EBRI—T-168—House EBRI—T-168—House EBRI—T-168—House EBRI—T-168—House EBRI—T-168—House Ed &Workforce Subcommittee on HELP Hearing—June Ed &Workforce Subcommittee on HELP Hearing—June Ed &Workforce Subcommittee on HELP Hearing—June Ed &Workforce Subcommittee on HELP Hearing—June Ed &Workforce Subcommittee on HELP Hearing—June 14,2011—Pg. 14,2011—Pg. 14,2011—Pg. 12 14,2011—Pg. 14,2011—Pg. 9 5 11 14 E EBRI—T EBRI—T EBRI—T E EBRI—T EBRI—T EBRI—T EBRI—T BB RI R—T- I—T- - - -168— 168—House Ed 168—House Ed 168—House Ed - - - -168— 168—House Ed 168—House Ed 168—House Ed 168—House Ed H HH H ouse E ouse E dd & & & & & & & & & W Workforc Workforc Workforc Work Workforc Workforc Workforc Workforc orkfo o fforce Subcommitt rce e e e Subcommitte Subcommitt Subcommitt Subcommitt e e e e Subcommitt Subcommitt Subcommitt Subcommitt ee on HEL ee on HEL ee on HEL e e ee on HEL ee on HEL ee on HEL ee on HEL e e on HE e on HE LP LP P P PP P P P Hearing—J Hearing—J Hearing—J H Hearing—J Hearing—J Hearing—J Hearing—J H eari earn n i ing—June 14, g—June 14, une 14,20 une 14,20 une 14,20 une 14,20 une 14,20 une 14,20 une 14,20 20 20 11—Pg. 16 11—Pg. 10 11—Pg. 13 11 11—Pg. 3 11—Pg. 4 11—Pg. 8 11—Pg. 7 11 1 — — —P Pgg. . 1 6 5 Figure 1 TM Baseline EBRI Retirement Readiness Rating (RRR) Percentage of population “at risk” for inadequate retirement income, Figure Figure 1 Figure Figure 8 4 60 achieve adeq Given that the other preretirem health insurance and out-of-pocket age 65 (the baseline retir percentag ges auacy re catego for a specified percent rized for eac ement assu ent income quartiles h h health-related expenses, plus st m of ptthe three ion) to achieve age of siage cohorts muwill start with a larger percentage of households lated retire adequate ret iinto ment oochastic expe n ire s e of th . Figures 20 ment income 50, 70, and 90 e e following l nses fro -22 in VanDerhei and e em vels, based nursing hom percent o oTn -168 e VanDerhei, Jack, and Craig Copeland. “Can America Afford Tomorrow's Retirees: Results From the EBRI-ERF Summary and Conclusion "Retirement Security: Challenges Confronting by age cohort (baseline assumptions) V Percentage Percentage alue Value of of DC Participation DC Participation of Baby of Baby Boom Boom After and Gen X and Gen X After A Age 64: Increase in ge Households Households 64: Relative Simulated Simulated the Increase Percentage in the to Hav to Hav of e e ® and hom achieving the Copeland (2010) present additional of the tim future yee health care expenses (at least a ae fo rs of eligibil 50 percent probability r each household. Whi i ity (whether o osavings (expressed as a percent le thi r not the em of suntil the usccess threshold in concept p ppoint loy mee actual a y be they difficult are picked up Figure lly chose to p 4, there will be less dramati a to com ge of com by a a prticipate in rehen Me pensation) needed to dicaid). This d at first, it is a a VE plan or version of c i i m m portant pacts o opted The Value of Participating in a Defi The EBRI Retirem Retirement Security Projection Model.” ent Security Projection Model EBRI Issue ned Contribution Plan After Age (R Brie SPM) was developed in f, no. 263 (Employee B20 ene 03 to fit Research provi 64 de Insti an tute, Pension Plan Sponsors, Workers, and Retirees" A APercentage d dBaby eq equat uat Boom e e* * Retirement Retirement of and Gen X Baby Boom Income Income for Households and for at Gen X at Least Least 80% Simulated Households 50% of Simulated of to Hav Simulated Life Simulated e Adequ Life Paths to ate* Hav Paths e the m (in terms of the additional to understand that a retire achieve various probabiliti out of an odel is constructed to 10 A A 0% E plan): m households s es of success ent target based on simulate “basic” retiremen afor retirem tisfying averages (such as ave the ent thresholds). Focusing on the highest preretire tage at 65. Unfortunatel income adequacy rage ; life expectancy however, alternative versions of y, the results for many , average ment assessment of national retirem Given the current baseline assu November 2003). ent inco mptions of no job cha me prospects. The m nge after age 64, the im odel was updated in portance of participating in a 2010 using more recent AdRetirement equat A Ae fter Retirement fter Retirement * Retirement Income for at Least 70% Income A Ag ge, by e, by for Preretirement Preretirement at Least of Simulated 50%Income Income of Simulated Life Quartiles Quartiles Paths Life After Paths By Jack VanDerhei, EBRI House C Committtee on Education n and th he Workkforce the m income threshold, co invest mbinations of age/income cohorts odel all ment experience, ave ow sim 89.1 percent already ilar analy rage health ca sis for replace would be too hi have at least re expend ment rate itures in retire a 50 percent probability of success by gh to be feasible. s, standard-of-living calculations, and ment) would, in essence, provide the aoth ge 65. This er ad hoc ? Zero years o of future eligib bility. data and incorporating re defined contribution plan af tireter age 64 could be substa ment plan changes (e.g., auto-enrollm ntial. This is i ent, auto-esca nvestigated in lation of contributions, Figures 7, 8, and 9 by Retirement After Retirement Age, by Preretirement Income Quartile Age, by Preretirement Income 10 100% 0% 90% thresholds. value increas appropriate target onl es to 94.5 y if percent by one was willin age 69 but then levels off for several g to settle for a retirement planning years before finally procedure with approxim reaching 98.4 ately _____. 10 25 0% % “The Impact of PPA on Retirement Income for 401(k) Participants.” EBRI Issue Brief, no. 318 and diversified default inve bifurcating several co ? 1–9 y Inc ears. ome Q m uarb tile inations of retire stments resulting from ment age an the Pension Prote d preretirement incom ction Act of 2 e quartiles into those 006) as well as updates Subccommitttee on Health, Employm ment, Lab bor, and d Pensions EBRI RRR Baseline 2010 EBRI RRR Baseline 2003 90 90% % Income Quartile Income Quartile Introduction Lowest If additional s percent age at a 50 percent “failure” rate. a 84. vings will not be sufficient for som Adding the 70 and 90 per e households, it cent probabilit is possible that they ies allows more realistic may defer modeling of a (Employee Benefit Research Institute, June 2008). for financial market perfor participating i ? 8010–1 % n a defined contribut 9 years s. mance and em ion plan afte ployee be r age 64 and those that are not and com havior (based on a database of 20 mputing the illion 401(k) 90% 2 Lowest Lowest Since 2003, EBRI has been producing national estimates of retirement income adequacy through its The version of the m retirement age instead. The next section worker’s risk 80% aversion. odel used in VanDerhei and Co of this reporpeland (Jul t will explore the likel y 2010) assumes all workers retire at age y impact on retirement income 80% participants). The m differences in the percentages. Figure 7 odel produced Retirement Readine provides the analy ss Ratings for age and inco sis for the 50 percent probability of success me cohorts to determine 3 ? 20 or more y years. ® 2 2 TM 20 80% % 70% Retirement Security Pr Highe ojection Model st (RSPM). Prior publications He earing on: using this model have focused on 65 and imm adequacy The value of ___ __. “The of EBRI R etaking this action, but it should be st diately deferring retirem e tirem begin en to withdraw m t Rea ent age on retirem diness Raoney ting: from R ent income adequacy for the second and t ressed that deferring retirement age will not etirement Incom their individua e l accounts (defined contrib Preparation and Future Pros hird alway u pects.” tion an s be EB d RI what percentage of ho threshold. In this case, the useholds would l numbers are l ika ely be “at rgest for age risk” of having inadequate retire 65 and decline to differences of 6 perce ment income. ntage 70 70% % 3 3 quantifying the relative likelihood that various cohorts will be “at risk” of having inadequate retirement 70% cash balance feasible. For exam preretirement incom Issue Brieplans, as well f, no. 34 ple, heal e quart 4 (Employ as IRAs th problems of either iles falls between th ee Be ) ne whenever the sum fit Research I ese two the worker or the s nstitute extrem of their bas , July es. In both cases, though, a signif 201 ipouse m c expenses a 0). ay prevent this from nd uninsured medical icant Since the genesis of this project in the late 1990s, t Baseline by Age Cohort points or less for age 84. However, two points must be he m considered when interpreting these results. First, odel had always assumed a retirement age of 65. 60% Highest Highest 60 60% % 3 income and estimating the additional amount of savings these households would need to undertake each happening or percentage of the househol expenses exceed the after-t a suitable job ds that do ax for the worker’s skills annual inc not meet the ome from m 50 percent success threshold by age 65 will Social Security ay not be availa and defined b ble. The Retirem enefit plans (if any ent Confidence meet it if ). If While there was abundant evidence of many Figure 1 provides the basel the differences at age 65 are not due t ine analysis for the 20 o additional accum individ 10 Retire uals retiring earlier (e.g., as soon as the ulm ations after age 65, but to the fact that to have ent Readiness Ratings in terms of the y became 60% 15% 4 8 year until age 65 to have a 50, 70, or 50 50 50 % % % 90 percent probability of a “successful” retirement outcome. Surve they defer retirem there is sufficient m y has consistentl ent age u oney y found t to pay expenses without ntil 69. For e hat a large percentage xample, 39.4 tappi percent of the househol of retirees leave the work force earlier t ng into the tax-qualified individual accounts, ds in the second han planned, the _____. “The Impact of Deferring Retirement Age on Retirement Income Adequacy.” EBRI Issue Brief, no. eligible for S percentage of the pop participated in a defined contribut ocial Security retirement benefits at ulation simuion lated to be “at risk” for three age cohorts: plan at 65 m age 62), the m eans that the household m odel was construct u st have been a participant at ed to measure the 50% 10 Income Quartile Unfortunately, many of these cohorts (especially those very close to retirement age, those in the lowest preretire and 45 excess ipercent of retirees reported in 2011 sm assu ent incom med to be invested in a non-tax-advantag e quartile do not meet the 50 per that they were in this situation. cent succes ed account where the invest s threshold at age 65, ment inco but that mnum e is taxed ber household’s age 64 (and likely for several y 40%probability of retirement inco ears prior to that tim me adequacy e, depending if this temptation were on the simulated avoided and r tenure for the etirement last job). ? 40 Early % Boomers (born between 1948–1954, now ages 57–63). 358 (Employe 40% e Benefit Research Institute, June 2011). 5 Lowest preretirement incom 40% e quartile and those with limited attachment to employer-sponsored retirement plans) 10% decreases to as ordinary in 24.4 compercent at age 69. In e. The individual accounts are tracked until the po other words, 38 percent of the househol int at which ds not able to s they are depleted; if the atisfy the “ “Retirement Security t : Challen nges Conf fronting deferred to age 65. However, even with this adm Second, the absolute differences for values at age 84 w ittedly optim ould be expected to be quite sm istic assumption, the results in both 2003 all given that the ? Late Boomers (born between 1955–1964, now ages 47–56). 30% 30% 2 would require an additional savings rate that would be too large to be feasible (in many cases more than 30% Social Security and defined benefit pa threshold at age 65 will be Prior to analyzing the impact of deferring retirem able to satisfy it by yments are age ent not sufficient to pay 69. age, the 20 The results are even 10 version of the basic expe more RSPM was updated with nses, the entity is dramatic for the third 30% and 201 aggregated results at that age in Figure 0 showed that the median additional percen 4 are all over 90 percent. tage of compensation that would be required for ? Generation Xers (born bet P Pension Pla an Spons ween 1965–1 o ors, Work 974, now ages 37–4 e ers, and 6).R R etirees” 3 20 20% % 25 percent of compensation annually). Endnotes designated as having “ru preretirement incom financial market inform e quart ati n on to Januar short of m ile, with 44 oney ypercent of th 1, 2011, ” at that tim and ese households several employ e. that were not able to satisfy the ee behavior assumptions were retirement income adequacy at m ore than a 50 percent probability would exceed 25 percent of Highest 20% 5% 20% 13 threshold at age 65 being able to satisfy updated from industr 10% y stu dies. A new su it by broutine was adde age 69. d to the 2011 version of the RSPM that would 10% co Figures 10, mpensation annuall 11 and 12 are used to deal y (until age 65) for with th many e second p age/income co oint abo mb vinations. e. Instead of taking the simple In 2010, nearly one-half (47.2 percent) of the oldest cohort (Early Boomers) are simulated to be at risk of Tuesdayy, June 14, 20011 1 10% In VanDerhei and Copeland (June 2011), RSPM is modified to allow retirement at ages other than 65 and The nominal cost of these expenditures increases with component-specific inflation assumptions. See the appendix allow the expansion of the household’s accumulation period (i.e., the time in the work force prior to 10% Brief Review of Previous Results From the 2010 Retirement Security difference (for each combination of retirement age and preretirement income quartile) of percentage of 0% not having su 0% fficient retirement income to pay for “basic” retirement expenditures as well as uninsured to VanDerhei and Copeland (June 2011) for more details. assess the val 0% 65 65 ue of deferring retirem 67 67 69 69 ent age for increas 71 71 73 73 ing the proba 75 75 77 77 bility 79 79 of retirement inco 81 81 83 83me adequacy 85 85 . Figure 5 pr retirement) to be expanded ovides a similar analy beyond age sis, although in 65. Unfortu this case the thresh nately, this requiold for success increases to having red the need for many wage and 0% As a result, th households sae 2011 tisfying the threshold success probability version of RSPM added a new feature that would allow ho assuming a defined contribution plan m useholds to defe inus the r Projection Model health care costs. The percentage at risk drops for the Late Boomers (to 43.7 percent) but then increases 65 69 75 84 Retir ement Age 0% 65 69 Retirement Age 75 84 14 Age This testi 2 mony starts with a review of RSPM and the Retirement Readiness Ratings used to measure Age adequate retir benefit assumptions for ement incovery elderly me for at least workers in areas 70 percent of the si where e mum lated piri life paths in retire cal data are quite lim ment. As ited. Therefore, expected, retire percentage of households satisfy Net housing equity is introduced into the model ment age past age 65 in an attem ing the thres pt to determ in three different mechanisms (explained below) hold success probability assu ine whether retirement age deferral is indeed ming no defined contribution . Early Boomers Late Boomers Gen Xers The definition of “at risk” of inadequate retirement in slightly for Generation Xers to 44.5 percent. come depends to a large extent on the type of model ® Source: EBRI Retirement Security Projection Model version 110410i. ® 11 ® Source: EBRI Retirement Security Projection Model version 110410i. those “at risk.” It then revi Source: EBRI Retirement Security Projection ews so Model me of the ma version110410i. jor findings from the 2010 version of RSPM and discusses Source: EBRI Retirement Security Projection Model® version 110410i. each of the four lines from this analy*s An indiv is starts with a se idual or family is considered the Figure 4 t of assu have“adequate” retirement mptions that will fall, given income in would be m this vthat fewer households wil ers ion of o the model st fav if their aggregate orable to deferring retireme resources in l be able to meet the retirement are sufficient nt age: to sufficiently 3 plan, a ratio valuable to m was computed it where this difference is igate retirement income ad the num equacy erator and the deno problems for most minator is the value (1- households (assuming the used to analyze the various contingencies. For example, some studies project retirement income and ** An indiv An individual idual or or family family is considered is considered hav have“adequate” e "adequate” retirement retirement income income in in this v this v ers ers ion ion of the model if their aggregate of the model if their aggregate resour resouces in rces in retirement retirement are are sufficient sufficient to to IRS tax tables from 2010 are * An individual or family is considered used to compute the tax owed have "adequate” retirement income in this version of the model if their aggregate on the amounts received fr resources om defined be in retirement are sufficient nefit plans to meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function of how the m meet aggregate odel was updated and m minimum retirement expenditures defined odified to pr as a combinat oduce t ion of deterministi he 2011 c expenses version. from the Co nsumer Expenditure Survey (as a function mo re stringent threshold at meet aggregate minimum retirement any expenditures defined specific retire as a combi m nation of ent age. deterministi Onl c y ex 6. penses 0 per from the C cent of the ho onsumer Expenditure useholds in t Survey (as a function he lowest of income) and some health insurance and out-of-pocket health-rela ted expenses, plus stochastic expenses from nursing home and home health care worker is physically percentage of households satisfy able to continue wor ing the thres king an hold success probability assu d that there continues to be a suitable dem ming no defined contribution and for his or wealth to a particular age, and then simply compare the annuitized value of the various components with a For purposes of historical com and Soincome) and some cial Sec of income) and urity ( some health insurance health insurance with the percentage o and and out-of-pocket p out-of-pocket arisons, the 2003 Re health-related f health-re Social Securi lated expenses, plus expenses, ty benefits subjec tirem plus stochastic stochasti ent Readiness Ratings are also included in ex c penses expenses from from t to federal income tax proxie nursing home and nursing home and hom home health e health care care expenses d as a of income) and some health insurance and out-of-pocket health-re lated expenses, plus stochasti c expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid). The resources in retirement will consist of Social Security (either status quo or one of the (at least until the point they are picked up by Medicaid). The resources in retirement will consist of Social Security (either status quo or one of the specified expenses (at least until the point they are picked up by Medicaid). The resources in retirement 6 will consist of Social Security (either status quo or one of the preretirement incom Wages: expenses (at least Sourc es: EBRI until the point Reti e quart rement they Se ile will are picked curity Projec m up by eet t tion M Model edicaid). his new th ™ T vers he resources ions reshold 1005 in retirement 04e and 1 of success (co w 00708e ill consist . of Social Security mpar (either status ed to 29.6 percent under the quo or one of the specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities fro m defined benefit plans (unless her skills). The answer, unfortunatel plan). In essence, this value can be conceptualized as y, is not always “y the ratio of those househol es,” even if retirement age i ds NOT satisf s deferred into the 80s. ying the function of the various retirement income components) as well as the individual account withdrawals. threshold bas Figure 1. The Retire ed on som ment Readiness R e type of replace atings show ther ment rate analy e has been sis. While t a significant his is a useful metric to determ decrease in the “at-risk” ine reform alternativ specified reform es), account alternatives), account balances from balances from defined contribution defined contribution plans, IRAs plans, and/or cash balance plans, annuities IRAs and/or cash balance plans, annuities from defined from benefit plans (unless defined benefit plans the (unless lump- specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities fro m defined benefit plans (unless the lump-sum distribution scenario is chosen), and (in some cases) net housing equity (either in the form of an annuity or as a lump-sum distribution). This At that point, sum distribution RSPM si scenario is chosen), mula and (in some tions are presented show cases) net housing Submi equity ttted (either in the form of an annuity Te ing the percentage of hous stimonyy by or as a lump-sum distribution). eholds with adequate This version of the the lump-sum distribution scenario is chosen), and (in some cases) net housing equity (either in the form of an annuity or as a lump-sum distribution). This 50 percent threshold). By the lump-sum o No age/wage distribution scenario curves were deferring retire is chosen), and (in some cases) assu m m ent to age 69, ed to exist af net housing equity (either 14.9 percent of these households would m ter age 6 in the form 4; instead, it of an annuity or as awas a lump-sum distribution ssumed that the ). This eet the version of the model is constructed to simulate "basic" retirement income adequacy; how ever, alternative versions of the model allow similar analysis for Using the thr 4 threshold probabilit eshold of reti y of success without a defined cont rement income adequacy described above (essentially ribution plan that are able to satisfy sufficient retirem it with a ent what percentage of the households being studied will achieve certain benchmarks, it is difficult (if not levels for all three groups between 2003 and 2010, with the largest decrease (12.9 percentage points) model is version of the model constructed is constructed to simulate "basic" to simulate "basic" retirement retirement income adequac income adequacy y; however, alternativ ; how ev e v er, ersions of alternativ the e vmodel allow ersions of the similar model an allow alysis for similar analy replacement sis for rates, Roth IRA and 401(k) accounts are not used in this version of the model but will be incorporated into a forthcoming version of the model is constructed to simulate "basic" retirement income adequacy; how ever, alternative versions of the model allow similar analysis for replacement rates, standard-of-living and other ad hoc thresholds. retirement income for retirement ages vary standard-of-living and other ad hoc thresholds. ing from 65 to 84. Alternative simulations are run to show the 70 percent thr replacement rates, worker’s wages grow at average national wage growth. eshold (or an standard-of-living additional 9 percent of th and other ad hoc thresholds. ese households that had not met the threshold at age replacement rates, standard-of-living and other ad hoc thresholds. income to pay for basic retire defined contribution plan. ment expenses and uninsured medical costs for the entire retirement period), impossible) to accurately integrate the concepts of longevity risk, post-retirement investment risk, and experienced by the Gen Xers. The major EBRI publication. reason for the large magnitude of these decreases is attributed to impact of increasing the probability of a successful retirement income from 50 percent to 70 percent and 65 woul Job change, disability d meet it by age 6 , une 9). A total of mployment: 39.2 Jack percent of Va anDerhei, the households in the lowest preretir Ph.D. ement income RSPM baseli ne results indicate that the lowest preretirement income quartile would need to defer uninsured post-retirement health car the projection of future defined contributi e risk in such a form on account balances (which ulation. would have the largest impact on 5 Capital gains treatment is not used in this version of the model. then to 80 percent. quartile woul o This was as d meet the 70 percent threshold sumed to not take place after Res bye e age 84 arch age 64. Directo . A total of rr 23.5 percent of the households in the retirement age to 84 For example, when the 29.6 percen before 90 percent of the households would have t aggregate value for the lowest preretirement incom a 50 percent probability of success. e quartile at the youngest group). The 2010 Retirement Readiness Ratings fully reflect the trend to auto-enrollment, 6 second preretirem Nursing home or hom ent income quartile would e health care expenses for the worker: be able to satisfy the 70 percent threshold if they retired at See VanDerhei (September 2004) for a description of the Emp ployee Benefitt Researc various approaches to benchm h Institute (EBRI)) arking retirement income Although a significant port retirement age 65 is bifurcated for a 50 ion of the improvem percent su ent takes place in the first four ccess rate, the corresponding years aft values are 35.2 percent for er age 65, the The EBRI Retirement Readiness Rating,™ as well as other results in VanDerhei and Copeland (June auto-escalation of contributions, and QDIAs as a result of PPA and subsequent regulations. While some Once the value of deferring retirement age has been demonstrated for various preretirement income needs. age 65. This o It was as value increas sumed that these costs are es to 36.5 percent at age 69 not incurred prior (or an additional 17 to retirempercent of these households that ent. im those participating in a defi provement tends to level ned contrib off in the early 70s ution plan an wbefore w ww.ebri.org d 2picking 1.4 percent fo up in the late 70s and early 80s. r those not participating in a defined 2011) plans had already , are based on an updated version of RSPM. As expl adopted auto-escalation at the tim Figure 1 Figure Figure e of the 2003 m 9 51ained briefly odel, the percentage of workers below (and in much more detail in Figure 7 quartiles, the value of participation in defined contribution plans after age 64 is analyzed. 7 had not m Defined contributio et the threshold n plans: at age 65 wou ld meet it by age 69). A total of 49.1 percent of the households in Households in higher preretirement income quartiles st contribution plan. This difference of 13.8 percent is the value of th art at a much higher level, and therefore have less e first bar in Figure 7. When the 13.8 the appendix For a descripti to VanDerhei on of the EBRI/ICI Participant-Directed Re Percentage V Va alue lue Value of of DC Participation of DC Participation and Copelan DC Participation of Baby Boom d (June 20 A Aand Gen X fter fter After A A A 11) g gtirement Plan e e ), this m g 64: Increase in 64: Increase in e Households 64: Relativ odel Dat was originally developed i a Collection e Simulated the the Increase Percentage Percentage Project, see the in the to Hav of of e n November 2003 to affected was minimal and hence not included in the simulations. In conclus sion, this Issu ue Brief used t the RSPM to provide an in nitial estimate e of just how valuable defe erring the third prer o In terms of em etirement income quartile would be abl ployee contributions, it was assu e to satisfy med that the age 64 participating status and the 70 percent threshold if they retired at i percent is divided by 2010 EBRI Issue Brief and ICI mprovement in terms of additiona the percentage of these house Perspective, at www.ebr l households reaching a 50 i.org holds without a /publications/ib percent success rat defined contri and www.ici.or e bution plan w g/research/perspective as retiremenho have t age is A Percentage deq Baby Baby uat e Boom Boom * Retirement of and Gen X and Gen X Baby Boom Income Households Households and for at Figure 2 Gen X Least Simulated Simulated Households 70% of Simulated to Hav to Hav Simulated e e A Ad dequ equ Life Paths to a ate* te* Have provide detailed micro-simulation projections of the percentage of preretirement households “at risk” of retirement t age might be in terms of retirement in ncome adequa acy for Baby B Boomers and d Gen Xers. G Given age 65. This Brief Description of RSPM contributi value increas on ra es to 60.5 te is continued until retirement age. percent at age 69 (or an additional 22 Implicitly, this percent of these households that means that any employee in 8 Adeq Retirement Retirement uat Ae fter Retirement * Retirement Income for at Least 50% Income for at Least 80% Income Age, by for Preretirement at Least of Simulated of Simulated 70%Income of Simulated Life Life Quartiles Paths Paths Life A After fter Paths deferred for these households. NOT satisfied the 50 percent success threshold (100 Impact of Income Group o percent – 21.4 percent = 78.6 percent) the resulting n At-Risk* Probability having inadequate retirement income to finance basic retirement expenditures, as well as uninsured retiree This allows simulations for those ages 36–62 in 2010. In previous work with this model (VanDerhei and Copeland, Baseline by Preretirement Income Groups the paucit ty of data with h respect to m many wage an nd benefit con nditions for w workers beyon nd age 65, sev veral 100% had not m One of the basic objectives of RSPM is t et the threshold an AE plan with auto-escalation has the Retirement Retirement at age 65 wou After Retirement A A g ld m g o e, e, sim by by eet it by u A Preretirement Income Quartiles lat Preretirement Income Quartile ge, e th by escal age 69). A tot e percentage Preretirement ation featof the populat a ure turned off at age 65. l of 75. Income 9 percent of the ho ion that will be “at risk” useholds in ratio is 13.8 percent/78.6 percent, or 17.6 percent (the first bar in Figure 10). This relative value for the Percentage of population “at risk” for inadequate retirement income, by age-specific 15 2003), workers health care ex between the a penses (including ges of 38 and nursing hom 67 in 2003 wer e care). Te simulated. his model benefits greatly from having access to Although the 2010 Retirement Readiness Ratings show relatively little change in “at-risk” probability by assumptio ons with little empirical verification wer re needed to p produce the in nitial results. In most cases s, 70% 25 25% % remaining career income group (baseline as 7 sumptions) the highest pr of having retire o 90 % For em eretirement inco ment inco ployer contributi me that is inadequate to me quartile would be abl ons, match rates cove are r basic expenses and pay e to satisfy assumed to rem the 70 percent threshold if they ain constant and non for uninsured elective health care retired 9 The problem lowest prereti with using a rement income quartile increases for eac 50 percent probability of success, of co h retirement age m urse, is that the househol odeled in Figure 10 (22.6 d is in a percent ad 9 ministrative records on tens of millions of 401(k) participants, dating back in some cases to 1996, to age cohort, Figure 2 shows a significant impact of the relative level of preretirement income. In this the assu Preretirement income in RSPM is determined in a ma m mptions made were optimistic in terms o of their im nner 1similar to the average indexed pactt on the value e of deferrin monthly earni g g retirement a ngs g ge. Income Quartile 100% at age 65. Thi costs for the re contributi s value increases to 81.1 pe mainder of their lives once they ons continue at the age 64 cont rcent at retire. age 69 (or an addit ribution However, the EBRI Retirement Readiness rate. ional 30 percent of these households position wher at age 69, 27.6 percent age 75, and e they will “run short 44. of mone 3 percent at y” in retir age 84). Given t ement one chance out of t hat larger percentages of higher wo. While most permit simulating the accumulations under the most important component (but also the most complicated 80% case, households in the low computation fo 60% r Social Security wi est one-third th the following modificati when ranked Inc by ons: om age-specific preretirement incom e Quartile e are simulated Therefore e, the percenta ages of ho Lo us wes e ehold t s with ad dequate retirem ment income e in Figures 4 - -6 should be seen that had not Social Security met the threshold at age 6 : 5 would meet it by age 69). Rating™ also 90% provides information on the distribution of the likely number of years before those at risk BaselineRSPM2010 households (a preretirement incom t least those that are cognizant of these ri e quartile households satisfy the 50 sks) are likely to have a ri percent threshold, the same absolute i sk aversion level that ncrease in 20% in terms of 20% modeling) of future wealth generated by the employer-sponsored retirement system. These 2 Lowest to be “at risk” 70.3 percent of the time, while the middle-inco me group has an “at-risk” percentage of as a best- ? All earned income is included up to the age o c case estimate, especially at t the more advanced retire f retirement (i.e., there is no maximum taxable wage base ment ages. 12 70% “run short of o Initial receipt is deferred until the earlier of retirem money,” as well as the percentage of compensation they ent age or age 70. would need in terms of additional 80% would m percentage of househol ake this untenable, switching to ds satisfying the th a higher reshold as a probability result of defined contrib of success will significantly Incom ueti Quartile on participati reduce the on after age 50% 3 2 household projections are combined with the other components of retirement income/wealth (such as 41.6 percent. This figure dr constraint and the calculatio ops to 2 n te 3.3 rminates at retirement age). percent for the highest-income group. Lowest Figure 6 pr savings to ha 60%ovides a si ve a 50, 70, or 90 percent probabilit milar analysis, although in y this case the thresh of retirement income adequacy. old for success increases to having Given the e 70% ir current age es and the ass Highest umption unde er the runs in 3 VanDerhei a and Copelan BaselineRd d SP (20 M2003 10) that percentage of househol 64 will result in a larger relative increase. This is ds capable of satisfying the thr exactly what is found in F eshold at any given retirement age. For exa igures 10 through 12 as the mple, if Social Security, defined benefit annuities and lump-sum distributions, IRA rollovers, non-rollover IRAs, ?15 % Instead of indexing for changes in average national wages, the model indexes based on assumed after -tax 2 15% adequate retir 40% ement income for at least 80 percent of the si Highe m stulated life paths in retirement. Less than 1 everyone retires at age 65, Early Bo oomers obviou usly can be in n only one of the first two levels. When n the the succes The Impact of Defe relative values for each reti 60% s rate is moved to a threshold rring Retirement rement age ar of 70 e monotoni percen Age on Retirement In cally increasing with an increase in preretir t, only 2 out of 5 households come Ade in the lowest-income quacy ement and net housing equity) at retirement age, and run through 1,000 alternative retirem 3 ent paths to see what 50% Again for hist rate of return b orical coam sed on asset parisons, the 2003 Retirem allocations that are a function of th ent Readiness Ratings by e individual’s age in e income group are included ach year. Referen nces percent of the househol The appendix to VanDerhei and Copeland (June ds in the lowest preretirem 2011) ent income quartile will describes how households meet this threshold. Highe (whose heads are st By results for r this age cohort are bifurcated by future e eligibility in n a defined co ontribution pl lan, the differ rence quartile will attain retirem Figure 4 shows the value of deferring retire income quartile. ent income adequacy ment even age for Baby if they defer retirement age to 84. Increasing the Boom and Gen X households assuming 50% percentage of the time the households “run short of money” in retirement. The present value of the in Figure 2. Both the middle- and high-income cohorts experience a 16 percentage point decrease, while ? Percentile distributions are then established based on population statistics for each five -year age cohort. 40% 30% Helman, R Ruth, Craig Cop peland, and Ja ack VanDerheii. “The 2011 R Retirement Con nfidence Surve ey: Confidence e 10% deferring retire currently ages 37–6 ment to age 69, 1.3 percent of these ho 3) are tracked through retirement age, and how t useholds would m heir retirement incom eet the 80 percent threshold (or e/wealth is in the “at- -risk” percent tages is quite large (16 percentage pointts), even after r at most nine e years of futu ure threshold to that a 50 percent probabilit 80 percent reduces the number of lowest y of “success” is sufficient preretirement incom (where success is defined as not runni e quartile households that can ng short of deficits gener 40% ated in retirement are also computed and divided by the accumulated remaining wages of 10% the low-income cohort has a Retirement Readiness Rating that decreases by only 9 percentage points 10 Helman, Copeland, and Drops to Record Low wVan s, Reflecting Derhei (2011) ‘The New Normal,’” EBRI Is Issue Brief, no. 355 (Employ yee Benefit less than 1 percent of these households that had not met the threshold at age 65 would meet it by age 69). sim eligibilit ulated for the following y y 30. La % te Boome ers and Gen components: X Xers are able t to have signif ficantly larger r future perio ods of time eli igible satisfy Figure 11 money this standard at a retire in retirem provides results from ent). For the lowest preretirement m ent ag a simila e of 84 t r analy os appr is to income quartile, onl oxim Figure 10; ately 1 how out of 7 ever, the threshold in y .29.6 per cent of these households this case is set the household to provide a 30% percentage of compensation that would need to be saved in each year (in between 2003 and 2010. While this may appear counterintuitive at first given the huge positive impact of 20% Income Quartile 11 A total of 10. The Rese viewa assrch expressed Institute, 3 percent of t in nMarch thih s e househol statem 2011).e e ntds in the sec are solelyy thos ond preretirem e of Jackk VanDerhei ent incom aaend quartile would be able to should not be attributted to partici ? p pate in a defi Social Security. n ned contribut i ion plan and t therefore the d differences ar re much large er. Late Boom mers at 70 percent. The relative increas would have s Many of these ufficient resources to not run short assumptions will be relaxed e in each case is in future work. of smone maller than it was for the 50 y in retirement 50 percent of the time; however, percent threshold but the addition t 5% 20% o any employee contributions simulated to be made to defined contribution plans and/or IRAs) 20% Lowest auto-enrollment and auto-escalation of contributions on the low income (VanDerhei and Copeland, 2008 5% satisfy to the the 80 Em mploypercent threshold if t ee Beneffit Research hInstit ey reute tired at ag (EBR RI), e th 65. This e EBRI EEvalue increas ducation and des to 15.3 percent at age 69 (or Research Fu und, any of itss One of the factors that overall trends are si with no f ? u utDefined contribution balances. ure eligibili milt tm a yr. Figure 12 repe a akes a re sim m ula ajor d t ted to have a ifference in th ats this analysis n n “at-risk” le e percentage of ho with an 80 percent threshold. Again, the relative v vel 26 percen usehold nt tage points l s satisfy a aing t rger than th he retirement o ose 12 this increases to 34.6 percent if retirement is deferred until age 67 and 46.5 percent if retirem 2ent is to provide alternative probabilities of adequate retirement income. 10% 10% and VanDerhei, April 201 Social Security benefits are increased by 0), Figure 8 i a c n VanDerhei ertain percenta and Copeland ( ge (depending 2010) on date of birth) if retirement is deferred demonstrates how far many of 10% VanDerheii, Jack. “Measu uring Retireme ent Income Ad dequacy, Part One: Traditional Replaceme ent Ratios and d 3 an additional 6 percent of these households that had not met the threshold at age 65 would meet it by age with 10–1 19 future year rs of eligibility y. Gen Xers o obviously hav ve the largest differential ( (40 percentage income adequacy increase deferred until age 69. The i programs are s, officers, small thresholds at any e tru r than in the previous stees, ncrem spons ental in o o retirement age is whether the worker rs, or crease in analy otherses but with sim sstaff. the percentage of househol The Employe ilar e overall trends. Bene is still participating in ffit Research ds in the lowest Institute a defined is a ? Individual retirement account (IRA) balances. While knowing the percentage of households that are “at risk” (as well as their composition by age, beyond Social Security Normal Retirement Age. The benefit increase no longer applies after the worker reaches age the lower-income cohorts are fro 0% m the point they will no longer be classified as “at risk.” 0% Highest Result ts for Workers s at Large Com mpanies.” EBRI RI Notes, no. 9 (Employee Be enefit Researc ch Institute, 69). A total of 33.2 percent of the households in the third preretirement income quartile would be able to points): 0%T T0% hose with no future y Low Incomeears of eligibility have an Middle Inc“a omt e-r risk” level of 60 per High cent, c Incomeo ompared with h only contribution preretirement incom nonprofit, noplan after age 65. The increase in the per npartisa e quart n n, education ile having at least a 50 a and research organization percent probability of success l centage of households that established in Washingto are predicted to have evels off for several n, DC, in 1978 8. 70. ? Defined benefit annuities and/or l 65 69 ump-sum distributions. 75 84 income levels, and level of participation in defined contribution plans) is obviously valuable, it does 0% 65 65 67 69 71 69 73 75 77 75 79 81 84 83 85 September 2004): 65 2 2 -12. 2 69 75 84 satisfy the 80 percent threshold if they retired at age 65. This value increases to 40.6 percent at age 69 (or adequate retir y 20 perce ears (in larg n nt for those w e part due to t ement inco i ith 20 or m me as a re he elim oination of the r sult of defined e e years of elig g de ibilit cont layed retirement credits under Social Security ribution y. Age participation varies by retirement age, ) but then EBRI doess not take policy positions,, nor does it lo obby, advocaate specific po olicy recomm mendations, or nothing to inf 13 orm policymakers, employers, or worker Age s of how much additional savings is required to ? Net housing equity. Retirement Age Age Similar calculations for the other two preretirement income quartiles are: 24 percent for the lowest quartile and 50 Baseline by Future Years of Eligibility in a Defined Contribution Plan an additional 11 percent of these households that had not met the threshold at age 65 would meet it by age preretirement incom picks up again after age 75. Approxim e quartile and proba ately bilit one-half ( y of retiremen 49.1 t inco percent) of the lowest preretire me adequacy, but this factor results in at ment income ®® ® achieve the desired probability receive fe ederal fundingg. of success. ® Source: EBR Source: EBR Source: EBR I R I R I R ee tirement Security e tirement Security tirement Security Projection Projection Projection M M M odel odel odel ® vv ersion110410i v ersion ersion 110410i. 110410i. . percent for the highest quartil Source: EBR Source: I R E eB tirement Security RI Retirement Projection Sec e. urity M Pr odel ojecti von Mode ersion110410i. l versions 100504e and 100708e. One of the advantages of a national retirement income adequacy model based on micro-simulation data _____.* “ An indiv Th he Imp idual or family act of is considered A Autom hav atic Enr e“adequate” retirement ollment i income in n 401 1this (k) v Plans ers ion of the model on F Futur if their aggregate e Retireresour m ment Accumul ces in retirement are a ations sufficient : A to * An indiv * An indiv idual idual or family or family is is considered considered hav hav e e "adequate” "adequate” retirement retirement income in income in this this vers version of the model if their aggregate ion of the model if their aggregate resou resou rces rces in retirement in retirement are sufficient are sufficient to to 69). A total * An indiv * An idual inof 61.2 dior vidua family l or is considered fpercent of the households in amily is cohav nsie "adequate” dered to be retirement “at risk” in income this ver in this sth ion of e highest preretirem vers tion of the model if their aggregate he model if their aggregate ent inco res resou ourcrces es in me quartile would be able in retirement retirementare sufficient are not to least a 10 percentage point difference in the majo quartile households retiring at age 75 would have at least a 50 percent probabilit rity of the retirement age/income co y of success, mbinations but that Analyziing the Im mportance of Retirem ment Age A household is considered to run short of money in this model if aggregate resources in retirement are not meet aggregate meet aggregate meet aggregate minimum minimum minimum retirement retirement retirement ex ex ex penditures defined penditures defined penditures defined as a combi as a combi as a combinat nation of nation of ion of deterministi deterministi deterministi cc c ex ex ex penses penses penses from the C from the C from the C onsumer onsumer onsumer Ex Ex Ex penditure penditure penditure Surv Surv Surv ey ey ey (as a (as a (as a function function function 14 meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as a function sufficient to meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer such as RSPM is the ability to correlate statistics such as the “at-risk” percentages with other outcomes A future version of the model will include the ability to model retirement ages prior to Medicare eligibility. Simul of income) and a ation Stu some health insurance dy Ba ased on Plan and out-of-pocket D Design health-rela Modifi ted ex cpenses, ations of L plus stochastic arg ge Plan expenses from Spo nursing home and nso ors.” EBRI Is home health su sue Brie care f, no. 3 341 of of income) and income) and some health insurance some health insurance and and out-of-pocket out-of-pocket health-re health-re lated lated ex ex penses, penses, plus plus stochasti stochasti c c ex ex penses from penses from nursing home and nursing home and home health home health care care to satisfy of income) and the 80 percent thr some health insurance eshold if the and out-of-pocket health-relate y retired at d expenses, age plus stochastic 65. This value increas expenses from nursing home and es to 68.7 percent at age 69 home health care investigated. The results ar increases to 61.7 percent at age 80 and e even more striking when 90.2 percent at age 84. the value of defined contribution participation after Previous Ex E Ependi BRI rese ture Survar ey c c (ah i s a f n uto retire nction of incm m oment incom e) and some heal e a a thde insquacy urance and ana oua t-lof y-z poc ed the per ket health rela centage of h ted expenses, plus o o suse tochas holds at tic r risk Similar to the concepts applied in VanDerhei and Copeland (2003), the analysis in VanDerhei and sufficient to meet aggregate minimum retirement expenditures, which are defined as a combination of ex ex ex penses (at least penses (at least penses (at least until the point until the point until the point they they they are picked are picked are picked up by up by up by M M M edicaid). edicaid). edicaid). T T T he he he resources resources resources in retirement in retirement in retirement w w w ill ill ill consist consist consist of Social of Social of Social Security Security Security (either status (either status (either status quo or quo or quo or one of the one of the one of the expenses (at least until the point they are picked up by Medicaid). The resources in retirement will consist of Social Security (either status quo or one of the for the simulated households. Figure 3 provides an example of the large extent to which “at-risk” 15 expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid). The resources in specified reform alternatives), account balances from defined contribution plans, IRAs and/or cash balance plans, annuities fro m defined benefit plans (unless (or an additional 19 percent of these (Especified reform m specified reform ployee Benefit alternativ alternativ es), account es), account R Researc balances from balances from h Institute, defined households that had not m defined April 20 contribution contribution plans, 1 1 plans, 0). IR IR As As and/or cash balance plans, annuities and/or cash balance plans, annuities et the threshold at age 65 would m fro fro m m defined benefit defined benefit plans plans (unless (unless eet it by The o specified bviou reform alternativ s exceptio es), n is that ho account balances using equity from defined contribution was no plans, IR t included As and/or cash balance plans, annuities in the baseline runs frofor this analysis. A fut m defined benefit plans (unless ure EBRI age 64 is vie wed as the relative increase in the percentage of households simulated to have adequate for insuffi ficient retirem ment income as well as how w much more at-risk househ holds would n need to save t to Copeland (2010) also m deterministic expenses from th odels how the Consumer Expenditure much additional savings woul Survey (as a function of incom d need to be contributed fr e), and som om 2010 until e retirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances from defined the lump-sum the lump-sum the lump-sum distribution distribution distribution scenario scenario scenario is chosen), is chosen), is chosen), and (in some cases) and (in some cases) and (in some cases) net housing net housing net housing equity equity equity (either (either (either in in in the form the form the form of of of an annuity an annuity an annuity or as a or as a or as a lump-sum distribution lump-sum distribution lump-sum distribution )) . T ) . T . T his his his the lump-sum distribution scenario is chosen), and (in some cases) net housing equity (either in the form of an annuity or as a lump-sum distribution). This percentages are associated with the years of future eligibility in defined contribution plans. The “at-risk” EBRI 1100 13 Stt. NW #878 Washingtton, DC 200055 (202) 6659-0670 www.ebri.o org publication will version of the model contribufocus on the importance of th tion plans is constructed , IRAs and/ to si or mulate "basic" retirement cash balance plans is component of potential reti , annu income adequacy ities from de ; fhow ined ev ber, enef alternativ it plans e v (u ersions of rement income. nless the the lumodel mp-sum allow di s similar analy tribution sc se is for nario is age 69). version of the model version of the model is constructed is constructed to si to si mulate "basic" retirement mulate "basic" retirement income adequacy income adequacy ; how ; how ev ev er, er, alternativ alternativ e v e v ersions of ersions of the the model model allow allow similar analy similar analy sis for sis for version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for retirement income (see Figures 10 -12). replacement rates, replacement rates, replacement rates, standard-of-liv standard-of-liv standard-of-liv in in in g g g and other ad hoc thresholds. and other ad hoc thresholds. and other ad hoc thresholds. replacement chosen) rates, standard-of-liv and (in some cain se g s and other ad hoc thresholds. ) net housing equity (either in the form of an annuity or as a lump-sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis for replacement rates, standard of living and other ad hoc thresholds. Percentage of Households Per Perc centage of entage of Hous Households eholds