11

•The State of US Retirement PlansThe State of US Retirement Plans

• Dallas L. SalisburyDallas L. Salisbury• President and CEOPresident and CEO• Employee Benefit Research InstituteEmployee Benefit Research Institute• Maxwell MPA, 1973 and ABD, 1976Maxwell MPA, 1973 and ABD, 1976

• www.ebri.orgwww.ebri.org

• NPF September 18, 2007NPF September 18, 2007

22

EBRIEBRI

• Founded 1978Founded 1978

• Current Team of 15 and Budget of $4.5 Current Team of 15 and Budget of $4.5 millionmillion

• No Change of Mission Since 1978No Change of Mission Since 1978

• On Sixth Generation of Representatives On Sixth Generation of Representatives from Outside Organizationsfrom Outside Organizations

• www.ebri.orgwww.ebri.org and and www.choosetosave.orgwww.choosetosave.org

33

EBRI Mission: To contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education.

EBRI Methods: Research, Publications, Education, Web Tools and Dissemination, No Position Advocacy or Solutions Advocacy – A Neutral Source for All Sides of a Debate – “Just the Facts”

44

The EBRI DifferenceThe EBRI Difference

• Research and analysis without position Research and analysis without position advocacy.advocacy.

• Primary focus on universe and national Primary focus on universe and national data.data.

• Use of results by organizations and Use of results by organizations and individuals on all sides of issues because individuals on all sides of issues because of non-advocacy approach.of non-advocacy approach.

• Broad-based financial support from Broad-based financial support from organizations across the spectrum of organizations across the spectrum of interests/ideologies and all sectors.interests/ideologies and all sectors.

55

AgendaAgenda

• Public Policy InfluencePublic Policy Influence

• Demographic InfluenceDemographic Influence

• Employer DirectionsEmployer Directions

• ImplicationsImplications

• Can DC Plans Provide Adequacy?Can DC Plans Provide Adequacy?

6

Public Policy Influence

o PPA of 2006 and shift from government desire for DB plans to neutralo

o Government focus on the individual “ownership society” SSA IA’s “universal” IRA PPA automation of plans

77

Demographic InfluencesDemographic Influences

8

Population 2000

9

Population 2100

10

Labor Force New Young Labor Force New Young Entrant Decline Entrant Decline

(Average Annual Gain)(Average Annual Gain)

11

U.S. Job Growth vs. Workforce GrowthU.S. Job Growth vs. Workforce Growth

2006 (per BLS projection)

1122

Percentage of Older Long Tenure Percentage of Older Long Tenure Workers Drops From 23% to 19% -Workers Drops From 23% to 19% -Gold Watches?Gold Watches?

Percentage of All Wage & Salary Workers w ith 25+ Years of Tenure,by Cohort Ages 45+ (1983--2002)

12.9

11.3 11.412.6

11.9 11.6 11.7

22.7

20.2 20.119.4 19.8

18.8 18.7

23.3

20.519.9

18.4

20.1

17.0 17.5

0

5

10

15

20

25

1983 1987 1991 1996 1998 2000 2002

Source: EBRI tabulations of data from the Bureau of Labor Statistics

Per

cen

tag

e Ages 45 to 54

Ages 55 to 59

Ages 60 to 64

1133

Source: Annuity 2000 Mortality Table, American Society of Actuaries. Figures assume you are in good health.

Longevity Builds on Longevity Builds on LongevityLongevity

Couple(Both Age 65)

FemaleAge 65

Age 92

50% chance of one survivor

MaleAge 65

Age 88 94 100

Age 85 92 100

50% chance 25% chance

50% chance 25% chance

25% chance of one survivor

97 10095

9590

90

9085

85

14

Employer Directions

15

Health Spending Up; Retirement Contributions Down

Figure 2Employer Spending on Benefits as a Percentage

of Total Benefit Spending, Selected Years, 1960–2002

59.7% 60.8% 58.5%50.2%

14.4%22.2% 26.7% 36.3%

25.8%16.4% 14.8% 13.5% 9.7%

46.9%

43.2%

0%

20%

40%

60%

80%

100%

120%

1960 1970 1980 1990 2002

Other

Health

Retirement

Source: Employee Benefit Research Institute tabulations of data from the U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts of the United States.

16

High Job Turnover Economy – Participation Gaps

0%10%20%30%40%50%60%70%80%90%

100%

<10 '10-19.9

'20-29.9

'30-39.9

'40-49.9

'50+ all

Earnings (x$1,000)

Per

cen

t o

f T

ota

l

No plan available

Not participating

Participating

Employee Benefit Research Institute

1177

Pension Participation Rates Pension Participation Rates by Firm Sizeby Firm Size

0%

20%

40%

60%

80%

1-9 10-24 25-99 100-499 500-999 1000+

Full time

Part time

Source: March 2005 Current Population Survey tabulations.

1188

Figure fDistribution of Private Sector Workers Who Are Participating in an

Employment-Based Retirement Plan, by Plan Type, 1979-2004

0%

10%

20%

30%

40%

50%

60%

70%

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Defined Benefit Only Defined Contribution Only Both Plans

Source: Depart of Labor Form 5500 Tabulations 1999, 2000-2004 EBRI estimates.

1199

Labor Market Trends Labor Market Trends Mean Future DeclineMean Future Decline

ClassClass RetRet MedMed DentalDental VisionVision DrugDrugWhite White CC

6161 5858 4242 2424 5252

Blue CBlue C 5151 6161 3939 2525 5656ServiceService 2222 2727 1717 1212 2525FullTimFullTimee

6060 6666 4545 2727 5959

PartTPartT 1919 1212 99 66 1111UnionUnion 8585 8383 6767 5151 7777Non-UNon-U 4646 4949 3333 1919 44441-991-99 3737 4343 2424 1414 3737100+100+ 6767 6565 5151 3232 6161Source: Bureau of Labor Statistics

20

Individual Implications

2211

And increased health care costs have And increased health care costs have caused many to have financial caused many to have financial difficulties.difficulties.

45%

34%

29%

26%

24%

18%

Decrease your contributions to a retirement plan, such as a 401(k),

403(b) or 457 plan, or an IRA

Have difficulty paying for other bills

Decrease your contributions to other savings

Use up all or most of your savings

Borrow money

Have difficulty paying for basic necessities, like food, heat, and housing

Percentage Saying Yes

2222

Fixed 4.43% of Pay Plan Cost -Fixed 4.43% of Pay Plan Cost -Entry age 30 –The Price of pay Entry age 30 –The Price of pay EquityEquity

50%

9% 11%16%

0%

10%

20%

30%

40%

50%

DB DC 4% RR DC 6% RR DC 8% RR

DB DC Cost Efficiency Comparison

% Income Replacement

2233

How much do you need to save How much do you need to save if you work until 67?if you work until 67?• Starting at age 20 and Starting at age 20 and

saving consistently for saving consistently for 47 years will support a 47 years will support a long life at rates some long life at rates some are now saving, without are now saving, without annuity purchase.annuity purchase.

• Waiting until 40 or 50 Waiting until 40 or 50 moves the numbers up.moves the numbers up.

• A life income annuity A life income annuity helps keep them lower helps keep them lower as you only need as you only need enough to get you to enough to get you to average life average life expectancy.expectancy.

0

5

10

15

20

25

30

35

40

45

75 80 85 90 95 100

20

40

50

Source: Ballpark E$timate Worksheet, www.choosetosave.org

24

Individual savings shortfalls for meeting basic expenses

• Definition of basic expenses– basic living expenses and any expense associated with an

episode of care in a nursing home or from a home health care provider

• Next two slides shows results by:– Birth cohort– Income quartile

• Function of all future years of work, not just current year or year prior to retirement

• We assume individuals want a better than 50/50 chance of having “sufficient” retirement income to cover basic expenses– Model both a 75 and 90 percent confidence level

25

Median Percentage of Compensation That Must Be Saved Each Year Until Retirement For a 75% Confidence Level For Funds To

Cover Basic Expenses* When Combined With Simulated Retirement Wealth by Birth Cohort and Income Quartile

(Limited to 25%; assumes current Social Security and housing equity is never liquidated)

0%

5%

10%

15%

20%

25%

1936-1940

1941-1945

1946-1950

1951-1955

1956-1960

1961-1965

1234

Income quartile

* Basic expenses = basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care providerSource: EBRI-ERF Retirement Security Projection Model.

26

0%

5%

10%

15%

20%

25%

1936-1940

1941-1945

1946-1950

1951-1955

1956-1960

1961-1965

1234

Median Percentage of Compensation That Must Be Saved Each Year Until Retirement For a 90% Confidence Level For Funds To Cover

Basic Expenses* When Combined With Simulated Retirement Wealth by Birth Cohort and Income Quartile

(Limited to 25%; assumes current Social Security and housing equity is never liquidated) Income

quartile

* Basic expenses = basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care providerSource: EBRI-ERF Retirement Security Projection Model.

2277

Percent of 65+ With Pension Percent of 65+ With Pension and Annuity Income 1988-and Annuity Income 1988-20022002

0%

5%

10%

15%

20%

25%

30%

35%

40%

65+ 65-67 68-70 71-75 76-80 80+

198819911995199820012002

Source: EBRI CPS tabulations, EBRI Notes v24n12, 12/0313% are from Public Employers

2288

SSA Income DominatesSSA Income DominatesSources of retiree income by Sources of retiree income by age (2004)age (2004)

0

20

40

60

80

100

120

60-64 65-69 70-74 75-79 80-84 85+

Earnings SSA Private DBPublic DB Annuities Asset Income

Source: Current Population Survey, Bureau of the Census

2299

SSA Grows in Importance With Age – Income from SSA Grows in Importance With Age – Income from Work PersistsWork PersistsPercentage of total income by age for the retired Percentage of total income by age for the retired population (2004)population (2004)

01020304050607080

60-64 65-69 70-74 75-79 80-84 85+

Earnings SSA Private DBPublic DB Annuities Asset Income

Source: Current Population Survey, Bureau of the Census

3300

Public Policy ImplicationsPublic Policy Implications

• Social Security Becomes More Important Not Less Social Security Becomes More Important Not Less – Even for the Haves’– Even for the Haves’

• Medicare Becomes Primary Source for the Haves’Medicare Becomes Primary Source for the Haves’• Growing Gap Between Public Worker (retiree) and Growing Gap Between Public Worker (retiree) and

Private Worker (retiree) Benefits Private Worker (retiree) Benefits • As Employer Provision/Payment Declines Pressure As Employer Provision/Payment Declines Pressure

on/for Government Programs Growson/for Government Programs Grows• Re-Regulation? New Paternalism? National Health Re-Regulation? New Paternalism? National Health

Insurance? Mandated Savings? Trade Reversal?Insurance? Mandated Savings? Trade Reversal?

3311

Can DC Plans Provide Can DC Plans Provide Adequacy?Adequacy?

32

Average Participant Before-Tax Contribution Rates by Age and Salary, 1999(percent of salary)

Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (see Holden and VanDerhei (October 2001))

5.3

6.7

8.5

6.8 7.1

9.3

7.4 7.3

9.0

20s 40s 60s

Participant Age

$20,000 to $40,000 >$40,000 to $60,000 >$60,000 to $80,000

3333

Average Account Balance Among Average Account Balance Among 401(k) Participants from Year-End 401(k) Participants from Year-End 1999 Through Year-End 2006 by 1999 Through Year-End 2006 by AgeAge

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

1999 1999 2000 2001 2002 2003 2004 2005 2006

20s

30s

40s

50s

60s

Source: "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2006,“ August 2007

3344

Here’s the retirement income the Here’s the retirement income the current DC system may replace by current DC system may replace by the 2030’s…for continuous the 2030’s…for continuous participantsparticipants

Sources: Tabulations from Holden and VanDerhei (2005)

23%33%

43%56%

LowestIncome

Quartile 2 Quartile 3 HighestIncome

All Eligible Workers (Without Automatic Enrollment)

3355

23%33%

43%56%

29%22%

15%

7%

Here is what Here is what might might be achieved -- be achieved -- with two key reforms – auto-with two key reforms – auto-enrollment and lifecycle fundsenrollment and lifecycle funds

Sources: Tabulations from Holden and VanDerhei (2005)

LowestIncome

Quartile 2 Quartile 3 HighestIncome

Increase from Automatic Enrollment (6% Contribution Rate; Life-Cycle Fund)All Eligible Workers (Without Automatic Enrollment)

52% 55% 58%63%

3366

5231 23 16

2333 43 56

2922 15 7

lowestincome

secondquartile

thirdquartile

highestincome

Social Security+ 401(k) with AE

Social Security+401(k) wo AE

Social Security

104%86%

81% 79%

Combined with SSA- Combined with SSA- Continuous Participation and Continuous Participation and PreservationPreservation

37

Median Replacement Rates for 401(k) Accumulations* for Participants Reaching Age 65 Between 2030 and 2039(percent of final five-year average salary)

*The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances.Source: Tabulations from the EBRI/ICI 401(k) Accumulation Projection Model

50.7 54.059.5

67.2

27.724.723.223.2

1 2 3 4

Baseline Don't always have a 401(k)

27.5 30.8 34.739.4

Income Quartile at Age 65

3838

Drivers of GridlockDrivers of Gridlock

• Concern over future funding and benefit levels of Social Security Concern over future funding and benefit levels of Social Security and Medicare and Medicaid LTCand Medicare and Medicaid LTC

• Long term fiscal imbalance and its implications for tax levels and for Long term fiscal imbalance and its implications for tax levels and for tax incentives for health care and retirement savingstax incentives for health care and retirement savings

• Decline of employer provision of retiree life income annuity streams Decline of employer provision of retiree life income annuity streams and retiree healthand retiree health

• Implications for competitiveness of mandates on employersImplications for competitiveness of mandates on employers• Implications for economic growth and consumer spending of Implications for economic growth and consumer spending of

mandates on employeesmandates on employees• Lack of individual understanding of the magnitude of the savings Lack of individual understanding of the magnitude of the savings

needed for retirement and the resulting lack of preparationneeded for retirement and the resulting lack of preparation• Absence of employee/employer/voter support for:Absence of employee/employer/voter support for:

– Mandated savingsMandated savings– Mandated life income streams Mandated life income streams – Increased taxes on “me/us” to pay for programs (existing or new)Increased taxes on “me/us” to pay for programs (existing or new)

• Absence of public trust in “government” or “special interests” to be Absence of public trust in “government” or “special interests” to be honesthonest

39

What Does The Future Hold?

Applies to firms, families, nations…….

40

www.ebri.org and and www.choosetosave.org

Dallas L. SalisburyDallas L. SalisburyPresident and CEOPresident and CEO

Employee Benefit Research InstituteEmployee Benefit Research Institute

www.ebri.org and and www.choosetosave.org