Selected Research & Analysis: Retirement > Private Pensions
Retirement Savings Inequality: Different Effects of Earnings Shocks, Portfolio Selections, and Employer Contributions by Worker Earnings Level
Changes in accumulated retirement savings, particularly in employer-sponsored defined contribution (DC) plan balances, differ by worker earnings levels. Earnings shocks, portfolio diversification, and employer contributions to workers’ DC plans affect retirement savings for lower earners more than for higher earners. The authors match Survey of Income and Program Participation data to Social Security Administration earnings records and find factors underlying the different retirement savings outcomes by earnings level beyond mere differences in earnings.
Retirement income in the United States has been described as a three-legged stool composed of Social Security benefits, personal savings, and employer-based retirement plans. For the latter, today's workers usually have a defined contribution plan in which the worker and employer contribute to the plan and the worker bears the risk for account performance. At retirement, the worker has the option of purchasing an annuity, which is similar to Social Security benefits and traditional defined benefit pension plans insofar as they provide a steady income stream for life. This issue paper examines the similarities and differences between Social Security retirement benefits and annuities, and the factors that determine how much lifetime retirement income an individual would receive.
Contributory Retirement Saving Plans: Differences Across Earnings Groups and Implications for Retirement Security
This article examines how savings in defined contribution (DC) retirement plans vary across the earnings distribution. Specifically, the authors investigate the extent of an earnings gradient in access to, participation in, and levels of contribution to DC plans. Using a nationally representative sample of Survey of Income and Program Participation respondents linked to data from their W-2 tax records, the authors find that DC plan access, participation, and contributions increase as earnings increase, even after controlling for key socioeconomic and labor-market covariates. They also find that, despite changing economic conditions, the earnings gradient changed little between 2006 and 2012.
This article provides an update of the relationship between pension plan coverage and firm size among private-sector workers, using data from the Survey of Income and Program Participation (SIPP) for 3 years: 2006, 2009, and 2012. Following previous work, our measures of pension coverage and participation take into account, and correct for, survey-response errors in the SIPP by using information in the W-2 records regarding tax-deferred earnings to defined contribution plans. The authors' findings show that compared with 2006, the offer and participation rates of any pension plan slightly increased in 2009 and 2012. Throughout the 2006–2012 period, offer and participation rates differed substantially by firm size, whereas there was little difference in the take-up rate.
The authors present data on annual retirement income of American Indians and Alaska Natives (AIANs) from the American Community Survey and include separate analyses for AIANs of single-race and multiple-race backgrounds. The authors also compare retirement income of AIANs with that of whites and blacks and find that, overall, annual retirement income among all AIANs was significantly lower than that of whites and also of blacks.
This article presents descriptive statistics on pension participation and the types of plans among married couples, using data from the 1996 and 2008 Panels of the Survey of Income and Program Participation and Social Security administrative records. The findings indicate that in only 20 percent of couples, neither of the spouses participated in a pension plan; in about 10 percent of couples, the wife was the only one participating in a retirement plan; and in 37 percent of couples, the husband was the only one participating. Despite the substantial changes in pension landscape over the past decade, the findings reveal only modest changes in participation rates and in the types of plans respondents participated in between 1998 and 2009.
The income of the aged is composed largely of Social Security benefits, asset income, and pension income. Over the past three decades, the primary form of employer-sponsored pension has shifted from the traditional defined benefit plan to defined contribution plans, such as the 401(k). That trend creates problems for measuring the income of the aged because most household surveys of income either do not collect information about distributions from defined contribution retirement accounts or do not include those distributions in their summary measures of income. This article examines the impact of including distributions from retirement accounts on the estimated income of families headed by persons aged 65 or older.
The authors investigate the extent of changes in workers' participation and contributions to defined contribution (DC) plans during the Great Recession of 2007–2009. Using longitudinal information from Social Security W-2 tax records matched to a nationally representative sample of respondents from the Survey of Income and Program Participation, they find that the recent economic downturn had a considerable impact on workers' participation and contributions to DC plans. A sizable segment of 2007 participants (39 percent) decreased their contributions to DC plans by more than 10 percent during the Great Recession. The findings also highlight the interrelationship between the dynamics in DC contributions and earnings changes.
How Did the Recession of 2007–2009 Affect the Wealth and Retirement of the Near Retirement Age Population in the Health and Retirement Study?
This article uses household wealth and labor market data from the Health and Retirement Study (HRS) to investigate how the recent "Great Recession" has affected the wealth and retirement of the Early Boomer cohort, those in the population who were just approaching retirement age at the beginning of the recession. The retirement wealth of people aged 53–58 before the onset of the recession in 2006 declined by a relatively modest 2.8 percent by 2010. For members of older cohorts, wealth had increased by about 5 percent over a comparable age span. The wealth holdings of poorer households were least affected by the recession. Relative losses were greatest for those who initially had the highest wealth when the recession began. The retirement behavior of the Early Boomer cohort looks similar, at least to date, to the behavior observed for members of older cohorts at comparable ages.
This article discusses the importance of 401(k)-type defined contribution plans and individual retirement accounts in providing retirement income for current and future retirees. The rising prevalence and importance of this type of income creates measurement errors in the Current Population Survey and other sources of data on the income of the aged because those sources substantially underreport the distributions from such retirement plans.
Income typically falls in retirement, and the timing and extent of that decline concerns policymakers. If income from Social Security, pensions, and savings do not allow retirees to maintain their desired standard of living, they will face difficult and perhaps unexpected choices about reducing or eliminating certain kinds of expenditures. The income replacement ratio—retirement income expressed as a percentage of preretirement income—has become a familiar metric for assessing the adequacy of retirement income. This article presents the income replacement ratios experienced by members of the original sample cohort of the Health and Retirement Study (HRS), who were born between 1931 and 1941. Median replacement ratios among this sample fall as the retirement period grows longer.
Defined Contribution Pension Participation and Contributions by Earnings Levels Using Administrative Data
This article examines the relationship between earnings levels and participation and contribution rates in defined contribution (DC) retirement plans. Specifically, the article estimates DC plan participation and contribution rates in 2006 both by the worker's current earnings and by the annual average of real earnings over the 10-year period 1997–2006. Using these two different measures of earnings allows us to assess whether employing a longer period of earnings, such as a decade, provides a better representation of pension outcomes than the short-term measure of current earnings.
Of particular interest in this article is the relationship between firm size and pension coverage and participation because small businesses tend to be less likely to offer retirement benefits to their employees than do large businesses. This relationship is particularly important given the current administration's retirement proposals to create automatic individual retirement accounts. Obviously, accurate information is important not only in formulating retirement income security policies that target workers without retirement plan coverage, but also to assess the impact of such policies on workers' retirement plan participation.
The Impact of Response Error on Participation Rates and Contributions to Defined Contribution Pension Plans
The accuracy of information about coverage and contributions to defined contribution (DC) pension plans is important in understanding the economic well-being of future retirees because these plans are an increasingly important part of retirement income security. Using data from the 1996 and 2004 panels of the Survey of Income and Program Participation (SIPP) merged with information from W-2 tax records, we examine the extent to which estimated participation rates and contribution amounts to DC plans derived from SIPP reports differ from estimates obtained from tax-deferred contributions in the W-2 tax records.
The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers
A large share of traditional defined benefit pension plans have frozen within the past decade and evidence suggests that this trend will continue in the future. This article uses the Model of Income in the Near Term (MINT) microsimulation model to project the impact on boomers' retirement incomes of freezing traditional pension plans and replacing them with 401(k)-type plans. The projections suggest that the largest impact will be for the most recent boomers born between 1961 and 1965.
This article examines pension participation and nonpension net worth of two cohorts of near retirees. Particularly, the authors look at people born in 1933 through 1939 who were ages 55–61 in 1994, and the more recent cohort consisting of people of the same age in 2004 who were born in 1943 through 1949. Data are from the Health and Retirement Study, a longitudinal, nationally representative survey of older Americans.
On July 1, 2007, New Zealand introduced KiwiSaver, a new subsidized retirement savings plan. All new entrants to the labor force and anyone starting a new job are automatically enrolled in a plan and may opt out if they wish. Anyone younger than age 65, including the self-employed and anyone not in the labor force, may choose to set up a KiwiSaver account. The government provides tax credits for both employer and account holder contributions, a one-time tax-free payment to each account, and an annual fee subsidy to defray administrative costs.
This article examines the development of Japanese voluntary employer-sponsored retirement plans with an emphasis on recent trends. Before 2001, companies in Japan offered retirement benefits as lump-sum severance payments and/or benefits from one of two types of defined benefit (DB) pension plans. One DB plan type was based on an earlier occupational pension model used in the United States. The other DB plan type allowed companies to opt out of the earnings-related portion of social security. Landmark laws passed in 2001 introduced a new generation of occupational retirement plans to employers and employees, creating three new DB plan designs and two new defined contribution types of plans. Since that time, the mix of employer-sponsored retirement plans offered in Japan has changed significantly, and overall employee coverage has declined. On balance, employer-sponsored retirement plans have remained largely DB in design.
This policy brief analyzes changes in the employer-sponsored pension system and the relationship of these changes to the Supplemental Security Income program's treatment of retirement plans. SSI does not treat assets in defined benefit and defined contribution retirement plans in the same manner. The primary difference is that a potential SSI recipient has access to the funds in a defined contribution plan, but a participant in the defined benefit plan has no access to the pension until attaining a specific age. The increasing prevalence of the defined contribution retirement plan and the decreasing prevalence of the defined benefit plan is one significant change—a trend that has gained momentum since the mid-1980s. The importance of these issues relates to the extent of pension plan holdings among SSI applicants and recipients, which is in turn directly related to their involvement in the labor force. The policy brief discusses three alternate approaches to SSI treatment of defined contribution retirement plans, one of which is to retain the current policy.
This article presents a comparison of replacement rates for employees of medium and large private establishments to replacement rates for federal employees under the Civil Service Retirement System and the Federal Employees Retirement System. This analysis shows the possibility of replacement rates exceeding 100 percent for FERS employees who contribute 6 percent of earnings to the Thrift Savings Plan over a full working career. Private-sector replacement rates were quite similar for workers with both a defined benefit and a defined contribution pension plan.
This article summarizes recent trends in employer sponsorship of retirement plans and employee participation in those plans. It is based on data collected in surveys of employers conducted by the U.S. Department of Labor's Bureau of Labor Statistics and surveys of households conducted by the U.S. Census Bureau.
Many employer-provided pension plans explicitly account for Social Security in their benefit formulas—a practice known as integration. Because integrated pensions are directly linked to Social Security, both the incidence and design of explicitly integrated plans are likely to be affected by changes in the current Social Security program. While integration has been mentioned as an important issue in discussions of Social Security reform, researchers have largely ignored the concept of pension integration. This paper provides basic information about pension integration and addresses, in general terms, the relationship between Social Security reform and pension integration.
Pension Coverage Among Private Wage and Salary Workers: Preliminary Findings From the 1988 Survey of Employee Benefits
Pension Coverage Among Private Wage and Salary Workers: Preliminary Findings from the 1988 Survey of Employee Benefits
Pension coverage is declining in the United States, and most of the decline can be attributed to decreasing coverage among younger workers. In addition, it appears that the types of pension coverage are shifting, with a decline in traditional pension plans and an increase in 401(k) plans.
These are perhaps the most important findings from a 1988 survey of American workers, similar to pension surveys in 1972, 1979, and 1983. The 1988 survey collected data from a sample representing 114 million workers who were currently employed. This paper examines patterns of pension coverage among all private wage and salary workers, but focuses on those working full time.
Pension Status of Recently Retired Workers on Their Longest Job: Findings From the New Beneficiary Survey
Pension Coverage and Vesting Among Private Wage and Salary Workers, 1979: Preliminary Estimates from the 1979 Survey of Pension Plan Coverage
This paper examines pension coverage and vesting in 1979 among private wage and salary workers aged 14 and older in the employed labor force. Coverage and vested status are examined in relation to personal and current job characteristics in order to provide a profile of workers protected and not protected under the private retirement system. The data are derived from the 1979 Survey of Pension Plan Coverage, a supplement to the May 1979 Current Population Survey.
Three major findings emerge from the analysis. First, coverage rates among full-time workers increased slightly between 1972 and 1979, and vested rates increased substantially during the same period. Second, although coverage rates were moderate to high for certain groups of workers, many workers were not in these groups. Third, women were much less likely than men to be covered by a retirement plan and to have acquired vested rights to their benefits.
This paper examines the effect of inflation on private pension saving. The role that private pensions can or should play in providing income in old age in the current inflationary environment is an important policy issue. A number of studies have discussed the effect of inflation on pensions. This study extends the existing analysis and presents the first empirical estimates. Inflation is seen to have a large negative effect on this aspect of retirement saving by workers.