The Success of the U.S. Retirement System

7/30/2019 The Success of the U.S. Retirement System

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The Success of the U.S. Retirement System


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Copyright 2012 by the Investment Company Institute. All r ights reserved.

Suggested citation: Brady, Peter, Kimberly Burham, and Sarah Holden. 2012. The Success of the U.S. Retirement

System (December). Washington, DC: Investment Company Institute.


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Pet er Brady, ICI Senior Economist ; K imberly Burham, ICI Economist ; a nd Sarah Holden, ICI Senio r Director

of Retirement and Investor Research, prepared this report.

Key Findings ............................................................................ ...................................................................... 3

Introduction ..................................................................................................................................................4

Households Savings Goals ......................................................................................................... .................. 5

Focus o Saving Changes over the Lie Cycle ....................................................................... ................... 5

Focus o Saving Varies with Household Income .....................................................................................6

Using Focus on Retirement Savings to Understand Statistics on Retirement Plan Coverage .................8

The U.S. Retirement System: A Retirement Resource Pyramid ....................................................................9

Evidence o the Success o the U.S. Retirement System .......................................................................... .... 10

Assets Earmarked or Reti rement over Ti me .......... ...... ..... ...... ..... ...... ..... ...... ...... ..... ...... ..... ...... ..... ...... 10

Wealth and Retirement Accumulations o Successive Generations ....................................................... 12

Poverty Among Older Individuals over Time ..................................................................... .................. 14

Changes in Households Standard o Living at Retirement .................................................................. 14

Changes in Household Wealth in Retirement ..................................................................... .................. 17

Components o the U.S. Retirement Resource Pyramid ............................................................................. 17

Social Security Beneits ........................................................................... .............................................. 17

Homeownership..................... ............................................................................... ................................ 22

Employer-Sponsored Retirement Plans and IRAs ............................................................................ ..... 26

Other Assets ................................................................... ....................................................................... 32

TheSuccessoftheU.S.RetirementSystem


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2 TheSUCCeSSOFTheUSReTIReMeNTSYSTeM

Estimating the Components o the Retirement Resource Pyramid ............................................................ 34

What Do Current Trends Suggest About Retirement in the Future? .......................................................... 36

Historical Trends in Reti ree Income rom Employer-Sponsored Retirement Plans and IRAs .............. 36

Projecting the Future o Retiree Income rom Employer-Sponsored Retirement Plans and IRAs ....... 37

What Are the Primary Areas o Concern Going Forward? ......................................................................... 39

Conclusions ......................................................................... ........................................................................ 42

Appendi x: Additional Deta il on Surveys, Housing-Related Data, and Near-Retiree Households ...... ..... ..... 43

Notes ..................................................................... ............................................................................... ....... 53

Reerences .......................................................................... ......................................................................... 57


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TheSUCCeSSOFTheUSReTIReMeNTSYSTeM 3

Key Findings

The U.S. retirement system h s successfully provided dequte retirement resources to genertions

of Americns. Studies that examine spending, i ncome, and wealth conclude that households, on

average, maintain their standard o living in retirement. By some measures, retirees appear to be

better o than other segments o the population: in 2011, a lower percentage o the population

aged 65 or older lived in poverty (9 percent) than the percentage aged 18 to 64 (14 percent) or the

percentage younger than 18 (22 percent).

To dte, successive genertions of retirees hve been better off thn previous genertions.Analysis

shows that, on average, more-recent generations o households have higher levels o resources to

draw on in retirement than previous generations. Other measures also indicate improvements in

retiree well-being. For example, the poverty rate among people aged 65 or older has declined rom

nearly 30 percent in 1966 to 9 percent in 2011.

The shift in privte-sector retirement plns from predominntly defined benefit (DB) plns to

predominntly defined contribution (DC) plns is unlikely to reduce retirement prepredness. The

extent to which previous generations o retired households relied on income generated by private-

sector DB plans is oten exaggerated. Since 1975, the prevalence o income generated by private-

sector retirement plans o all types (measured by both the share o retirees with the income and the

amount o income) has increased substantially. In act, because they are better suited to the mobile

U.S. workorce, several studies conclude that the shit rom DB plans to DC plans in the private

sector will increase retirement resources or most households.

The focus of household sving chnges over the life cycle. In 2010, only 14 percent o households

younger than 35 reported that retirement was their primar y sav ings goal, compared with nearly

hal o households aged 50 to 64. Younger households typically are ocused on other goals:

32 percent o households younger than 35 reported that saving or education, homes, or other

large purchases was their primary saving goal. Because households may choose to save orretirement when older, it is di icult to assess retirement preparedness or households that are

not in or near reti rement.

Rther thn the trditionl three-legged stool n logy, pyrmid is more ccurte depiction of the

resources Americns rely on in retirement. The retirement resource pyramid has ive components:

Social Security; homeownership; employer-sponsored retirement plans (DB and DC); IRAs; and

other assets. Households do not rely on each resource equally; the composition o the retirement

resource pyramid var ies across households.

Socil Security benefits provide brod bse of resources for ne rly ll retirees. Social Security has

evolved into a system that provides substantial retirement resources throughout the income andwealth distribution, and provides the primary retirement resource or workers with low lietime

earnings. For workers born in the 1940s, Social Security is projected to replace 70 percent o

average lietime earnings or the bottom 20 percent o earners and 29 percent o average lietime

earnings or the top 20 percent o earners.


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For mny households, the homes they live in represent the second most importnt retirement resource

fter Socil Security. Older households are more likely to own their homes; more likely to own

their homes without mortgage debt; and, i they sti ll have mortgages, are more likely to have small

mortgages relative to the value o their homes. Retired households typically access this resource

simply by living in their homes and not paying rent.

Employer-sponsored retirement plns nd IRAs ply complementry role to Socil Security benefits,

incresing in importnce for households for whom Socil Security replces smller shre of ernings.

Nevertheless, employer-sponsored plans and IR As are an important resource or households

regardless o income or wealth. In 2010, about 80 percent o near-retiree households had accrued

beneits in retirement plans or IRAs. Nearly hal o near-retiree households with income less t han

$30,000; 71 percent o near-retiree households with income o $30,000 to $54,999; and 94 percent

o near-retiree households with income o $55,000 or more had retirement accumulations.

Introduction

This study examines the empirical evidence on the eectiveness o the U.S. retirement system. The

empirical evidence demonstrates that the U.S. retirement system is successul. On average, households areable to maintain their standard o living in retirement. To the extent that there has been a trend in retiree

well-being, measures such as income, wealth, and poverty rates show that successive generations o retired

households have become better onot worse oover time. The U.S. retirement system will ace many

challenges andas has always been the casethe uture is uncertai n. However, changes to pr ivate-sector

retirement savingin particular, the growing importance o employer-sponsored deined contribution

(DC) retirement plans and individual reti rement accounts (IRAs)do not represent a major challenge or

the system. To date, the shit to a more account-based system has not been associated with a reduction in

the income o retired households, and there is reason to believe that many households will beneit rom

this shit.

The U.S. retirement system has ive key components. For retirees as a group, Social Security beneits

represent the largest component o retirement resources. For some retirees, homeownership represents

the second most important resource. By owning rather than renting the house that they live in, these

households do not need to generate as much monthly income in retirement. Employer-sponsored

retirement plansincluding both deined beneit (DB) plans and DC plansand IRAs provide a

supplement to Social Security bene its. In act, or many households, retirement plans and IRAs are more

valuable than either their Social Security bene its or the equity they have in their homes. Although less

important on average, retirees also rely on other assets in retirementassets such as inancial holdings

outside o retirement plans and IRAs, investment real estate, and business investments. The importance

o these ive components in providing retirement resources diers rom household to household. In their

entirety, these ive components have allowed recent generations o retirees, on average, to maintain t heir

standard o living in retirement.


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The irst section o this paper illustrates that saving or retirement is one o many savings goals o U.S.

households; moreover, the ocus o household saving changes over the lie cycle and varies with household

income. The second section introduces a new way to think about retirement planning in the United

States: the retirement resource pyramid. In the thi rd section, the success o the U.S. retirement system is

evaluated using various measures. The sections that ollow describe the ive key building blocks o the U.S.

retirement system, the roles they play, and how those roles have evolved. Estimates o the components

o the retirement resource pyramid are provided or households approaching reti rement to analyze howthe pyramid d iers across households nearing retirement. Some insights into what current trends suggest

about the uture o retirement are explored, including discussions o the likely impact o the shi t among

private-sector employers rom DB retirement plans to DC retirement plans, and the major risks aced by

uture reti rees. A summary o the key results concludes the paper.

Households Svings Gols

Households have many savings goals and the goals vary across the lie cycle and across income groups.

In addition to saving or retirement, households save to und education expenses, to purchase homes, to

pre-und other large purchases, or to have cash on hand or emergencies or unexpected needs ( liquidity).

The Survey o Consumer Finances (SCF) ask s households their most important motivation or saving.1

In the 2010 SCF, 35 percent o U.S. households listed saving or liquidity as their most important reason

or saving (Figure 1). In act, regardless o age or income, liquidity is an important motivation or saving

or a substantial portion o households. Retirement was the next most common reason, with 30 percent

o households listing reti rement as the primary reason they save.2 Another 23 percent o U.S. households

listed education, buying homes, or saving or other large purchases as their primary savings goal.

Retirement is not the most important reason to save or all households, and it is oten not the most

important reason to save or any given household in every stage o lie. For this reason, it is di icult to

assess the adequacy o retirement resources or households other than those near or in retirement.

Focus of Sving Chnges over the Life Cycle

As households approach retirement age, they become more ocused on sav ing or retirement. For

example, in 2010, only 14 percent o households with a household head younger than 35 saved primarily

or retirement; 32 percent o these households cited education, homes, or large purchases as the primary

reason they saved (Figure 1). Those numbers are reversed or older households aged 50 to 64: nearly hal

o these households reported that retirement was their primary savings goal and only 15 percent reported

that saving or education, homes, or large purchases was their pri mary savings goal.

The household survey data showing that older households are more ocused on retirement saving are

consistent with economic models o lie-cycle consumption, which predict that households rationally delay

saving or retirement until later in their working careers when they typically have higher earnings. It is

not that younger households do not save, but rather that they t ypically save or other reasons. Oten the

irst savings pr iority or a household is to build up a rai ny-day und. In addition, younger, newly ormed

households oten invest in their uture in ways that do not result in the accumulation o inancial assets or

ormal retirement savings. Examples include purchasing a home; purchasing consumer durables such as

vehicles, appliances, and urniture; unding education; and raising children. These households may choose

to ocus on saving or retirement when older.


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Focus of Sving Vries with Household Income

Households at dierent income levels also have dierent primary reasons or saving. Having cash on hand

in the event o emergency or unexpected need (l iquidity) was an important reason to save or all i ncome

and age groups (Figure 2). However, regardless o their age, households with lower incomes were more

likely to report liquidity as their primar y reason or saving. Among households aged 35 to 49 in 2010,

34 percent o households with income less than $25,000 indicated that liquidity was their primary savings

goal, compared with 28 percent o households with income o $100,000 or more (Figure 2, top panel).

A similar pattern by income is seen among households aged 50 to 64 (Figure 2, lower panel).

Saving or education, homes, or large purchases is more important to households with lower incomes than

saving or retirement. For example, among households aged 35 to 49 in 2010, 36 percent o households with

income less than $25,000 reported that saving or education, homes, or large purchases was t heir primary

reason or saving, compared with 23 percent o households with income o $100,000 or more (Figure 2,

top panel). At all levels o income, older households were less likely to save primarily or these reasons.

Among households aged 50 to 64 in 2010, 26 percent o households with income less than $25,000 cited

saving or education, homes, or large purchases as their primar y reason to save, compared with 10 percent

o households with income o $100,000 or more (Figure 2, lower panel).

FIgURe

Households Primary Reasons for Saving Vary by Age

Percentge of U.S. households by ge, 2010

Primry reson for sving

All

households

Age of hed of household

Younger

thn 35 35 to 49 50 to 64 65 or older

Retirement 30 14 29 48 24

Liquidity (cash on hand, emergencies,

unexpected needs)35 39 35 30 39

Education, home, or large purchases 23 32 27 15 19

education 8 11 16 4 2

Buy own om 3 9 3 1 (*)

Lar purcass 12 12 9 10 17

Other 8 14 6 4 11

Invstmnts 1 2 1 1 1

For t family 6 11 5 3 6

No particular rason 1 1 1 1 4

Cannot or do not save 4 2 3 3 7

Total 100 100 100 100 100

(*)=lsstanprcnt

Not:Componntsmaynotaddtottotalbcausofroundin

Sourc:InvstmntCompanyInstituttabulationsoftSurvyofConsumrFinancs


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FIgURe

Households Primary Reasons for Saving Vary with Household Income

Householdincome*

Householdincome*

Primaryreasonforsaving

Cannotordonotsave

Other(investmentsforthefamilynoparticularreason)

Liquidity(cashonhandemergenciesunexpectedneeds)Educationhomeorlargepurchases

Retirement

All

ormore

to

to

to

to

Lessthan

All

ormore

to

to

to

to

Lessthan

Percentageofhouseholdswithhouseholdheadagedtobyhouseholdincome*

Percentageofhouseholdswithhouseholdheadagedtobyhouseholdincome*

*Totalisousoldincombfortaxsin

Not:Componntsmaynotaddtoprcntbcausofroundin



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In contrast to other reasons to save, the ocus on saving or retirement increases with household income.

For example, among households aged 35 to 49 in 2010, 15 percent o households with income less than

$25,000 said retirement was their pr imary reason or saving, compared with 44 percent o households with

income o $100,000 or more (Figure 2, top panel). Among households aged 50 to 64 in 2010, 27 percent

o households with income less than $25,000 indicated retirement was their primar y reason or saving,

compared with 65 percent o households with income o $100,000 or more (Figure 2, lower panel).

One reason lower-income households may be less ocused on saving or retirement is that, with limited

resources, they prioritize saving or liquidity. Another reason is that the Social Security beneit ormula is

highly progressive and resu lts in beneits that replace a much higher percentage o earnings or workers

with lower lietime income.3 The result is thatat any given agelower-income households tend to be

less ocused on saving to supplement Social Security in reti rement.

Using Focus on Retirement Svings to Understnd Sttistics on Retirement Pln Coverge

Understanding di erences between households in their motivation or saving can provide insight into

statistics on employer-sponsored retirement plan coverage. Using Current Population Survey (CPS)

data or 2011,4 Brady and Bogdan (2012a) ind that 50 percent o private-sector wage and salary workers

were employed by irms that sponsored retirement plans (including both DB and DC plans). However,

access to retirement plans is not random. Workers who are part o groups who tend to be more ocused

on saving or reti rement also are much more likely to work or employers that oer plans. For example,

limiting the analysis to ull-time, ul l-year workers aged 30 to 64, access to retirement plans increases to

60 percent. I the analysis is narrowed urther to the groups o workers most likely to be ocused on saving

or retirementworkers aged 30 or older with at least moderate levels o earnings and all but the lowest-

earning workers aged 45 or olderthen 69 percent work or employers that sponsor plans. In add ition,

some in this group without access to plans at their own employers have access to plans through their

spouses employers. Taking into account access through spouses, 74 percent o workers who are likely to

be ocused on saving or retirement have access to employer-prov ided retirement plans, and 93 percent

participate in the plans oered.

Looking at the percentage o all workers who have access to retirement plans at their employers at any

single point in time understates the share o the population who will reach retirement with work-related

retirement beneits. Many young workers, low-wage workers, or part-time workers are more concerned

with saving or a ra iny day, to purchase homes, or to und education than they are with saving or

retirement. However, young workers do not remain young throughout their working careers, and many

low-wage and part-time workers do not remain low-wage and part-time throughout their careers. Many

workers who do not have access to employer-sponsored retirement plans today will have access to a plan

either through their own employers or their spouses employersprior to reti rement.


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The U.S. Retirement System: A Retirement Resource Pyrmid

Households rely on many types o resources in retirement and the role each type plays has changed over

time and varies across households. The traditional analogy i s that retirement resources are like a three-

legged stool. This analogy implies that everyone should have resources divided equally among Social

Security, employer-sponsored pension plans, and private savings. This is not currently, nor has it ever been,

an accurate picture o Americans retirement resources. A pyramid is a better representation o retirement

resources.

The retirement resource pyramid has ive basic components, which draw rom government programs,

deerral o compensation until reti rement, and other savings. The ive components o the retirement

resource pyramid are Social Secur ity; homeownership; employer-sponsored retirement plans (both

private-sector employer and government employer plans, as well as both DB and DC plans); IR As

(including rollovers); and other assets.

At the base o the ret irement resource pyramid is Socia l Security (Fig ure 3). Social Securit y covers

households across a ll levels o earnings; however, it replaces the largest port ion o average lietime

earnings or households with low lietime earnings.

A resource avai lable to the vast majorit y o retired households is the home in which they l ive (Figure 3).

Homeownership increases with age and is high across all i ncome groups among near-retiree households.

Households who own homes oten have no or low mortgage debt by the time they reach retirement age.

Households do not have to sell their homes to beneit rom them in retirement; they simply have to live

in them. Homeownership is like having an annuity that provides rent, as the home provides a place to live

that otherwise would have to be rented.5

The next two layers o the reti rement resource pyramid consist o accumulations in employer-sponsored

retirement plans (both private-sector employer and government employer plans, as well as both

DB and DC plans) and IRAs (both contributory and those resulting rom rollovers rom employer-

sponsored plans) (Figure 3). In 2010, the SCF data show that accrued beneits and asset accumulations

in employer-sponsored retirement plans and IR As constituted a resource or about 80 percent o near-

retiree households. Near-retiree households across all income groups have these retirement beneits, but

employer-sponsored retirement plans and IR As ty pically provide a larger share o resources or higher-

income households.

Finally, at the top o the retirement resource pyramid are other assets that a household may own

(Figure 3). These assets can be inancial assetsincluding bank deposits and stocks, bonds, and mutual

unds owned outside o employer-sponsored retirement plans and IR As; and noninancial assets

including business equity, nonresidential propert y, second homes, vehicles, and consumer durables

(long-lived goods such as household appliances and urniture). Assets in this category tend to be ownedmore requently by higher-income households.


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Evidence of the Success of the U.S. Retirement System

Generations o retirees have beneitted rom the resources provided to them by the U.S. retirement system,

and the empirical evidence demonstrates that, on average, retirement outcomes have improved over

time. The amount o assets earmarked or use during retirement has increased over time and successive

generations o households have reached retirement with higher levels o wealth, on average, than prior

generations. Furthermore, poverty rates or people aged 65 or older have allen over time. In addition,

expenditure and income data generally indicate that households are able to maintain their standard oliving when they retire. Final ly, research inds that retirees, on average, maintain su icient wealth to

generate as much income as they could when irst reti red.

Assets Ermrked for Retirement over Time

The amount o assets earmarked or retirement has grown, even when adjusted or in lation and growth

in the number o U.S. households.

Assets earmarked or retirement include IRAs, DC plans, private-sector DB plans, state and local

government pension plans, ederal pension plans, and annuities. In mid-2012, total retirement assets stood

at $18.5 tri llion (Figure 4, top panel) and accounted or 36 percent o U.S. households inancial assets.6

DC plans and IRAs accounted or $9.8 tril lion, or more than hal, o total retirement assets. Fueled in

signi icant part by rollovers rom employer-sponsored retirement plans (both DB and DC; both private-

sector employer and government employer plans), IRAs represented more than one-quarter o the total

U.S. retirement assets in mid-2012, compared with about 10 percent in 1985. DC plans, which include

401(k) plans, 403(b) plans, and 457 plans, also have risen in share over the past two decades, largely the

result o private-sector adoption o 401(k) plans. Despite the decline in private-sector DB plans, such plans

had assets o $2.4 tril lion in mid-2012, and they continue to pay beneits to retirees.7 Federal, state, and

local government plans had $4.6 tr illion in mid-2012, predominantly in DB plans.8

FIgURe

Retirement Resource Pyramid

Other assets

IRAs

(including rollovers)

Employer-sponsored retirement plans

Homeownership

Social Security

Sourc:InvstmntCompanyInstitut


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FIgURe

Retirement Assets Have Grown over Time

Annuities

Federalpensionplans

Stateandlocalgovernmentpensionplans

PrivateDBplansDCplans

IRAs

UStotalretirementmarketassetstrillionsof(nominal)dollarsend-of-periodselecteddates

AverageretirementassetsperUShouseholdconstantdollarsroundedtonearestend-of-periodselecteddates

Q

Q

e e e

AnnuitisincludallfixdandvariablannuityrsrvsatlifinsuranccompanislssannuitisldbyIRAs(b)plansplansand

privatpnsionfundsSomoftsannuityrsrvsrprsntasstsofindividualsnotspcificallyforrtirmntowvrinformation

tosparatoutsucrsrvsisnotavailablBcausannuitisldinIRAsplansand(b)plansarnttdfromtflowoffunds

accountsannuitis(lifinsurancpnsionfundrsrvs)fiurandrportdintirrspctivcatorisbyICIICIrportsalowrannuitis

totaltantflowoffundsaccounts(sUSFdralRsrvBoarda)FdralpnsionplansincludUSTrasuryscurityoldinsoftcivilsrvicrtirmntanddisabilityfundtmilitaryrtirmntfund

tjudicialrtirmntfundstRailroadRtirmntBoardandtforinsrvicrtirmntanddisabilityfundTsplansalsoinclud

scuritisldintNationalRailroadRtirmntInvstmntTrustandFdralemploysRtirmntSystm(FeRS)TriftSavinsPlan(TSP)AltoutTSPissimilartoa(k)planasstsldbytTSParincluddinfdralovrnmntrtirmntasstsandarnot

includdintDCplantotalAtyar-ndtTSPld$billioninntasstsFormordtailsrardintTSPsCliftonLarson

AllnLLP Tiscatoryincluds(b)plansplansandprivatmployr-sponsordDCplans(includin(k)plans)Dataarstimatd Not:Componntsmaynotaddtottotalbcausofroundin Sourcs:InvstmntCompanyInstitutUSFdralRsrvBoardNationalAssociationofgovrnmntDfindContributionAdministrators

AmricanCouncilofLifInsurrsIntrnalRvnuSrvicStatisticsofIncomDivisionUSDpartmntofCommrcUSCnsusBurau

USDpartmntofLaborBurauofLaborStatisticsandUSDpartmntofLaboremployBnfitScurityAdministration


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Even when adjusted or both in lation and growth in the number o U.S. households, assets speci ically

earmarked or reti rement have increased signi icantly over time. As o June 30, 2012, the average amount

o retirement assets per U.S. household, adjusted or in lation, was 2.7 times higher than in 1985, and

5.6 times higher than in 1975 (Figure 4, lower panel). In constant 2012 dollars, average retirement assets

per U.S. household were approximately $153,100 in mid-2012, compared with about $56,100 in 1985 and

about $27,300 in 1975.

Welth nd Retirement Accumultions of Successive Genertions

Data show that more recent cohorts o retirees tend to enter retirement wealthier than previous cohorts.

Haveman et al. (2007) use data rom two surveysthe New Beneiciary Survey (NBS) and the Health

and Retirement Study (HRS) to construct a comprehensive measure o wealth that includes the present

value o Social Security beneits and DB pensions.9 The authors ind that new reti rees in the mid-1990s had

higher levels o wealth than new reti rees in the early-1980s. Compared with new retirees i n the early 1980s,

wealth or new retirees in the mid-1990s was 60 percent higher or married couples and about 35 percent

higher or single men and women. A more recent study suggests that this trend has continued. Using HRS

data, Gustman, Steinmeier, and Tabatabai (2009) construct a similarly comprehensive measure o wealth

and compare three groups o households approaching retirement: those aged 51 to 56 in 1992; those aged51 to 56 in 1998; and those aged 51 to 56 in 2004. The authors ind that each successive cohort approaching

retirement was wealthier, with the 2004 cohort 7 percent wealthier than the 1998 cohort and 12 percent

wealthier than the 1992 cohort.

The global inancial cri sis o 2008 and the great recession (December 2007 through June 2009) negatively

impacted the wealth o households across the board.10 Coming ater the bear market and recession earlier

in the decade, the inancial cr isis and great recession represented the second time household balance

sheets had taken a substantial hit in less than 10 years. Nevertheless, over the past decade, wealth and

inancial assets held up better or older households than younger households. Bricker et a l. (2012) report

that between 2001 and 2010 average net worth ell or most age groups, but it ell less or households aged

55 to 64 than younger age groups and actually rose or households aged 65 or older.

Further, although retirement assets ell between 2007 and 2010, assets in retirement accounts ell less

than other assets and grew as a portion o household inancial asset holdings. Looking over a longer

period and ocusing on near-retiree households, the SCF data show their retirement assets have increased

substantially, despite the recent drop in value. For example, since 2001, about seven in 10 near-retiree

households had DC plan assets, IRAs, or both (Figure 5). In addition, the median amount o retirement

assets was $101,350 in 2010, compared with $63,719 in 2001 (in 2010 dollars).


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Ner-Retiree Households Anlyzed in This Pper

To provide insight into what Americans have accumulated to prepare or retirement, this paper uses

the Survey o Consumer Finances (SCF) to analyze households headed by a working individual aged

55 to 64, which are identiied as near-retiree households. In the SCF, a head o household is the male ina mixed-sex couple or the older person in a same-sex couple. The SCF collects data on household total

income beore taxes or the calendar year preceding the survey. For the analysis i n this paper, a near-

retiree household is de ined as a household in the 2010 SCF that is headed by a working individual

aged 55 to 64, excluding the top and bottom 1 percent o the income distribution.

Note: For a brie description o the SCF, see Figure A.1 in the appendix. For a summary o indings

rom the 2010 SCF, see Bricker et al. (2012).

FIgURe

Real Median Balance and Percentage of Near-Retiree Households with Retirement Assets

Near-retiree households, assets expressed in constant 2010 dollars, 19892010

Medianretirementassets

amongsavers

(leftscale)

Sharewithretirementassets

(rightscale)

Not:RtirmntasstsincludasstsinIRAsandDCplanaccountsNar-rtirousoldsarousoldswitaworkinadadto

xcludinttopandbottomprcntoftincomdistribution



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Poverty Among Older Individuls over Time

One way to measure the success o the U.S. retirement system is to consider poverty rates among the

elderly. The poverty rate among individuals aged 65 or older has declined substantial ly since 1966

(Figure 6). In 1966, nearly 30 percent o people aged 65 or older had income below the poverty line. In

2011, the poverty rate or thi s group stood at 9 percent. Even during the great recession, the poverty

rates among the elderly declined slightly. In act, poverty rates or people aged 65 or older are lower than

poverty rates or both the working-age population and chi ldren. In 2011, only 9 percent o people aged65 or older had income below the poverty line, compared with 14 percent o people aged 18 to 64, and

22 percent o people younger than 18.11

Chnges in Households Stndrd of Living t Retirement

It is di icult to measure reti ree well-being directly. One approach to determine i households can maintaintheir standard o liv ing in reti rement is to compare a households actual wealth to a prediction o optimal

wealth accumulation. Another approach is to analyze actors that impact standard o livingsuch as

consumption and income. The data illustrate that the U.S. retirement system provides most households

with su icient resources to maintain their standard o living in retirement.

FIgURe

Poverty Rates Among People Aged 65 or Older Have Fallen over Time

Poverty rtes by ge, percentge of individuls in ge group, 19 662011

Youngerthanto

orolder

Individualsage

Sourc:USCnsusBurauCurrntPopulationSurvy:toAnnualSocialandeconomicSupplmnts


17/64


WealthAccumulationsatRetirementandOptimalWealth

Research suggests that most U.S. households nearing reti rement have accumulated wealth that is equal to

or greater than the optimal amount o wealth they should have accumulated, as predicted by a lie-cycle

model o consumption. Lie-cycle models assume that individuals maximize lietime well-being (or utility)

by optimal ly choosing consumpt ion (and thus savings) over the course o their li eti me.12 Using HRS data

combined with administrative data on lietime earnings, Scholz, Seshadri, and Khitatrakun (2006) use a

lie-cycle model to solve or the optimal amount o wealth or each household and compare that to eachhouseholds actual wealth accumulations. They ind that, among households aged 51 to 61 in 1992, ewer

than 20 percent o households had wealth less than the target amount, and that, among these households,

projected shortal ls were smallon average about $5,000.13

RetireeConsumption

Research on retirees consumption patterns suggests that reti red households generally maintain their

liestyles when they transition into retirement. Hurd and Rohwedder (2008) analyze HRS data and ind

that, other than those who retired because o poor health, spending declines by only a small amount

when a person retires.14 The small declines can be explai ned by reductions in ood and work-related

expenditures. In other research, Hurst (2008) analyzes Consumer Expenditure Survey (CEX) data and alsoinds that most o the declines in spendi ng near retirement are due to reductions in ood and work-related

expenditures. When Hurst (2008) uses Universal Product Code (UPC) data tracking speci ic purchases to

examine ood expenditures more closely, he concludes that reti red households pay lower prices or their

grocery bil ls than younger households. In addition, urther analysis o HRS-Consumption and Activities

Mail Survey (CAMS) data by Hurd and Rohwedder (2006) inds that retirees eat at home more oten.15

Overall, the data suggest that retired households reduce expenditures by substituting money to purchase

goods in the market or time producing goods at home, such as in ood preparation or shopping research.

RetireeIncome

Anot her way to gain insight into retiree well-being is to analyze retirees income. Analysis oadminist rative tax data shows that individuals, on average, maintain their in lation-adjusted, net-o-tax

income near the time o their irst claiming o Social Security beneits. Brady and Pierce (2011) use data

on individuals aged 55 to 61 who did not receive Social Security beneits and who iled a tax return in 1999

to examine the transition into retirement.16 The data allow the authors to ollow this group o individuals

through 2008 and to measure their employment-related income, which consists o wages, Social Security

bene its, and distr ibutions rom employer-sponsored plans (both private-sector employer and government

employer plans, as well as both DB and DC plans) and IRAs. Because the data include inormation

reported to the IRS through inormation returns (such as Form W-2, Form 1099-SSA, and Form 1099-R),

employment-related income can be measured even i individuals do not ile a tax return i n uture years.

To allow su icient data or comparison, the study ocuses on those individuals who irst received SocialSecurity retirement beneits at some point between 2000 and 2005 and compares the employment-related

income o each individual in later years to the individuals employment-related income in t he year prior to

irst claiming Social Security beneits.


18/64


The study inds that employment-related income, net o taxes and adjusted or in lation, remains ai rly

stable, on average, in the year individuals irst c laim Social Security beneits, and or three years thereater

(Figure 7). In the irst year Social Security beneits were claimed, the median individual had inlation-

adjusted ater-tax employment-related income that was 107 percent o their real net employment-related

income in the prior year. By the third year ater claiming Social Security beneits, the median individual

had real net employment-related income o 100 percent o their real net employment-related income in the

year pr ior to cla iming Social Security beneits.

FIgURe

Employment-Related Income Before and After Claiming Social Security Benefits

Per capita1 work-related income,2 net of taxes and adjusted for inflation, expressed as a percentage of same measure

one year prior to first receipt of Social Security retirement benefits; working individuals ag ed 55 to 61 in 199 9 who

had no Social Security benefits, filed a tax return, first received benefits between 2000 and 2005, and were alive

three years after the year be nefits were first received

10 and 90

25 and 75

Median

Percentile of the distribution

8779 76

71

187

209199 195

5549 46 42

132140 136 134

107 107 104 100

Year of first receipt One year after first receipt Two years after first receipt Three years after first receipt

Formarridindividualsincomistsumofwork-rlatdincomfrombotspoussdividdbytwoemploymnt-rlatdincomisdfindastsumoffdrallytaxablwasandtipsrportdonFormW-pnsionandIRAdistributions

rportdonForm-RandSocialScuritybnfitsrportdonForm-SSAlsstsumofIRAcontributionsrportdonForm

andRotcontributionstoanmployrplanrportdonFormW-lsstsumoffdralincomtaxs(iffilinataxrturn)andpayroll

taxs(ifworkin) Sourc:BradyandPircanalysisoftaxrturndataproviddbytStatisticsofIncomDivisionoftIntrnalRvnuSrvic


19/64


Chnges in Household Welth in Retirement

Households may begin reti rement with su icient resources, but this does not necessarily mean that they

are able to maintain those resources through many years o retirement. However, studies that examine

households later in retirement ind that reti rees, on average, maintain su icient wealth to generate as

much income as they could early in reti rement.17 Haveman et al. (2005) analyze NBS data and report that

10 years ater reti rement, retirees could generate as much annual income rom their wealth as they could

when irst reti red. Love, Palumbo, and Smith (2008) use HRS data and show that the income stream thatcould be generated by wealth actually rose as households moved through retirement. Poterba, Venti, and

Wise (2012) use HRS data to st udy wealth and income at the end o lie. They ind that, although many

households had low inancial assets at the end o lie, income at the end o lie was similar to income when

the households were in their it ies and sixties.

Components of the U.S. Retirement Resource Pyrmid

This sect ion examines the components o the U.S. retirement system, or the retirement resource pyramid,

and how they have evolved. The resources oten relied on by U.S. households in retirement are Social

Security beneits; homeownership; work-related retirement accumulationsrom both pr ivate-sectoremployer and government employer plans, as well as both DB and DC plans; and IRAs (including

contributory and rollover). In addition, households may have other assets.

Socil Security Benefits

For most households, one o the most valuable resources is their Social Security retirement beneits.

However, this resource typical ly is not included in measures o household wealth. Social Secur ity is

designed to be progressive; that is, it provides a h igher proportion o retirement beneits relative to

pre-retirement earnings or workers with low earnings than or workers with high earnings. Thus, it

comprises a higher share o lower-earning households retirement income, and i it were to be counted as

an asset, would comprise a higher share o assets in such an augmented balance sheet or those households.

SocialSecurityBenefitChangesoverTime

When Social Security was signed into law in 1935, it was intended to replace a modest portion o income.

Changes to the system since its inceptionin particular, two periods o expansion, irst in the 1950s

and then again in the 1970s increased beneits substantially, especially or those with low lietime

earnings.18 Described as a cornerstone or U.S. retirement security at its beginning,19 Social Security has

transormed into a comprehensive government-provided pension or workers with lower li etime earnings

and a strong oundation or retirement security or those with higher lietime earnings.


20/64


One way to see the evolution o the Social Security system is to look at estimates o replacement rates

calculated by the Social Security Administration (SSA) or hypothetical workers. Each year the SSA

calculates an average wage index (AWI) that roughly corresponds to the average annual earnings or

workers covered by the Social Security system.20 The SSA uses the AWI to create three hypothetical

workers. These hypothetical workers are low earners, with career average earnings approximately

45 percent o the AWI; medium earners, about 100 percent o the AWI; and high earners, about 160

percent o AWI.21

In 1940, according to the SSA estimates, replacement rates at the normal retirement age(NRA), measured as irst-year beneits divided by career-average wage-indexed earnings, ranged rom

18 percent or a high earner to 29 percent or a low earner (Figure 8). For those retiring currently, Social

Security beneits are considerably higher in real terms and are about twice as high when measured as a

percentage o average earnings than when Social Security began to pay beneits. Beneits are projected to

replace 36 percent o career average earnings or a high earner and 58 percent o career average earni ngs

or a low earner. Under current law, these replacement rates are projected to remain stable into the

uture.22

FIgURe

Social Security Replacement Rates over Time for Representative Workers

Estimates of replacement rates (first-year benefits relative to average indexed earnings) at normal retirement age;

percentage of li fet ime earnings ; 1940203 5

Disabilitybenefits

Congressbeginstoincreasebenefitswithspecialacts

MedicareandMedicaid

COLAformulaadjusted

Automaticannualcostoflivingadjustments

(COLAs)

SocialSecurityamendmentscoverageoffederalemployeesincreasetaxratesfutureincreasestonormalretirementage

Repealofretirementearningstest

Medicareprescriptiondrugbenefit

Lowearner

Mediumearner

Highearner

Not:Lowmdiumandiarnrrfrtoscaldarninstatrflctpattrnsofworkandarninsforypotticalworkrsovrt

coursofacarrProjctionsassumnocanincurrntpolicy

Sourcs:ICIsummaryoflislativcansandSocialScurityAdministrationOfficoftCifActuary


21/64


SocialSecurityReplacementRatesbyHouseholdLifetimeEarnings

Social Security beneits vary with earni ngs and provide higher replacement rates or lower-earning

households. The replacement rates that SSA ca lculates are a useul measure to calibrate the evolution

o Social Security bene its over time (Figure 8). However, they are not an ideal measure o the range

o replacement rates that actual workers can expect to receive under the system, as they only measure

the replacement rates or three hypothetical workers.23 An alternative estimate o replacement rates is

produced regularly by the Congressional Budget Oice (CBO). Rather than create hypothetical workers,the CBO builds a model based on the actual earning records o a large sample o workers, which allows

or the calculation o replacement rates or a wider range o incomes.24 To analyze how Social Security

bene its di er by earnings, the CBO irst groups individuals by the decade in which they were born, and

then ranks individuals by household lietime earnings.

Social Security is designed to replace a greater portion o income or lower earners because it uses a

progressive ormula to determine beneits.25 This means that or lower earners, Social Security unctions

as a pension program that provides an annuity beneit that replaces a high percentage o their average

lietime earnings. For the cohort o individuals born in the 1940s, the CBO analysis shows that Social

Security beneits a re projected to replace 70 percent o average earnings or the typical individual in the

bottom 20 percent o individuals ranked by l ietime earnings (Fig ure 9). The replacement rate drops to

47 percent or the second quintile, and then declines more slowly as li etime earnings increase. Social

Security beneits a re projected to replace a considerable ract ion o earnings29 percentor even the

top 20 percent o earners.

FIgURe

Social Security Benefit Formula Is Highly Progressive

CBO estimates of first-year benefits relative to average indexed earnings by household lifetime ea rnings (median),

1940s birth cohort, percent

HighestFourthMiddleSecondLowest

29

3742

47

70

Lifetime earnings quintile

Sourc:ConrssionalBudtOffic(sConrssionalBudtOfficb)


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ImpactofSocialSecurityonPoverty

The expansion o Social Security beneits likely was a major actor in the reduction in the elderly poverty

rate since the late 1960s. The Social Security program has expanded since its inception in 1935 both in

the scope o its coverage and in the generosity o its beneits.26 The current system now covers most U.S.

workers, and over the years has added spousal, survivors, dependent childrens, and disability beneits.27

In addition, government-provided medical bene its or low-income and elderly individuals were introduced

in the mid-1960s and subsequently expanded.

The generosity o the basic beneit or those attaining the Social Security NRAmeasured as the

share o a workers average lietime earnings replaced by i rst-year beneitsincreased substantially in

the early 1950s and again in the 1970s (Figure 8). When instituted, Social Security beneits were not

automatically adjusted or either in lation or wage growth. In the 1950s and 1960s, beneit increases

were made periodically by special acts o Congress. Legislation enacted between 1950 and 1954 raised

replacement rates or new retirees substantially. Between 1955 and 1969, the legislative adjustments kept

bene its airly stable relative to wages. Leg islation passed between 1969 and 1973 led to a second jump

in replacement rates. Further, legislation enacted in 1972 provided that bene its would be automatically

indexed or in lation through an annual cost o livi ng adjustment (COLA).28 However, a law in the

method used to calculate in lation-adjusted beneits led to beneits being over-indexed or in lation. A

new beneit ormula was adopted in 1977, which ixed the law and clawed back some o thepresumably

unintendedincrease in beneits caused by the method introduced in 1972.29 The 1977 beneit ormula is

still used today and, under current law, the Social Security replacement rate at NRA is projected to remain

stable or uture retirees.30

When Social Security was created in 1935, it was intended to be a modest source o retirement income. 31

However, rom its modest beginnings, Social Secur ity has evolved to become a system designed to be the

primary means o support or retirees with low lietime earni ngs. The progressive beneit structure o

Social Security provides workers with low lietime earnings an income stream that replaces a substantial

portion o their pre-retirement income. For workers with higher lietime earnings, it provides a loorbelow which ret irement income cannot all.


23/64


Medicre nd Medicid Provide Resources to Retirees

Other important government-sponsored resources or retirees include Medicare and Medicaid. Along

with Social Security, Medicare and Medicaid are part o Americas saety net or retirees.

Medicare

The Social Security Act o 1965 created Medicare, which is inanced by the ederal government and

individual premium payments.* Medicares purpose is to provide health insurance to people aged

65 or older regardless o income or medical history. Typically, to be eligible a person must be aged

65 or older, an American citizen or legal resident or ive years, and have paid Medicare taxes or

10 years. Medicare beneits have expanded over time, including the addition o Part D prescription

drug coverage. In 2011, 93 percent o people aged 65 or older were covered by Medicare. Medicare

provides widespread health insurance coverage, which is an important resource or retirees. In 2011,

only 2 percent o Americans aged 65 or older were uninsured compared with 18 percent o Americans

younger than 65.

Medicaid

Medicaid, also created as a par t o the Social Security Act o 1965, is a means-tested program that

provides access to health insurance or people with low income and low i nancial assets. Medicaid

is paid or by the ederal government, state governments, and some county governments. In 2008,

about 4.6 million low-income people aged 65 or older received beneits rom Medicaid. Medicaid is an

important source o unding or long-term care: in 2008, Medicaid covered nearly 41 percent o the

total costs o nursing acility care.

* For additional inormation, see U.S. Social Security Administration, Ofce o Retirement and Disability Policy 2012a. See DeNavas-Walt, Proctor, and Smith 2012.

See U.S. Social Security Administration, Ofce o Retirement and Disability Policy 2012b.


24/64


Homeownership

For many households nearing retirement, the home that they live in is one o their most valuable

assets. Not only do older households tend to be more likely to own their homes compared with younger

households, they also are less likely to have mortgages on their homes. In addition, among older

households with a mortgage, the amount outstanding tends to be small in comparison with the value o

the home. Homeownership is a key resource available to households in reti rement. Although owning a

home does not direct ly provide a stream o income that can be used to und consumption in retirement, it

reduces monthly housing expenses. That is, retirees can l ive in their home and not pay rent elsewhere. In

this way, homeownership reduces the need to generate regular monthly income in retirement.

HomeownershipbyHouseholdAge

Homeownership by Birth Cohort. The rate o homeownership tends to i ncrease rapidly with age and

then stabilize, i ncreasing rom around 30 percent or younger households to over 80 percent or older

households (Figure 10, top panel).* For example, in 1989, the homeownership rate was 30 percent or

households born between 1960 and 1969 (the 1960s birth cohort) and aged 20 to 29 at the time o the

survey; 71 percent or the 1940s birth cohort (aged 40 to 49 at the time o the survey); and 79 percent or

the 1920s cohort (aged 60 to 69 at the time o the survey). Similarly, in 2010, the homeownership rate was

58 percent or the 1970s birth cohort (aged 31 to 40 at the time o the survey); 76 percent or the 1950s birth

cohort (aged 51 to 60 at the time o the survey); and 83 percent or the 1930s birth cohort (aged 71 to 80 at

the time o the survey).

Supplementl Security Income

An important government-sponsored resource or retirees i s the Supplemental Security Income

(SSI) program.* SSI was enacted by the Social Security A mendment Act o 1972 to provide beneits

to people aged 65 or older, and blind or disabled adults and children. Eligibil ity and ederal beneits

are nationally un iorm, but may be supplemented by states. SSI is a means tested program or those

with little or no Social Security beneits or other resources, with payment levels determined by bothincome and wealth. In 2011, the ederal SSI beneit or those with no other income was $674 per month

or individuals and $1,011 per month or couples. In 2010, more than 2 million people aged 65 or older

received SSI beneits.

* For additional inormation, see U.S. Social Security Administration, Ofce o Retirement and Disability Policy 2012c.

See U.S. Social Security Administration, Ofce o Retirement and Disability Policy 2012d.

* Figures 10 and 11 present housing-related data or households grouped by the decade in which the head o the household was

born. Housing-related data are available on these households every three years rom 1989 to 2010 rom the SCF. For eachyear in which data are avai lable, the relevant statistics are plotted at the approximate midpoint o the age range or each10-year birth cohort. For example, in 1989, the 1950s birth cohort ranged in age rom 30 years (or those born in 1959) to 39

years (or those born in 1950), and the 1989 data point or th is group is plotted above age 35. In 2010, the 1950s cohort rangedin age rom 51 years to 60 years, and the 2010 data point or this group is plotted above age 56. Presented in this way, patternscan be di scerned both across households and over time. For the data plotted in Figure 10, see Figures A.2 and A.3 in theappendix. For the data plotted in Figure 11, see Figure A.4 in the appendix.


25/64


Impact of Developments Between 2007 and 2010 on Homeownership. Between 2007 and 2010, the

homeownership rate or younger birth cohorts increased less than would be expected based solely on the

experience o preceding birth cohorts at the same ages. However, the relative drop in homeownership

experienced during the great recession needs to be kept in perspective: as homeownership expanded prior

to 2007, the rate o homeownership at any given age was higher or each successive cohort. In general,

the drop in homeownership or younger birth cohorts between 2007 and 2010 simply brought their

homeownership rate more in line with their predecessors.

Changes in the homeownership rates or each bi rth cohort between 2007 and 2010 can be seen by

comparing the last two observations (the dark blue and purple dots) on each cohorts line (Figure 10, top

panel).* For example, the line or the 1970s birth cohort shows that their homeownership rate edged down

rom 60 percent in 2007 (when they were aged 28 to 37) to 58 percent in 2010 (when they were aged 31

to 40). However, the 58 percent rate o homeownership or the 1970s birth cohort in 2010 was not much

dierent than the 57 percent rate o the 1950s birth cohort in 1989 (when they were aged 30 to 39) or the

57 percent rate o the 1960s birth cohort in 1998 (when they were aged 29 to 38).

MortgageDebtbyHouseholdAge

Incidence of Mortgage Debt by Birth Cohor t.As households age, they are more likely to own a home with

no mortgage debt. In particular, there appears to be a st rong tendency within cohorts to pay o mortgage

debt ater reaching age 50. For example, among those in the 1930s birth cohort, 33 percent o households

(representing 42 percent o home-owning households in the cohort) 32 owned a home with no mortgage

debt in 1992, when they were aged 53 to 62 (Figure 10, lower panel). This compares with 44 percent o

households (representing 53 percent o home-owning households in the cohort)in the same 1930s birth

cohort in 2001, when they were aged 62 to 71; and 53 percent o households (representing 64 percent o

home-owning households in the cohort) in the same 1930s birth cohort in 2010, when they were aged

71 to 80.

Although the pat tern o paying o mortgage debt a ter reaching age 50 can be seen within cohorts, youngerbir th cohorts appear to be somewhat less likely to own a home with no mortgage debt. This can be seen

by compar ing di erent cohorts when they were similar in age. For example, in 1989, when they were aged

60 to 69, 54 percent o all households in the 1920s birth cohort (representing 68 percent o home-owning

households in the cohort)owned their homes with no mortgage debt (Figure 10, lower panel). This

compares with 42 percent o all households in the 1930s birth cohort (representing 51 percent o home-

owning households in the cohort) in 1998, when they were aged 59 to 68; and 35 percent o all households

in the 1940s cohort (representing 42 percent o home-owning households) in 2010, when they were aged

61 to 70.

* The lone exception is the 1920s birth cohort. The last two observations plotted or this group are t he 2001 and 2004 surveys.


26/64


FIgURe

Homeownership and Mortgage Incidence by Age

Percentage of U.S. households by 10-year birth cohort of the head of household; 19892010

Born

Born

Born

Born

Born

Born

Ageattimeofsurvey

Homeowninghouseholds

807570656055504540353025

Born Born

Born

Born

Born

Born

Ageattimeofsurvey

Homeowninghouseholdswithnomortgagedebt

Not:AisbasdontaoftadofousoldFordataplottdintisfiursFiursAandAintappndix



27/64


Impact of Developments Between 2007 and 2010 on the Incidence of Mortgage Debt. The tendency o

households to pay o their mortgages as they age held up even during the great recession. For example,

among all households in the 1940s birth cohort, the share who owned a home with no mortgage debt

increased rom 32 percent in 2007 to 35 percent in 2010 (Figure 10, lower panel). When the analysis is

narrowed to home-owning households in the 1940s bir th cohort, the share o homeowners with no

mortgage debt increased rom 37 percent in 2007 to 42 percent in 2010.

Loan-to-Value Ratios by Birth Cohort. For households that have not paid o their mortgage debt, mortgage

debt as a percentage o home value tends to decline with age (Figure 11). For example, in 2010, the median

loan-to-value ratio or homeowners with debt was 81 percent or households in the 1970s birth cohort

(aged 31 to 40 in 2010); 53 percent or households in the 1950s birth cohort (aged 51 to 60); and 35 percent

or homeowners in the 1930s birth cohort (aged 71 to 80).

Impact of Developments Between 2007 and 2010 on Loan-to Value Ratios.The eects o the great recession

and housing market developments can be seen by the act that all birth cohorts have an increase in the

median loan-to-value ratio or homeowners with debt between 2007 and 2010 (Figure 11). For example, the

loan-to-value ratio or the 1950s birth cohort increased rom 45 percent in 2007 to 53 percent in 2010. The

changes in loan-to-value ratios across the cohorts were dr iven primarily by large drops in home valuesrather than increases i n mortgage debt; overall mortgage debt actually declined between 2007 and 2010.33

FIgURe

Loan-to-Value Ratios Typically Are Lower Among Older Households with Mortgages

Medin lon-to-vlue rtio (percent) by 10-yer birth cohort of the h ed of household; 1989 2010

Born

Ageattimeofsurvey

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

807570656055504540353025

Born

Born

Born

Born

Born

Not:AisbasdontaoftadofousoldTloan-to-valuratioiscalculatdforUSousoldswitmortasFortdata

plottdintisfiursFiurAintappndix



28/64


HomeEquityAmongNear-RetireeHouseholds

Home equitythe value o the home less any mortgage debt owed on the propertyrepresents a large

portion o measured wealth or many U.S. households. The typical measure o household wealth is net

worth, which is the sum o the value o al l household assets (inancia l and noninancial) less household

debt. As a group, near-retiree households, deined in this paper as households headed by a working

individual aged 55 to 64,34 held 19 percent o their measured wealth in the orm o home equity in 2010.35

The median ratio o home equity to net worth or near-retiree homeowners was 32 percent (Figure 12).

In 2010, 82 percent o near-retiree households owned their homes (Figure 12). Among near-retiree

households, homeownership tends to rise with household income: 48 percent o near-retiree households

with income less than $30,000 owned their homes, compared with 86 percent o households with income

o $55,000 to $79,999 and 96 percent o near-retiree households with income o $150,000 or more.

Among near-ret iree households that owned their homes, 25 percent owned their homes with no mortgage

debt in 2010 (Figure 12). Lower-income near-retiree households are more likely to have paid o the

mortgages on their homes. Among home-owning near-retiree households with income less than $30,000,

46 percent had no mortgage debt, compared with ewer than 25 percent o other homeowners. Among all

near-retiree households with mortgage debt, the median loan-to-value ratio was 51 percent.

Although ewer lower-income near-retiree households owned their homes, or those that owned their

homes, home equity represented a much higher share o wealth. For example, the median ratio o home

equity to net worth or near-retiree home-owning households with income less than $30,000 was 58

percent, compared with 40 percent or homeowners with income o $55,000 to $79,999, and 19 percent

or homeowners with income o $150,000 or more (Figure 12).

Employer-Sponsored Retirement Plns nd IRA s

Employer-sponsored retirement plans (which include both private-sector employer and government

employer plans, as well as both DB and DC plans) and IRAs are an important part o the retirement

resource pyramid or many households. Accumulations in employer-sponsored retirement plans and IR As

provide income in retirement that supplements Social Security beneits. Consistent with their role as a

supplement to Social Security, they increase in importance among households or whom Social Security

bene its replace a smaller share o thei r average li etime earnings.


29/64


FIgURe

Homeownership and Mortgages Among Near-Retiree Households by Household Income

Ner-retiree households ,1 2010

Household income2 All ner-retiree

households

Less thn

$30,000

$30,000

$54,999

$55,000

$79,999

$80,000

$149,999

$150,000

or more

Percentage of near-retiree

households16 24 19 23 18 100

Household income (dollars)2

Avra 20,263 42,588 66,895 110,287 318,780 109,141

Mdian 21,347 42,693 67,090 108,766 219,566 67,090

Household net worth (dollars)3

Avra 161,980 297,237 322,175 682,864 3,176,997 890,664

Mdian 15,100 138,100 181,400 382,800 1,949,100 221,300

Housing

homownrsip rat (prcnt) 48 80 86 94 96 82

Avra om quity (dollars)4 39,776 85,810 89,261 154,281 495,615 168,950

Mdian om quity (dollars)4 0 56,000 75,000 99,000 323,000 79,000

Selected statistics for home-owning households

Avra ous valu (dollars) 135,834 174,815 193,554 280,906 729,339 320,853

Mdian ous valu (dollars) 100,000 135,000 160,000 225,000 550,000 200,000

Avra om quity (dollars)4 82,621 107,056 104,149 164,234 513,991 205,917

Mdian om quity (dollars)4 75,000 72,500 83,000 104,000 345,000 104,000

Mdian ratio of om quity to

nt wort (prcnt)3, 458 46 40 29 19 32

Incidnc of morta dbt

(prcnt)54 76 77 78 77 75

Mdian loan-to-valu ratio for all

omownrs (prcnt)18 39 39 44 28 35

Mdian loan-to-valu ratio for

omownrs wit dbt (prcnt)47 54 60 54 39 51

Nar-rtirousoldsarousoldswitaworkinadadtoxcludinttopandbottomprcntoftincom

distributionTotalisousoldincombfortaxsinhousoldntwortistdiffrncbtwnousoldrossassts(financialandnonfinancial)andliabilitishomquityistomvalulssanyoutstandinmortadbtontatom Sourc:InvstmntCompanyInstituttabulationsoftSurvyofConsumrFinancs


30/64


Near-RetireeHouseholdsRetirementAccumulations

Employer-sponsored retirement plans and IRAs provide retirement resources to about 80 percent o near-

retiree households (Figure 13). Employer-sponsored retirement plans and IR As act as a supplement to

Social Security. For the past two decades, about 80 percent o near-retiree households have consistently

accrued DB, DC, or both types o reti rement plan beneit (rom private-sector employer and government

employer plans), or IRAs (rollover and contributory). Despite the act that, among private-sector

employers, DC plans have grown relative to DB plans, the portion o near-retiree households with accruedbene its in employer-sponsored retirement plans or IRAs has remained about 80 percent si nce 1989. These

data suggest that the transition rom DB to DC plans has not reduced the share o the population that has

reached retirement with employment-based retirement accumulations. In 2010, 81 percent o near-retiree

households had either claims to beneits rom DB retirement plans (rom current and previous employers,

private-sector employer and government employer plans), reti rement assets (IRAs or DC account ty pe

pensions, such as 401(k) plans or si milar accounts rom current and previous employers, private-sector

employer and government employer plans), or both.

DBPlanBenefits

Workers with traditional DB plans earn beneits that are based on years o service and earn ings averaged

over a period o years (or example, the highest ive years, or the most recent ive years). Because o the

bene it ormula, traditional DB plans place a premium on hav ing both a long tenure at a single employer

and separating rom employment close to retirement age.36 Workers with cash balance plans, another

type o DB plan, earn retirement beneits that are expressed as a notional account balance. The notional

account typically i s increased each year by a percentage o the workers pay plus an increase based on

a speci ied rate o return. Workers with cash balance plans accrue retirement beneits more evenly

throughout their working careers.

Participation in DB plans never has been universal and the number o workers participating in private-

sector DB plans has declined over the past 20 years. In 2010, there were 17 million active participants

in private-sector DB plans, compared with 27 mil lion active participants i n 1989.37 Despite the act thatewer current private-sector workers are covered by DB plans, many households who are near retirement

have accrued beneits in DB pension plans, and thus DB plans wil l continue to be an important source o

retirement resources in the near uture. In 2010, 41 percent o near-retiree households had accrued DB plan

bene its (including accruals in both pr ivate-sector employer and government employer plans), compared

with 55 percent o near-retiree households who had accrued DB plan beneits i n 1989 (Figure 13).


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FIgURe

Vast Majority of Near-Retiree Households Have Accrued Pension Benefits

Percentage of near-retiree households,1 19892010

Retirementassetsonly

BothDBbenefitsandretirementassets

DBbenefitsonly

Nar-rtirousoldsarousoldswitaworkinadadtointyarindicatdxcludinttopandbottomprcnt

oftincomdistribution RtirmntasstsincludDCplanassts((k)(b)triftandotrDCplans)andIRAs(traditionalRotSePSAR-SePand

SIMPLe)wtrfromprivat-sctororovrnmntmployrs DBbnfitsincludousoldscurrntlyrcivinDBbnfitsandousoldswittpromisoffuturDBbnfitswtrfrom

privat-sctororovrnmntmployrs

Not:Componntsmaynotaddtottotalbcausofroundin Sourc:InvstmntCompanyInstituttabulationsoftSurvyofConsumrFinancs


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DCPlanBenefitsandIRAs

In a DC plan, there is no beneit ormula. The beneit is the balance in the account, which re lects

contributions made to the account and investment returns earned on the account. Contributions to DC

plans can be made by employers, workers, or both. A 401(k) plan is one type o DC plan. Workers who

participate in a 401(k) plan have the option to contribute a portion o their earnings into a retirement

account. In addition, employers may contribute to the employees retirement account, either through

automatic or matching contributions. When the worker reaches retirement age, their retirement beneitis the balance in the 401(k) account, and the worker may begin to withdraw money. 38 I a worker does

not stay with the same employer throughout their career, the DC account can be let at the old employer,

rolled over into an IRA, or shi ted to a new employer. In any case, the balance o the DC account remains

under the ownership and control o the worker.

DC pension plans have grown signi icantly, particularly 401(k) plans in the private sector, which had

$3.3 trillion in assets in mid-2012.39 In 1989, there were 17 mill ion active participants in 401(k) plans,

compared with 51 million in 2010.40 Because 401(k) plans were irst introduced in the early 1980s,41

workers who are currently near retirement will not have had the opportunity to participate in 401(k) plans

throughout their ul l careers. Employees o non-proit organizations, un iversities, and public schools

typical ly are oered another type o DC plan, a 403(b) plan; these plans held $771 billion in mid-2012.42

State and local government employees had accumulated $201 billion in 457 plans in mid-2012.43 All told,

DC plan assets totaled $4.7 trill ion in mid-2012 (Figure 4).

Created in 1974 under the Employee Retirement Income Security Act (ERISA), IRAs were designed with

two goals.44 First, they provide individuals not covered by workplace retirement plans with an opportunity

to save or retirement on their own. Second, through rollovers, they allow workers who are leaving a job

a means to preserve the tax beneits and growth opportunities that employer-sponsored retirement plans

provide. The IRA has proved successul in both roles, although contributions to IRAs decl ined ater 1986

when restrictions were placed on who could make deductible contributions to traditional IR As.45 More

recently, rolloversinclusive o rollovers rom DB and DC plans; private-sector employer and governmentemployer planshave been the primary source o unds lowing into IRAs.46 As o the end o June 2012,

IRA assets totaled $5.1 tril lion (Figure 4).47

The growth o DC plans and IRAs also can be seen on household balance sheets. In 2010, 71 percent o

near-retiree households had DC plan accounts or IRAs, compared with 60 percent in 1989 (Figure 13).

Among households with DC plan accounts or IRAs, the median amount o assets in these accounts (in

constant 2010 dollars) has increased to $101,350 in 2010, compared with $40,479 in 1989 (Figure 5) .


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Near-RetireeHouseholdsRetirementAccumulationsbyHouseholdIncome

The portion o near-retiree households that have accrued beneits in employer-sponsored retirement plans

or IRAs is high across all i ncome groups. In 2010, 94 percent o near-retiree households with income o

$55,000 or more had DB plan beneits, DC plan accounts, or IRAs (Figure 14). More than 70 percent o

near-retiree households with income o $30,000 to $54,999 had such employer-sponsored retirement plan

bene its or IRAs. Among near-ret iree households with income less than $30,000, almost hal had such

retirement plan beneits or IRAs.

Employer-sponsored retirement plans and IRAs act as a supplement to Social Security. The ownership

pattern o employment-sponsored retirement beneits mirrors (or complements) the progressive Social

Security bene it. Social Security provides higher replacement rates or workers with lower lietime

earnings. Employer-sponsored retirement plans supply retirement beneits at al l income levels, but higher-

income households are more l ikely to accrue beneits in employer-provided retirement plans.

FIgURe

Near-Retiree Households Across All Income Groups Have Retirement Assets or DB Benefits or Both

Percentge of ner-retiree households1 by income group,2 2010

Retirementassetsonly

BothDBbenefitsandretirementassets

DBbenefitsonly

AllHigher

ormore

Upper-Middle

to

Middle

to

Lower-Middle

to

Lower

Lessthan

Householdincomegroup


distributionTotalisousoldincombfortaxsin RtirmntasstsincludDCplanassts((k)(b)triftandotrDCplans)andIRAs(traditionalRotSePSAR-SePand

SIMPLe)wtrfromprivat-sctororovrnmntmployrsDBbnfitsincludousoldscurrntlyrcivinDBbnfitsandousoldswittpromisoffuturDBbnfitswtrfrom

privat-sctororovrnmntmployrs

Not:Componntsmaynotaddtottotalbcausofroundin Sourc:InvstmntCompanyInstituttabulationsoftSurvyofConsumrFinancs


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Near-retiree households across a ll income groups part icipate in employer-sponsored retirement plans and

IRAs. As household income increases so too does the amount o retirement assets in DC plans and IRAs, as

well as the share o near-retiree households with DB beneits (Figure 15). The median ratio o DC account

and IRA assets to net worth var ies across income groups. For example, in 2010, near-retiree households

with income less than $30,000 that owned retirement assets had median reti rement assets o $18,000. One-

quarter o those households also had DB pension beneits. In comparison, near-retiree households with

income o $150,000 or more that owned retirement assets in DC accounts and IRAs had median retirementassets o $423,000, and almost hal o those households expected beneits rom DB pension plans. However,

the accumulation in DC accounts o near-retiree households today is not an indication o what uture

generations o workers wil l accumulate when exposed to DC plans or a ull working career.48 In 2010,

among near-retiree households with reti rement assets, 43 percent also had beneits rom DB plans.

As a share o net worth, retirement assets are most important to moderate-income households. In 2010, the

median ratio o retirement assets (DC accounts and IRAs) to net worth was 23 percent or households with

income less than $30,000 that owned reti rement assets (Figure 15). The median ratio o retirement assets

to net worth rises with income, reaching 40 percent or households with income between $80,000 and

$149,999 that owned retirement assets. Although the amount o retirement assets continues to increase

with income, these assets represent a smaller share o net worth or households with t he highest incomes.Among households with income o $150,000 or more that ow ned retirement assets, the ratio o retirement

assets to net worth was 24 percent.

Other Assets

In addition to Social Security, homeownership, employer-sponsored DB and DC plans, and IRAs, some

households own other assets upon which they can draw in reti rement. Other assets include inancial

and noninancial assets, such as nonresidential property, business equity, and stocks owned outside o

employer-sponsored retirement plans or IRAs.

Ownership o other assets is not evenly distributed across households. Bricker et al. (2012) ind thathouseholds with greater wealth and higher incomes are more likely to own other assets. For example,

stock ownership outside retirement accounts rises with wealth. In 2010, the SCF shows that 3 percent o

households with net worth in the bottom 25 percent o the population owned stocks outside o retirement

accounts, compared with 55 percent o households with net worth in the top 10 percent o the population.

Similarly, the 2010 SCF data show that 5 percent o households in the bottom 20 percent o the income

distribution owned business equity, compared with 38 percent o households in the top 10 percent o the

income distr ibution.


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FIgURe

Retirement Plans and IRAs Among Near-Retiree Households by Household Income

Ner-retiree households ,1 2010

Household income2All ner-

retiree

households

Less thn

$30,000

$30,000

$54,999

$55,000

$79,999

$80,000

$149,999

$150,000

or more

Percentage of near-retiree

households16 24 19 23 18 100

Household income (dollars)2

Avra 20,263 42,588 66,895 110,287 318,780 109,141

Mdian 21,347 42,693 67,090 108,766 219,566 67,090

Household net worth (dollars)3

Avra 161,980 297,237 322,175 682,864 3,176,997 890,664

Mdian 15,100 138,100 181,400 382,800 1,949,100 221,300

Accrued pension benefits

Som typ of accrud pnsion

bnfit (prcnt)48 71 89 95 96 81

Rtirmnt assts only4 28 38 43 43 48 40

Bot DB bnfits and rtirmnt

assts4, 59 20 32 45 45 31

DB bnfits only5 11 12 14 7 3 10

Avra rtirmnt assts (dollars)4 17,431 51,048 83,780 206,002 654,545 196,735

Mdian rtirmnt assts (dollars)4 0 4,300 28,000 130,000 400,000 34,000

Selected statistics for households with retirement assets

Avra rtirmnt assts (dollars)4 47,224 87,741 112,341 233,042 704,385 277,064

Mdian rtirmnt assts (dollars)4 18,000 36,000 57,000 150,000 423,000 101,350

Sar tat also av DB bnfits

(prcnt)525 35 43 51 48 43

Mdian ratio of rtirmnt assts to

nt wort (prcnt)3, 423 27 32 40 24 29


distributionTotalisousoldincombfortaxsinhousoldntwortistdiffrncbtwnousoldrossassts(financialandnonfinancial)andliabilitis

RtirmntasstsincludDCplanassts((k)(b)triftandotrDCplans)andIRAs(traditionalRotSePSAR-SePandSIMPLe)wtrfromprivat-sctororovrnmntmployrs

DBbnfitsincludousoldscurrntlyrcivinDBbnfitsandousoldswittpromisoffuturDBbnfitswtrfrom

privat-sctororovrnmntmployrs Sourc:InvstmntCompanyInstituttabulationsoftSurvyofConsumrFinancs


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Estimting the Components of the Retirement Resource Pyrmid

The U.S. retirement system generally is successul at providing reti rement resources to older Americans.

The system consists o Socia l Security, which provides a wide base o resources to households;

homeownership; DB and DC employer-sponsored retirement plans and IR As, which complement Social

Security; and other assets. Households do not rely on each part o the retirement system equally in order

to maintain li estyles as they transition rom working lie to reti red lie. Some components o Americas

retirement system, such as Social Security, are designed to provide greater support to people with lower

lietime income. This means that Americans with higher levels o lietime income are more reliant on

employer-sponsored retirement plans, IRAs, homeownership, and other assets in retirement.

It is possible to estimate the retirement resource pyramid or U.S. households, but doing so requires

measuring the value o a households uture stream o Social Security and DB plan beneits. Gustman,

Steinmeier, and Tabatabai (2009) undertake this exercise using HRS data rom 2006. The analysis ocuses

on households approaching reti rementin this case, households with a member born between 1948 and

1953 (aged 53 to 58 in 2006). Their analysis is used to estimate the components o the retirement resource

pyramid or these households, with households grouped by their augmented wealth (Figure 16).

Re lecting the progress ive beneit ormula, households approaching retirement in the lowest augmented

wealth quintile (the lowest 20 percent o households approaching retirement ranked by augmented wealth)

rely heavily on Social Security beneits. In 2006, Social Security comprised 82 percent o total augmented

wealth or households approaching retirement who were in the lowest augmented wealth quintile

(Figure 16). Although Social Security typical ly replaces a high percentage o earnings or these households,

many also had equity in their homes, accumulated retirement beneits, and other assets.

In comparison with those with lower augmented wealth, households approaching reti rement in the middle

o the augmented wealth distribution rely more heavily on resources other than Social Security. Social

Security comprised a large portion o total augmented wealth (

Documents

The Success of the U.S. Retirement System