EBRI—T-169—Senate EBRI—T-169—Senate HELP Committee Hearing—July HELP Committee Hearing—July 12, 2011—Pg. 4 12, 2011—Pg. 6 E E E E E EE E E E E E B B B B B BB B B B B B R R R R R RR R R R R R I I I I I I— — — — — — I I I I I I— — — — — — T- T- T- T- T- T- T- T- T- T- T- T- 169— 169— 169— 169— 169— 169— 169— 169— 169— 169— 169— 169— Senate HE Senate HE Senate HE Senate HE Senate HE Senate HE Senate HE Senate HE Senate HE Senate HE Senate HE Senate HE LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— LP Committee Hearing— July 12, July 12, July 12, July 12, July 12, July 12, July 12, July 12, July 12, July 12, July 12, July 12, 2011— 2011— 2011— 2011— 2011— 2011— 2011— 2011— 2011— 2011— 2011— 2011— P P P P P PP P P P P P g g g g g g. . . . . . g g g g g g 12 13 14 10 11 15 . . . . . . 8 2 7 9 3 5 Figure 1 Figure 3 Impact of Age and Presence of Defined Benefit Accrual at Retirement Age Impact of Age and Income and Presence of Defined Benefit Accrual at on At-Risk* Probabilities of these expenses is estima Whil Appendix dis Even thou References single ___ The Endnotes c__. ne harg e th males “R w mo e esetire gh BLS tha del t (19– h m tinformation was e overa was use ent Incom 34 con pell rcent d d fin uct to pr ed te analyz de ing t e Adeq ovides signific d d pen for th by th huacy: Alt at th d e ho in e e g o Nati e elderly w pr neligi e onal Ce age ant detail esence o rnative b (65 cohort ility or ol nter Thr for f on a fo ), participatio de e der) t sh and mor r Health hfine olds an e by gen d family s ben ee Statis rosity d t th n in eh fit a e n a ia de tics from Ju ze Importance of Fut parameters twic ccrual at (sin fin e as e gle d cont large for age or c fo ly ribution through r defin o 65 r uple u single ere El ) a duces th e plan d benefit December nd fa igi fe bimales (11 il mily income m e at-r ity in pacts plans, 1999 isk T-169 0– Retirement Age on At Risk* Probabilities Percentage of population “at risk” for inadequate retirement income, The Power of Pensions: Build 27 ing a Strong 21 Percentage of population “at risk” for inadequate retirement income, Defined Contribution Retirement Plans.” EBRI Notes, no. 4 (Employee Benefit Research Institute, April 135 retireme (less tha and perce prelimi Van percent 20 ntage Dn 04. erhei (Se ary a nt inc n $ Th by 2 depen 0 n eome adequacy , 11. alysis indicat NHHCS 000, ptember 2006) 6 d $2 in perce g o 0,0 is a n nta 0 a n 0 ed that –$3 g in a ge e co tionwi b Sept 9,9 points yhort). several a99, a gde ember e c sample is oho E nd qu v rt 20 of these provi $4 en thou ite im , an 10. 0,0 survey of d 00 or pres fu It gh ture s th was ive, m y e e pr shome h o aions were rre in also use this im s esent va elig 2 ib e 0 le pact is alth 0 lik 8 d fo do to lu r a ely to p es are c n a llars) o d rt undou oimpute c hospice car ip be at de fi hi bte th ofin n Retir ghl e d ely d in co fa y correlate mily/in e muted to som e agenci ment Savi nstant divid es, th d (e ngs ual dollars, the specially eir curr e . e Shortfalls xtent ent for by Combes, Andrea. “U.S. Retirement Income Deficit: $6.6 Trillion.” SmartMoney (September 16, 2010). Brief Chronology of RSPM by age and age specific remainingcareer income quartiles (baseline assumptions) 28 1 100% 2011): 10 -19. for Boomers a RSS integrat the i and dischar nteraction for any ed pl g gende a e patients that n n of s). Therefore, a time series d Gen Xers de r/marita fined co i l n status combin was conducted ntributio October n 2010. plan ation inc of sev accumul by the eral rease Natio a hu tion s n ndre fo sal Center . Althou r youn d define ger for gh t d bene cohorts. This he Health St greater fit pla at h ns istics from Au ei per tse large rogen year was ly due t eity gus pro c o to d 20 the ded uce 00 impact dto by 22 www.ebri.org/publications/benfaq/index.cfm?fa=retfaq14, last accessed July 26, 2011. ® Middle Class and Strong Economy Van 10D 0% erhei and Copeland (2008). The original version of Retirement Security Projection Model (RSPM) was used to analyze the future economic 34 The estimates are derived from the 2008 Consumer Expenditure Survey (CES) conducted by the Bureau of Copeland, Craig, and Jack VanDerhei. “The Declining Role of Private Defined Benefit Pension Plans: Who Is 90% allow of assumin defi through nefor assignment to d contr Deg ce h imber bution ealth c 20 pla are-r 00 the i n an s precludes a sim ela d from tned costs dividuals i Augu will n st 2007 throu R ip n S le crease PM. bifurcation faster gh February than of whet the gen her 2008. ore not a ral i nflatio plan n r bal ate. ance exists at age 65, we 2 90% well VanD 23 For a historical review of causes of this decline see Olsen a -bein erhei, g of Ja tck, and Crai he retired population g Copeland at th . Ore egstate level. on Future R Te htirement e Employe nd VanDerhei ( Inco e Bme Assessment Project. A enef 1997). it Research Institute an project of t d the Milbhank e In Octob Labor Statistic Affecte er 2010 s of th d, a testimony ne U.S. d How.Departm ”before the S In Robert L. Clark ent oe f Labor. nate Health, and Olivia Mitc The survey targets t Educatiohell, eds., n, Lah bor and Pen e total noninstitutionalized Reorienting Reti sions Committee, on “ rement Ri population sk The Copeland and VanDerhei (2010). are able to 80 distinguish % the overall impact of eligibility in a defined contribution plan by tracking the number of Senate Committee on Health, Education, Labor and Pensions 80% Memorial EBRI Ed Fund, worki ucatio nn an g witd R h the governo esearch Fund r of Or and t ego he Mil n, sb et out to ank Memorial F see if this sit und, 2 u001. ation could be addressed for Wobbly Stool In testimony 3 (urban a For Although determi n Man the d ru nin a before this com Tax : Retirem ral) o gement g wReform heth f th e Un e (Oxford e r a nt An i ct of i(In)security i ted St m ndivi ittee l University Press f 1986 at l ates an dual ast year (VanDerh has d is the basic n e t ast partia America,” hese e None S o xrp lly the Pen ens the model was used to s ei modifi o es , Octob urce o o , the me DB a s ed the ion fe follo r 20 data ccr Research C ua c win ls 10b ofor revisin nstraints on i g) proces , weo u u anal s s g n ed is t cil, 2010): 1 h un n yze this model to e items tegrat dertaken. the rel ed pe and weights ativ 22 An n - s demonstrate eion pla 136 import indivi . in t n dual ance s by he 24 future See VanDer years o hei (2007) for a summary of the By Ja f simulat ck Van ed eli Dgerh ibility an ei, Rese d dis arch Dire p responses of laying thcto e im r, Employee Bene d pact of efined benefit the presence o sponsors to the implementation of the fit Rese f a de arch Insti fined bene tute fit a ccrual in 70% 70% 14 VanDerhei (2009). 29 Oregon. The analysis focused primarily on simulated retirement wealth with a comparison to ad hoc of the im market bas reachin addi em ng Sec. ployer portanc g thk e 4 -provided et S 01(l) to th e of co o of Social cial S ns eretir curity umer e Sec Ie nment ben ternal purchas normal ret urity retir Reven ee se to fits and Social iment benefits rement a u be e Code, it price gd e wo for has . Sec We estimated u ta pro he Consum lu d a rity p.b pear t abi lity o er hat that if th Price I f a signifi being i ndos n e cant on x. e b T e enef herefor percenta of fo its ur we e, a possibl ge o re t n e fo xdefin be e assumed pense valu ed e one of four categories: new funding requirements under the Pension Protection Act of 2006 as w ell as the potential pension expense 60% 60% _____. Kansas Future Retirement Income Assessment Project. A project of the EBRI Education and Research Park, Youngkyun. “Public Pension Plan Asset Allocations.” EBRI Notes, no. 4 (Employee Benefit Research 25 thresholds for retirement expenditures, but the results made it clear that major decisions lie ahead if the eliminat is calculat “healt benefit s h” statu ep d, t e onso d u hs e aggre srs have r es: ing actguate al etain ex deficit perie ed Primary I wou nce of t ld jump to h ne el surance derly $8. Amoun for 5 tril ea lion an ch fam t (PIAd t )-o ily siz hffs e a et ev and incom erage plans. wou In or e l ld de e increase to vel r to estimate t by avera ap gproximate ing t he offset he ly VanDerhei (April 2010). volatility under new FASB requirements. Hearing on: 50% Fun 50 d % and the Milbank Memorial Fund, July 16, 2002. Institute, April 2009). In February 2011, the model was used to analyze the impact of the 2008/9 crisis in the financial and real state’s population is to have adequate resources in retirement. observed $89, provide ? 00 Zero 0. d ex unde futur per the nses for t e ye pla ars of e nh for e el mligibl derly ulas, RSPM ewith partici in computes th e pa ation. ch cate gory e employee meeting th ’s Av e aerage bove crit Index eria. edThe Monthly Ear basic heal nth ings, Primary 26 40% 30 4 VanDer ? Not re hei and ceivin Copeland (2010). g either home health or nursing home care, Introduction 40% estate market This does not s on retir necessarily imply that man ement income adequacy. y existing defi ned benefit sponsors have or will terminate their existing exp Insurance Am enditure ca ount, an tegory has d cov additio ered compens nal data needs ation valu beses fo ides jr the birt ust the CES. h coh ort. _____. Massachusetts Future Retirement Income Assessment Project. A project of the EBRI Education and 30% Olsen, Kelly and Jack VanDerhei. "Defined Contribution Plan Dominance Grows Across Sectors and Employer Sizes, 1 Subsequent to the rele “The Power of Pensions ase of the Oregon study, it was decide : Building a Strong d that the approach could be carried to other 27 defined bene ? 1-9 f30 ufit plans. Instead ture % years of eligi the process of freezing th ble participation. ese plans for current and/or new workers has increased According to EBRI estimates, the percentage of private-sector workers participating in an employment-based The Importance of Defined Benefit Pla ? Home health care patient, ns for Retirement Income Adequacy VanDerhei (September 2010). Research Fund and the Milbank Memorial Fund, December 1, 2002. 31 20% While Mega Defined Benefit Plans Remain Strong: Where We Are and Where We Are Going." In Retirement Finally, an April 2011 article introduced a new method of analyzing the results from the RSPM. Instead of states as wel Health Define d Con l.t Kansas an ribution Pla d M ns assachuse tts were chosen as the next states for analysis. Results of the Kansas defi substantially in recent years. ned ben20 efi %t plan decreased For mo from re infor 38 pemation on the impact of plan rcent in 1979 to 15 percent i frn 2 eezes on workers see Va 008. Although much of t nDer his de hei (March crease None 28 10% Prospects in a Defined Contribution World. Washington, DC: Employee Benefit Researc 15h Institute, 1997): Previous EBR Van ? Nursin Derhei (October 2010a). g Ihom studies e care patient, were able to document the degree to which eligibility for participation in defined 2 3 simply comput ? 10-19 fut ing ure an ove years of rall perce eligible ntage partic ofipatio the simulat n. ed life paths in a particular cohort that will not have study were presented to the state’s Long-Term Care Services Task Force on July 11, 2002, and the results of 2006). For an analysis of whether “frozen” workers have been financially indemnified via enhanced Some employer DB Accruals took place by 1997, there have been a number of recent developments that have made defined benefit ___ The Previous stu __. bas “Ca ic heal n 10 d A % ie th ex m s on th erica peA ndit e EB fford Tomorrow's R ure R Middle Class I/ICI s are es Partici timat pae n ed us t-Dir tirees: Result in e an cte g ad s d Stron R om etirement s ewhat From th di Plan g ff e EB Econom eren Data Collecti RI-ERF R t techniqu etire y” e a on me n Project d are nt S comp ecurity have analyzed ris Projection ed of two 0% pp. 55-92 16 contribution plans matters with respect to “at-risk” status. For example, the at-risk probability for Gen Xers sufficient retirement income to pay for the simulated expenses, the new method computes what percentage of 29 the Massachusetts study were presented on Dec. 1, 2002. With the assistance of the Kansas Insurance sp contribution to onsors in the p ? Death, Lowest defined contribution pl rivate sector re-exami 2 3 Highestans, see Copeland an Lowest ne the costs and be 2 3 d Van H nef ighest D its of erhei (2 Lowest providing reti 010). 2 re 3 ment Highest benefits through the VanDerhei (October 2010b). Model.” EBRI Issue Brief, no. 263 (Employee Benefit Research Institute, November 2003). parts. Th the average a e firsccount t part uses th balance CES as a es for 401(k bove to estimate ) participants by age an the elded ten rly’s an ure. R nual ehealth cently e publ xpen ished resu ditures tha lts t are paid 0% ? 20 or more future years of eligible participation. varies from 60 percent for those with no future years of eligibility in a defined contribution plan to 20 percent 4 the households will meet that requirement more than a specified percentage of times in the simulation. Department, EBRI was able t Early B oo create omers Retirement Read Lin ate ess Ratings Boomers based on a full stochastic decu Gen XersN mulation Early Boomers Late Boomers Gen Xers form of a qualified defined benefit plan. However, these plans still cover millions of U.S. workers and have out-of-pocket 5 (VanDerhei, H o or are lden an not d Alo fullnso, 20 y reimbursed (or not co 09) show that the ver ye ed ar-en ) by Me d 20 dicar 08 aev erage and/or bal pra ivate nce ran Med ge iga d p h from $3, ealth 237 for 30 VanDerhei, Jack. Testimony for the U.S. Senate Special Committee on Aging Hearing on Retirement Planning: A brief description of RSPM is included in the appendix. based upo VanDerhei (February 201 n the estimates o 1). f the use of each type of care from the surveys above and mortality. The individual for those with 20 or more years. However, RSPM had never been used in the past to quantify the importance _____. “ERISA At 30: The Decline of Private-Sector Defined Benefit Promises and Annuity Payments: What Will model that took into account the household’s longevity risk, post-retirement investment risk, and exposure to long been valued as an integral component of retire ® ment income adequacy for their households. In this insurance. participants i “Do Soun We rc their e: Have EBRI 20s wit /ER Fa Crisis in Retirem h less than ent Se Am curiterica? R y Pr thr ojece tie years o on eModel sults ver From th f tenure sion 11071 e EBRI 4e. with their -ERF Retir current ement Sec employer to urity Pr $17 ojection Model,” 2,555 for Figure 4 provides the results for this 8 analysis. As expected, the overall impact of a defined benefit accrual at Retirement Income and Wealth Assumptions is randomly assigned to each of these four categories with the likelihood of falling into one of the four ® of accru 6 als in defined benefit plans. For purposes of this testimony, we assumed that all households retire 31 Source: * An EBRI/ERF individual Retirement or fam Security ily is co Projection nsidered Model to be version “at ris k 110714e. ” in this version of the model if their aggregate resources in retirement are not potential It Mean? ly cat ” astrophic EBRI Issue Brie nursing f,home no. 269 and (Employee B home health ene care risks. T fit Research his Insti was follo tute, May wed 20 by the 04). e xpansion of Household deficits for married couples are divided equally between the two spouses. VanDerhei (April 2011). testimony, we make use of an EBRI simulation project that has been ongoing for more than ten years to participants i Jan. 27 n their , 20 60s who 04 (T-141 have be ). en with the current employer for at least 30 years (thereby effectively age 65 is muc * An individual h lar or g family er is for t considered hose househol to be “at risk” in thisds with version of the no model futu if theirre years o aggregate resources f eli in g retirement ible partici are notsufficient pation in to meet a aggregate defin ed sufficient to meet aggregate minimum retirement expend 9 itures defined as a combination of deterministic expenses from the categories based upon the estimated probabilities of each event. If the individual does not need long-term when the oldest wage earner reaches age 65. We bifurcated each household in terms of whether it had a RSPM is based in part on a 13-year time series of administrative data from several million 401(k) participants minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as afunction of income) and some Consumer Expenditure Survey (as a function of income) and some health insurance and out-of-pocket health-related expenses, The RSPM, as second pa well as the rt contains Retirem insurance ent Re pr adiemiu ness Ratin m estimates, gs produ inccluding Medi ed by it, to acare Part national B mo an de d Part l and th D pr e pres emiuentation ms. All of of evaluate 7 the importance of defined benefit plans for households assuming they retire at age 65. 32 eliminating any capability for IRA rollovers). contributio health n pl insurance an (23. and out 6 perce of pocket health ntage related 10 poi expenses, nts) and decr plus stochastic expenses eases from as the nursing home fut and ure home years of health care expenses defin (at e d co least until ntributio the point they n eligib11 ility Boston Colleg plus se’s Center for tochastic expenses Retirement Research has re from nursing hom 32e and home health cce are ntly estimated a figure of $6.6 trilli expenses (at least until the point they are picked on in retirement up by The EBRI/ICI Participant-Directed Retirement Plan Data Collection Project is the largest, most representative care, no stochastic expenses are incurred. Each year, the individual will again face these probabilities (the _____. “The Impact of PPA on Retirement Income for 401(k) Participants.” EBRI Issue Brief, no. 318 defi and t ne ed ns of thousands of 401(k benefit accrual at age 6) plans, 5 to assess the as well as a impact time of these series of be sever nefitsal hu on retir ndre emen d pla tn income descriptions adequacy. used to are picked up by Medicaid). The resources in retirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances ___ the f __. irst micro “Projections of -simulation Fut ret ure irement Retirement I incomn e adequacy m come Security o: Impact o del built inf L part from ong-Term admi Carnistrative 401(k) data at e Insurance.” American the elderly are assumed to Medicaid). The resources participate in in retirement will c P ons art B a ist of Socn ial d Part Securit D, a y (either n d the pr status quo or emium is one of the s det pecifie ed rmined ann reform alternativ u eal s),ly by t he increases (11.3 percentage points for 1-9 years, 8.5 percentage points for 10-19 years and 6.4 percentage from defined contribution plans, IRAs and/or cash balance plans, annuities from defined benefit plans (unless the lump sum distribution scenario is chosen), and (in income deficits or “about $90,000 per household if you count all 72 million households ages 32 to 64” (Coombes, repository of in accouformation about indivi nt balances from defined contrdual 401 ibution plans (k) plan participant accounts. , IRAs and/or cash balance p 5lans, annuitAs of Decembe ies from defined benef r 31, 2009, the database it plans (unlesst he probabiliti (Employe es of bein e B g i en nefit the Researc differenh t statu Institute, 17 ses will Jun chan e 20ge as th 08). e individual becomes older after reaching age 75 We then ran the results for all Baby Boom and Gen Xer households and found that overall the presence of a provide a sample of the various defined benefit and defined contribution plan provisions applicable to plan In 2010, EBRI Society on some cases) updated its net housing Agi equity ng/Natio (either Retirement in n the al C formo of Sec uncil o an annuity urity Projectio n or A as ag lump ing joint sum distribution). n Model conf This ere version (RS nce, Marc P of M) an the model h 2 d is constructed det 005. er m toined that simulate "basic" th retirement e overall Medicar Unfortunate the EBRe I D program an ely, the cember EBRI 20 d is t 03 /ICI pol he same nat database icy forum. do ional es not c Th ly with e basic urrently an model inc rprovide easing contri was the detail n mo bution ed difie informatio dfrom th for Sen nat e on oth individu e Agie nr ty g testim al/fa pemily on t s of defi ony inne h e d lump-sum distribution scenario is chosen), and (in some cases) net housing equity (either in the form of an annuity or as a lum p- points for those with 20 or more years). 2010). The proper interpretation of this num income adequacy; however, alternative versions of the modelber is somewhat allow similar analysis for replacement problematic rates, standard in that it appea of living, and other adr hoc s that they ar thresholds. e assuming included statistical information about: then again at age 85) of being in each of the four statuses. This continues until death or the need for long- sum distribution). This version of the model is constructed to simulate "basic" retirement income adequacy; however, alternative 18 defi partici nep d ants. I benefin t accrual addition, at a several ge 65public su reduces t rveys based he at-risk perc on entag participa e by 1 nts’ 1self .6 p-repo ercent rted answers (the age points. Survey of retirement income adequacy for households currently ages 36–62 had substantially improved since 2003 2004 to quantify the beneficial impact of a mandatory co TM ntribution of 5 percent of compensation. bas contributio is of their n pl income. ans, nor For th does e Me it allo diga w an p alysis of defi insurance Tuesday, July 12, 2011 prne emiu d cm, it is ontributio assn um bal ea d a nces ll o that f the ma elderly y have purc be has en e le a M ft wedi ith gap versions of the model allow similar analysis for replacement rates, standard-of-living, and other ad hoc thresholds. _____. “The EBRI Retirement Readiness Rating: Retirement Income Preparation and Future Prospects.” EBRI virtually none of the 72.6 million households in that age range in the 2007 Survey of Consumer Finances die prior to ___ term care. __. “Defi ned Benefit Plan Freezes: Who's Affected, How Much, and Replacing Lost Accruals.” EBRI Issue Consumer .Finances [SCF], the Current Population Survey [CPS], and the Survey of Income and Program (VanDerhei and Copeland, 2010). Almost one-half of Baby Boomers and Gen Xers were determined to be at policy. A previous ? natio 20.7 million 40 employers. RSPM nal estimat 1(k) plan participants, in e is uses self- derived from reported a 20 resp 05 surv onseey s f don or wh e ether by Thes antreet.com that individual has a receiv defied ne aver d conage tribution quotes Summary Issue Brief, no. 344 (Employee Benefit Research Institute, July 2010). Figure age 65. 1 shows the impact of a defined benefit accrual at age 65 on at-risk probabilities by age cohort. The Brief, no. 291 (Employee Benefit Research Institute, March 2006). The first majo Participation [SIPP]) wer r modification e usof the model o ed to model partici ccurred for pation, th wages, e EBR and in I May 20 itial accou 04 policn y f t o ba rulance m. Ininformat an analysi ion. s to risk of not having sufficient retirement income to cover even basic expenses and uninsured health care costs. SD-430 Dirksen Senate Office Building for Pla balancn e to F in esti 47 states an mate a partici d th pe District. Th ation model e estimate and the res port are calc ed valulated ue is mo based on deled as a a 65-year-ol function of d femal age a end t . The e nur 2005 e. For those who have a resulting status of home health care or nursing home care, their duration of care is The analysis ? 51,852 employer-sponsored performed for this testimony 401(k) plans, holding shows the tremendous importance of defined benefit plans in greatest impact is on the early boomers as the percentage of households without any defined benefit accruals 8 determine the impact of annuitizing defined contribution and IRA balances at retirement age, VanDerhei and The results, n This was primarily due to the increased ot surprisingly, were even likelihood of future worse for low-income house eligibility in a defined contribution plan relative to a holds, as 70 percent of households in the premium _____. “The leve Ilm is the pact of avera Defe ge of rring Retir the 47e sta ment te avera Age on ge Reti quotes rement I . Then 2 com 010e pr Ad emium equacy.” level EBRI Issue was estimat Brief, ed n by o. 358 _____. "Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates." EBRI Issue simulated bas achieving retire ed ment upon income the distribution adequacy of t forh Baby e durations Boomers of care and fo Gen und in Xers the . Overal NNHS l, th an e d presenc NHHCS. A e of fte a r the define d considered to be at risk of insufficient retirement income is 67 percent compared with only 41 percent for their This information is combined to model participation and initial account balance information for all defined Copelan The proce d (200 dure4) wer for mo edel abing le to partici demo pation nstrate an that d contributio for a hou ns behavior ehold seekin and asset al g a 75 percent location for probabi defi lity of ned retirement lowes defined bene ? t on $1.21 trilli e-th fit plan. ird when on in assets. ranked by preretirement income were classified as “at risk.” Moreover, 41 percent of (Employee Benefit Research Institute, June 2011). applying the annual growth rates in the Part B premiums from 2006 through 2010 to the average 2005 Brief, no. 297 (Employee Benefit Research Institute, September 2006). duration of care for a nursing home stay or episode of home health care, the individual will have a probability benefit accrual at age 65 reduces the “at-risk” percentage by 11.6 percentage points. The defined benefit plan counterparts contribution participants, as well with some defined bene as contri fit accruals. As e bution behavior xpecte for dnon-40 , the de 1(k fine ) d ben define ed cont fit advantag ribution e (as plans. meas Asset ured by income adequacy, the additional savings that would otherwise need to be set aside each year until retirement contribution plans that have not adopted automatic enrollment is described in VanDerhei and Copeland (2008). those in the lowest preretirement income quartile are predicted to run short of money within 10 years of premium. 9 The EBRI/ICI project is unique because it includes data provided by a wide variety of plan recordkeepers and, of bein advantage This assumption will be relaxed in a later study. g disch (asarged to o measured nby e of the other th the gap between th ree status e twes o at ba -risk perc sed upon entages) is the dischar partic ge estimates from ularly valuableNNHS a for then d the gap between the two at-risk percentages) narrows for younger cohorts. For late boomers the at-risk allocation information is based on previously published results of the EBRI/ICI Participant-Directed Retirement VanDerhei, Jack, Sarah Holden, and Luis Alonso. “401(k) Plan Asset Allocation, Account Balances, and Loan to achiev The proce ed this ure objective for model wo ing ucontributio ld decrease n by a me behavior dian (with am and ount of witho 3u 0t a per utomatic escal cent. Addition ation of al refinem contri ents butions) for were Submitted Testimony by retirement. _____. “Retirement Income Adequacy After PPA and FAS 158: Part One—Plan Sponsors' Reactions.” EBRI NHHCS, r therefore, portr espectively. T ays the activity he stochastic ex of participants in 401(k) plan penses incurred are th s of varying siz en determes— ined by from very large corporations to small the length of the stay/number lowest-income quartile but also has a strong impact on the middle class (the reduction in the at-risk 10 perce Plan Data Co ntage isllection 59 perc Project, and em ent for those with ployee contributio no defined benef n behavior it accruals to ver 401(k sus 38 ) plans is percen provided by t for those an wit h expa some nsion introduce Activity in d in 2005 to 2008.” evalu Eate the BRI Issue im Brie pactf, of no. purc 33has 5 (Employee ing long-term Benefit care Researc insuranhce Institute, on retire Oct ment ober income 2009). This a 40 The term “acc 1(k) plans is d pproach is taken for rual at age 65” escribed in tw Vo reason a does not denote that an em nDerhes. i (2010). First, sufficient Asset allo quality pl cation for oyee age 65 ac data auto do not exist matic enro crued a bene for llm the matching ent fit in that year. I plans is assumed to of retir nstead, it ee Issue Brief, no. 337 (Employee Benefit Research Institute, July 2007). businesses—with a variety of investment options. of days percentage of ca 19 for re the times second a the per di nd t em cha hird incom rge es e quartiles timated co for mbine the nu d is rsing ho 9.7 perce me care an ntage po d h ints wh ome hea ich corr lth caesponds to re, defined benefit accrual. The gap narrows even more for the Gen Xers: 55 percent for those with no defined of a method developed in VanDerhei and Copeland (2008) and further refined in VanDerhei (2010). Although the 2010 version of RSPM assumed all households retired at age 65, the model was updated in 2011 adequacy. medical follow avera care g ( e age-a as wellppro as th pe riate tar generos get-dat ity of Jack VanDerhei, Ph.D. e funds and cost Figur as de of thscribed i e e covera 2 nge VanDerhei ) and Medi (2009). I gap policy us nvestment r e to vae rious turns are is meant to indicate that they had a previously accrued benefit that has not been cashed out prior to age 65. Figure 4 respectively. a 19.5 percent relative reduction). 33 benefit accruals versus 38 percent for those with some defined benefit accrual. to allow retirement income adequacy simulations for deferred retirement ages through age 84 (VanDerhei and _____. “How Would Target-Date Funds Likely Impact Future 401(k) Contributions.” Testimony before the joint characteristics based The model is currently progra on those use of thd e iImpac elderly. n Park (200 Secon t mmed to allow the employee of9). Income and Pres d , the health status oence f the el to participate in a nonintegrat of derly De at fin the a ed gBe e ofnefit 65 ied career aver s not known, lage plan; et alone 11 Impact of Presence of Defined Benefit Accrual at Retirement Age and A combinat It is important to note that this is not the same as a ion of Form 5500 data and self-reported results was also ssessing the importance of all defined benefit plan used to estimate defined benefit accruals. The model was next used in March of 2006 to evaluate the impact of defined benefit freezes on participants by Research Director CopelandDOL/SEC H , 2011). Te he perc aring, e Tar ntage get Da of te Fund Pu householdsblic with Hearin adequat g, June e ret 20 irement 09. income at a 50, 70 or 80 percent over the an integrated c entirea course reer average A of cc th rua eir rem plan; a five- l at ainin Retir g yee la ife. m r final aver e Thus, nt Aby a g ag ee ssuming ev on plan without integration; a three- At-Ris eryone on k* Proba e hbilit as a standar iesyear final d leveaverage pla l of n Future Years of Eligibility for Participation For any It should be n person wit oted th hout t at this he need for analysis does long-term care, NOT attemp this t to process r do a compar epeaison bet ts annual wle y. T en h the re e process re lative efpeats for fectiveness Figure 2 provides similar information to Figure 1 although this time the impact is displayed as a function of pre- partici Whenever a pation n e models; ho mployee is assumed to le wever, it appears ave informat a job in RSPM, ion in the the present val latter is rather ue ofunrel the veste iable w d defined bene ith respect to fit accrual Social Security Benefits simulating the minimum employer co ntribution rate that would be needed to financially indemnify the probability level obviously increased as the deferral period beyond age 65 increased but the results cast coverage without integration; a five- eliminates tryin Pe g y to rc ear final average e di ntaffer ge of entiat popula e among a plan with co tion “at rill skpossible cov ” vered compensation as the integration level; a three-year for inadequat erage e retire types as ment inc we ome ll , as determining whether 12 individuals receiving home in h ae De alth c fined are or Con nutribution rsing home Plan care at on At the en Risk* d of t Probabilities heir duration of stay/care and of defined benefit vs. defined contribution plans in providing retirement income adequacy; however, it does 20 retireme estimating cur from the current job is compa nt income leve rent and/or future accr l. Th red with the year-specific in e greates uetd def benef ined its. Th benef eref it a voluntary cash- ore, a dvantage data (as base of out thresho meas defin ured ld an by ed benef th d converted to a terminated e ga it plan p bet pro weev n the isions for two _____. “The Impact of Automatic Enrollment in 401(k) Plans on Future Retirement Accumulations: A employees for the reduction by age-s in t pech ifeir ic r ex emain pec in ted r g car eeer tirem inco ent me income quartiles un (bder aselin various rat e assumpte-o ions f-ret ) urn assumptions. Employee Benefit Research Institute (EBRI) suspicions on Social Security the conv ’s current-la entio wn bene al wisdom t fits are a hat merely ssumed to wor bek ing a paid an fed r w mo ecei re years ved by thos beyo end a quali ge fyin 65g for would the be ben efits the sick or final average healthy have th plan with covered compensation as the inte e coverage. Therefore, avera grg ation level; a five- ing of the expenses over year final a thve e erage plan with a PIA ntire population should Percentage of population “at risk” for inadequate retirement income, by Future Years of Eligible subsequ show that ently when th if note val receu iving the e of a de specia fined be lize nefit d car pla e a ng is ain a n at alyze thed ir n for th ext b ose witho irthday. T uh t a osney fut who u a re re eli si gmu ibility latein a d to die, at-risk percentages) is for the lowest-income quartile: the percentage of households without any defined salary-related plans was vested status if 100% greater. Any p constructed resent values l to estess imate benefit than the threshold are ass accruals. umed to be cashed out. Simulation Study Based on Plan Design Modifications of Large Plan Sponsors.” EBRI Issue Brief, no. Later that year, an updated version of the model was developed to enhance the EBRI interactive Ballpark Participation in a Defined Contribution Plan (baseline assumptions) adequate under the for baseline all reti scenario. rees (esp This ecial fu ly for ndin th g ose in t could eith he er low be from est-income an incr quartile). ease in the payroll tax or from a general have of offset; a three-year final a fsetting effects in th vere ag age plan with a gregate. PIA offset; a cash balance plan, or a flat benefit plan. of course, are not further simulated. defined contr ® ibution plan, the impact on the at-risk ratings increases to 23.6 percentage points. In other benefit accruals considered to be at risk of insufficient retirement income is 86 percent compared with only 68 341 (Employee Benefit Research Institute, April 2010). 12 90% E$timate worksheet by providing Monte Carlo simulati www.ebri.org ons of th e necessary replacement rates needed for revenue transfer. The Specifically, each household is placed into one of four benefits are projected for each quar cohotiles based on age-specific remaining career rt assuming the intermediate assumptions income. within t he 80% 34 Combinations of self-reported results were used to initialize IRA accounts. Future IRA contributions were words, for those households without future years of defined contribution eligibility, the presence of a 21defined percent for BLS information was utilized to co their counterparts with de the distribution of generosity some defined benefit accruals. parameters for flat benefit plans. The absolute value of the differences EBRI rec 80% eived several requests to focus on what the average present values of retirement income deficits The specific total pro dete bab rministic e ilities of retir xpee nses for t ment income he el ade derly quacy individu under a al or lfamily ar ternativee risk mana then the sum gement treatm of the valu ees i nts.n all the 2009 OASDI Trustee’s Report. A second alternative is used where all recipients’ benefits are cut 24 percent on As with t 13 he basic health care expenses, the qualification of Medicaid by income and asset levels is considered 70% ___ modeled from SIPP data, whi __. “Retirement Income Adeq le future uacy fo rollov r Today’s er activity Work was ers: How C assumed to ertain, How Muc flow from futur h Will e separ It Cost, ation and Ho from w bene The value of t fit accrual at a he absolute dif ge 65 is suffici ference divided ent to save near by the at ly 1-risk out of percentage without defined b 4 of these households in the enefit accruals Baby Boom is 21 er and decrease as the relative pre-retirement income quartiles increase (10.3 percentage points for the second would be 35 for various cohorts of future retirees, and what the aggregate value of those deficits are likely to be expense c 70% ategories for family size and family income level of the individual or family. These expenses make up the While the medical consumer price index only accounts for th date that the OASDI Trust Fund is depleted (2037). e increases in prices of the health care services, it to see how much of the stochastic expenses must be covered by the individual to determine the individual’s employment Does Eli in those gibility cases for Partici in which pati the on in em a ployee Define was d Contr partici ibutio patin n Plan g in Hel a de p?” fine EB d co RI N ntributio otes, no. n plan 9 (Employ sponsored ee 60% Gen percent for the lowest-income Xer cohorts from becom quartile, 18 percent for the ing “at risk” of running short second-income q of money in re utirement artile, 21 percent for the third-income for basic expenses and RSPM income quarti was significant le, 9.0 perce ly enha nta nced for ge points the for the May 20 thi 08 rd EBRI -incom policy e quartile forum anby allowi d 8.7 perc ng aut entage points omatic enro for llment of the high est- in current dollars. The 2010 Retirement Savings Shortfalls (RSS) were determined as a present value of the basic annual (recurring) expenses for the individual or family. However, if the individual or family meet the 60% does not account for the changes in the number and/or intensity of services obtained. Thus, with increased longevity, final expenditures for the care. Only those expenditures attributable to the individual ?not the Medicaid 22 Benefit Research Institute, September 2010): 13 -20. by the previous employer. Industry data are used to estimate the relative likelihood that the balances are rolled uninsure quartile and 33 d medical percent for the highest-income quartile. expenses. 401(k) pa income 50%quarti rticipants with the le); however, th potential for e relative val au ue tomati (when c escal comp ation of contri ared with the at-risk l butions to evels be in for those wit cluded. Ah ddi out defin tional ed Expenditure Assumptions retirement deficits at age 65 for the same three age cohorts in VanDerhei (September 2010): income and asset tests for Medicaid, Medicaid is assumed to cover the basic health care expenses (both parts), the rate of heal 50% th care expenditure growth will be significantly higher than the 4.0 percent medical inflation rate, as program ?are considered as expenses to the individual and as a result in any of the “deficit” calculations. 13 over to an IRA, left with the previous employer, transferred to a new employer, or used for other purposes. bene modificat fit accrua ions were ls) rema adde in quit d in 20 e hi 09 gh. for a P ension Research Council presentation that involved a winners/losers 14 40% not the individual or family. Furthermore, Part D and Part B premium relief for the low-income elderly (not The Van ex Dpen erhei an diturd es used in Copeland (2001). the model for the elderly consist of two components—deterministic and stochastic ___ has been t __. “Retire he cam se in recent y ent Savings Shortfalls for Today’s Work ears. ers.” EBRI Notes, no. 10 (Employee Benefit Research 40% ? Early Boomers (born between 1948–1954, now ages 56–62). analysis of defined benefit freezes and the enhanced defined contribution employer contributions provided as a Total Expen 30% ditures q expenses. T ualifying foh r eMe det die crministic aid) is also i expenses in ncorporaclu tedd . e those expenses that the elderly incur in their basic daily life, Defined B Institute, enefit Plans October 20 10a): 2 -9. 15 30% 23 Figure 3 shows the impact of a defined benefit accrual at age 65 on at-risk probabilities by age cohort and pre- VanDerhei and Copeland (July 2002). quid pro quo. None while the stochastic expenses in this model are exclusively health-event related—such as an admission to a 20% The elderly individuals’ or families’ expenses are then the sum of their assumed deterministic expenses based A stochastic job ? Late Boomers 20% duration (born al b gorithm w etween 1as es 955–1 timated 964, now a and a gppli es 46 ed to e –55).ach individual in RSPM to predict the retirement income level. In each case the greatest defined benefit advantage (as measured by the gap None 16 Stochastic Expenses _____. Testimony before the Senate Health, Education, Labor and Pensions Committee, on “The Wobbly Stool: VanDerhei and Copeland (December 2002). nursing home or the commencement of an episode of home health care—that occur only for a portion of upon their 10% retirement income plus any simulated stochastic expenses that they may have incurred. In each The views expressed in this statement are solely those of Jack VanDerhei and should not be attrib So uted meto th DB e accrual Employese Benefit number of jobs held and age at each job change. Each time the individual starts a new job, RSPM Some DB simulates Accruals betw A new subrout een 10% the tw ine o at was a -risk per dded to the centages) model is for the to allow low simu est-income lations of various styles quartile. The absolu of ta te di rget-date fu fference fnds for a or the low est- Retirement (In)security in America” (T-166). Oct. 7, 2010b. The second component of health expenditures is the result of simulated health events that would require long- retirement Research Insti (if tutever), e (EBRI) not o , then E an an BRI Educ nual ation or c ae nd Res rtain ear basis. ch Fu nd, any of its programs, officers, trustees, sponsors, or other 17 ? Generation Xers (born between 1965–1974, now ag 24 es 36–45). subsequent year of life, the total expenditures are again calculated in this manner. The base year’s expenditure whether or not it will result in coverage in a defined benefit plan, a defined contribution plan, both, or neither. income quarti comparison VanD 0% erhei an wile th part d is 20.0 Copeland (2003) icipa perc nt-directe entage points for d investments in Early Boo 2009 mer . s and 20.7 perc In April 2010, the model entage points for t was compl he Leate Boomers. tely 0% term care staff. The Emplo in a nursin yee Benef g home it Research Ins or homtitute is a e-based settin nonprofit, g for non tpartisan he elde, education rly. Neither of and re th sear ese s ch organization imulated typ established es of care in 01 910 19 20 or More Lowest 2 3 Highest value estimates excluding the health care expenses, are adjusted annually using the assumed general inflation If coverage in a defined benefit plan is predicted, time series information from the Bureau of Labor Statistics It decr reparamet _____. “ eases s A Post- erized with omewhat Crisis Assessment of Retirement In 401(k) plan for Gen Xers design but still de parameters creases com foer sponsors tha the at Adequacy -risk rati for Baby Boomers tn have g for th ado e lo pted automat we st-income and Geni c enrollment Xers quartile i .” EBRI n th at 18 Washington, DC, in 1978. EBRI does not take policy positions, nor does it lobby, advocate specific policy recommendations, or Deterministic Expenses Future Years of Eligible Participation in aDefined Contribution Plan The Van aggre Derhei (January 2 gate RSS for these 004). age cohorts expressed in 2010 dollars is $4.55 trillion, for an overall average of would be reimbursed by Medicare because they would be for custodial (not rehabilitative) care. The incidence Source: EBRI/ERF Retirement Security Projection Model ® version 33 110714e. 25 rate of 2.8 percent from the 2009 OASDI Trustees Report, while the health care expenses are adjusted receive federal f (BLS) is used t unding. o predict what type of plan it will be. cohort by provisions. Issue Brie 15. A 8 perc completely f,enta no. 35 ge u 4 po p (Employ ints dated version . ee Bene of the fit Res natio earch I nal model nstitute w , Fe as pr bruary oduce 20 d11). for th e May 2010 EBRI policy 6 7 * An individual or family is considered to be “at risk” in this version of the model if their aggregate resources in retirement are not $47, of the 73 nu 2 per in rsing home dividual and ho still as me he sumed to alth c be are a an live at d the r age 6 esulting ex 5. Figu pen re 1 ditiures on n VanDerh theei (Oct care are ober 20 estimat 10a e) d sfrom th hows that e The deterministic expenses are broken ®do wn into seven categories—food, apparel and services (dry cleaning, 19 Source: EBRI/ERF Retirement Security Projection Model version 110714e. 26 sufficient to meet aggregate minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer annually using the 4.0 percent medical consumer price index that corresponds to the average annual level from VanDerhei (2005). forum and used in the July 2010 Issue Brief. * An individual or family is considered to be “at risk” in this version of the model if their aggregate resources in retirement are not sufficient to meet aggregate Expenditure Survey (as a function of income) and some health insurance and out-of-pocket health-related expenses, plus stochastic the average RSS varies by age cohort as well as gender and marital status. The RSS per individual is always 199 haircuts), 9 and 20 tran 35 04 sportation, ent National Nurse ing Home rtainment, readin Survey (NNHS) g and ed au nd t cation, he 20 housi 00 an nd g, 20 an07 d basic h National Home ealth expen and dit Hospice ures. Each minimum retirement expenditures defined as a combination of deterministic expenses from the Consumer Expenditure Survey (as afunction of income) and some 200 4 ?2009. expenses from nursing home and home health care expenses (at least until the point they are picked up by Medicaid). The resources in 20 health insurance and out of pocket th health relatedexpenses, plus stochastic expenses from nursing home and home health care expenses (at least until the point they VanDerhei (March 2006). retirement will consist of Social Security (either status quo or one of the specified reform alternatives), account balances from defined lowest Care Sufo rvey r ho(NHHCS). useholds (varyi NNHS is a ng from $29, nationwi 4de sam 67 for Early ple su Broomers to $ vey of nursin 3g 2 homes, th ,098 for Gen X eir current ers), some reside whnts and at higher for EBRI 1100 13 St. NW #800 Washington, DC 20005 (202) 659-0670 www.ebri.org are picked up by Medicaid). The resources in retirement will consist of SocialSecurity (either status quo or one of the specified reform alternatives), account balances contribution plans, IRAs and/or cash balance plans, annuities from defined benefit plans (unless the lump-sum distribution scenario is from defined contribution plans, IRAsand/or cash balance plans, annuities from defined benefit plans (unless the lump sum distribution scenario is chosen), and (in chosen), and (in some cases) net housing equity (either in the form of an annuity or as a lump-sum distribution). This version of the some cases) 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 model is constructed to simulate "basic" retirement income adequacy; however, alternative versions of the model allow similar analysis income adequacy; however, alternative versions of the modelallow similar analysis for replacement rates, standard of living, and other ad hoc thresholds. for replacement rates, standard-of-living, and other ad hoc thresholds.