Pensions and Social Security play
an important role in determining U.S. savings rates. As
the personal savings rate fell to a low of 4.3 percent of
personal disposable income in 1987 from an average rate
of 7.8 percent in the 1970s, the contribution of these
retirement income programs has assumed increasing
importance. Employment-based pensions paid retirees $234
billion in 1990.
Retirement income programs are
closely related to demographic changes projected to occur
in the next century, including an increase in the
proportion of elderly persons in the population, a
gradual decline in the fertility rate, and a longer
average life span. These demographic changes will produce
a higher ratio of persons aged 65 and over per 100
persons aged 18–64, which may increase the need for
The Social Security system plays an
important role in individual savings decisions and
retirement income. In 1979 and 1983, Congress revised the
system's benefit levels, scheduled tax rates, and future
retirement age in order to maintain solvency and to
prepare to pay for the baby boom generation's retirement
benefits. Social Security paid cash retirement benefits
totaling $168 billion in 1990.
Several studies have investigated
the effects of individual retirement accounts (IRAs) on
savings. Analysts have found that some portion of IRA
contributions represent new savings. The Employee Benefit
Research Institute estimates that a portion of 401(k)
contributions do also; 401(k) contributions by employees
reached nearly $25 billion in 1988.
During the 1980s, Congress changed
some aspect of the retirement system almost annually.
Future legislation affecting pensions and the Social
Security system should be considered in terms of its
effect on savings and economic security in retirement.