PPI PUBLIC POLICY INSTITUTE RETIREMENT PLAN COVERAGE AND SAVING TRENDS OF BABY BOOMER COHORTS BY SEX: ANALYSIS OF THE AND SCF D A T A D I G E S T Introduction Over the next three decades, the retirement of the baby boom generation will present enormous challenges to the nation s retirement income security system. This system, which encompasses Social Security, pensions, and savings, will experience severe strains. (born 1946 through 1964) are rapidly approaching retirement, and there is disagreement about whether as a generation they will have adequate retirement income. There is general agreement, however, that boomers will probably have to rely more heavily than ever on employer-provided pensions because their savings are inadequate and their Social Security benefits are being reduced. 1 Unfortunately, the likelihood that boomers can count on better pension benefits is also in doubt because the pension coverage rate has remained unchanged since the late 1960s at about one-half the workforce. In addition, there has been a decline in defined benefit (DB) plans and an increase in riskier defined contribution (DC) plans. The boomer cohort is highly diverse. Some subgroups might not fare as well as others in retirement. For example, younger boomers might be more disadvantaged than older boomers in terms of retirement income security. boomers are more likely to have experienced less adequate pension coverage, lower house price appreciation, 1 Legislation has cut the real Social Security benefits boomers will receive by raising the age at which they will be eligible to receive full benefits and subjecting some benefits to taxation (Lewin-VHI, 1994). fewer job market opportunities, and higher divorce rates than older boomers experienced when they were the same age (CBO, 1993; Gist, et al., 1999). Female boomers are especially likely to receive lower pension benefits than their more fortunate male counterparts because low pension coverage rates and lower wages during working years translate into poor pension benefits in retirement (Lewin-VHI, 1994). On the other hand, women s pension coverage has improved over the last several decades, while men s coverage has declined. 2 The Survey of Consumer Finances This data digest uses data from the and Survey of Consumer Finances (SCF) a triennial survey conducted by the Federal Reserve Board to examine recent changes in boomer retirement plan (i.e., pension and Individual Retirement Account [IRA]) coverage and savings, focusing on differences between older and younger boomers as well as differences between women and men. 3 Only working boomers are analyzed in this data digest. 2 This is the result of increased earnings and labor force attachment of women and a decline for men in union membership and employment in large manufacturing firms (Munnell and Sunden, 2001). These analyses may tell only part of the story since they frequently use survey data (e.g., the March Current Population Survey) that provide only a snapshot based on the worker s current job, and do not tell us whether workers will have or did have coverage at some other point in their work life. 3 The SCF provides detailed information on pension coverage levels as well as the type of coverage available. The SCF contains demographic and economic information about the household and detailed information about IRAs and employer-sponsored Page 1 DD-93
This data digest highlights the SCF results for and compares them to SCF data. This permits analysis of retirement plan trends for women and men over roughly a 10-year period. For purposes of analysis, the boomers are frequently split into two age groups. In this data digest, boomers are defined as a 20-year group born between 1946 and 1965 (rather than the usual 19- year group). This permits the creation of two 10-year cohorts those born from 1946 through 1955 are known as older boomers, and those born from 1956 through 1965 are called younger boomers (Woods, 1994). 4 In other words, the older boomers are the 10-year age group that just preceded the younger boomers. Data from and almost a 10-year period permit an assessment of whether younger boomers are doing as well as older boomers when they were the same age. In addition, a third cohort pre-boomers is created to examine the 10-year age group that just preceded older boomers. 5 This allows an analysis of preboomers and older boomers when they were the same age. Figure 1 illustrates how pre-, older, and younger boomers can be compared when they were roughly the pension plans, including 401(k) plans. The unit of analysis is the individual worker and includes respondents, his/her spouse, and partner. The sample sizes are 2,541 for and 3,617 for. 4 Woods (1994) defined baby boomers as a 20-year group rather than as a 19-year group, i.e., those born in 1946 through 1964. Using two 10-year cohorts, he analyzed pension coverage with 1993 and 1988 Current Population Survey (CPS) data. 5 Pre-boomers are defined as those born 1936 through 1945. There is no standard definition for pre-boomers as an age cohort. For comparability with older boomers, a 10-year cohort is selected in this paper. Earlier studies that used this approach include CBO (1993), Hurst et al. (), and Keister (2000). same age using the and SCF data. This data digest looks at retirement plan coverage as well as the amount of retirement savings that boomers have accumulated in their 401(k)s, other DC plans, and IRAs. 6 The SCF data permit a broadgauged approach to retirement plan coverage, i.e., they can capture any retirement plan coverage obtained by workers during their working careers and coverage on all previous jobs. Most analyses of pension and retirement plan coverage look at current primary job coverage only. Consequently, they produce estimates of aggregate pension coverage for specific groups that are biased downward, especially groups like women who move in and out of the labor force and older workers, who have had long careers. Here retirement plan coverage is defined as pension coverage during a worker s career (i.e., from a current primary and any previous job) or having an IRA. The inclusion of IRAs acknowledges blurring of the distinction Figure 1 Relationship of 10-year Boomer Cohorts at Similar Points in Their Careers Pre- 6 In this data digest retirement plan savings do not include wealth accumulation of DB plans. Here, retirement plan savings are measured as median savings levels (in constant dollars) in all DC plans, including 401(k)s, as well as in IRAs. Page 2
between employer-provided DC pension benefits and personal retirement savings. Retirement Plan Coverage Trends among The trend analysis focuses on comparable populations and measures over time. In Table 1, the age differences in retirement plan coverage are seen clearly. For younger boomer workers, pension coverage obtained at any time dramatic differences among the age groups. There was basically little or no change in the retirement plan coverage of pre-boomers and older boomers over the 10-year period, while comparable coverage of younger boomers surged from.9 percent in to 64.7 percent in. Does this mean that younger boomers were actually better off than older boomers when both cohorts were the Table 1 Percentage of Workers Having Pension or Individual Retirement Plan by Age Cohort, and Birth Age of Worker (in ) Cohort during their careers (to the point of the given survey, i.e., not lifetime but until or ) increased from 45 percent in to 56.4 percent in. For older boomers, there was basically no change in career pension coverage during this 10- year period. This differs from findings that show pension coverage (on a current job) increasing with age through age (Copeland, 2002). Pre-boomers experienced a decline in pension coverage from 62.8 percent to 58.5 percent between and. IRA coverage trends were very different from those for pension coverage. All three 10-year age groups experienced increases in IRA coverage over time the older the worker, the more likely he or she was to have an IRA. This reflects, in part, the ability of workers to roll over 401(k) assets into IRAs when they change jobs. Changes in overall retirement plan coverage (i.e., pension or IRA) exhibited Have Any Pension Plan 1 IRA With Any Coverage 2 (33-52) 1946-1965 52.7 57.6 20.7 27.0 60.4 66.6 (33-42) 1956-1965 45.0 56.4 14.6 23.7.9 64.7 (43-52) 1946-1955 58.7 58.9 25.5 30.4 67.8 68.6 Pre- (53-62) 1936-1945 62.8 58.5 31.2 40.4 72.5 72.8 1 Includes current job and previous job. 2 Have any pension or IRA. same age? Further analysis indicates this is not necessarily the case. For both pension (on any career job) and IRA coverage, younger boomers had lower coverage than older boomers when older and younger boomers were the same age (Figure 2). As a result their overall retirement plan coverage was also lower when these cohorts were the same age 64.7 percent versus 67.8 percent. The same pattern is true when older boomers were compared to pre-boomers 68.6 percent versus 72.5 percent. Percent Figure 2 Percent of Retirement Plan Coverage for Different Age Cohorts at Similar Points in Their Careers 78 74 66 62 58 54 67.8 Boomer in 64.7 72.5 (Aged 33-42) 68.6 Pre- Boomer in (Aged 43-52) Page 3
Table 2 Percentage of Workers Having Pension or Individual Retirement Plan by Age Cohort and Sex, and Age of Worker (in ) Birth Cohort Have Any Pension Plan 1 IRA With Any Coverage 2 Men Women Men Women Men Women (33-52) 1946-1965 55.4 59.2 54.4 55.8 22.0 26.7 19.1 27.3 62.9 67.9 57.1 65.0 (33-42) 1956-1965 45.1 57.5 47.8 55.0 15.7 23.8 13.0 23.6.9 65.5.9 63.8 (43-52) 1946-1955 64.0 60.8 59.4 56.6 27.2 29.6 23.5 31.3 72.8.4 61.5 66.4 Pre- (53-62) 1936-1945.2 63.1 64.8 53.5 36.4 41.7 26.1 39.1 79.0 75.8 66.2 69.6 1 Includes current job and previous job. 2 Have any pension or IRA. Retirement Plan Coverage Trends: Women and Men As expected, retirement plan coverage for women and men differed significantly. 7 Women were less likely to have had pension coverage during their careers but were more likely than men to have had IRA coverage. Almost 63 percent of boomer men were covered by a retirement plan in ; 10 years later, their coverage rate had increased to almost 68 percent (Table 2). Among women there was also an increase, from 57.1 percent to 65 percent. IRA coverage for both men and women also increased over the period. Among women, the increase was especially dramatic from 19.1 to 27.3 percent. Not all boomer cohorts experienced increases in coverage. boomer pension coverage fell over these 10 years with both men and women experiencing declines. Trends in any retirement plan coverage were the opposite for male and female older boomers. Men s coverage decreased from 72.8 percent to.4 percent, while women s coverage increased from 61.5 percent to 66.4 percent. Even more interesting is the comparison of two cohorts at the same age. Male and female boomers both older and younger experienced a greater decline in pension coverage than preceding cohorts (Table 2, figures 3 and 4). 8 In terms of IRA coverage, male boomers both older and younger also suffered a decline in coverage when these cohorts were the Percent 65 60 55 Figure 3 Percent of Pension Coverage by Sex of and Boomer Age Cohort in and 64.0 Men 57.5 (Aged 33-42) 59.4 Women 55.0 (Aged 33-42) same age. In contrast, female older boomers enjoyed an increase in IRA coverage (from 26.1 percent to 31.3 percent), and younger boomer coverage was equal (23.5 percent versus 23.6 percent) to older boomer coverage when these cohorts were the same age (Table 2). 7 A test based on a 95 percent confidence interval indicates that all differences in retirement plan, IRA, and pension coverage by age and gender were statistically significant for both and. 8 These findings differ from those uncovered in an analysis of 1983 and 1993 CPS data. Analysis of the CPS found that male boomers experienced a greater decline in pension coverage than previous cohorts, while both cohorts of female boomers enjoyed a coverage increase (Woods, 1994). Page 4
Percent 80 75 65 60 55 Figure 4 Percent of Pension Coverage by Sex of Pre- and Boomer Age Cohort in and.2 Pre-Boomer in Men 60.8 64.8 Pre-Boomer in Women 56.6 (Aged 43-52) (Aged 43-52) The result is that male boomers (both younger and older) saw a greater decline in overall retirement plan coverage than preceding cohorts when they were the same age (72.8 percent versus 65.5 percent and 79 percent versus.4 percent). In contrast, while female younger boomers experienced a greater coverage increase (61.5 to 63.8 percent) than their older boomer counterparts of the same age, and female older boomers had coverage equal to their pre-boomer counterparts at the same point in their careers (figures 5 and 6). Percent Figure 5 Percent of Retirement Plan Coverage by Sex of and Boomer Age Cohort in and 80 75 65 60 55 72.8 Men 65.5 Women 61.5 63.8 (Aged 33-42) (Aged 33-42) Percent Figure 6 Percent of Retirement Plan Coverage by Sex for Pre- and Boomer Age Cohort in and 90 85 80 75 65 60 55 79.0 Pre- Men.4 66.2 66.4 Pre- Women (Aged 43-52) (Aged 43-52) Trends in Retirement Plan Savings for This section examines the changes in retirement plan savings (401[k] and other DC plans as well as IRAs) between and for boomer cohorts as well as for women and men. How have savings amounts changed? Are younger boomers as well off as older boomers when they were the same age? And are older boomers as well off as pre-boomers when they were the same age? How do women s retirement plan savings compare to men s? Overall, median retirement plan savings appear to be very low ranging from $16,000 to $32,000 in for boomer and pre-boomers (Table 3). However, savings have increased substantially for boomers overall as well as for older and younger boomer cohorts between and. This reflects, in part, the surge in the stock market during this period. As expected, pre-boomers the group with the longest time to invest had more savings than boomers, and older Page 5
Table 3 Median Retirement Saving for Workers Who Participated in DC Pension Plan or Had IRA by Age Cohort, and (in dollars) Age of Worker (in ) Birth Cohort Retirement Saving 1 DC Pension Plan 401(k ) All Workers (25+) Before 1974 10,516 20,000 9,202 18,000 7,887 12,000 (33-52) 1946-1965 6,573 20,000 6,573 21,000 5,258 17,000 (33-42) 1956-1965 3,944 16,000 3,944 18,000 3,944 14,000 (43-52) 1946-1955 9,202 27,000 9,202 25,000 6,573 20,000 Pre- (53-62) 1936-1945 13,145 32,000 15,774 28,000 22,347 22,000 1 Includes DC pension plan and IRA. Table 4 Median Retirement Saving for Workers 1 Who Participated in DC Pension Plan or Had IRA by Age Cohort and by Sex, and (in dollars) Retirement Saving 1 DC Pension Plan 401(k) Only Age of Worker Men Women Men Women Men Women (in ) (33-52) 7,887 26,000 6,573 14,200 6,573 24,000 5,127 13,000 6,573 22,000 3,944 10,000 (33-42) 3,944 22,000 2,629 8,0 5,258 22,000 789 8,000 5,258 21,000 2,629 8,0 (43-52) 11,831 30,000 7,887 24,000 10,910 26,000 6,573 22,000 6,573 25,000 5,258 15,000 Pre- (53-62) 18,403,000 10,516 16,000 22,347 35,000 3,944 10,000 39,435 35,000 11,831 6,200 1 Includes DC pension plan and IRA. boomers had more savings than younger boomers. For all age groups, savings amounts (in constant dollars) more than doubled over the 10-year period. Since 2000, however, there has been a major drop-off in stock value as measured by the S&P 0. Figure 7 Median Retirement Saving* for Workers Who Have DC Pension or IRA by Different Age Cohorts at Similar Points in Their Careers $32,000 $28,000 $24,000 $20,000 $16,000 $12,000 $8,000 $4,000 $0 $9,202 $16,000 $13,145 Pre-Boomer in $27,000 (Aged 33-42) (Aged 43-52) *Includes total amount of DC pension plan and IRA. Are younger boomers as well off as older boomers at the same age? And are older boomers as well off as preboomers at the same age? The data show that every younger cohort had higher retirement plan assets than its comparable older cohort at the same age. For example, younger boomers had accumulated $16,000 in retirement savings in, compared to $9,202 for older boomers in i.e., when both were aged 33-42 (Table 3 and figure 7). But younger boomers are less likely to have DB plans than older boomers (Verma and Lichtenstein, 2000). Do men and women boomers have similar patterns of retirement plan savings accumulation? There are some major differences (Table 4). For all cohorts and in both years, women s savings are lower than men s. Male pre-boomers in had the highest retirement savings, at $,000, while female younger boomers in had the lowest $2,629. In addition, Page 6
although female younger boomers are better off than female older boomers at the same age, and female older boomers are better off than female pre-boomers at the same age, there are several instances of small differences. For example, total retirement savings of female older boomers in and female younger boomers in differs by only $613 an increase of less than 8 percent for younger female boomers. One surprising finding is that some younger cohorts of men are less well off than their older comparable cohort at the same age. For example, older boomers have lower 401(k) savings than preboomers $25,000 versus $39,435 when both groups were age 43-52. This is the only instance of a decline in pension amounts between groups at comparable ages. This might reflect the fact that male pre-boomers were more likely than male older boomers to be covered by a DB plan and a supplemental 401(k). Workers with traditional DB plans are more likely to take greater risks investing their 401(k) plan assets and, therefore, might accrue higher returns than workers with 401(k) plan coverage only (Bajtelsmit and Bernasek, 2001). Conclusions The concern about adequate retirement income for boomers appears to be well founded. Analysis of trends from the and SCF indicates that younger boomer cohorts are less likely to have retirement plan coverage than older cohorts at the same age. In addition, women s pension coverage does not appear to be increasing when this coverage is measured over a career. The more significant increase in women s retirement plan coverage appears to be the jump in IRA coverage. Unfortunately, the savings limits in IRAs are much lower than those in DC pension plans, such as 401(k)s, and women may be able to contribute only small amounts in any case. Therefore, increases in women s IRA coverage may translate into poor and inadequate retirement benefits. On the other hand, this analysis underestimates women s retirement plan benefits because it does not account for spousal pensions or IRAs. While retirement plan savings have increased significantly for all boomer cohorts between and, savings levels remain low ranging from $16,000 to $32,000 in for boomers and preboomers at the median. Women have lower retirement plan savings levels than men, and female younger boomers have not increased their savings significantly over older boomers when both groups were at the same point in their career. Given that the 1990s enjoyed a record stock market boom, it is worrisome to think about what has happened to the retirement savings of working boomers, and especially vulnerable subgroups, since. The stock market has only partially recovered from its steep decline over the 2000-2002 period. Lack of a quick full recovery could severely reduce the retirement income prospects of large segments of Americans as they approach retirement. In addition, the ability of boomers to save for retirement is being challenged by soaring health costs, reductions in retiree health benefits, and double-digit increases in the costs of providing higher education for their children. Further, rapidly appreciating housing prices even with very low mortgage interest rates may make it difficult for many younger boomers to Page 7
achieve homeownership especially in those markets where housing inflation is the highest. References Bajtelsmit, Vickie L., and Bernasek, Alexandra. Risk Preferences and the Investment Decisions of Americans, AARP Public Policy Institute, Issue Paper #2001-11, June 2001. Congressional Budget Office, Baby in Retirement: An Early Perspective, Washington, DC, September 1993. Written by Jules H. Lichtenstein and Ke Bin Wu Public Policy Institute November 2003 AARP, 601 E Street, NW Washington, DC 20049 Reprinting with permission only. 2003 AARP www.aarp.org/ppi Copeland, Craig. An Analysis of the Retirement and Pension Plan Coverage Topical Module of SIPP, EBRI Issue Brief No. 245, May 2002. EBRI, Baby in Retirement: What Are Their Prospects? EBRI Special Report and Issue Brief No. 151, July 1994. Gist, John, Wu, Ke Bin, and Ford, Charles. Do Baby Save and, If So, What For? AARP Public Policy Institute, Issue Paper #9906, June 1999. Hurst, E., Luoh, M., and Stafford, F. The Wealth Dynamics of American Families, 1984-1994, Brookings Papers on Economic Activity, Vol. 1. Washington, DC: Brookings Institution,. Keister, Lisa A. Wealth in America: Trends in Wealth Inequality, Cambridge, UK: Cambridge University Press, 2000. Lewin-VHI, Inc. Baby Boomer Pension Benefits: Will They Be Adequate for the Future? Prepared for AARP, 1994. Lichtenstein, Jules, and Wu, Ke Bin. Pension and IRA Coverage among Boomer, Pre-Boomer and Workers, AARP Public Policy Institute, Issue Paper #2000-03, February 2000. Munnell, Alicia H., and Sunden, Annika. Private Pensions: Coverage and Benefit Trends, Prepared for Conversation on Coverage Conference, Pension Rights Center, Washington, DC, 2001. Verma, Satyendra K., and Lichtenstein, Jules H. Retirement Plan Coverage of Baby and Retired Workers: Analysis of SIPP Data, AARP Public Policy Institute, Issue Paper #2003-10, July 2003. Woods, John. Pension Coverage among Baby : Initial Findings from the 1993 Survey. Social Security Bulletin, Vol. 57, No. 3: 12-25 (Fall 1994). Page 8