Retirements At Risk: The Outlook for the United States

Transcription

1 Retirements At Risk: The Outlook for the United States Alicia H. Munnell Peter F. Drucker Professor, Boston College Carroll School of Management Director, Center for Retirement Research at Boston College Designing Adequate DC Pensions Retirement Readiness Project Initial Ideas Annual OECD/IOPS Global Forum on Private Pensions Sydney, Australia November 2-3, 2010

2 Years Retirement needs in the U.S. are increasing people are living longer Cohort Life Expectancy at 65, Men and Women, Source: U.S. Social Security Administration Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, D.C: U.S. Government Printing Office. 1

3 they continue to retire early Workforce Participation Rates of Men Aged 50-74, 1970, 1985, and 2009 Age Source: U.S. Bureau of Labor Statistics. Current Population Survey, 1970, 1985, and Washington, D.C. 2

4 and health care costs are rising. Medicare Out-of-Pocket Expenditures as a Percentage of the Average Social Security Benefit, % 40% 38% 36% 30% 27% 20% 10% 7% 0% Current law Author s calculations based on the possible impact of the recently enacted Patient Protection and Affordable Care Act Source: Centers for Medicare & Medicaid Services (CMS), Office of the Actuary SMI Out-of-Pocket Expenses as a Percentage of Illustrative Social Security Benefit. Washington, D.C. 3

5 But U.S. retirement resources are decreasing Retirement income Social Security Employer-sponsored pensions Individual saving Defined benefit plans Defined contribution - 401(k) - plans 4

6 Social Security will replace less income in the future. Social Security Replacement Rates for Average Earner Retiring at Age 65, 2002 and 2030 Source: Author s updates based on Alicia H. Munnell The Declining Role of Social Security. Just the Facts on Retirement Issues. Chestnut Hill, MA: Center for Retirement Research at Boston College. 5

7 6 In terms of pensions, only half of private sector workers has any employer plan. Percent of Private-Sector Workers Ages Participating in an Employer-Sponsored Pension, % 80% 60% 40% 20% 0% Source: Author's calculations based on U.S. Census Bureau. Current Population Survey, Washington, D.C.

8 7 And those with coverage increasingly have defined contribution (401(k)) plans. Workers with Pension Coverage by Type of Plan, 1983, 1995, and 2007 Source: Alicia H. Munnell, Francesca Golub-Sass, and Dan Muldoon An Update on 401(k) Plans: Insights From the 2007 SCF. Issue in Brief 9-5. Chestnut Hill, MA: Center for Retirement Research at Boston College.

9 8 401(k)s shift all decisions to individuals; many make mistakes at every step. Percent of Individuals, 2007 Source: Author s calculations based on U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, Washington, D.C.

10 Age Even before the crash, 401(k) balances were way below potential. 401(k)/IRA Actual and Simulated Accumulations of Individuals with 401(k) Plans, by Age Group, 2004 and $35,000 $61, actual Sim ulated $60,000 $162, $78,000 $320,000 $0 $100,000 $200,000 $300,000 $400,000 Source: Alicia H. Munnell, Francesca Golub-Sass, and Dan Muldoon An Update on 401(k) Plans: Insights From the 2007 SCF. Issue in Brief 9-5. Chestnut Hill, MA: Center for Retirement Research at Boston College. 9

11 With regard to saving, Americans save nothing beyond Social Security and pensions. NIPA Personal Saving Rate: Working-Age Population with and without Pensions, Source: Author s updates based on Alicia H. Munnell, Francesca Golub-Sass, and Andrew Varani How Much are Workers Saving? Issue in Brief 34. Chestnut Hill, MA: Center for Retirement Research at Boston College. 10

12 Center created National Retirement Risk Index to quantify size of retirement challenge. Nationally representative sample of households from 2004 SCF Projected replacement rate at age 65 = NRRI percentage of households with projected rate < target Life-cycle savings model Target replacement rate 11

13 Projected replacement rate = retirement income as a share of income before retirement. Social Security + Defined Benefit Pensions + Annuitized Financial Assets + Imputed Rent + Annuitized Value of Reversionary Interest of House Earnings + Asset Income + Imputed Rent 12

14 Wealth is estimated using wealth-toincome ratios from Surveys of Consumer Finances. Median Ratio of Wealth-to-Income from the Surveys of Consumer Finances Source: U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances., Washington, D.C. 13

15 Wealth is converted to an income stream with inflation-indexed annuity. Wealth before retirement x Inflation-indexed annuity rate = Stream of income (e.g. $100,000) (e.g. 5.5%: Annuity rate for 65-year-old married couple) (e.g. $5,500) 14

16 The next step is to create target replacement rates. Target Replacement Rates by Income Group 100% 80% 80% 71% 67% 60% 40% 20% 0% Bottom third Middle third Top third Source: Center for Retirement Research at Boston College Retirements at Risk: A New National Retirement Risk Index. Chestnut Hill, MA. 15

17 Comparing projected to target rates, Index found 43% of households at risk in Percent of Households Unable to Maintain Pre-Retirement Living Standard, by Birth Cohort 60% 49% 43% 44% 40% 35% 20% 0% All Early boomers ( ) Late boomers ( ) Generation Xers ( ) Source: Center for Retirement Research at Boston College Retirements at Risk: A New National Retirement Risk Index. Chestnut Hill, MA. LIMRA International The 2001 Individual Annuity Market: Sales and Assets. Windsor, CT. 1

18 Vulnerable groups include those with low incomes and no pension. Percent of Households At Risk by Income Group and Pension Coverage 100% By Income 100% By Pension Coverage 80% 80% 60% 55% 60% 59% 52% 40% 40% 37% 40% 20% 20% 22% 19% 0% Bottom third Middle third Top third 0% No pension DC plan only DB plan only Both Source: Center for Retirement Research at Boston College Retirements at Risk: A New National Retirement Risk Index. Chestnut Hill, MA. 17

19 18 The percentage of households at risk rose from 2004 to Percent of Households At Risk at Age 65 by Income Group, 2004 and % 60% 40% % 51% 53% 60% 40% 47% 36% 42% 20% 0% All Low income Middle income High income Source: Alicia H. Munnell, Francesca Golub-Sass, and Anthony Webb The National Retirement Risk Index: After the Crash. Issue in Brief Chestnut Hill, MA: Center for Retirement Research.

20 Reducing risk in retirement can only be done the old-fashioned way: 1) longer work lives; and 2) increased savings. 19

21 Thousands Working longer has a powerful impact on retirement income. 140% 120% 100% More Social Security 132% $140 $120 $100 More 401(k) $ Increased Ratio of Working to Retirement Years 3 80% 60% 75% $80 $60 $ % 20% $40 $20 1 0% $ Age Age Sources: U.S. Social Security Administration The 2010 Annual Report of the Board of Trustees of the Federal Old Age, Survivors and Disability Insurance Trust Funds. Washington, D.C: U.S. Government Printing Office; Author s calculations based on U.S. Board of Governors of the Federal Reserve System Survey of Consumer Finances; Congressional Budget Office Retirement Age and the Need for Saving. Economic and Budget Issue Brief. Washington, D.C. 20

22 Raising the assumed retirement age reduces the 2009 NRRI from 51 to 40 percent. Percent of Households At Risk by Assumed Retirement Age, 2009 Age 63 Age 65 Age 67 Source: Author s calculations based on Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass The National Retirement Risk Index: After The Crash. Issue in Brief Chestnut Hill, MA: Center for Retirement Research. 21

23 Improving retirement readiness also requires increased saving. Worker Confidence in Having Enough to Live Comfortably in Retirement, % 16% Very confident Somewhat confident Not too confident Not at all confident 24% 38% Source: Employee Benefit Research Institute The 2010 Retirement Confidence Survey: Economy Drives Confidence to Record Lows; Many Looking to Work Longer. Washington, D.C. 24

24 U.S. needs to make 401(k) plans work as well as possible. Percent of Large Plans with Automatic Enrollment, 2008 Percent of 401(k) Automatic Enrollment Plans that Increase Default Deferrals over Time, % 34% 50% 56% 16% With Without No Voluntary Automatic Source: Profit Sharing/401(k) Council of America nd Annual Survey of Profit Sharing and 401(k) Plans. Chicago, IL. 23

25 U.S. needs to maintain scheduled Social Security replacement rates. Sources of Non-earned Income for Households by Tercile, Age 65 and Over, % 3% Bottom Tercile Middle Tercile Top Tercile 6% 3% 7% 26% 20% 3% 37% 87% 70% SocialSecurity Pensions Assets O ther 34% Source: Author s calculations based on the U.S. Bureau of Labor Statistics Current Population Survey. Washington, D.C: U.S. Government Printing Office. 24

26 Replacement rate U.S. needs a new tier of retirement saving. Source: Author s illustration. 25

27 Saving 3 percent more reduces the NRRI for younger workers from 56 to 48 percent. Percent of Gen Xer Households At Risk by Assumed Saving Rate, 2009 Lower saving rate (contribution rates 3% lower) 63% Base case 56% Higher saving rate (contribution rates 3% lower) 48% 0% 20% 40% 60% 80% Source: Author s calculations based on Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass The National Retirement Risk Index: After The Crash. Issue in Brief Chestnut Hill, MA: Center for Retirement Research. 26

28 Conclusion U.S. retirement needs are increasing. U.S. retirement income system is contracting. National Retirement Risk Index captures the magnitude of the problem. Solution requires: Working longer; and Saving more, which requires a new tier. 27