Past and Future of Private Retirement Options
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Transcript of Past and Future of Private Retirement Options
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2011
Dallas L. SalisburyCEO and President, EBRI
ERISA at 40 – the state of retirement plans
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
DC 1974 – DOJ Pre ERISA, DOL and PBGC – Age 24
2
EBRI Founding 1978 … 9/28/2013 was 35th Anniversary………..Age 64
40 Years of Research and Policy Analysis:
Retirement, Health, Savings, and Other Employee Benefits
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
EBRI
3
Descriptive Not Normative
Policy maker goals and objectives will determine their interpretation of whetherthe numbers presented tell a good or bad story – do not bias them
Let the data fall where it may (see last point)
Consider actual behavior and risks in assessing possible outcomes
Run multiple scenarios
Look at all scenarios/outcomes by multiple demographic variables
Try to avoid ever giving a single number – which is almost always what has been asked for - as the answer to a complex question
Disclose strengths and limitations of EBRI research and modeling and do the same for research and modeling done by others
® Employee Benefit Research Institute 20144
® Employee Benefit Research Institute 201
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
THE MOST COMMON REQUEST WE GET:
GIVE ME ONE NUMBER FOR…..
5
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
In Conclusion
82% Coverage
47% Coverage
28% Coverage
6
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
Seriously…………….
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• ERISA definition change: defined contribution plans are pensions – anda pension does not necessarily have to pay a life income stream
• ERISA vesting change: every participant that spends a reasonable time in a plan should get some benefit -- ideally vesting will be immediate andthe cash and accrual will be portable
• ERISA funding change: the money should always be in the plan and markto market is the appropriate method of valuing assets and liabilities
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
Seriously…………….ERISA had consequences…..intended and unintended….
8
• ERISA definition change: defined contribution plans are pensions – anda pension does not necessarily have to pay a life income stream
• ERISA vesting change: every participant that spends a reasonable time in a plan should get some benefit -- ideally vesting will be immediate andthe cash and accrual will be portable
• ERISA funding change: the money should always be in the plan and markto market is the appropriate method of valuing assets and liabilities
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
Seriously…………….ERISA had consequences…..intended and unintended….with key realities in most defined contribution plans
9
• ERISA definition change: defined contribution plans are pensions – anda pension does not necessarily have to pay a life income stream
• ERISA vesting change: every participant that spends a reasonable time in a plan should get some benefit -- ideally vesting will be immediate andthe cash and accrual will be portable
• ERISA funding change: the money should always be in the plan and mar• ppropriate method of valuing assets and liabilities
Voluntary decision on whether or not to sponsor a plan Voluntary decision on how expensive a plan to adopt Voluntary emphasis on allowing the worker to opt out
Of participation Of fixed contribution amount Of specified investment
Voluntary emphasis on allowing the worker to choose withdrawal timing Voluntary emphasis on allowing the worker to choose benefit form
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
Seriously…………….ERISA had consequences…..intended and unintended….with key realities in most defined contribution plans
10
• ERISA definition change: defined contribution plans are pensions – anda pension does not necessarily have to pay a life income stream
• ERISA vesting change: every participant that spends a reasonable time in a plan should get some benefit -- ideally vesting will be immediate andthe cash and accrual will be portable
• ERISA funding change: the money should always be in the plan and mar• ppropriate method of valuing assets and liabilities
ERISA recognized that employers and workers have different ability to pay,that one size does not fit all, that flexibility encourages sponsorship and participation.
The form of the Affordable Care Act – the variations in mandate by employer size, the number of options vis level of plan cost and protection, the amount/form of income related premium subsidies, the inclusion of Medicaid for the poor….
Underlines why moving to mandatory private savings programs has not happened……………………and
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 20111
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Total Participants By Plan Type (Active, Vested, Retired)
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® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 20113
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
% Sponsorship, Participation and Vesting 1940 ‒ 2012
1940 1950 1960 1970 1974 1979 1988 1998 2009 20120
10
20
30
40
50
60
70
Sponsorship Participation % Vested %
14
U.S. Bureau of the Census, various datasets, 1940‒2013.
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 20115
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 20116
® Employee Benefit Research Institute 201417
Public Pension Debate - Replays ERISA Reform Debate
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
For Many State and Local Workers Public Pensions Offer Little Retirement Security, Urban Institute Study Shows
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“The traditional pension plans generally provide lucrative retirement incomes to long-term employees but offer little retirement security to workers who change employers several times over their career,”
Traditional plans tend to encourage older employees to retire early, a problematic feature as the work force grows older. These plans may complicate government efforts to recruit younger employers and retain older ones.”
Richard Johnson, Urban Institute, Director ,Program on Retirement Policy
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
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® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
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® Employee Benefit Research Institute 2014
Male Prime-Age (25-64) Workers Median Tenure Trends, By Age, 1951-2010
3.52.7 2.7
4.5
7.6
6.06.7
7.36.5 6.1
5.5 5.3 5.2 5.2 5.3
7.6
11.4 11.5 11.8
10.19.4 9.5 9.6
8.1 8.2 8.5
9.3
13.0
14.5 14.615.3
14.513.4
10.511.2
10.2 10.2 9.8 9.510.1 10.4
3.22.82.93.02.82.72.82.8
3.2 3.2 3.1 3.1 3.0
5.1
7.0
5.0
6.9
8.8
11.0
12.8
9.1
11.2
14.7
0
2
4
6
8
10
12
14
16
18
1951 1963 1966 1973 1978 1983 1987 1991 1996 1998 2000 2002 2004 2006 2008 2010
Year
Year
s of
Ten
ure
Ages 25-34Ages 35-44Ages 45-54Ages 55-64
Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the Monthly Labor Review (September 1952, October 1963, January 1967, December 1974, and December 1979); from press releases (for 1983, 1987, 1991, 1996, 1998, 2000, 2002, 2004, 2006, 2008, 2010) from the U.S. Department of Labor, Bureau of Labor Statistics.
® Employee Benefit Research Institute 2014
Female Prime-Age (25-64) Workers Median Tenure Trends, by Age, 1951-2012
1.8 2.0 1.92.2
1.6
3.0 3.13.13.6 3.5 3.6 3.6
4.14.4 4.3 4.2
4.95.2
6.15.7 5.9 5.9
6.37.0 7.2 7.3
7.0 7.1 7.3
4.5
7.8
8.88.5
9.8 9.7 9.9 10.09.6
9.99.6 9.8 9.7
10.0
2.62.5 2.5 2.5
2.82.82.8 2.6 2.72.7
4.74.5
4.64.84.5 4.5
6.7
4.0
6.8 6.76.5 6.4
9.2
9.29.0
0
2
4
6
8
10
12
1951 1963 1966 1973 1978 1983 1987 1991 1996 1998 2000 2002 2004 2006 2008 2010 2012
Year
Yea
rs o
f Ten
ure
Ages 25-34Ages 35-44Ages 45-54Ages 55-64
Source: Data (for 1951, 1963, 1966, 1973, and 1978) from the Monthly Labor Review (September 1952, October 1963, January 1967, December 1974, and December 1979); from press releases (for 1983, 1987, 1991, 1996, 1998, 2000, 2002, 2004, 2006, 2008, 2010, and 2012) from the U.S. Department of Labor, Bureau of Labor Statistics.
® Employee Benefit Research Institute 2014
Percentage of Wage and Salary Workers Ages 45-64 Who Had 25 or More Years of Tenure, by Age and Sector, 2004-2012
10.0% 9.5%
17.4%
15.1%
19.4%
15.4%
17.9% 18.0% 18.3%
25.4%
8.8%8.9%9.3%
13.2%13.3%12.8%
15.0%16.4%15.4%15.3%
16.1%
24.3%
22.6%
25.8%
23.2%
15.2%
26.5%
23.5%
24.9%
21.8%
8%
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
2004 2006 2008 2010 2012
Ages 45 to 54-Private Sector Ages 45 to 54-Public Sector Ages 55 to 59-Private SectorAges 55 to 59-Public Sector Ages 60 to 64-Private Sector Ages 60 to 64-Public Sector
Source: Employee Benefit Research Institute estimates from the January 2004, 2006, 2008, 2010, and 2012 Current Population Surveys.
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Systemic Reality: Many workers do not leave work by choice
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® Employee Benefit Research Institute 201425
People Retire Early for a Variety of Reasons, Though Over Half of Retirees Cite Health Problems as a Factor
Why did you retire earlier than you had planned? (2013 Retirees retiring earlier than planned n=127, percent yes)
You had a health problem or disability
You could afford to retire earlier
You had to care for a spouse or another family member
Changes at your company
You had another work-related reason
You wanted to do something else
Changes in the skills required for your job
55%
32%
23%
20%
20%
19%
9%
Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 1993-2013 Retirement Confidence Surveys.
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
EBRI strives to move others away from:
QUOTING A SINGLE NUMBER AS INDICATIVE OF STATUS OR SUCCESS OR FAILURE OF A COMPLEX SYSTEM FOR A DIVERSE POPULATION.
26
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
A COMMON SINGLE NUMBER:
USING A SINGLE NUMBER AS INDICATIVE OF SUFFICIENT SAVINGS OR INCOME - SUCH AS AN 80% REPLACEMENT RATE - WHEN THE REAL NUMBER/% DIFFERS BASED UPON INDIVIDUAL CIRCUMSTANCES. AND, WHEN THE 80% CAN APPLY TO DIFFERENT OBJECTIVE MEASURES
DOES IT APPLY TO LIFETIME INCOME, OR FINAL INCOME, OR BASIC EXPENSE NEEDS, OR ???????????????
27
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
The reporter or marketing brochure or though leader might say “the Boston College CRR reports that 54.7%
of workers will not be able to maintain their pre-retirement standard of living using an 80% of income
threshold.”
Implication or sometimes stated conclusion:The current voluntary system is not successful.
28
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
A COMMON MISTAKE:
ACCEPTING AS TRUTH WHAT OTHERS SAY OR WRITE WITHOUT INVESTIGATION,
LEADING TO MYTHOLOGY AND MISTAKES.
As Ronald Reagan said, Trust but Verify.
29
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
What does the one number not tell you?
30
How does the result vary by income or age or tenure? No, the sample is too small for that level of detail, it is a macro model
Does the number assume future contributions to plans? No, it does not, it uses a constant income to wealth ratio until each person turns age 65 (in this simulation)
How does it deal with longevity and long term care It assumes that everyone turns their assets into a life income annuity and that everyone has long term care insurance
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Probability of NOT running short of money in retirement depends on the number of future years of eligibility for a defined contribution plan
(Gen Xers with Long Term Care and Home Health costs included)
Zero 1-9 10-19 20+0%
20%
40%
60%
80%
100%
2014EBRI Re-tirement
Readiness Ratings
Percent of simulated expenses
31
Source: Employee Benefit Research Institute Retirement Security Projection Model® Version 1995
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Probability of NOT running short of money in retirement depends on relative pre-retirement income level and the expense threshold
(Boomers and Gen Xers with and without Long Term Care and Home Health costs included)
Lowes
t qua
rtile w
ith...
Secon
d qua
rtile w
ith...
Third q
uartil
e with
LTC
Highes
t qua
rtile w
ith...
Lowes
t qua
rtile w
itho..
.
Secon
d qua
rtile w
itho..
.
Third q
uartil
e with
ou...
Highes
t qua
rtile w
itho..
.0%
20%
40%
60%
80%
100%
2014EBRI Re-tirement
Readiness Ratings
32
Source: Employee Benefit Research Institute Retirement Security Projection Model® Version 1995
Percent of simulated expenses
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
® Employee Benefit Research Institute 201434
® Employee Benefit Research Institute 201
What (Some) Experts Say…The tax preferences for pensions are “upside down” - - not by all definitions
…IF you overlook the actual impact of nondiscrimination tests and contribution limits…and ignore the data that show that balances stay in close proportion to compensation…
® Employee Benefit Research Institute 201435
“Bad news sells papers. It also sells market research.”
-Professor Byron Sharp
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Percentage of Those Age 65 or Older With Any DB Pension Annuity Income, 1975-2011
1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 2010 201122%
24%
26%
28%
30%
32%
34%
36%
38%
40%
25.2%
24.9%
26.7%
26.9%
29.6%30.7%
33.2% 35.1%
37.0% 37.4%
35.3%
35.9%
34.9%
34.8% 35.4%
35.4%
35.4%
35.0%
34.5%
34.8%
Source: EBRI tabulations of the 1976-2012 Current Population Survey.
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Percentage of Income Attributable to Pension Income for Those Age 65 or Older, 1975-2011
1975 1977 1979 1980 1983 1985 1987 1989 1991 1993 1996 1998 2000 2002 2004 2006 2008 2009 2010 201112%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
14.4%
14.6%
14.8%
15.3%
15.8%
15.6%
17.7%
17.7%
19.5%
20.8%
19.6%
19.9%
19.1%
20.2%20.8%
19.3%
19.7%
19.2%
19.7%
19.8%
Source: EBRI tabulations of the 1976-2012 Current Population Survey.
® Employee Benefit Research Institute 201438
Use of a single average or a single median to judge the success or failure of SSA, voluntary savings, etc. will always mislead policy makers and skew perceptions.
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Quintiles of LSD equivalents from 2010 defined benefit participants ages 65-70 from CPS
p20 p40 p60 p80 $-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
39
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Quintiles of 2010 year end 401(k) balances for ages 60-65 by tenure category
p20 p40 p60 p80 $-
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
$300,000.00
$350,000.00
40
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Quintiles of 2010 year end combined 401(k) and IRA balances for ages 60-65 by tenure category (for 401(k) participants with at least one IRA)
p20 p40 p60 p80 $-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
41
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
Average Employer Expenditures for Retirement Plans - % of Total Compensation Civilian Workers
1959 1970 1980 1990 2004 2010 20130
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
TotalDBDC
42Source: Author’s Compilation from BLS.gov
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
43
PAYABLE Monthly Benefit Levels as Percent of Career-
Average Earnings by Year of Retirement at age 62
0
10
20
30
40
50
60
70
1960 1980 2000 2020 2040 2060 2080
Low Earner ($19,388 in 2010; 25th percentile)
Medium Earner ($43,084 in 2010; 56th percentile)
High Earner ($68,934 in 2010; 81st percentile)Max Earner ($106,800 in 2010; 100th percentile)
Source: 2010 OASDI Trustees Report
® Employee Benefit Research Institute 201444
® Employee Benefit Research Institute 201
Takeaways• There is not a retirement “crisis” for the nation• If there is deemed to be one today, there has been one for the history
of the nation, a “continuous” crisis• There have always been savings, income and care shortfalls for the
largest segment of the population• World experience is that a universal mandatory system is the lowest
cost and most effective, but funding has never failed to be a problem/challenge for any nation
• World experience is that annuity based programs are the most cost effective, but increasingly people want “their” money for “their control” in all nations
• US DB plans have moved to lump sums for 40 years, and DC have always resulted in lump sums, responding to individual choice, but making good across society outcomes more difficult and expensive
• “ChooseTo $ave®” and “$ave Four Your Future®” get more important with each passing day, week, month, year.
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 201
DC 1974 – DOJ Pre ERISA, DOL and PBGC – Age 24
45
EBRI Founding 1978 … 9/28/2013 was 35th Anniversary………..Age 64
40 Years of Research and Policy Analysis:
Retirement, Health, Savings, and Other Employee Benefits
® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2014
EBRI : Just the Facts™
www.ebri.org
www.choosetosave.org