Retirement Readiness (NPF)

8/7/2019 Retirement Readiness (NPF)

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A presentation for theNational Press Foundation

September 19, 2007

Barbara D. BovbjergDirector

Education, Workforce, and Income Security

Retirement Readiness: What AmericansDo and Don¶t Know about Retirement



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Economic Security in Retirement

� Adequate retirement income

� Social Security

� Pensions

� Savings� Earnings from continued employment (e.g., part-

time)

� Affordable health care

� Medicare� Retiree health care

� Long-term care (a hybrid)



3

Elderly Households¶ Source of Income

S n s

3 %

P e n s o n s

%

E rn n s

6 %

S oc l S ec u r y

3 9 %

O th er

3 %

Source: Income of the Popul

tion 55 or Older,¡

004 (W

shin ¢ ton, D.C.: SSA, Off ice of Rese

rch

nd statistics,¡

006).



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Percentage of Elderly Households Receiving

Each Type of Income

8

4

43

4

8

ocial ecurity avings Pensions Earnings

Percentage of elderly households

£ ource: Income of the Population ¤ ¤ or Older, ¥ ¦ ¦ 4 (Washington, D.C.: £ £ A, Office of Research and statistics, ¥ ¦ ¦ § ).



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Three Stages of the Retirement

Process

� Preparation For Retirement (Accumulation Phase)

� Decision to Retire ± when should one leave the labor market and to what degree (binary vs. continuous view of retirement)

� Spending Down During Retirement (Decumulation Phase)



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Preparation for Retirement:

Social Security



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Social Security and Medicare¶sHospital Insurance Trust FundsFace Cash Deficits

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Ca lendar yea r

M ed ic ar e H I c as h f l o S o c ia l S ec u ri t y c as h f l o

Medicare HIcash deficit

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Social Security

cash deficit

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Billions of 7 dollars

Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration and Office of the Actuary, Centers for Medicare and Medicaid Services.Note: Projections based on the intermediate assumptions of the

¨ © © 7 Trustees¶ Reports. The CPI is used to adjust from current to constant dollars.

GAO38



Slide 7

GAO38 DM 1938639, tab VI.F7, col. M for Social Security; tab VI.F9 for HI. Chart verified by JRM 4/27/07GAO, 4/27/2007



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Potential Fiscal Outcomes Under Baseline Extended

Revenues and Composition of Spending as a

Share of GDP

0

1 0

2 0

3 0

4 0

5 0

2 0 0 6 2 0 1 5 2 0 3 0 2 0 4 0F i s c a l

e a r

Pe rce n t o f G DP

e t in te re s t S o c i al S e c u r it

ed i ca re & ed ic a id

l l o th er s p en d in g

Revenue

Source: G

O¶s

ugust 2007 anal

sis.

otes: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2017 mainl

due to (1) real bracket creep, (2) more taxpa

ers becoming subject to the

T, and (3)

increased revenue from tax-deferred retirement accounts.

fter 2017, revenue as a share of GDP is held constant²implicitl

assuming that action is taken to offset increased revenue from realbracket creep, the

T, and tax-deferred retirement accounts.



Slide 8

GAO39 DM#1826655, tab "haircut data"

OK MSM 1/31/07

GAO, 1/31/2007



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Life Expectancy at Age 65

Source: Felicitie C. Bell and Michael L. Miller, ³Life Tables for the United States Social Security Area 1900-2100,´ Actuarial Study No. 120,http://www.ssa.gov/OACT/NOTES/as120/TOC.html.

Years

0

2

6

1 0

1 2

1 1 6

1

2 0

2 2

1 9 0 1 9 5 1 9 0 1 9 5 1 9 9 0 1 9 9 5 2 0 0 0 2 0 0 5 2 0 1 0 2 0 1 5 2 0 2 0

M e n!

o m e n



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Fertility Rate Hovers Around the

Replacement Rate

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Source: U.S. Census Bureau, Statistical Abstract of the United States: 2007 (126th Edition) Washington, DC, 2006; http://www.census.gov/statab/www/, table No. 81.

Note: The total fertility rate is the number of births that 1,000 women w ould have in their lifetime if, at each year of age, they experienced the birth rates occurring in the specified year.



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Aged Population as a Share of Total U.S.

Population Continues to Grow

Percent of total population aged 65 and over

Source: Office of the Chief Actuary, Social Security Administration.

Note: Projections based on the intermediate assumptions of the 2007 Trustees¶ Reports.

0

5

1 0

1 5

2 0

2 5

1 " 5 0 1 " 7 5 2 0 0 0 2 0 2 5 2 0 5 0 2 0 7 5



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Preparation for Retirement:

Pensions and Savings



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The Number of DC Plans Have Increased While the

Number of DB Plans Have Decreased

1# $ 1 % 3

1321 $ 2

846 & 5 & 50 4 7 4 7 41

4 6 2

5 7 05 ' ' 5 ' 8

6 1 '

6 2 4

6 6 16 8 3 6 8 7

6 5 3

7 1 1

0

1 0 0

2 0 0

3 0 0

4 0 0

5 0 0

6 0 0

7 0 0

8 0 0

1 8 5 1 8 7 1 8 1 1 1 3 1 5 1 7 1 2 0 0 1 2 0 0 3 2 0 0 5

P

lans

(

thousan

ds

)

D e f in e d b e n e f it la n s D e f in e d c o n t rib u t i o n la n s

Source: U.S. De 0 artment of Labor 1 1 2 85 ± 2003 data3 ; Investment Com 0 any Institute 1 2005 estimates3 .

Note: The Investment Com 0 any Institute¶s estimates for 2005 are based on the De 0 artment of Labor, Form 5500 Annual re 0 orts, and other information.



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As DB Plan Participation Has Fallen, DC Plan

Participation Has Grown

2 4

2827 26

252 5 2 5 2 5

2221 21

6 6

6

56

4

6

6

6

7

4 2

4 85 0

5 2 5 2

5 5

0

1 0

2 0

0

4 0

5 0

6 0

1 8 5 1 8 7 1 8 1 1 1 1 5 1 7 1 2 0 0 1 2 0 0 2 0 0 5

A

ctive participants

8

9

illions

@

D e in e e n e i t p la n s D e in e c o n t ri t io n p la n s

So A rce: U.S. Depart B ent oC

La D or E 1 F 85 ± 200G H ataI ; Invest B ent Co B pany Instit A te E 2005 esti B ates I .

Note: The Invest B ent Co B pany Instit A te¶s esti B atesC

or 2005 are D ase H on the Depart B ent oC

La D or, For B 5500 Ann A al reports, an H other inC

or B ation.



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Annual Saving Required for a

35-Year Old, with Social Security

0%

2%

4%

6%

8%

10%

12%

14%

62 63 64 65 66 67 68 69 70

Retirement Age

Required Contribution: Percentage of Gross Income

FemaleMale

Source: GAO analysis, based on Social Security Administration data.

Note: The chart shows the percentage of gross salary 35-year old male and female earning an average wage in 2005 would need to withhold so that the individual would

accumulate funds suff icient, along with scheduled social security benefits, to provide retirement income equal to 75% of his or her pre-retirement income. The projections

are based on economic assumptions from the 2005 Social Security Trustees Report for inflation (2.8%), real wage growth (1.1%), real interest rate (3%), and nominal

interest rate (5.8%).



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Falling Personal Saving Rate

Percentage of disposable personal income

Source: Bureau of Economic Analysis.

.

.

.

6 .

.

1 .

1 .

1 6 0 1 6 5 1 0 1 5 1 0 1 5 1 0 1 5 2 0 0 0 2 0 0 6



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Decision to Retire



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Federal Retirement Age-Related Rules

Sources: GAO (analysis); Art Explosion (images).



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Average Effective Retirement Age Has

Been Decreasing

Source: OECD analysis of Census Bureau data.

Note: This is a 5-year moving average based on labor force participation data in the Current Population Survey. For each 5-year period ending in the year shown in thefigure, the effective age of retirement corresponds to the average age of exit for all labor force participants initially aged 40 and over who were no longer in the labor force 5years later.



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Why Older Americans Don¶t

Work Longer

� Cultural Expectation to Retire in mid-60s andMixed Signals from Federal Policy

� Older Americans Perceive Few EmploymentOpportunities

� Most Employers Do Not Make a Special Effortto Hire and Retain Older Workers



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Mixed Signals from Federal Policy

� Social Security early retirement age is 62

� Many private pensions have similar or lower eligibility

ages

� Medicare eligibility age is 65



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Older Americans Perceive Few Employment

Opportunities

� Few older workers felt they had opportunities for partialretirement

� Most older workers and retirees saw low wage, lowskilled jobs as their primary employment opportunities



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Special Effort is Not Made to Hire or Retain

Older Workers

� Many employers say they are willing to implementpolicies to recruit and retain older workers, but fewhave actually done so

� Employers cite barriers, such as federal pensionregulations, to flexible employment options for older workers



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Labor Force Participation Has Been

Increasing

Labor force participation rate

Source: United States Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, http://www.bls.gov/data/

0

10

20

30

40

50

60

70

80

90

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

Men 55-64 Men 65+ Women 55-64 Women 65+



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Spending Down During

Retirement



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Most Retirees Received Annuities, But Direct

Rollovers Increasing

Percent of retirees who received benefit payoutsa

Note: For our analysis, ³retirees with pensions´ are survey respondents who reported leaving a preceding-wave job to retire and reported receiving a pension payout from that job. Figures in subcategories should not be added because some

respondents report receiving multiple pension payouts.aIncludes respondents who received pension benefit payouts from both DB and DC plans.bFor retirees with DB plans, includes respondents who expect to receive benefits in the future. For those with DC plans, includes respondents who reported leaving their assets in a plan account.



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Factors Affecting Payout Options Offered

and/or Elected

� Worker preferences for the type of plan they wantand/or how they receive benefits

� Lack of consumer knowledge and understandingabout annuitization and key risks they will face inretirement



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Importance of Information and

Education

� Helping participants to understand longevity risk and theimportance of saving

� Helping participants/retirees understand financial risks thatthey will face in retirement

� Helping participants understand annuities

� Strategies/advice for managing retirement income duringretirement



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Government Can Help: GAO

Recommendations

� Provide Financial Education/Information

� assist in evaluation of financial literacy programs by serving asan information clearinghouse, setting some standardized

benchmarks, and helping nonprofits build an evaluationinfrastructure.

� Encourage Working Longer

� consider changes to laws, programs, and policies that supportretirement security, including retirement ages, in order to providea set of signals that work in tandem to encourage work at older ages.



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Recommendations

� Bolster the Pension System

� require all sponsors of participant-directed plans to disclose feeinformation of 401(k) investment options to participants in a way

that facilitates comparison among the options.

� require that 401(k) service providers disclose to plan sponsorsthe compensation that providers receive from other serviceproviders.

� require plan sponsors to report a summary of all fees that arepaid out of plan assets or by participants.



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Recommendations

� Reform Social Security: In choosing among proposals, policymakersshould consider three basic criteria:

� the extent to which the proposal achieves sustainablesolvency and how the proposal would affect the economy andthe federal budget;

� the balance struck between the twin goals of individual equity(rates of return on individual contributions) and incomeadequacy (level and certainty of benefits); and

� how readily such changes could be implemented,administered, and explained to the public.



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Barbara D. Bovbjerg

Director, Education Workforce, and Income Security

[email protected]

www.gao.gov

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