children. T $18,000 (compared with $11,600 in 1996). For worker There are a num • • 401(k) plan data show that m Under Model 2 individual accounts, th his pay-as-you go system ber of Social Security refo Written Testimony o o autom re than half atica rm f Dallas Salis scenarios under consideration. Given the lly transfers funds fr e benefit would range from of participants have less than $18,000 in s with m bury ore than 30 years of service om working kids to $10,800 to T-144 Appendix their parents without guilt. More important, it projected funding shortf and now in their 60s, average balances are now about $168,000. America is a land of great $15,700, depending upo all curre opportunity. However, m n the investm ntly facing Social Security, e does it without having to negotiate with your nt of the account assets. any ofthe prom its citizens are passing on ised benefit is not Annual EBRI their accounts. Retirement Confidence Survey th 401(k) Accounts: What the EBRI/ICI Database Shows spouse on a m their often one-tim projec Research updated this month finds that a ted to m Chairma an Thom onthly basis how m terialize ( e chance to as and m with intermediate a ebuild wealth and to have fi mbers of the comm u Written Statement ch money t ssumptions), unless changes are m current 401(k) participant who is assum o send to your respective “in-laws.” Just ittee: My nam nancial security by spending e is Dallas Sa alisbury. de by either ed to For the 15 year in 2005, EBRI and Matthew Greenwald & Associates have conducted • Someone who turns 65 this year and has no other source of income than the To understand Americans’ retirement plan investment activity and decisions, EBRI think for a mom beyond their m reducing benefits or raising revenues. I am always work for e Again, any benefit an individual account prov president and chief executive officer eans, not properly pl ent about how mployers offering a 401(k) pl that monthly session woul anning for life’s unexpected ev of the nonpartisan Em an could reasonably expect 401(k) balances ides would fluctuate widely according to d go for you or your children. ployee Benefit Research ents, failing to invest in the country's most established and comprehensive study of the attitudes and behavior of average $10,000-a-year Social Security benefit would need about $140,000 to maintains the EBRI/ICI 401(k) database. This is the world’s largest repository of Institute (E their own retirem Am early decisions this individual m and IRA rollovers for m erican workers and retirees towards all as Fourth, Social Secu EBRI resear BRI). I am ch shows h ent savings, m pleased to appear be rity oney originating in 401( does not allow access ow people in dif aaking bad decisions kes. for the fore you today to test pects of saving, retirem ferent stages of k) plans to replace be about debt, and not participating in thei to funds for reaso th ify on retirem e life cy etween 51% (for those nt planning, and long- ns other than death, cle will f ent policy are under r purchase an immediate indexed annuity that would pay out that amount. That information about individual 401(k) plan participant accounts. As of Dec. 31, 2003, the disability, or retirem various courses of reform. If em challenges and opportunities for our aging soci term in the lowest incom ployers’ retirem What about a higher-incom financial secur ent plans. W e ity, the quartile) ent. W Retirem e the nation settles on including so and 67% (for those in the hi know from e e, older individua feeent Confidence Survey (RCS) l the grea IR test sham ety. All views expressed are m As and defined contri l? For exam e is that these actions are often done ghest incom m ple, a 50-year-old individual e sort of individual accounts . This annual survey is a bution plans (like the e quartile) of final y own, and gives you an idea of how small most savings are in America, even among those EBRI/ICI database includes statistical information on 15.0 million 401(k) plan participants, Federal Thrift Savings P should not be attributed to EBRI. I have pe out of sim in Social Security, EBRI research s (born in 1955) and currently earning about five-year av pleerage income. This is in additi ignorance. lHouse Committee on Ways and Means an) that, given a chan hows the onl on to between 52% (for the low rsonally worked on retirem $72,500 would have a current-law benefit of ce to borrow y way to achieve greate or take hardship withdrawals, ent and pension r retu est incom rns, other than e random, nationally representative survey of 1,000 individuals age 25 and over. The survey who have savings. in 45,152 employer-sponsored 401(k) plans, holding $776.0 billion in assets. The 2003 issues s taking a reduction of benefits, m $23,200—the sam quartile) and 16% (for the larges illions will do it—th The financial secu ince joining the Labor Departm e benefit as waiting until the ere rity of the by eating into their f is to ensure the accounts are i t incom nation, including the financial ent e quartile) of incom in 1975 as it was o u ture retirem revenue shortfall. U ent savings. e nvested in diversified portfolios r ganizing to fulfill its comwell-being of m ing from Social Security. nder the gradual y parents, contains a core set of questions that is asked annually, allowing key attitudes and self- EBRI/ICI database covers approximately 35% of the universe of 401(k) plan participants, and not sim responsibilities under the Em their four children, their six gr reduction in benefits, her or his benefit That research underlined the ch Hearing on the Retirement Policy Challenges Decades of data underline that compulsion ply more “safe” bond funds, assuming ployee Retirem andchildren, and their six great- allenges of our m would be $22,900. Unde ent Incom in savings and distribution produce better o and Opportunities of bile workfo past returns are an indication of future e Security Act of 1974 (ERISA). I grandchildren, depend on it. rce, showing an alternative r Model 2 individual an Aging Society reported behavior patterns to be tracked over time. We also add special questions each year. With changing demographics, projected financing shortfalls in public programs such as 10% of plans, and 41% of 401(k) plan assets. The EBRI/ICI data are unique because they retirem returns. However, governm accounts, this person’s annual benefit w was later on the staff of t hypothetical scenario in which workers are Mr. Chairm This year’s findings shed light on a num ent incoman and m e results than open individual c he Pe embers of the comm ent regulation tells us nsion Benefit Guaranty Corporat ould range from assum ber of hoice. If ittee, I comm that we should not assu e issues relev d to random $21,000–$21,300, depending on the the policy ae ion, before joining EBRI in nt to f lnd you for exploring these y change jobs without obje inancial lite ctive me that the past is is choice, tha racy related t Social Security and Medicare, and a transfer in responsibility for retirement savings and cover a wide variety of plan record keepers and, therefore, a wide range of plan sizes topics, and thank you for the opportun an indica does not matter. If the policy objective is 1978. to retirem investm regard to the existence of a 401(k) plan fo ents. So, this indivi tor ent planning and of the future, so there is still a risk savings. We found that: dual would be better off not ity to m May 19, 2005 r subsequent em life-long retirement incom eet with you today. related to f ployers. In that case, the ucontributing to an individual ture outcoem adequacy, it does es. Our research distribution decisions from employers to individuals, there is a greater need than ever before offering a variety of investment alternatives. In addition, the database covers a broad range m com account. replacem atter. Established in 1978, EBRI is comm pares “Model 2” from ent rate from 401(k) balances and IR the President’s 2001 itted exA rollovers for money originating in 401(k) clusively to data dissem Commission to Strengthen Social Security ination, policy for all individuals to actively pl • Employers with a retirem an and save for their long-term ent plan can help their workers achieve investm personal financial security. ent of 401(k) plans, from very large corporations to small businesses. (which appears to have the principles for research, and education on financial security plans is closer to 25% of What about someone who is born in 2015? final income. an individual account plan favored by the Bush and em Assum ployee benefits. EBRI does not lobby ing this individual has average annual Without action on the part of individuals, we diversification through the investm could at least expe ent options they orience greater incom ffer. Employers looking to e 1 The most recent findings from this database indicate the portion of 401(k) balances What Do Data and Research Tell Us About I adm or advocate specific policy recomm earnings of $55,000 in 2005 Recent news inistration) with three basic options: stories aboudollars, his or her t the term endations ination of United Airlin ; the m current-law benefit ndividual Account Design? ission is to provide objective and es’ pwould be $36,500. Under ension plans have help employees make more informed investment allocations may be able to do so difficulties for Americans as they age, and at worse a dramatic decline in the standard of invested in equities increased in 2003, reflecting the strength of equity prices. Beyond the reliable research and inform the cliff benefit cut opti focused new attention on defined benefit pens First, that either m • Current-law benef andatory on, the benefit would fall to ation. All of our its w participation or a default into a savings account gains the ith taxes ra research is available on the Internet at ised ion plans. W to cover the shortfall over the 75-year $22,700, and under the gradual hen ERISA was enacted, these living of retirees and an incr more efficiently by offering lifestyle or ease in elderly poverty. Therefor lifecycle funds. A e, financial education—and the mong participants not market-driven changes, 401(k) plan participants do not appear to have made significant asset highest levels of participation. www.ebri.org reduction in benefits were the prim actuarial period, by removing the exis ary source of retirem to $24,500. The individual account ent coverage for Am ting $90,000 wage cap and including al erican workers. About 27% of plan would provide benefits l financial lite currently offered these types of racy to which it leads—are of great national im funds, 23% say they would be portance. very likely to reallocations or to have made changes in their loan activity. Buoyed by strong equity ranging from private sector workers w Second, that a m workers. $19,500–$31,700, depending on atching contribution ere active participan increase ts in these plans in 1984 compared to 20% the investm s the amount that workers will con ents. Again, early decisions about tribute. participate in a lifecycle fund, 21% would be very likely to participate in a lifestyle market returns and ongoing contributions, 401(k) account balances increased in 2003. investing will greatly impact What Are Retirement Programs Delivering? today. The actual num Third, that individuals, given • Maintain current b ber of work e this person’s standard of liv nefits until the r cho ers particip ices, will place a h ating in thes evenue shor ing long after they are m igh per e p tfall occu lans has remained at abo centage rs, and then impose a of assets a in “saf de. ut 23 e” Have the N fund, and 15% would be ation and Work Force Radically Changed? very likely to participate in a managed account. Among participants with accounts since year-end 1999, the average account balance investm million to 2 The announcem The bottom ents, “clif 6 m m f” line: There are som a benef illion ov ny will concentr ent of this hearing underlines it cu er tha t. t perate a significant percentage of ioe d, while the priva significant the changing dem differences in outcom te workforce incr their 401(k) portfolio in ographics of our country ea es, which depend on sed by 29 million The nation • Half or m and the work force hav ore think they would be e not chang much more ed as mu or ch over recen somewhat more t decades like asly to the increased 29.1% by from 2002 to 2003. The principal findings as of year-end 2003 are as com when som in the decad The actua pany st • A gradual reduction in current-law benefits. eone is born, how m ock, and a significant percentage a es ahead and l number of the absen workers pa uch he or sh ce of savings by m rticipating in the e earns, and how any funds in an individual ppear not to have changed their m s oe plans ha st Americans. s increased from 23 million ix of headlines and magazine covers would often have us believe. In the so-called “good old participate if there was a provision that automatically raises workers’ contributions follows: investm account are invested. Nevert to 26 m The need to do better as a nation is m e illio nts once set in place—bu n in that period, but the p heless, a few basic conclusi t individuals h rivate-s ade cl ecto ear by the financial stat a r workforce increas ve a high rate of acceptance of inve ons can be drawn from ed by 29 m us of today’s retiree illion o stm v this er ent days,” about one-third of workers spent an entire career with just one employer; today, that by a fixed amount or percentage when they receive a pay raise (55%). options that autom analys population. One-quarter of this sam Under current law, a 30-year-old pers is: e period. atically dive current retirees rely rsify and rebalance the account. on (born in 1975) and currently m totally on Social Security for the aking around ir income, is down to about 18% of the work force. At the height of defined benefit pension coverage, Asset Allocat • A third said a m ion anaged account would persuade them to participate (35%). and have no outside resour $16,500 a year would receive an initial annual So Am Fourth, tha • ong the growing number of wor Lower-incom t individu e people are m als will gene ces. Two-thirds rely orally take re likely to do be kers who a lum pare saving at work through program rcial Security retirem imarily p-sum tter under an indivi on Social Secu distribution at retirem ent benefit of $11,200 rity for their dual account plan ent, rather s like about one-third of retirees had pension income in retirement; today, among recent retirees, it • • On average, at year-end 2003, 45% of 401(k) pl Automatic enrollment in 401(k) plans, as opposed to waiting for an participants’ assets were invested the worker to sign 2 By 3 than an annuity, if given a choice, due to what in today’s d incom the Federal Thrift Savings Plan (TS e. One-third have annuity incom structured like Model 2 than are higher-i ollars. Here is how that individual woul P) and 401( e from a pension plan: About 13% have annuity econom k)s, research has now docum ncom ists describe as d fare under the three basic options e individuals, re the “wealth illusion.” lative to ented a num the othe ber r is now about 31% and declining—and this decline will continue over decades. In other in equity funds, up, could also increase plan participation an 16% in company stock, 9% in balanced funds, 10% in bond funds, d savings. Non-participants appear to com Surveys indicate there is an absence of unders incom of things: pared with th e from prior public-sector employm options. e projected $11,200 initial an ent and 20% from nutanding of life expect al current-law Social S prior private-sector ancy and the prim ecurity benefit: ary words, most workers have always had to save for themselves in order to have income on 13% in guaranteed investm accept automatic enrollm eent—40% say th nt contracts (GICey would be s) and other stable value funds, and 5% very likely to stay in the Dallas Salisbury pooling v employm • • • Twenty-something-year-olds and younger in More than a quarter of those who e Under the cliff benefit cut, where the cut irtue of an an nt. Overall, today’s nuity, and workers are saving the fact that could a lum participate in a sa mbegins in 2042, this odividuals (born in 1985 and after) will p re than -sum will on those who went before them vings plan do not—but ly last you un individual’s benefit til average , top of Social Security in retirement. Today, we do more to make that possible than at any in m plan if their em oney funds. ployer automatically enrolled them in one, and 26% would be life expectancy, whereas an annuity (pooled but they are not saving enough—and m benefit the most from would still be $11,200, since he o reform action now, as opposed to waiting. any are not saving at all. r she with other retirees) would reach the norm can provide a monthly al retirement age automatic enrollment with an opt-out could dramatically increase participation and other time in history, and we know more than ever about how to get workers to undertake somewhat likely to do so. • Equity securities—equity funds, the equity portion of balanced funds, and company President & CEO paym • The hearing announcem ent as long as you live. Model 2 benefits with historic before the steep cut goes ent referen in effect. cequ ed individu ity rates of al retirem return, a ent accounts (IRAs). Research re the average level of many final retirement income. Recent research suggests that for today’s young low- voluntary savings. Mandated savings, like that which occurs in a defined benefit retirement • stock—represented 67% of 401(k) plan a Workers are more likely to save through th ssets at year-end 2003, up from e work place than on their ow 62% in n. More Employee Benefit Research Institute shows that at the height of IRA usage Fifth, rules that require funds to • possible scenarios; because there can be If, instead, benefits were cut gradually, so be left in a retirem in 1986, just over 16% wide variations around an average, the that one generation ent plan of taxpayers m or rolled over at job change doesn’t face the full ade income workers, automatic enrollment would increase median final replacement program such as Federal Employee Retirement System (FERS), avoids leaving the results to 2002, generally reflecting the st than 8 in 10 eligible workers say rong perform they apar nce of the equity m ticipate in a work-plac arkets relative to e retirement Washington, DC will dram contributions; but currently, m resulting benefit could vary signific im atically in pact of the funding deficit, this crease account b ore recent tax da alances at a individual’s benefit ntly f retirem ta show that less than 3% of taxpayers now rom this averag ent and the incom would fall to $9,600. e benefit. e replacement they chance; bu rates from t as program 401(k) plans and IRA rollovers s like the Federal Thrift Savings Plan (TSP) of money originating in 401(k) plans by have shown, we now fixed-incom savings plan (82%); 38% of workers have e securities. an individual retirement account (IRA). will prov contribute in any year. R • • Everyone, regardless of ide. Under Model 2, if approxim esearch also shows age, incom ately half of th that the prim e, and personal retirem e individual account was invested in the ary source of new dollars flowing ent goals, should be 61%. know that the right combination of education, payroll deduction, automatic features in Promoting plans that allow automatic withdrawals from individual bank accounts • Other asset allocation patterns do not seem to have been affected by the strong stock www.ebri.org into IRAs is from Different policy objectives would lead to di educated on issues of savings, life expect equity m rolling over lum arket and historical rates of p-sum distributions from fferent conclusions on which of these design ancy, investm return were achieved, the annual benefit both defi ent allo ned benefit and defined cation, and the basics savings program • Less than 8 s, and pre-dive % contribute as m rsified investm uch as they c ent options ca ould legally contribute. n increase participa Extrapolation of tion and may not significantly increase nonwork-place savings. In this case, ignorance is market performance: www.choosetosave.org features to s contribution em of Social Security. would be $12,500. Instead, if the entire elect, but th ployment based retirem e research is availabl ent plans, e to allow design to be m which are the prim account were invested in Treasury bonds ary source of individual atched to objectives. savings. the research findings above suggests that a default to a high initial contribution not the issue: Nearly 7 in 10 of those who do not currently use automatic 4 Younger participants still tended to hold a higher portion of their accounts in savings in the nation today. to avoid the risk of investing in the equity market, the annual benefit would be rate, or a base automatic contribution by the employer, could increase final account withdrawals for retirement savings are already aware that they have this option The benefits equity assets and older participants tended and replacement rates presented abo to invest m ve are for very spec ore in fixed-incom ific individuals who e assets. Social Secu Research sh $10,400. rity Refo ows that: rm Alternatives: Comparing Benefits balances, assuming that a choice of a higher default contribution rate will not be What Can Data and Surveys Tell Us About Social Security Reform? (68%). have steady earnings. T 4 The mix of investm hey are not the benefits ent options offered individuals should expect if they have a very by a plan, particularly the inclusion of A major issue Americans need to understand while making decisions about savings and • About 10% of all workers ages 21 to 64 now own only an IRA. First, as I already noted, offset by a decline in participation. Social Security is either the only or the primary income source different earnings pattern. Full results of this research were published in the May 2005 EBRI company stock or GICs and other stable value products, significantly affects the ### work place retirem As this shows, even if a person inv ent programs relates to what ested a portion of their payroll tax in an individual and when Social Security will pay. Social for the m • About 21.7% own only a defined co ajority of American retirees. ntribution plan personal retirement account. • Many participants in plans do not diversify their investments, and more than three- Issue Brief and can be accessed at www.ebri.org. asset allocation of participants in a plan. account, certain investment allocatio Security is the most widely recognized and ut ns would actually result in a ilized retirement incom reduced e program benefit over other in the United Second, for a growing number of workers, Social Security will be the only annuity • About 9.2% own both. quarters make no changes in their allocations and do not rebalance—but the 2005 1 4About 13% of the participants in these plans held more than 80% of their account See the President’s Commission to Strengthen Social Security report for a further discussion of this model, as options. States. As I noted, it is the only source of income for 25% of retirees, and the primary incom e protection they have again Retirement Confidence Survey found that st the risk of outliv large num ing their m bers would welcome pre- oney. At 91, my father has Conclusion well as thbalances in com e other models that pwere offered by th any stock. e commission at www.csss.gov/reports/Final_report.pdf. source of incom However, for a 20-year-old born 10 years la e for 66% of retirees. Whatever results from ter (in 1985) and currently earning the same Social Security reform, had a much longer life than he anticipated, and with each passing year Social Security In the case of IRAs, this does not repres diversified investment options like thos ent an increase since the 1990s. For personal e now being implemented in the Federal 2 Unfortunately, no matter how you look at the statistics, the bottom lines are the same: The $10,000 annual salary is 27 percent of the average wage, $16,500 is 45 percent of the average wage, am Am ount, the initial Social Security benefit unde ericans will need to understand how the progr r current law w am works and how it affects their overall ould be $12,500 a year. What Changes in Asset Allocation Over Time becomes increasingly important to Dad and Mom. Few plan their spending in anticipation retirement accounts at work it represents Thrift Savings Plan. a 19.3% increase, from 18.2% to 21.7%. 1. Financial literacy in the nation is not good. $36,500 is 100 percent, $55,000 is 150 percent, $72,500 is 200 percent, and $95,000 is 260 percent. Each then financial future. Th ? is won’t be easy to do: Even though Americans have been getting annual The Knowing how people currently participat views expressed in this statement are solely those e and allocate their em of Dallas L. Salisbury and sh ploym ould no ent t b -based e attributed to the of living to that 10% probability. My Mom and Dad saved and made intelligent annuity Average and median account balances in all plans have continued to grow. The most • Surveys indicate that even among investors, large numbers do not know the worker m 2. Most Am aintains this p ericans are no ercentage of tht planning for their e average wage throughou future by taking control of their current t his or her career. Employee Benefit Research Institute (EBRI), the EBRI Education and Research Fund, any of its programs, benefit statem retirem • ent savings, we need to know what wo Because th ents for years, only 18% of is individual will reach the norm respondents in the 2005 Retirem rkers do over tim al retirem e. Research shows that few ent age afterent Confidence the date when decisions, but they did not expect to be alive this long. At birth their average life recent research available finds average 401(k) balances for the employee’s current difference between a stock and a bond. 3 financial situation and saving for retirement and other life events. officers, trustees, sponsors, or other staff. The Employee Benefit Research Institute is a nonprofit, nonpartisan, “Funds” include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled Survey knew the age at which they would be e participants m Social Secu ake changes in th rity’s revenu eir asset alloca es will fall belo tions over tim ligiw its co ble for full sts, th e. Allocations in equity funds benefi e stee ts. Clearly, m p reduction caused by ost people expectan employer (and ignoring any balances cies were below age 50, and by the tim still residing with previous e they hit 65, their averag employers or rolled over to e life expectancies • Surveys find that the public does not know when they will be eligible for Social educat 3.i on an To change that, we need to sustain and e d research organization established in Washingtoxpan n, DCd the nation in 1978. The al effort to increase th testimony draws heavily e investment product primarily invested in the security indicated (see page 6 for definitions of the investment do not read or understand their Soci from 1999 to 2002 were generally constant. Re the cliff benefit cut option would redu al Security benefit statements. ce his or her initia ports from individual 401(k) adm l benefit to $7,700. inistration were still well shy of 80. IRAs) at over $51,000 (compared with $37,000 in 1996), and median balances at about Security, how long they are likely to live, how much they need to save for from research publications of the Employee Benefit Research Institute, but any errors or misinterpretations are categories used in this paper). Unless otherwise indicated, all asset allocation averages are expressed as a number of savings programs, the rates of participation, the preservation of balances • If the benefit reductions were gradual, the benefit would be $9,800. firms suggest that nearly 90% of participants make no changes over time. Third, Social Security annuities and pension annuities save the marriages of retirees’ those of the witness. dollar-weighted average. retirement, and much more. upon job change, and the preservation of balances over the full life cycle. 10 8 2 4 3 7 6 5 9