past and future of private retirement options

® Employee Benefit Research Institute 2014® Employee Benefit Research Institute 2011

Dallas L. SalisburyCEO and President, EBRI

[email protected]

ERISA at 40 – the state of retirement plans

mailto:[email protected]


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


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



THE MOST COMMON REQUEST WE GET:

GIVE ME ONE NUMBER FOR…..

5


In Conclusion

82% Coverage

47% Coverage

28% Coverage

6


Seriously…………….

7

• 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


Seriously…………….ERISA had consequences…..intended and unintended….

8



• ERISA funding change: the money should always be in the plan and markto market is the appropriate method of valuing assets and liabilities


Seriously…………….ERISA had consequences…..intended and unintended….with key realities in most defined contribution plans

9



• 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


Seriously…………….ERISA had consequences…..intended and unintended….with key realities in most defined contribution plans

10



• 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


Total Participants By Plan Type (Active, Vested, Retired)

12


% 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.


Public Pension Debate - Replays ERISA Reform Debate


For Many State and Local Workers Public Pensions Offer Little Retirement Security, Urban Institute Study Shows

18

“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

http://www.urban.org/url.cfm?ID=904623




19


20


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.


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.


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.


Systemic Reality: Many workers do not leave work by choice

24


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.


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


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


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


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


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


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


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


http://urbanlegends.about.com/od/dubiousquotes/Dubious_Quotations.htm



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…


“Bad news sells papers. It also sells market research.”

-Professor Byron Sharp


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.


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.


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.


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


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


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


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


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



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.


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


EBRI : Just the Facts™

www.ebri.org

www.choosetosave.org

http://www.ebri.org/

past and future of private retirement options

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