employer subsidies, tightening eligibility, limiting or reducing benefits, or some combination of these.

However, as that Issue Brief also notes, very few private-sector employers currently offer retiree health benefits, and the number offering them has been declining, even in the public sector: Between 1997 and 2010, the percentage of non-working retirees over age 65 with retiree health benefits fell from 20 percent to 16 percent. Still, expectations seem to outpace reality; in 2010, 32 percent of workers expected retiree health benefits, while only 25 percent of early retirees and 16 percent of Medicare-eligible retirees actually had them.

Circumstances change, expectations matter, and retirement planning that relies on flawed or outdated expectations can, unfortunately, leave us short of where we need to be.

Nevin E. Adams, JD

See Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997‒2010

Rely-Able?

Last week the Center for Retirement Research at Boston College provided an update on its National Retirement Risk Index (NRRI).¹ The impetus for the update was the triennial release of the Federal Reserve’s Survey of Consumer Finance (SCF), published in June, reflecting information as of December 2010.

Now, many things have changed since 2007, and in the most recent iteration of the NRRI, the authors note five main changes: the replacement of households from the 2007 SCF with those from the 2010 SCF; the incorporation of 2010 data to predict financial and housing wealth at age 65; a change in the age groups (because a significant number of Baby Boomers have retired, according to the report authors); the impact of lower interest rates on the amounts provided by annuities; and changes in the Home Equity Conversion Mortgage (HECM) rules that lowered the percentage of house value that borrowers could receive in the form of a reverse mortgage at any given interest rate.

And, when all those changes are taken into account, the CRR analysis concludes that, as of December 2010, anyway, the percentage of households (albeit those from a partially different cohort) at risk of being unable to maintain their pre-retirement standard of living in retirement increased by 9 percentage points² between 2007 and 2010 (from 44 percent at risk to 53 percent).

When the baseline for your analysis is updated only every three years, it’s certainly challenging to provide a current assessment of retirement readiness. In previous posts, we’ve covered the limitations of relying solely on the SCF data³and, to some extent, the apparent shortcomings of the NRRI (see “’Last’ Chances”), and retirement projection models, generally (see “’Generation’ Gaps”).

On the other hand, the impact of the decline in housing prices and the stock market were modeled by EBRI in February 2011 (see “A Post-Crisis Assessment of Retirement Income Adequacy for Baby Boomers and Gen Xers”), while the impact of the rising age for full Social Security benefits has been incorporated in EBRI’s Retirement Savings Projection Model (RSPM) since 2003. Moreover, EBRI has also included the potential impact of reverse mortgages in our model for nearly a decade now.

Meanwhile, as a recent EBRI report noted (see “Is Working to Age 70 Really the Answer for Retirement Income Adequacy?”), the NRRI not only assumes that everyone annuitizes at retirement, and continues to ignore the impact of long-term care and nursing home costs (or assumes that they are insured against by everyone), but it also seems to rely on an outdated perspective of 401(k)-plan designs and savings trends, essentially ignoring the impact of automatic enrollment, auto-escalation of contributions, and the diversification impact of qualified default investment alternatives.

It’s one thing to draw conclusions based on an extrapolation of information that, while dated, may be the most reliable available. It’s another altogether to rely on that result in one’s retirement planning, or the formulation of policies designed to facilitate good planning.

Nevin E. Adams, JD

¹ The report, “The National Retirement Risk Index: An Update” is available online here.

² The report notes that, between 2007 and 2010, the NRRI jumped by 9 percentage points due to: the bursting of the housing bubble (4.5 percentage points); falling interest rates (2.2 percentage points); the ongoing rise in Social Security’s Full Retirement Age (1.6 percentage points); and continued low stock prices (0.8 percentage points).

³ As valuable as the SCF information is, it’s important to remember that it contains self-reported information from approximately 6,500 households in 2010, which is to say the results are what individuals told the surveying organizations on a range of household finance issues (typically over a 90-minute interviewing period); of those households, only about 2,100 had defined contribution (401(k)-type) retirement accounts. Also, the SCF does not necessarily include the same households from one survey period to the next. See “Facts and ‘Figures.’”

APP Solution

A couple of weeks back, I was on one of Virginia’s Civil War battlefields, looking to join one of the local park ranger tours. This particular one was scheduled to start deep within the park itself, and while I left home certain that I knew where I was heading, when I got there, I quickly discovered otherwise.

Fortunately, or so I thought at the time, there were about a half dozen other individuals also looking to find the same tour. We quickly convened around a shared map, looked for landmarks, and—based on the collective sense of the group—headed off in what seemed to be the right direction.

Five minutes later I began to suspect we were not heading in the right direction, and 15minutes later I was sure of it. Then I remembered that I had recently downloaded a smartphone “app” for this particular battlefield—one that not only contained a map, but also a GPS feature that allowed me to not only find where I was but to visualize where I needed to be. With that, we could begin heading in the right direction.

Smartphones are an increasingly important part of our lives, in no small part because of the “apps” (short for applications) that they bring to us. These days, apps make it possible to order a pizza, identify that song playing on the radio (and order and/or download your own copy), scan price codes and comparison shop without leaving the store.

While many of today’s “apps” offer much in the way of entertainment and informational value, a great many of them also make it easy to spend , rather than save, money. In fact, the 2012 Retirement Confidence Survey by the Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., found that the use of technology, such as smart phones and tablet computers to help manage finances was still relatively rare.¹

But now there’s a new app designed to make it easier to know where you are in your retirement savings: the EBRI Ballpark E$timate,® developed by Matrix Group International, Inc., and the research team at EBRI, and provided by Choose to Save.®

As a web-based tool, and as a hardcopy reference, the EBRI Ballpark E$timate® (as well as other tools and information available at www.choosetosave.org²) has long helped millions of Americans do a better job of planning for their financial future.

Now the EBRI Ballpark E$timate® “app” (like that smartphone GPS) can help Americans do a better job of knowing where they are—so they can make sure they are headed in the right direction, too.

The EBRI Ballpark E$timate® is currently available as a free download from the iPhone store. More information is online here.

Nevin E. Adams, JD

¹ “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” is online here.

² In addition to the Ballpark E$timate,® you will find a wide variety of free tools and innovative resources, including free videos that can be used to share key savings messages with participants available at www.choosetosave.org

“Storm” Warnings

Amidst the recent coverage of Hurricane Isaac, I was reminded that it was only a year ago that Hurricane Irene came barreling up the East Coast. We had just deposited my youngest off for his first semester of college, and then spent the drive home up the East Coast with Irene (and the reports of her potential destruction and probable landfalls) close behind. We arrived home, unloaded in record time, and went straight to the local hardware store to stock up for the coming storm.

We weren’t the only ones to do so, of course. And what we had most hoped to acquire (a generator) was not to be found—there, or at that moment, apparently anywhere in the state.

What made that situation all the more infuriating was that, while the prospect of a hurricane landfall was relatively unique, we had, on several prior occasions, been without power, and for extended periods. After each I had told myself that we really needed to invest in a generator—but, as human beings are inclined to do, thinking that I had time to do so when it was more convenient, I simply (and repeatedly) postponed taking action.

Life is full of uncertainty, and events and circumstances, as often as not, happen with little, if any warning. However, hurricanes you can see coming a long way off. There’s always the chance that they will peter out sooner than expected, that landfall will result in a dramatic shift in course and/or intensity, or that, as with Hurricane Katrina, the real impact is what happens afterward. In theory, at least, that provides time to prepare—but, as I was reminded a year ago, sometimes you don’t have time enough.

I suppose a lot of retirement plan participants are going to look back at their working lives that way as they near the threshold of retirement. They’ll likely remember the admonitions about saving sooner, saving more, and the importance of regular, prudent reallocations of investment portfolios.

The Retirement Confidence Survey (RCS) has, for years now, chronicled not only the current state of retirement unpreparedness of many, but their awareness of the need to be more attentive to those preparations. Sure, you can find yourself forced suddenly into an unplanned retirement—in fact, retiree respondents to the RCS have long indicated that they stopped working sooner than they had planned.¹ But most of us have plenty of time, both to see that day coming, and to do something about it.

Ultimately, of course, what matters isn’t the time you have, it’s what you do² with it.

Nevin E. Adams, JD

¹ Twenty-five percent of workers in the 2012 Retirement Confidence Survey say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that more than tripled, to 37 percent. Those expectations notwithstanding, half of current retirees surveyed say they left the work force unexpectedly due to health problems, disability, or changes at their employer, such as downsizing or closure (see “The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on Retirement Confidence, Savings,” online here).

² A great place to start those preparations is to figure out what you’ll need, as millions of Americans have with the BallparkE$timate,® developed by the research team at the Employee Benefit Research Institute, and available online here.

Additionally, a wide variety of free tools and innovative resources, including free videos that can be used to share key savings messages with participants, is available here.

Reality “Checks”

A recent opinion piece by Teresa Ghilarducci in the New York Times took on what she termed a “ridiculous approach to retirement,” drawn from what appears to be a series of “ad hoc” dinner conversations with friends about their “retirement plans and prospects.”

Most of the op-ed focused on the perceived shortfalls of the voluntary retirement savings system: People don’t have enough savings, don’t know how much “enough” is, make inaccurate assumptions about the length of their lives and their ability to extend their working careers, and aren’t able to find qualified help to help them make more appropriate savings decisions. In place of the current system, which Ghilarducci maintains “will always fall short,” she proposes “a way out” via mandatory savings in addition to the current Social Security withholding. Consider that, just three sentences into the op-ed, she posits the jaw-dropping statistic that 75 percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts.

“You don’t like mandates? Get real,” she declares.

When we looked across the EBRI database of some 2.3 million active¹ 401(k) participants at the end of 2010 who were between the ages of 56 and 65, inclusive – people who have chosen to supplement Social Security through voluntary savings – we found only about half that number (37 percent) with less than $30,000 in those accounts. Moreover, when looking at those in that group who have more than 30 years of tenure, fewer than 13% are in that circumstance – and neither set of numbers includes retirement assets that those individuals may have accumulated in the plans of their previous employers, or that they may have rolled into Individual Retirement Accounts (IRAs), as well as pensions or other savings (see Average IRA Balances a Third Higher When Multiple Accounts are Considered).

That’s not to say that the financial challenges outlined in the op-ed won’t be a reality for some. In fact, EBRI’s Retirement Security Projection Model® (RSPM) developed in 2003, updated in 2010², finds that for Early Baby Boomers (individuals born between 1948 and 1954), Late Baby Boomers (born between 1955 and 1964) and Generation Xers (born between 1965 and 1974), roughly 44 percent of the simulated lifepaths were projected to lack adequate retirement income for basic retirement expenses plus uninsured health care costs (see “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model”) .

The op-ed declares that a voluntary Social Security system “would have been a disaster.” Indeed, an objective observer might conclude that that is why Congress originally established Social Security as a mandatory system, to provide a base of income for retirees as it still does today. With the underpinnings of that mandatory foundation of Social Security, the current voluntary system was established to allow employers and individuals to supplement that base. In recent decades Social Security’s benefits have been “reduced” by increases in the definition of normal retirement age, and a partial taxation of benefits, despite increases in the mandatory withholding rates, in order to adjust to the realities of rising costs from changing demographics. Even before the recent two-year partial withholding “holiday,” Congress was, and is still today, discussing additional adjustments to that mandatory system.

The voluntary system should be judged as just that, a voluntary system. As noted above, the data makes it clear that voluntary employer-based plans are, in fact, leading to a great deal of real savings accumulated to supplement Social Security. Many in the nation work every day to encourage those savings to be increased (see www.choosetosave.org ).

The “real” questions, certainly as one reflects on the debate over the Affordable Care Act mandate, amidst today’s political and economic turmoil, are whether the Congress and the nation will be willing – and able – to pay the price of an expanded or new retirement savings mandate, and, regardless of that outcome, how can a voluntary system be moved to higher levels of success?

Nevin E. Adams, JD

¹ Active in this case is defined as anyone in the database with a positive account balance and a positive total contribution (employee plus employer) for 2010.

² The RSPM was updated for a variety of 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 to account 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. For more information on the RSPM, check out the May 2012 EBRI Notes, “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model.”

Last June EBRI CEO Dallas Salisbury participated in an “Ideas in Action with Jim Glassman” program discussion with Ghilarducci and Alex Brill from the American Enterprise Institute titled “America’s Retirement Challenge: Should We Ditch 401(k) Plans?” You can view it online here.

Facts and “Figures”

A recent paper from the Center for Retirement Research at Boston College was titled “401(k) Plans in 2010: An Update from the SCF.” The SCF¹ (perhaps better known to non-researchers as the Survey of Consumer Finances) is, as its name suggests, a survey of consumer households “to provide detailed information on the finances of U.S. families.” It’s conducted every three years by the Federal Reserve, and is eagerly awaited and widely used—from analysis at the Federal Reserve and other branches of government to scholarly work at the major economic research centers. The 2010 version was published in June.

As valuable as the SCF information is, it’s important to remember that it contains self-reported information from approximately 6,500 households in 2010, which is to say the results are what individuals told the surveying organizations on a range of household finance issues (typically over a 90 minute period); of those households, only about 2,100 had defined contribution retirement accounts. Also, the SCF does not necessarily include the same households from one survey period to the next.

The CRR analysis incorporated some of the SCF data (ownership of a retirement plan account, participation, median 401(k)/IRA account balances, asset allocations within those accounts, and distribution/loan patterns). The report then brings in data from other sources on features such as automatic enrollment, hardship withdrawals, and IRAs to complete its assessment, summarized on its website as “Progress in the 401(k) system stalled in the wake of the economic crisis.”

The summary went on to note that “despite an increase in auto-enrollment, the percent of employees not participating ticked up,” “401(k) contributions slipped, while leakages through cash outs, loans, and hardship withdrawals increased”—and that, “…the typical household approaching retirement had only $120,000 in 401(k)/IRA holdings in 2010, about the same as in 2007.” Setting aside for a moment the question of what “typical” is, a logical research question arises: Are these statements a researcher’s extrapolation, or based upon hard data, and thus “facts”?

What We Know

EBRI research has previously noted that, while the financial crisis of 2008 had a significant impact on retirement savings balances, as recently as just a month ago, more than 94 percent of the consistent participants in the EBRI/ICI 401(k) database² are estimated to have balances higher than they did at the pre-recession market peak of October 9, 2007 (see “Returns Engagement”). According to a number of industry surveys, participation rates have remained relatively consistent, despite the soft economy and tumultuous market environment, and EBRI research finds comparable trends in loan activity (see “401(k) Plan Asset Allocation, Account Balances, and Loan Activity In 2010”). Also, at year-end 2010, the data show that 401(k) loan balances outstanding declined slightly from those in the past few years.

What else do we know?

We know that the number of future years that workers are eligible to participate in a defined contribution plan makes a tremendous difference in their at-risk ratings (See “Opportunity Costs”).

We know that automatic enrollment, where deployed, has a significant positive impact on retirement readiness (see “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A Simulation Study Based on Plan Design Modifications of Large Plan Sponsors”; “EBRI: Auto-Enrollment Trend Boosts Retirement Readiness Ratings”).

We know that “averages” are easy to understand, and relatively easy to calculate—but they don’t always provide an accurate³ portrayal of the real world (see “Above Average”).

We also know that it’s important to understand the source and composition of data—particularly when using self-reported results, drawing from multiple sources, and creating a composite perspective.

Nevin E. Adams, JD

(1) The 2010 Survey of Consumer Finances is available here.

(2) As of December 31, 2010, the EBRI/ICI database included statistical information on about 23.4 million 401(k) plan participants, in nearly 65,000 employer-sponsored 401(k) plans, representing $1.414 trillion in assets. The 2010 EBRI/ICI database covered 46 percent of the universe of 401(k) plan participants, and 47 percent of 401(k) plan assets.

(3) When analyzing the change in participant account balances over time, it is important to have a consistent sample. Comparing average account balances across different year-end snapshots can lead to false conclusions. For example, the addition of a large number of new plans (arguably a good event) to the database would tend to pull down the average account balance, which could then be mistakenly described as an indication that balances are declining, but actually would tell us nothing about consistently participating workers.

The Good Old Days

There’s been a lot of talk lately about the need to fix the “broken”401(k) plan. Some say it disproportionately benefits higher-paid workers, some claim it can’t provide a level of retirement income sufficient to meet lower-income needs, and still others maintain it can’t provide that level of security for anyone. And, as often as not, those sentiments arise as part of a discussion where folks wistfully talk about the “good old days” when everybody had a defined benefit pension, and people didn’t have to worry about saving for retirement.

Only problem is—those “good old days” never really existed, nor were they as good as we “remember” them.

Consider that only a quarter of those age 65 or older had pension income in 1975, the year after ERISA was signed into law. The highest level ever was the early 1990s, when fewer than 4 in 10 (both public-and private-sector workers) reported pension income, according to EBRI tabulations of the 1976–2011 Current Population Survey (in 2010, 34 percent had pension income).

Perhaps more telling is that that pension income, vital as it surely has been for some, represented just 20 percent of all the income received by those 65 and older in 2010. In the “good old days” of 1975, it was less than 15 percent.

In fact, in 1979, just 28 percent of private-sector workers were covered “only” by a defined benefit (DB) plan (another 10 percent were covered by both a DB and a defined contribution plan), according to Department of Labor Form 5500 Summaries. In other words, even in the “good old days” when “everybody” supposedly had a pension, the reality is that most workers in the private sector did not.

Even among those who worked for an employer that offered a pension, most in the private sector weren’t working long enough with a single employer to accumulate the service levels you need for a full pension. Nor is this a recent phenomenon; median job tenure of the total workforce has hovered about four years since the early 1950s (in fact, as EBRI’s latest research points out, the average median job tenure has now risen, 5.2 years).[i] For private-sector workers, fewer than 1 in 5 have ever spent 25 years or more with one employer. Under pension accrual formulas, those kind of numbers mean that even among the workers who qualify for a pension, many are likely to receive a negligible amount because their job tenure is so short.

Ultimately what this suggests is that, even when defined benefit pensions were more prevalent than they are today, most Americans still had to worry about retirement income shortfalls.

Indeed, Americans today do have some additional concerns: longer lives and longer retirements to fund, as well as the attendant issues of higher health care costs and long-term care. For most workers—past and present—the more savings options they have, the better; and the easier we make it for them to save, the better. That is the power of payroll deduction, matching contributions, and employer action.

When all is said and done, we’re all still challenged to find the combination of funding—Social Security, personal savings, and employment-based retirement programs—to provide for a financially satisfying retirement.

Just like in the “good old days.”

- Nevin E. Adams, JD

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[i] EBRI Notes, December 2010, http://www.ebri.org/pdf/notespdf/EBRI_Notes_12-Dec10.Tenure-CEHCS.pdf

“Generation” Gaps

If you think it’s complicated trying to determine an individual’s retirement funding needs, imagine trying to do so for all American workers. That was the topic of a Senate Banking subcommittee hearing last week titled “Retirement (In)security: Examining the Retirement Savings Deficit,” at which EBRI Research Director Jack VanDerhei was asked to testify.(1)

When EBRI modeled the retirement savings gap of Baby Boomers and Gen Xers earlier this year, we found that between 43 and 44 percent of the households were projected to be at risk of not having adequate retirement income for BASIC retirement expenses plus uninsured health care costs—though that was 5–8 percentage points LOWER than what we found in 2003. That’s right: In terms of that retirement savings gap, American households are better off today than they were nine years ago—even after the financial and real estate market crises in 2008 and 2009.

Measuring retirement income adequacy is an extremely important and complex topic, and one that EBRI started to provide back as far as the late 1990s. Our recent projections indicate that the average individual deficit number (for those with a deficit) ranges from approximately $70,000 for families, to $95,000 for single males, to $105,000 for single females.

Stated in aggregate terms, that would be $4.3 trillion for all Baby Boomers and Gen Xers in 2012. That’s a large number, to be sure, but still considerably smaller than some of the projections that have been put forth.

Here are four things that are sometimes overlooked that help explain the “gaps” in retirement projection gaps:

Some won’t have a retirement

The reality is that some people won’t make it to retirement. On an individual level, we may not know who they are, but in the aggregate we can project the impact with some precision.

You can’t ignore the impact of uniquely post-retirement expenditures.

Health care costs—and post-retirement health care costs particularly—remain a potential source of underplanning, both for retirement and retirement projections. The reality is that we spend differently in retirement than we do before retirement. Moreover, the costs of care, and particularly care such as nursing home and/or long-term care, loom large. And many won’t think or insure for that risk until it’s too late.

Tomorrow’s retirement will be funded differently.

Looking back, even only a few years, assuming that the income sources of current retirees will be available to future retirees glosses over the reality that a major shift in emphasis in retirement plan design has taken place. In the future, the proportion of retirees receiving traditional pension income will almost certainly decline, and the percentage relying on defined contribution savings (primarily 401(k)-type plans) as a primary source of post-retirement income is certain to increase. Projecting future retirement income flows based on the experience of today’s retirees is certain to miss the mark.

We’re already saving “better.”

Thanks to the growing popularity of automatic plan design trends—automatic deferrals, contribution acceleration, qualified default investment alternatives—many of today’s retirement plan participants are already saving earlier and investing more age-appropriately than ever before. There’s no reason to assume these trends won’t continue to extend and expand going forward. Projections based on pre-Pension Protection Act defined contribution trends are relying on yesterday’s news.

- Nevin E. Adams, JD

(1) Video of the hearing is available online HERE. Dr. VanDerhei’s testimony is available HERE