A rapidly growing public policy
concern facing the United States is whether future
generations of retired Americans, particularly those in
the “baby boom” generation, will have adequate
retirement incomes. One reason is that Social Security's
projected long-term financial shortfall could result in a
reduction in the current-law benefit promises made to
future generations of retirees. Another reason is that
many baby boomers will be retiring with employment-based
defined contribution (DC) plans, as opposed to the
“traditional” defined benefit (DB) plans that
historically have been the predominant source of
employer-provided retirement income.
These factors are likely to reduce
the amount of life annuity benefits that future retirees
will receive relative to current retirees, raising
questions as to whether other sources of retirement
income--such as individual account plans (DC plans and
individual retirement accounts, or IRAs)—will make up
the difference.
This Issue Brief highlights
the changes in private pension plan participation for DB
and DC plans and provides some possible explanations for
these changes. Results are presented from the Employee
Benefit Research Institute's (EBRI) Retirement Income
Projection Model that quantify how much the importance of
individual account plans is expected to increase because
of these changes. This Issue Brief also
discusses the risk of outliving one's assets, since a
greater fraction of pension wealth is projected to come
from “nonguaranteed” sources.
Results of the model are compared
by gender for cohorts born between 1936 and 1964 in order
to estimate the percentage of retirees' retirement wealth
that will be derived from DB plans versus DC plans and
IRAs over the next three decades. Under the model's
baseline assumptions, both males and females are found to
have an appreciable drop in the percentage of private
retirement income that is attributable to defined benefit
plans (other than cash balance plans). In addition,
results show a clear increase in the income retirees will
receive that will have to be managed by the retiree. This
makes the risk of longevity more central to retirees'
expenditure decisions.
The implications of these model
results for retirees are significant. First,
individuals—rather than the pension plan
sponsor—increasingly will have to manage their
retirement assets and bear the risk of investment losses.
Second, since most retirees' non-Social Security
retirement income will be distributed as a lump sum or in
periodic payements (from a defined contribution plan or
IRA) rather than as a regular paycheck for life (from a
defined benefit plan), retirees will need either to
purchase an annuity from an insurance company or
carefully manage their individual rate of spending in
order to avoid outliving their assets.
