7 Employee Benefit Note s (August 1991): 1–8. The change in assumption generation means that “assumptions for the future have been revised in a less result. In addition, 41 percent said it was such information that led them to begin contributing to a retirement In addition, 26 percent of current workers expect money from employer Few among the general and who loses (and how) under the types of reform options EBRI modeled under key assumptions based on those contributing just enough to take full advantage of that plan feature but no more. legally required to match all employee 401k contributions. The truth is, sponsoring a plan does not have to be as employers who would have to readjust is even higher American public realize that trust fund balances are dwindling by legislative design and, ST STA ATEMENT OF P TEMENT OF P , as the above figure does not include employees of small AUL AUL J. J. Y YAKOBOSKI AKOBOSKI -funded plans to be their most important On the investment side, a real annual benefits under a partially privatized system. The working poor (defined as those earning at the poverty Endnotes • The result of the Social Security debate could potentially have great impact on the design of the employment- st optimistic direction” See Eugene Steuerle and Jon Bakija, Retooling Social Security for the 21 Century (Washington, DC: Urban Institute Press, 1994). source of retirement income, and 10 percent expect employment to be their most important source of retirement expensive and administratively burdensome as many apparently assume. therefore, falling trust fund balances are not “news.” The real news about the trust funds is that they were not savings plan. used by the Social Security T dichotomy exists in allocation behavior among workers within similar demographic groups. private firms or of the government who may also be participating in integrated pension plans. Readjusting benefit rustees (with the exception of the mortality decline rate, which is based on the EMPLOYEE BENEFIT RESEARCH INSTITUTE SENIOR RESEARCH ASSOCIATE A significant fraction level over their entire working lives) would also receive lower payback ratios for their Social Security contribu- Figure 3 Figure 7 Table 1 1 Figure 9 Figure 5 based pension system. An increase in the normal retirement age and/or early retirement age would probably Figure 1 The Retirement Confidence Survey (RCS) is sponsored by the Employee Benefit Research Institute (EBRI), the American Savings E EBRI ducation Council 15 In particular, program solvency is most sensitive to mortality and nativity assumptions, an area of controversial debate even within the federal Census Bureau’ expected to dwindle as quickly as current projections predict. income. of participants, particularly younger ones, are heavily diversified into equities, while at the same time a large formulas for Social Security changes would entail an administrative burden in addition to any other potential s mid-range assumptions). EBRI’ Motivational Factors in Saving for Retirement—Workers EMPLOYEE BENEFIT RESEARCH INSTITUTE s results are based on these and hundreds of other baseline After passage of the Social Security Amendments Act tions, as would average women born in 1976. For lower Workers’ Confidence in Investing Retirement Savings Wisely Expected Most Import -income earners, the returns that could be obtained by ant Sources of Retirement (ASEC), and Mathew Greenwald and Associates (MGA). The RCS is funded by grants from various public and private organizations. Most Important Reason for NOT Offering a Retirement Plan Impact of Saving Another $20 per Week result in adjustments in employers’ willingness to retain older employees and the designation of retirement Worker Confidence in Having Enough Money to Live Comfortably in Retirement government. For example, the Census Bureau’s mid-range projections predict 3.6 million more persons ages 85 and over by 2050 than the OASDI Trustees’ EMPLOYEE On the other side, small employers that do offer a retirement plan see real benefits in doing so (figure 10): assumptions, which can be altered by the individual user of the EBRI-SSASIM2 Policy Simulation Model. of 1983, the 1983 Social Security T Furthermore, among those receiving retirement education materials in the past year: percentage of their peers hold zero equities in their accounts. The data indicate that it may be the low-earning, burdens imposed on private pension sponsors under a new Social Security policy BEFORE THE SENA rustees’ Income Among Current W report projected that the trust funds would hold 54 percent of outlays in TE FINANCE COMMITTEE orkers . investing individual Social Security accounts partially in equities would not, on average, compensate for the SUMMARY 2 mid-range assumptions. Some academics project that numbers will be even higher. See “U.S. Population Projections: 2050 Ages 85 and Older,” National For a complete discussion of tenure patterns over time and the implications for retirement income security, see Paul Yakoboski, “Debunking the ages for employment-based pension plans. Not only is there concern as to the extent employers sponsoring Among workers who have saved for retirement BENEFIT Institute on Aging and Census Bureau estimates, 1996. Among small employers without a retirement plan reserve by 2060 under the second set of intermediate assumptions (Board of T • • younger participants who do not appreciate the advantages of diversifying their 401(k) portfolio to include equi- Retirement Policy Myth: Lifetime Jobs Never Existed for Most Workers,” Thirty-five percent report a major impact on their ability to hire and retain good employees. Eighty-one percent have money earmarked for retirement in an account in their name, compared with JUNE 18, 1998 EBRI Issue Brief no. 197 (Employee Benefit Research Institute, May 1998). rustees, 1983). In contrast, interme- Individual Saving and Retirement Plans additional costs of transition taxes and the reduced benefits from the current, redistributive system. In addition, pensions will adjust to changes in Social Security policy, but there is also debate about how participants in 1997 1998 T-115 16 RESEARCH • Assuming that partial privatization is administratively feasible, modeling results suggest that people born in 1976 3 diate assumptions used in the 1998 Social Security T ties. This is at the risk of accumulating insufficient assets to fund a retirement lifestyle that is desired or being Some other considerations with respect to potential changes in Social Security policy on employment-based See Board of Trustees, 1996 67 percent of those who have not received information from their employer Thirty percent report a major impact on employee attitude and performance. . It is interesting to note, however, that the 1996 Social Security Advisory Council assumes an adjustment of the consumer rustees’ report project the OASDI trust fund balance to be . • lower The good news in the 1998 Retirement Confidence Survey (RCS) is that working -earning workers could be at higher risk of investing extremely conservatively and of falling into poverty if Among those who have saved for retirement Americans have become more Prior to the passage of ERISA, there were no regulations relating specifically to vesting. ERISA established three standards that effectively required 100% employment-based plans will alter their behavior and how these adjustments will affect their retirement $600,000 According to the 1998 RCS, 63 percent of Americans have begun to save on their own for retirement. While this is price index of 0.21 percent, which decreases the expected shortfall from 2.17 percent of taxable payroll to 1.86 percent. See Advisory Council on Social 8 INSTITUTE plans either to fully vest participants after 10 years of service or to partially vest participants prior to 10 years of servic ® e with full vesting occurring after 22% exhausted by 2032. would fare less well under partial privatization relative to maintaining the current system with tax increases— • able to retire when desired. pension sponsors are the following: 100 Fifty-four percent report a major impact on their employees’ ability to prepare for retirement. rates of return on individual account assets were below those expected based on historical averages. focused on their retirement. Forty-five percent have tried to determine how much they need to save by retire- Employees Prefer Wages/Benefits $506,300 Personal Savings 51% 39% Security, security Report of the 1994-1995 Advisory Council on Social Security . , Vol. I (Washington, DC: Social Security Advisory Council,1997). no more than 15 years. These vesting requirements have become stricter with legislative changes over time. Current law requires a plan to adopt vesting good news in that most Americans are saving for retirement, it also means that one-third are not. We also know 19% 90% 15% 37%5% Annual Return 19% 18% 17% even if they invested in a mixed (life cycle) portfolio of equities and bonds (assumed to yield a nominal investment • Mr • . Chairman and members of the Committee: Fifty-six percent—more than one-half—have attempted to determine how much they need to save for retire- Would tax incentives for employment-based pensions—public and private—be reduced if Social Security costs 21% 33% 25% 48% ment, up from 32 percent in 1996. The increase is particularly striking among baby boomers. Employer Funded Plans 22% 24 26 standards for the employee’s benefit (the balance under a defined contribution plan or the accrued benefit under a defined bene 24% fit plan) at least as liberal 17 25% 16% Ibid. Revenue is Too Uncertain that the one-third tend to be younger workers and workers with lower incomes, often one in the same. These • Modeling results from the SSASIM2 Policy Simulation Model indicate that no reform option appears to be $500,000 as one of the following two schedules: full vesting (100 percent) after five years of service (with no vesting prior to that time, known as cliff vesting), or return of 7.06 percent in the simulations utilized in this report). Because the current Social Security system is Although legislative changes from 1983 to 1995 and more optimistic demographic assumptions had positive There are reasons to be optimistic about the prospects for increased plan sponsorship among small employers: In addition, preservation of the money set aside in retirement accounts until retirement is an area of concern. I am pleased to appear before you this morning to discuss issues regarding the retirement income security of ment, compared with 38 percent of those who have not received information from their employer put pressure on other parts of the federal budget? Social Security 12 13 . Is raising taxes to fund the current system a better solution than partial privatization? Not necessarily, as funding 47% 80% 50 46% • 18 While Americans have become more focused on their retirement, this has not translated into increases in their 10% Annual Return savings figures have remained essentially unchanged since the question was first asked in 1994 (figure 2). graded (gradual) vesting of 20 percent after three years of service and an additional 20 percent after each subsequent year of service until 100 percent The main parameters of seven such reform packages are summarized in Kelly Olsen, “Keeping Track of Social Security Reform Pr 80 oposals: A Summary,” win-win for all groups in all aspects. That is, no reform is likely to be a policy panacea for the challenges Employment 9 14% 10 implications for the combined OASDI trust fund balances, these were outweighed by other factors. The markedly largely pay-as-you go, most of what workers pay into the system funds today’ Research indicates that the level of retirement benefit preservation is low among many segments of the working • today’ Sixty-eight percent of those without a plan do not think their employees are well prepared for retirement. Costs Too Much to Set Up/Administer s workers. My name is Paul Yakoboski. I am a Senior Research Associate at the Employee Benefit Research s benefits. These benefits have the current system would require a 50 percent increase in Social Security (OASI) taxes by the year 2060. 41% And, this vesting is reached at the end of seven years of service. Benefits attributable to employee contributions to either defined cont 52% ribution or defined benefit EBRI Notes, vol. 17, no. 11 (November 1996). 29% retirement income confidence. Since 1993, a consistent 20 to 25 percent of working Americans are very confi- Sale of Home or Business a 4 facing this aging nation. Social Security reform will necessitate major policy tradeoffs. Identifying these 70% • • more negative projections in the OASDI T already been accrued. Unless Congress modifies the current statute, these benefits will have to be paid. But, on population despite the fact that preservation rates have been increasing over time. plans and investment income earned on employee contributions to defined contribution plans are immediately vested. Institute (EBRI), a nonprofit, nonpartisan, public policy research organization based in W • One-half of those without a plan have seriously considered it in the past. Thirty-one percent are very confident in their financial preparations for retirement, compared with 22 percent Will employees demand that employment-based pension plans be more generous under possible benefit cuts rustees’ reports from 1983 to 1995 are fully attributable to use of stricter According to EBRI analysis of ashington, DC. reform would not produce the higher national saving and growth effects produced by the partially privatized $400,000 40 12% 19 Company Contributions Too Expensive dent that they will have enough money to live comfortably through their retirement years. Inheritance 32% a 2 Integration with Social Security can be done in several ways, but the basic purpose of integration is to allow employers to take credit for the fact that What motivates individuals to begin saving for retirement? Unfortunately, the reality is that the top two motiva- Very Vesting rates (the fraction of plan participants who are vested) have been rising steadily over time. In 1965, 12 percent of plan participants were vested. tradeoffs is the first step in giving policymakers and the public the necessary information to engage in an top of paying current benefits, workers moving to a privatized system would have to pay “twice”—once for the actuarial methodology in calculating trust fund balances, a change to more pessimistic disability and economic • Hewitt of those who have not received information from their employer Seventeen percent say they are very likely resulting from Social Security reform? Associates’ data, 40 percent of distributions to job changers in 1996 were rolled over , and 27% somewhat likely . , to start a plan in the next two years. , up from 35 percent in system modeled in this report. Which reform is better also depends on one’s view of the appropriate levels of risk, they are financing one-half of the payroll tax assessed for the Social Security retirement benefits for their employees. In certain defined contribution plans, Support from Children/Family 1 1 In 1975, the year after ERISA was passed, 44 percent of plan participants were vested. As of 1993, 86 percent of plan participa 60 60% 39% nts were vested, an increase 43% tors are negative in nature (figure 3). Number one is having observed someone not prepare and then struggle in 9% informed public dialogue about the choices they are facing in preparing for the financial challenges confront- Vesting Requirements • Only 13 percent of workers expect Social Security to be their most important source of retirement income. This employers are allowed to contribute a fixed percentage of compensation for all parts up to a specified level of compensation an EBRI has been committed, since its founding in 1978, to the accurate statistical analysis of economic security d then a larger percentage for benefits going to today’ assumptions, and other changes. 1993. Rollover percentages are higher when examined by the dollars distributed, reflecting the fact that larger • Since employees who retire early sometimes receive bridge benefits from their employment-based pension s beneficiaries and again to their own individual Social Security accounts. Paying for this 42% An additional contributing factor is that the period projected in the 1995 report redistribution, guaranteed base benefits, and individual responsibility in the Social Security system (Olsen, of 95 percent since the passage of ERISA. This increase can be attributed to both the maturation of the employment-based retire 30 ment plan system and Other Government Programs 45% a 1 Somewhat 44% retirement. compensation in excess of that amount (up to the 401(a)(17) limit). The permitted disparity between the two percentages is cont $300,000 Almost one-half (48 percent) said this provided a lot of motivation, and an additional 36 percent said it 55% rolled by Internal Revenue stricter vesting requirements that have been legislated over time. ing the Social Security system. 14 compares with 42 percent of current retirees who say that Social Security is their most important source of issues. Through our research we strive to contribute to the formulation of effective and responsible health and 50% Statement 43% The findings indicate that, if significant progress is to be made in terms of retirement plan sponsorship among distributions are more likely to be preserved. Seventy-nine percent of all dollars distributed in 1996 were rolled includes 12 deficit years in which demographic pressures will be strong. transition would give persons born in 1976—those persons scheduled to pay transition taxes over their entire • Fifty-one percent of savers are very confident that they are investing wisely plans until they become eligible for Social Security, will an increase in the NRA , compared with 41 percent of raise bridge costs and reduce VanDerhei, and Salisbury, 1997). In addition, questions of administrative feasibility and political risk (for both 52% 4% Too Many Government Regulations Code sec. 401(l). 52% 36% provided some motivation. Number two is the realization that time was running out to prepare for retirement. 4 $188,200 income. In addition, 21 percent of workers do not expect Social Security to be a source of income for them at all Source: The Retirement Confidence Survey (1997 and 1998). Not Too retirement policies. Consistent with our mission, we do not lobby or advocate specific policy recommendations. I The number and percentage of individuals participating in private defined contribution plans is increasing relative to the number and percentage working lives in this report—fewer benefits for their Social Security contributions (that is, lower “payback ratios”) small employers, we must address employer concerns about offering plans and better educate them as to the over Integrating a defined benefit plan with Social Security is a more complicated procedure; however, the employer is allowed savers who have not received employer information. , compared with 73 percent in 1993. In 1996, 20 percent of distributions of less than $3,500 were rolled over bridge benefits as a result? 20 to indirectly increase the , traditional and structural reforms) must be considered, along with the multitude of reform options that are a 40 a 3% 40% 43% Thirty-seven percent said this provided a lot of motivation, and 42 percent said it provided some motivation. While participating in defined benefit plans. The total number of participants in all defined benefit plans was 33 million in 1975. P Benefits for Owner Too Small Not asked in 1997. articipation increased to generosity of the benefit provisions for employees earning in excess of the maximum taxable wage base ($62,700 in 1996) in reco 42% gnition of the fact that no in retirement. ask that my full statement and attachments be entered into the written record. compared with 95 percent of distributions larger than $100,000. and lower average net lifetime earnings (when Social Security contributions are subtracted) than a reform that options that are available to them and what these options actually entail. However Because, as a whole, the 1983 T $200,000 rustees’ assumptions are optimistic in retrospect, some are concerned that 1996 , the findings also show that combination of raising taxes and/or reducing benefits (such as the NRA reform presented in this report) and/or Before the $131,900 40 million in 1983, and has remained in the 39 million–41 million range since that time. The total number of participants in defined contribution plans Social Security retirement payroll tax has been paid by the employer on these wages. Not At All fear is often a great motivator and the perception is correct that a significant minority of current retirees are 10 2% T would “simply” raise taxes enough to pay for the current Social Security system. That is, the extra money that • effective policy must help make retirement planning and saving a priority for the individuals who work for these increased from 12 million in 1975 to 44 million in 1993. •rustees’ T How much in resources can employment-based pension sponsors be expected to allocate in adjusting to new 30% wenty-four percent are not confident about their overall retirement prospects, compared with 35 percent of projections are optimistic as well and are therefore understating the OASDI long-range financial short- Too Much Paperwork introducing individual accounts, etc. For a complete explanation of integration provisions, see Chapter 8 (for defined contribution plans) and Chapter 14 (for d 5% efined benefit plans) of Allen, • Sixty-three percent of Americans have begun to save on their own for retirement. While this is good news in 31% experiencing a retirement that is in some sense financially challenging, it would seem that these findings are a $72,600 2% 28% Melone, Rosenbloom and VanDerhei, 15 20 Pension Planning, Seventh edition (Homewood, IL: Richard D. Irwin, Inc., 1992). Also see Employee Benefit Research 23% $65,500 While over three-quarters of the dollars distributed are preserved via rollover fall. small employers as well. Reality Check for America average workers born in 1976 would have to contribute to Social Security to make the transition to a partially 5 those who have not received information from their employer Social Security policy in a time when they In addition, critics of the current system argue that the trust funds are already essentially depleted be- 17% , too, will need to prepare and provide for demographic pressures on . , the data indicate areas of concern. Despite the many changes in government regulation regarding defined benefit plans and the increased prevalence of defined contribution plans, defined that most Americans are saving for retirement, it also means that one-third are not. What motivates individu- 2% 17% $100,000 Don’t Know Where to Start Senate Finance Committee 19% Institute, Fundamentals of Employee Benefits, Fifth edition (Washington, DC: Employee Benefit Research Institute, 1997) and James Schulz and Thomas 20% 21% $36,100 signal that more needs to be done to reach out to individuals not yet saving and help them realize the advantages 0 benefit plans are still an important part of both the private and public retirement systems. The data in this report show that they are firmly entrenched in $18,200 cause their assets are borrowed by the federal government (i.e., Congress), which uses them to finance other privatized system offsets the extra expected returns that could be earned from individual Social Security accounts. Most distributions do not result in a rollover; 60 percent resulted in a cashout. From a financial planning perspec- their own plans? The simple overriding implication of these results, having been created under reasonable and widely accepted 18% $13,700 Leavitt, Pension Integration: Concepts, Issues and Proposals (Washington, DC: Employee Benefit Research Institute, 1983). als to begin saving for retirement? The top two motivators are negative in nature—having observed someone 15% 17% 1 Two weeks ago, we released the eighth annual Retirement Confidence Survey (RCS). The RCS tracks the retire- large companies and in plans covered by collective bargaining agreements. It is unlikely that many of these plans will be shift Very Confident Somewhat Confident Not Too Confident Not At All Confident ed—at least completely—to of beginning early with even seemingly small amounts of money <1% . The third ranked motivator was the availability Does Not Reward Performance government operations. When the OASDI program’ tive, even relatively small sums of money can compound into nontrivial contributions to a retirement nest egg over 10% s Treasury bonds must be redeemed in order to pay benefits, assumptions, is that all reform options involve tradeoffs and have winners and losers among generations and Employment-Based Retirement Plans 20 Plan Evolution and Its Implications defined contribution plans. not prepare and then struggle in retirement and the realization that time was running out to prepare for EBRI tabulation from the U.S. Department of Labor, Bureau of Labor Statistics, Employee Benefits in Medium and Large Private Establishments, 1993 0 ment planning and saving behavior of 16% Americans, as well as their confidence regarding various aspects of their Hearing on 14% of a retirement plan at work. 13% 12% $0 Have Seen Things Read in Advice Realized Availability 7% Family Professional (Washington, DC: U.S. Government Printing Office, 1995). the only way for the government to repay its loans will be to borrow money from other sources, increase general Because transition costs are expected to be fully paid by the time persons born in 2026 retire, some persons born a period of decades. Furthermore, the importance of preservation of seemingly small balances is enhanced by the • If part or all of Social Security’ 8% s current defined benefit system were reformed to include defined contribution 12% among members of the same generation. Identifying these tradeoffs is the first step in giving policymakers and the 6 retirement. Other Reason For a complete examination of the trends in the number of defined benefit plans and defined contribution plans and the implications of these trends, see Individuals today have greater opportunities to plan and save for retirement than members of any previous The voluntary retirement system has been a success for workers at large employers. Eighty-five percent of work- retirement. The good news in the 1998 RCS is that working 0% Americans have become more focused on their retire- People 10 Years of a 20 Years Event 30 Years Newspaper/ 40 Years from Friend Source: 1998 Retirement Confidence Survey. “New Directions in Retirement Security Policy: Time Was Financial 21 taxes, or reduce other areas of government spending. In any case, assuming that trust fund assets will need to be fact that individuals may receive a number of these “small” distributions over the course of a career as they in 2026 would win under a partially privatized system, but the degree to which they would win is influenced by accounts, would workers feel uneasy about not having as much of a defined benefit guarantee in retirement public the necessary information to engage in an informed public dialogue about the choices they are facing in Kelly Olsen and Jack VanDerhei, “Defined Contribution Plan Dominance Grows Across Sectors and Employer Sizes, While Mega Defined Benefit Plans The retirement income stool has traditionally been defined as having three legs: Social Security, individual savings, and private pension income. EBRI 1993 1994 1995 1996 1997 1998 Magazine or Family ment over the past few years. Not Prepared Running Out As evidence, 45 percent have tried to determine how much they need to save by Retirement Plan Advisor • generation. It can be argued that retirement plans today match the reality of the work experience for most Ameri- ers at employers with 100 or more employees are covered by a retirement plan (table 2). T The 1998 RCS reveals room for improvement, specifically it shows that most working The 1998 RCS reveals that most working Americans could do more in terms of saving for retirement. Fifty-five Americans could do more in wo-thirds of workers at Remain Strong: Where We Are and Where We Are Going,” 9, 10 Social Security, Pensions, Personal Savings, and W EBRI Issue Brief no. 190/ EBRI Special Report SR-33 (Employee Benefit Research Institute, ork” publications, beginning in 1979, have suggested that there are more “pillars,” including wages from work, government assistance 0 2 4 6 8 1012 1416 182 , survivor benefits, 0 22 tapped in order to pay benefits, general tax revenues are likely to rise. This leaves many to speculate that the the extent to which they invest in equities and may not be that much even if they pursued a life-cycle asset change jobs. and therefore place pressure on employers to expand employment-based defined benefit plans in terms of preparing for the financial challenges confronting the Social Security system. October 1997). For a complete discussion of hybrid plans, see Sharon Campbell, “Hybrid Plans: The Retirement Income System Cont Source: Employee Benefit Research Institute calculations. inues to Evolve,” EBRI inheritances, long-term care insurance, etc. retirement, up from 32 percent in 1996 and 36 percent in 1997. The increase is particularly striking among baby large employers actually participate in a plan at work. The same cannot be said of workers at small enterprises, cans better than at any time in history. The “lifetime job” has never existed for most workers. Over recent years, terms of saving for retirement (figure 4). Fifty-five percent of those not saving for retirement say it is reasonably percent of those not saving for retirement say it is reasonably possible for them to save $20 per week for this Percentage Reporting as Most Important combined OASDI trust fund “isn’ allocation. On average, program taxes/contributions would be about 50 percent lower by 2060, and payback ratios benefits and sponsorship? Would employers be encouraged to abandon employment-based defined contribution t really there” in the sense that the money current workers are paying today in Issue Brief no. 171/ EBRI Special Report SR-32 (Employee Benefit Research Institute, March 1996). Table 2 Source: 1998 Retirement Confidence Survey. 1983–1996, median tenure among male workers has dropped noticeably, but this decrease was concentrated particularly small businesses that are “family owned,” relatively young, and that tend to employ younger boomers. Half of older boomers (those born between 1946 and 1953) have now tried to figure out what they’ll need, , lower- possible for them to save $20 per week for retirement. In addition, 57 percent of workers who have begun to save purpose. In addition, 57 percent of workers who have begun to save for their retirement say that it is reason- No Motivation At All Some Motivation A Lot of Motivation excess of current benefit obligations is not going to help rein in overall tax rates tomorrow would be much higher for average workers born in 2026 under the partially privatized system modeled in this plans? by . Others argue that Social Security Source: 1998 Small Employer Retirement Survey. Civilian Nonagricultural Wage and Salary Workers, 7The Challenge See Paul Yakoboski and Jack VanDerhei, “Contribution Rates and Plan Features: An Analysis of Large 401(k) Plan Data,” EBRI Issue Brief no. 174 up 12 percentage points from 1997, while among younger boomers (born 1954 to 1964) the number is up earning workers who do not stay with the employer for more than a few years. Over 35 million for their retirement say that it is reasonably possible for them to save $20 per week more than they are currently among prime-age male workers. Despite this decline, tenure in 1996 was comparable with that of decades past. ably possible for them to save $20 per week more than they are currently saving. Americans work for (Employee Benefit Research Institute, June 1996). overall tax rates would be the same or even steeper in the future if the government had borrowed money from report than under a reform that maintained the current system by raising taxes only Ages 16 and Over, with Any Retirment Plan Coverage, 1993 . These same individuals 15 percentage points. It appears that the constant drumbeat of attention given to retirement, and retirement The Finance Issues an employer with under 100 employees, and 25 million of these employees do not have access to a retirement plan Tenure levels for female workers have risen consistently over time. The fact is that there has always been a good saving. While $20 per week may not seem like a lot of money, it is over $1,000 per year, and over the years this There are no quick fixes or silver bullets that will ensure retirement income security for today’ Source: 1998 Retirement Confidence Survey. s workers. It can be • higher 8 would receive payback ratios much closer to those realized by more traditional reforms if they chose to invest very • The findings demonstrate the continuing need for broad-based educational efforts designed to make retire- If Social Security policy changes to encourage more delayed retirement, will employer health care costs rise as -interest lending sources in the private sector or had raised current income taxes instead of borrowing See Paul Yakoboski and Jack VanDerhei, “Worker Investment Decisions: An Analysis of Large 401(k) Plan Data,” EBRI Issue Brief no. 176 (Employee Paul Yakoboski, Ph.D. 2 a b deal of job churning in our economy. through work. planning and saving, over the past few years by the media, by employers, and by policymakers is having an impact At very small employers (those with under 25 employees), 20 percent of workers are covered by a Plan design and public policy have evolved over time, and this evolution Under current law savings could make a real difference. The power of compound interest will help a 25-year , the Social Security program will meet the retirement of the baby boom generation in 2008, -old saving $20 a week, argued that the voluntary retirement system has been a success at large employers, where 85 percent of workers Workers (1,000s) Sponsorship Rate Participation Rate Benefit Research Institute, August 1996). Figure 8 OASDI trust fund reserves. Conversely conservatively (for example, a portfolio consisting entirely of T ment savings a priority for individuals. The good news in the 1998 RCS is the evidence that education can a result of an older work force? If so, will this reduce the funds available for employment-based pension plans? , some speculate that the federal government would not have expended as reasury bonds that produces a nominal rate of Senior Research Associate on workers. The need to plan and save for retirement has come into sharper focus on their radar screens. The assuming a 5 percent annual return over 40 years, to build a $132,000 nest egg. W plan, and at employers with 25–99 employees, 50 percent of workers are covered by a plan. when the first boomers reach eligibility for early retirement benefits at age 62. This retirement wave will only means that plans are better suited to meet the needs of mobile workers. ith a 10 percent annual rate of At very small employ- have an employer that sponsors a plan, and 66 percent of workers actually participate in a plan. The same cannot Actions Resulting from Employer-Provided Information 9 many resources had the Social Security T return of 5.97 percent in our simulations). Consider the following hypothetical example. An individual, age 25 and earning $25,000, begins saving for retirement by contr have a real impact at the individual level. rust funds not been available. ibuting 5 percent of pay to Figure 2 Total 105,815 64.4% 49.3% Employee Benefit Research Institute discussion surrounding Social Security and possible Social Security reforms is also surely having an effect in this exacerbate pre-existing demographic pressures, which are primarily the result of our aging society return, $20 per week for 40 years will compound into over $500,000 (figure 5). The message is clear that seemingly ers (those with under 25 employees), 15 percent of workers actually participate in a plan, and at employers with , maturing be said at the small employer level, where 29 percent of workers have an employer that sponsors a plan and a 401(k) plan (in addition, the employer matches 50 percent of every dollar contributed by the employee). If this individual st on Retirement Saving and Planning Figure 10 ayed with the same employer Not only is there concern as to the extent employers sponsoring pensions will adjust to changes in Social Security Workers Personally Saving for Retirement • The voluntary retirement system has been a success for workers at large employers. Eighty-five percent of 11 to age 65 and contributed 5 percent of earnings each year (earnings are assumed to grow at a 4 percent annual rate), then at age 65 he or she would have 25–99 employees, 36 percent of workers are plan participants (table 2). regard. small amounts of money saved on a regular basis over long periods of time can accumulate into a nest egg that social insurance systems, and lower birth rates in cohorts succeeding the baby boom generation. Impact of Offering a Retirement Plan to Employees In 1983, 21 percent of workers actually participate in a plan. Figure 6 Whatever one’ In exchange for higher payback ratios and lower program tax/contribution rates, the potential for market risk V policy esting requirements were instituted with the Employee Retirement Income Security , but there is also debate as to how workers participating in employment-based plans will alter their behav- s perspective on the trust fund reserves’ Firm Size efficacy in prefunding OASDI benefit obligations, projec- Act of 1974 (ERISA) and $866,000 in his or her 401(k) account (assuming an 8 percent annual rate of return). workers at employers with 100 or more employees are covered by a retirement plan. The same cannot be said Among workers who were provided information Figure 4 policymakers anticipated this long-range demographic strain by increasing the normal retirement age (NRA) and would make a difference in retirement. Retirement Needs Calculation—Workers 3 Now suppose this individual changes jobs at ages 30, 35, 40, and 50. Suppose that each job offers an equivalent 401(k) plan (similar investment options Fewer than 25 22,499 20.2 15.4 have become more stringent over time. Have you personally saved any money for retirement, not including Social Security taxes or employer-provided money? The Revenue Act of 1978 codified 401(k) cash or deferred arrangements tions show that the current FICA tax rate alone will be able to cover about three-quarters of projected program exists in any form of privatized system, especially if assets are invested in equities. Benefits under a partially ior and how these adjustments will affect their retirement security. Among small employers with a retirement plan of workers at small enterprises. Could You Save $20 Per Week More for Retirement? and a 50 percent match) in which the individual is immediately eligible to participate, and he or she continues to contribute 5 percent of earnings. Since While Americans have become more focused on their retirement, this has not translated into increases in their by raising Social Security taxes. Recalculating tax rates, policymakers averaged the combined Old-Age, Survivors Why don’t more small employers sponsor retirement plans? The immediate response is typically “administrative Our research indicates that long-term policies aimed at improving workers’ retirement income security must not 25 to 99 12,901 49.6 36.0 2121 K Street NW, Suite 600 liabilities by 2032 (Board of T privatized system could fall to the same levels as benefits under a reform that reduces benefits to maintain into law • If private investment accounts are incorporated into Social Security . The defined contribution plan market has experienced dramatic growth over time, spearheaded by 401(k) rustees, 1998). The projected OASDI deficit over the 75-year actuarial period after , would workers, upon seeing large accu- each job lasts at least five years, the individual is fully vested, assuming a cliff vesting schedule, in all employer contributions plus earnings on those costs,” and while this is an important reason, the true picture is more complex. In our survey retirement income confidence. Since 1993, a consistent 20 to 25 percent of working 100 or more 62,484 84.9 Americans are very confident 66.2 , small employers and Disability Insurance (OASDI) program’ Even among those who are saving, it is fair to say that most have absolutely no idea how much they need to save s cost as a percentage of taxable payroll over a 75-year projection • only address employer concerns about offering plans but also must educate workers about the need to make Why don’ 4 t more small employers sponsor retirement plans? Small employers identified three main reasons for Have you tried to figure out how much money you will need to have saved by the time you retire 16 contributions in addition to his or her own contributions and earnings on those at the time of each job change. Suppose that ve Washington, DC 20037 sted 401(k) account balances 1998 is expected to be 2.19 percent of taxable payroll under intermediate assumptions; current tax rates, if not lower plans. mulations in their Social Security accounts, be less likely to invest in employment-based plans? Such plans are offered as complements to defined benefit plans among large plan sponsors and as primary , if the participant invests in an extremely conservative fashion or if returns on that is, if payroll taxes 70 that they will have enough money to live comfortably through their retirement years (figure 1). This despite a very are completely preserved for retirement (via rollover to an IRA or the new employer’s plan, or by leaving the money in the former employer’s plan) and period, resulting in a tax rate higher than needed to fund short-term obligations. identified three main reasons for not offering a plan (figure 9): by the time they retire to fund their retirement. Less than one-half (45 percent) of all workers have tried to figure so that you can live comfortably in retirement? retirement saving and planning a priority not offering a plan. The first reason, which is a largely ignored but important fact, is what small employers see . In addition, it appears that there is a need to better inform small 5 retirement vehicles among smaller companies and those just instituting a plan. Benefit portability on job change were increased by this amount in 1996, a 17.7 percent increase, the combined OASDI program would be actuari- equities are not as high as those expected based on historical market performance. Voice: 202/775-6329 And, unfortunately, results Source: Employee Benefit Research Institute tabulations of the 1993 Current Population Survey continue to be invested such that they earn 8 percent annually. This individual would still have retirement savings of $866,000 at age 65. From a wealth 50 69% Among workers who have not saved for retirement Among workers who have saved for retirement strong economy and Americans’ increased attention on the issue. Some may find this puzzling, but the reason may • out how much they need to save (figure 6). The first reason, which is a largely ignored but important fact, is what small employers see as their employ- Among retirement savers, the figure is somewhat higher at 57 percent. employers about the options available to them and the true costs and potential benefits of these options. as their employees’ preference for wages and/or other benefits. The second main reason cited by small employ- accumulation perspective, this scenario results in retirement savings that are the same as if the worker had never changed jobs. ally solvent. However indicate that increased national savings under a partially privatized system would fail for many to make up for and the potential for workers to fully preserve benefits are key features of defined contribution plans. Hybrid • Employee’s Ability to Prepare Financially for If so, will this negatively impact retirement security , were the Congress to wait until 2022 to increase taxes without cutting benefits, taxes would employee benefits supplement. , or will the accumulations in Social Security accounts be Employees’ Ability to Prepare Financially for Fax: 202/775-6312 60 64% simply be that, as more ees’ preference for wages and/or other benefits: 22 percent of small employers cited this as the most important Americans try to figure out how much money they really need to save, the answer has 36% 7% In effect, this method of calculating the OASDI portion of FICA added a partial advance funding structure to the Therefore, even with most What happens, however, if not every distribution is preserved for retirement? After five years, the worker in our example a Americans saving for retirement, they are in a sense flying blind and hoping that things 54% has a vested account balance ers for not offering a plan is administrative costs. The third main reason is uncertain revenue, making it 62% 63% 17 Don’t Know 5% Retirement Don’t Know 2% The fraction of workers whose employer or union sponsors a plan for any of the employees at the Retirement 61% have to rise to close to 17 percent of taxable payroll. benefit reductions and/or increased risk, as lifetime average earnings plus net Social Security benefits would be plans have emerged combining features of defined benefit and defined contribution plans, including the portability enough to sustain secure retirement? 40 43% 43% E-mail: yakoboski@ebri.org Don’t Know 1% of about $12,000. Suppose he or she cashes out this amount when changing jobs at age 30. Then, assuming the same savings behavior and full preservation them worried and it has rattled their confidence. This is probably a good thing, as a reality check is the first step 41% Social Security system that went beyond the historical practice of simply maintaining a contingency reserve. Due work out in the end. In addition, less than one-half of retirement savers are very confident that they are investing reason they did not offer a plan. This finding is reinforced by previous EBRI research over the years that 43% Changes to the Social Security system are inevitable. difficult to commit to a plan. worker’s place of emplo 6 yment. As policymakers consider various options to reform the 43% features of defined contribution plans. just 1.3 percent higher for men born in 2026 and 1.7 percent on future job changes, this individual would have $676,625 at age 65, or $189,129 less than if that initial cashout at age 30 h lower for women under a partially privatized system 41% ad been preserved for b Internet: http://www.ebri.org 50 to positive action. The fraction of all workers participating in an employment-based plan. to the fact that since 1983, FICA taxes have been higher than needed to meet current benefit payments, “surplus” their retirement savings wisely (46 percent) (figure 7). Forty-seven percent are somewhat confident. It appears consistently demonstrates that retirement benefits come in a distant second as a desired benefit by employees, system, they should understand the interconnectedness of the Social Security system with employment-based retirement (a difference of 22 percent). This clearly demonstrates the high cost of cashing out a “modest” 401(k) accumulation on job change relatively early 30 with equity investment than they would be if taxes were raised to fund today’ As a result of this projected shortfall by 2032 of roughly one-quarter of benefits promised, numerous and diverse • If the new Social Security program has a defined contribution component with educational efforts, will this s Social Security program. • The findings indicate that if significant progress is to be made in terms of retirement plan sponsorship among in a career. far behind health care. Social Security revenue has been accumulated. This revenue has been converted into Special-Issue T that many retirement savers think that they are investing their funds wisely, but they are not really sure. There- reasury bonds retirement plans and even with individual savings. Ideally, reforms to the Social Security system would be based reform proposals have been promulgated. Depending on their supporters’ beliefs about the merit and viability of But it is also obvious that workers today face very explicit decision-making responsibilities that will directly increase workers’ awareness of the necessity and benefits of saving as well as the potential effects of inflation Company’s Ability to Hire and Retain Good Suppose that cashout occurs after the first two jobs. The individual cashes out both the vested account balances of $12,00 small employers, we must address employer concerns about offering plans. However, they also show that 0 at the first job and $14,400 at Yes 45% No 40 Where Will My Retirement Income Come From? 35% 44% 19% and credited to the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds, which are fore, many are saving but they do not know if they are saving enough, and many think they are doing a good job of • The second main reason cited by small employers for not offering a plan is administrative costs. Fourteen 20 not only on their impact on that system but also on their impact on the retirement income security system as a the second job, and therefore the individual starts saving for retirement all over again at age 35. Assuming the same saving behavior and full preservation Employees impact their retirement income security. So while the vehicles are there, the question remains as to whether Who would benefit most from a partially privatized Social Security system? Modeling results indicate that any the current system, these reforms range from fixing the Social Security system in very traditional ways to trans- and thereby increase worker participation in employment-based pension plans? effective policy must help make retirement planning and saving a priority for the individuals who work for until retirement, he or she would have $520,000 at age 65. This is $346,000 less than amount accumulated with preservation of those first two distribu- maintained by the Social Security investing their money but are not really sure. percent cited cost of plan set-up and administration as the most important reason for not offering a plan, and Administration. By the end of 1997, the OASDI trust funds had accumulated whole. 18 Yes system that relies more on individual accounts (which closely connect benefits with contributions and investment forming the existing system into a fundamentally different one (Advisory Council on Social Security workers are taking full advantage of the opportunities afforded them. In many instances, unfortunately , 1997). , the When workers are asked what they expect to be their most important retirement income source, the percentage these small employers as well. 38% tions, a difference of 40 percent. 38% 10 an additional 4 percent cited too many government regulations as the most important reason for not offering a 30 approximately $656 billion in assets, an amount anticipated to peak at about $3.78 trillion (in nominal dollars) by 36% returns) and relies less on the traditional defined benefit system (which redistributes income from high to low answer is “no.” • If the reformed Social Security system provides lower benefits than today As mentioned earlier Changed Allocation of , one-third of workers are not saving for retirement. Even among those Changed Amount Began to Contribute , will workers realize the need to expecting it to be personal savings showed a significant drop from 1997 (from 51 percent to 39 percent) (table 1). 10 34% For a complete discussion, see Paul Yakoboski, “Large Plan Lump-Sums: Rollovers and Cashouts,” EBRI Issue Brief no. 188 (Employee Benefit Research • It can be argued that retirement plans today match the reality of the work experience for most No 54% Americans the year 2020. plan. Education to the Rescue? References 31% Money in a Plan 22 July 1998 Contributed to a Plan wage earners) will disproportionately benefit higher wage earners. If they invested in a mixed (life-cycle) portfolio without a plan at work, an individual retirement account (IRA) is an option available for tax-preferred retirement Effects on the Rest of the U.S. Retirement System Institute, August 1997). increase savings in their defined contribution employment-based plans to the extent permitted by the em- What changed? One possibility is that as more people focus on retirement and figure out what they will need, and Employee Attitude and Performance better than at any time in history. Plan design and public policy have evolved over time, and this evolution 30% 51% 18% • The third main reason is uncertain revenue, making it difficult to commit to a plan. Sixteen percent cited this 20 of T savings. In the pre-Roth IRA world, only 10 percent of those eligible to make a tax-deductible contribution elected The result of the Social Security debate could potentially have great impact on the design of the employment- 11 reasury bonds and equities, high-wage earners would do better under partial privatization than under any of ployer? know what they have already put aside, confidence in their ability to save enough for retirement decreases. The findings demonstrate the continuing need for broad-based educational efforts designed to make retirement Persons born between 1946 and 1964. Advisory Council on Social Security. Report of the 1994-1995 Advisory Council on Social Security. Vol. 1 (Washing- means that plans are better suited to meet the needs of mobile workers. But it is also obvious that workers as the most important reason for not offering a plan. Theoretically, the Social Security trust fund surplus will be drawn down as demographic pressures mount, helping Yes 55% the traditional reforms modeled in this report in terms of both annual benefits and payback ratios on program based pension system. to do so. An increase in the NRA and/or early retirement age would probably result in adjustments Source: 1998 Retirement Confidence Survey. 12 savings a priority for individuals. While calls for “more and better education” may seem mundane and trite to ton, DC: Advisory Council on Social Security, 1997. A pay-as-you-go system is one in which all FICA taxes collected today are used to pay for all Social Security benefits due today. That is, in a pay-as-you- today face very explicit decision-making responsibilities that will directly impact their retirement income No 40% younger workers pay for Social Security retiree benefits and thereby keeping future FICA taxes lower than they 10 21 No 41% contributions. Given their higher levels of wealth, higher wage earners would also, on average, stand to gain most in employers’ willingness to retain older employees and the designation of retirement ages for employment-based go system, the only money used to pay current benefits is money collected from current workers’ wages. Ultimately, changes in the Social Security system could impact all legs of the retirement income stool, poten- Only 13 percent of workers expect Social Security to be their most important source of retirement income. This some, if we view this as a long-term challenge, education should be a major part of our efforts. The good news in 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Annual 12 13 security. So while the vehicles are there, the question remains whether workers are taking full advantage of would be if the system were maintained on a purely pay-as-you-go So, while administrative issues matter, the point we need to emphasize is that other factors are also at work that basis. Under intermediate assumptions, Yes 57% in total dollars from the beneficial effects of economic growth that are projected to arise from a partially privatized Among those saving, other concerns arise such as whether contribution levels are adequate and whether the pension plans. 13 tially changing its very constitution. compares with 42 percent of current retirees who say that Social Security is their most important source of the 1998 RCS is the evidence that education can have a real impact at the individual level (figure 8). Note that the assumption that trust fund surpluses will help future workers fund future benefits has never been unanimously accepted, although this Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust the opportunities afforded them. In many instances, unfortunately, the answer is “no.” need to be taken in account when discussing policy options. reserves from the OASDI trust funds will begin to be redeemed to finance the portion of Social Security benefits assumption seems to have been the rationale for the 1983 Commission’s surplus-generating recommendations. See Alicia Munnell an 0 d Lynn Blais, “Do We The views expressed in this statement are solely those of the author and should not be attributed to the system. money is being invested properly. For example, whether workers will accumulate adequate assets in their 401(k) Major Impact Minor Impact No Impact income. In addition, 21 percent of workers do not expect Social Security to be a source of income for them at all in Funds, 1983, 1996, and 1998. Washington, DC: Board of Trustees, 1983, 1996 and 1998. Want Large Social Security Surpluses?” New England Economic Review (September/October 1984): 5–21, and Robert Myers, “Social Security and the obligations not funded by current FICA taxes in 2013. In the absence of reform, the 1998 Social Security Trustees’ 1994 1995 • Under current law, the Social Security program will meet the retirement of the baby boom generation in 2008, Employee Benefit Research Institute, or the EBRI Education and Research Fund, its officers, trustees, 1996 In 1993, nearly 48 percent of employees in medium and large private establishments were covered by defined plans to help fund their retirement will depend in part on the amount they contribute and how those funds are Costs and Benefits Under Different Generic Reform Approaches 1997 retirement. So while it is good that most workers do not expect Social Security to be their most important source of Source: 1998 Retirement Confidence Survey. 1998 Among workers who had received educational material or attended seminars about retirement planning and Olsen, Kelly Federal Budget: Some Mirages, Myths, and Solutions,” , Jack VanDerhei, and Dallas Salisbury Journal of the American Society of CLU and ChFC , “A Framework for Analyzing and Comparing Social Security (March 1989): 58–63. report estimates that the trust fund reserves will be depleted in 2032. In addition, it appears that there is a fair amount of misunderstanding about retirement plans among small At that time, FICA revenues alone will be sponsors, or other staff, or to the EBRI-ERF when the first boomers reach eligibility for early retirement benefits at age 62. This retirement wave will only Source: 1998 Retirement Confidence Survey. American Savings Education Council. The Employee Benefit Who is worst off in terms of annual benefits under partial privatization relative to a funded current system? Those invested. EBRI analysis has provided stark evidence of the effect that plan features and legal limits can have on benefit pension plans using benefit formulas that were integrated with Social Security provisions (U.S. Depart- Modeling results from the EBRI-SSASIM2 Policy Simulation Model indicate that no reform option appears to be retirement income—after all it was always intended to be a floor or base to build on—many are apparently overly Source: 1998 Small Employer Retirement Survey. savings in the past year, 43 percent reported that the material led them to change the amount they contributed to 14 Policies,” EBRI Issue Brief no. 183 (Employee Benefit Research Institute, March 1997). For example, the revised test to determine the trust funds’ long-term financial condition became stricter in 1992, and the methodology used to generate Source: 1998 Retirement Confidence Survey. employers who do not sponsor one, especially as regards costs. For example, the Survey found that one-third of able to finance only about three-fourths of benefit obligations for the remainder of the 75-year projection period 19 exacerbate pre-existing demographic pressures, which are primarily the result of our aging society, maturing Research Institute is a nonprofit, nonpartisan, public policy research organization that does not lobby or with lower earnings or less attachment to the labor force, such as low-income workers and average women—even workers’ decisions concerning their contribution levels. Older workers tend to have their contributions constrained ment of Labor win-win for all groups in all aspects. That is, no reform is likely to be a policy panacea for the challenges facing , 1995). Hence, if Social Security benefit provisions change, the employers of approximately pessimistic in that they expect to get nothing from the system. the economic assumptions was also changed. See Michael Anzick, “1991 Social Security and Medicare Annual Reports Revise Insolve And the younger they are, the more likely they are ncy Projections,” a retirement savings plan, and 43 percent changed the allocation of their money in a retirement savings plan as a (2029 through 2070). small employers without a plan don’t know that a plan can be set up for less than $2,000, and many think they are 20 social insurance systems, and lower birth rates in cohorts succeeding the baby boom generation. take positions on legislative proposals. if they were to invest in a mixed portfolio that is expected to generate a higher rate of return—would receive lower by maximum limits (plan or legal), while many younger workers recognize the value of the employer match, 7.7 million workers will most likely have to readjust their retirement plan formulas. this aging nation. Social Security reform will necessitate major policy tradeoffs. This section summarizes who wins The total number of to feel this way (44 percent of Generation X do not expect to receive income from Social Security once they retire). 12 7 8 17 14 18 13 15 10 16 19 11 5 6 9 4 3 1 2 Percentage Percentage Dollars Accumulated Percentage of Workers Percentage No Yes