Summary
Executive Summary
At various times, policymakers have sought to improve the defined-contribution system by increasing the number of workers who have access to the system and by seeking ways to keep money in the system until workers retire. Conversely, motivated by budget concerns, they have also sought to reduce tax deferrals from the system by limiting pretax contributions through caps and other mechanisms.
Such policymaking can lead to unintended, and undesirable, consequences if it is not informed by sound research. The Employee Benefit Research Institute (EBRI) originally developed its Retirement Security Project Model® (RSPM) with the goal of providing just such insight for policymakers. Using assumptions based on actual, anonymized administrative data from tens of millions of 401(k) participants, RSPM® has been used to simulate the percentage of the population at risk of not having retirement income adequate to cover projected expenses under the current system since 2003. More critically, it can be used to examine the impact of potential changes to the 401(k) system—such as those proposed by policymakers.
In this Issue Brief, we will examine the impact of various retirement-reform proposals on all US households between the ages of 35 and 64 by first assessing the current, aggregate national-retirement deficit, and then examining the impact of the following potential initiatives:
- Auto Individual Retirement Account (IRA) programs, such as the one proposed under President Obama’s 2015 Budget.
- Programs expanding access to defined contribution plans, such as the Automatic Retirement Plan Act of 2017 (ARPA) proposal.
- A universal defined-contribution scenario.
- Auto-portability proposals.
- Proposed reductions in the 402(g) and/or 415(c) limits.
Note: RSPM® incorporates a definition of retirement income adequacy that is far more comprehensive than most models today. In RSPM®, a household is considered to “run short of money,” or to experience a retirement savings shortfall, if its resources in retirement are not sufficient to meet average deterministic retirement expenditures plus uncovered long-term care expenses from nursing homes and home health care.
Key findings from this RSPM® analysis are:
- It is projected that 57.4 percent of all US households – including those covered by employer-sponsored retirement plans and those who are not – will achieve retirement success and will not run short of money in retirement. But that means that nearly 43 percent of households will not achieve retirement success according to the model, though some may fall short by relative small amounts.
- However the probability of a successful retirement depends to a great extent on whether employees are eligible to participate in a defined contribution (DC) plan. For example, among Gen Xers, those with no future years of eligibility are simulated to have only a 48 percent probability of not running short of money in retirement. In contrast, those who have 20 or more years of future eligibility (this may include years in which employees are eligible but choose not to participate) are simulated to have a 72 percent probability of achieving a successful retirement and not running short of money.
- This translates into an aggregate national retirement savings shortfall of $4.1 trillion. The deficit averages nearly $90,000 for workers ages 35-39 who currently do not have and are not projected to gain access to the defined-contribution system. In contrast, for those fortunate enough to spend much of their working lives eligible for participation in the defined-contribution system, the projected deficit is less than a quarter of that amount.
- Long-term care costs must be considered if an accurate picture of retirement income adequacy is to be gained. Failing to incorporate long-term care costs into the model significantly changes the probability of not running short of money in retirement—increasing it by nearly a quarter.
- Various reform scenarios could reduce the retirement deficit by as much as 802 billion, or 19.4 percent.
- Eliminating pre-retirement cashouts would enable an additional 20 percent of low-income workers currently ages 25–29 who will have more than 30 years of simulated eligibility for participation in a 401(k) plan to attain an 80 percent real replacement rate from Social Security, 401(k) plan balances and IRA rollover balances that originated in 401(k) plans. It should be noted, however, that these results do not consider any potential reduction in contributions on behalf of workers who might, knowing that monies would not be available for hardship situations, decide to reduce, or even cease contributing to these plans.
- Reducing current contribution limits could significantly reduce projected account balances for certain workers.