NIRS Research on Retirement
Security
NAGDCA Industry
Roundtable Meeting
April 24, 2014
Diane Oakley
Executive Director
What Do Americans Think
About Retirement? Anxious
How concerned are you about current economic conditions affecting
your ability to achieve a secure retirement?
Source: NIRS Pensions & Retirement Security 2013
2
Disappearance of Pensions an
Impediment to “American Dream”
To what extent do you agree/disagree that the disappearance
of pensions has made it harder for workers to achieve the
“American Dream?”
3
It’s Only Getting Harder to
Prepare for Retirement
Do you feel that – compared to today – it will be easier or harder for
Americans to prepare for retirement in the future, or will there be no
difference?
Source: NIRS Pensions & Retirement Security 2013
4
ON THE RIGHT TRACK?
State Pension Reforms in the
Aftermath of the Financial Crisis
5
Why Private Employers Froze DB
Pensions and Shifted to 401(k)s
• Onerous funding regulations on private pensions and
FASB accounting rules caused funding volatility
• Changes in technology and industrial makeup of
economy
• Shift from internal labor markets to flexible labor
markets, insecure employment
• Corporate objective to maximize shareholder value
Many Private Sector Employers
Remain Committed to DB Plans
• “Many employers remain
committed to providing these
plans as an important part of
their compensation package.”
(U.S. Chamber of Commerce: Retirement Benefits
in the 21st Century)
• Three-fourths of active DB
pensions report “DB plan
aligns with our total rewards
philosophy” (AonHewitt: “Global Pension
Risk Survey 2011: US Survey Findings,” )
ON THE RIGHT TRACK?
Public Sector Difference
• Commitment to stable employment relations and
internal labor markets.
• Greater ability to smooth out the effects of business
cycles on funding requirements.
• Public interest mission: DB pensions help provide high
quality public services in a cost effective manner, while
also providing retirement security.
• Public employers have more in common with the
largest private employers, who have maintained DBs.
Public Pension Reforms After
2008 Financial Crisis
• Vast majority have modified their existing
pension plans. Most common:
– increased Employee contributions;
– reduced DB benefits for new hires, including
higher retirement age
– Cost of Living Adjustment (COLA)
reductions for retirees and existing workers.
Aggressive Reforms In Virtually All States to
Ensure Sustainability of Public Pensions
Types of Changes Enacted
Reduced benefits for new hires
39
Employee contribution increase
29
Reduced COLA for current members
16
Employer contribution increase
(statutory)
9
0
10
20
30
Number of States
40
50
Source: Author’s analysis of NCSL data. Changes affect some or all members of state-run plans in each state.
10
Public Pensions Typically Are Shared
Funding Responsibility
Employee and
Employer
Contributions,
1982 to 2009
Source: U.S. Census Bureau
11
After 2008 Financial Crisis:
48 States Make Pension Reforms
• No state has shifted to a DC-only plan
since 2005.
• Four new mandatory hybrid
arrangements with a DC component,
most for new hires only.
• Three Cash Balance Plan for new hires
• Only one state, Rhode Island, enacted a
“Hard Freeze” for current employees.
Most States Stay with DB;
Some Switch to Hybrid
Types of Changes to New Hire Benefits
Adjust existing DB plan
32
DB + DC hybrid
4
Mandatory CB (DB closed)
3
0
10
20
Number of States
30
40
Four states enacted optional DC-only benefits for new hires.
Source: Author’s analysis of NCSL data. Changes affect some or all members of state-run plans in each state.
Higher Age and Service Requirements
for New Members 2009–2012
4
4
Total: 32 States
14
P
R
Increases in Employee Contributions
2009–2012
Future Members Only (7 states)
At Least Some Current Members (23 states)
15
P
R
Reductions in Post-Retirement Benefit
Increases 2009–2012
Future hires only (7 states)
At least some active employees (6 states)
People already retired and active employees (11 states)
Total: 24
States
16
P
R
2013 Public Pension Reforms
Tennessee Hybrid
• Apply: State employees, teachers and Higher
Ed hired after July1, 2014
• Reduced DB: new 1% multiplier ( 1.575%)
and NRA 65 or rule of 90.
• Contributions:
– Employee: 5% for DB and 2% for DC
– Employer: 4% for DB and 4% for DC.
2013 Public Pension Reforms
Kentucky Cash Balance Plan
• Apply: State employees and County
employees hired after July1, 2013
• Contributions (vest in 5 years) :
– Employee: 7.5% for hazardous & 4% for non
– Employer: 8% for hazardous & 5% for non
• Guaranteed Interest Credit: 4% annually with
additional credits equal to 75% of return in
excess.
Texas Teachers Retirement System
Benefit Design Study
• $11.7 billion/49% increase
in closed DB plan liability
due to a more liquid asset
allocation
• Cost comparison of
multiple plan design
options
– DC most expensive
– DB least expensive
19
.
Pension Benefit Design Study
20
Source: Teacher Retirement System of Texas and Gabriel, Roeder, Smith & Company
.
Pension Benefit Design Study
21
Source: Teacher Retirement System of Texas and Gabriel, Roeder, Smith & Company
Texas Teachers Retirement System
Benefit Design Study
• Realistic simulations
of probable worker
outcomes in DC
plan:
• Workers would have
only a 50% chance
of reaching 60% of
the benefit provided
by the DB plan, at
the same cost.
22
2013 Public Pension Reforms
Texas Teacher Retirement System
Contributions:
• Employee: 6.4% currently
increases to 7.7% by 2017.
• State: from 6.4% to 6.8%
• Non-Social Security SD:
contribute 1.5% of payroll.
3% COLA – Because actuarially
sound, first retiree COLA since 2001.
Employees Under PEPRA, Estimated
to Receive Less than CalPERS
Classic
Source: The Emerging Role of Defined Contribution Plans for California Public
Employees, CalPERS. April 2014
Additional Monthly Contribution
Needed in DC Savings Plan for PEPRA
Employees to Reach Classic CalPERS
Source: The Emerging Role of Defined Contribution Plans for California Public
Employees, CalPERS. April 2014
What Do Americans Think
About Retirement? Anxious
How concerned are you about current economic conditions
affecting your ability to achieve a secure retirement?
Source: NIRS Pensions & Retirement Security 2013
26
Social Security is Major Source of
Income for 75 Percent of Retiree 65+
Sources of Income of Retirees 65 and Older
$60,000
Other
$50,000
$30,000
Interest, Dividends and
Rent
Retirement Income
$20,000
SSI & Disability
$40,000
$10,000
Social Security
$Bottom 25
Middle 50%
Top 25%
Source: NIRS Calculations for retirees who did not work from the March 2012 CPS extract from IPUMS
2
45% of All Working-Age Households
Have No Assets in Retirement Accounts
Household retirement account ownership
by age of head of household, 2010
Source: Author’s analysis of 2010 SCF.
Retirement Accounts Are Concentrated
Among Higher-Income Households
Retirement account ownership status
by household income quartile, 2010
Source: NIRS analysis of 2010 SCF. Universe is households with heads age 25-64. Households with negative earnings
excluded. Household income adjusted by marital status for ranking purposes.
Typical Working-Age Household Has
$3,000 in Retirement Assets; NearRetirement Household Has $12,000
Median retirement account balance,
households with retirement accounts vs. all households, 2010
Source: NIRS analysis of 2010 SCF. Universe is households with heads age 25-64, with total
earnings ≥ $5,000 and < $500,000 and total income < $1M.
4 out of 5 Households Have Less than One
Times Their Income in Retirement Savings
Retirement account balance as a percentage of income
among working households, 2010
Source: NIRS analysis of 2010 SCF. Universe is households with heads age 25-64, with total
earnings ≥ $5,000 and < $500,000 and total income < $1M.
Households of Color Are Less than Half as Likely As
White Households to Have Retirement Savings at
Least Annual Income
Source: NIRS analysis of 2010 SCF microdata. Universe is households with total earnings
> $5,000 and < $500,000 and total income < $1M. Values may not add up to 100% due to rounding.
Retirement Benchmarks from Financial
Firms: Accumulate 8-11 Times Income
• Fidelity:
– retire @ 67
– contribute over 42-year career
– 15% contribution rate over most
of career, incl. employer match
– 85% income replacement
• Aon Hewitt:
– retire @ 65
– contribute over 40-year career
– 15% contribution rate , incl.
employer match
– 85% income replacement
Source: Fidelity (2012) and Aon Hewitt (2012)
Retirement Savings Benchmarks:
Large Majority of Working Households Fall Short
Share of working households that do not meet retirement savings targets
for their age, by type of measure, 2010.
Source: Author's analysis of 2010 SCF based on retirement savings targets adapted from Fidelity (2012). Universe is households
with heads age 25-64, with total earnings ≥ $5,000 and < $500,000 and total income < $1M.
* "Total Retirement Assets" measure includes retirement account balances reported in SCF and DB pension assets imputed by
author.
Distribution of Baby Boomer
Retirement Wealth, 2010
Percentage of Assets
100%
4%
90%
Bottom 50%
of households
by net wealth
83%
80%
70%
56%
60%
50%
37%
40%
96%
30%
Top 50% of
households
by net wealth
20%
10%
0%
Top 25%
Source: NIRS analysis of 2010 Survey of Consumer Finances. Retirement wealth includes
assets health in retirement accounts, e.g., 401(k)s, IRAs, and KEOGH plans.
Top 10%
Top 5%
3
90th Percentile Household Has Nearly
100 Times the Retirement Savings of
Median Household
Source: M.Morrisey and N. Sabadish. Retirement Inequality. Economic Policy Institute. September 2013
36
DB Pension Benefits Are More Equally
Distributed than DC Account Balances
DC Retirement Account Balances
DB Pension income
Source: M.Morrisey and N. Sabadish. Retirement Inequality. Economic Policy Institute. September 2013
37
State Financial
Security Scorecard
• Scorecard evaluates relative
performance on aging
population’s key economic
dimensions – income, costs
and work.
• States ranked from 1 (best)
to 51 (worst) for each
variable.
• Rankings converted into
scores: 10 (best) to 1
(worst).
Scorecard Categories/Variables
Retirement Income
• Private workplace
retirement plan
participation
• Average defined
contribution account
balance
• Marginal tax rate on
pension income
Retiree Costs
Labor Market
• Medicare out-of• Unemployment rate
pocket costs
for people aged 55
• Medicaid generosity
years old and older.
• Housing cost burden • Median hourly
earnings (real) for
people aged 55
years old and older
Washington: Data and Scores
Category/Variable
Retirement Income
Private sector retirement plan participation
Estimated average DC account balance among
participants
Marginal tax rate on pension income
Retiree Costs
Medicare OOP Costs
Average Medicaid expenditure on aged
% of senior households paying 30%+ income on
housing
Labor Market
Median hourly earnings for 55+
Unemployment rate for 55+
Overall State Score
Raw Data
Rank
Score
8
47.8%
22
$35,344
0.0%
10
1
5
$1,613
$14,147
8
31
37.0%
41
6
$17.50
6.8%
2
42
19.6
7
Retirement Income Scores 2012
Retiree Cost Scores 2012
Labor Market Scores 2012
Overall Scores 2012
Proposals to Expand Retirement
Security In Washington & In States
• My RA – announced in STOUS by President Obama.
• Automatic IRA Act of 2013 – Introduced by Rep.
Richard Neal would require employers to offer payroll
deposit IRAs and offers small employers a tax credit
for costs associated with establishing an auto-IRA
• California Secure Choice Retirement Savings
Trust, SB 1234 - opt-out, Auto-IRA concept with a 3%
default employee contribution and professional
investment management. Mandated study under way.
• Expand the Savers Credit - HR 837 (Rep. Neal)
www.nirsonline.org
Diane Oakley
202.457.8190
doakley@nirsonline.org
46