The State of US Retirement Plans Dallas L. Salisbury President and CEO

1. The State of US Retirement Plans • Dallas L. Salisbury • President and CEO • Employee Benefit Research Institute • Maxwell MPA, 1973 and ABD, 1976 • www.ebri.org • NPF May 23, 2006

2. EBRI • Founded 1978 • Current Team of 15 and Budget of $4.5 million • No Change of Mission Since 1978 • On Sixth Generation of Representatives from Outside Organizations • www.ebri.org and www.choosetosave.org

3. EBRI Mission: To contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI Methods: Research, Publications, Education, Web Tools and Dissemination, No Position Advocacy or Solutions Advocacy – A Neutral Source for All Sides of a Debate – “Just the Facts”

4. The EBRI Difference • Research and analysis without position advocacy. • Primary focus on universe and national data. • Use of results by organizations and individuals on all sides of issues because of non-advocacy approach. • Broad-based financial support from organizations across the spectrum of interests/ideologies and all sectors.

5. Agenda • Public Policy Influence • Demographic Influence • Employer Directions • Implications • Can DC Plans Provide Adequacy?

6. The President 2003“Ownership Society” 2004 “Responsibilty Society” • 2003 • This administration is working hard to promote an ownership society in America. We want more people owning their own home. ... We want people owning and managing their own retirement accounts, owning and controlling their own health care accounts. • 2004 • We stand for a culture of responsibility in America. We're changing the culture of our country from one that has said, if it feels good, do it, and if you've got a problem, blame somebody else, to a culture in which each of us understands we are responsible for the decisions we make in life…..The culture of responsibility is growing.”

7. Demographic Influences

8. Population 2000

9. Population 2100

10. Labor Force New Young Entrant Decline (Average Annual Gain)

11. Jobs to fill (151 million) Workforce (141 million) U.S. Job Growth vs. Workforce Growth 2006 (per BLS projection)

12. Percentage of Older Long Tenure Workers Drops From 23% to 19% -Gold Watches?

13. Life Expectancy: Greater for Women than Men at All Ages

14. Longevity Builds on Longevity 85 92 90 95 100 Age Male Age 65 50% chance 25% chance 88 94 85 90 100 Age Female Age 65 50% chance 25% chance 97 92 95 85 90 100 Age Couple (Both Age 65) 50% chance of one survivor 25% chance of one survivor Source: Annuity 2000 Mortality Table, American Society of Actuaries. Figures assume you are in good health.

15. Employer Directions

16. Health Spending Up; Retirement Contributions Down

17. High Job Turnover Economy – Participation Gaps No plan available Not participating Participating Employee Benefit Research Institute

18. Pension Participation Rates by Firm Size Source: March 2005 Current Population Survey tabulations.

20. Labor Market Trends Mean Future Decline Source: Bureau of Labor Statistics

21. Individual Implications

22. And increased health care costs have caused many to have financial difficulties. Percentage Saying Yes Decrease your contributions to other savings Have difficulty paying for other bills Use up all or most of your savings Decrease your contributions to a retirement plan, such as a 401(k), 403(b) or 457 plan, or an IRA Have difficulty paying for basic necessities, like food, heat, and housing Borrow money

23. Pension Plans Being Frozen – 401(k) Growth/Enhancement • Soft Freeze • Hard Freeze • Multiple versions of “enhanced” DC • Some will come close to keeping many “whole” • Others will leave major shortfalls for most

24. Median Percentage of a Worker’s Annual Pay Needed to Offset the Impact of a Pension Freeze in 2006, by Pension Plan Type and Current Age (assumes 4% annual rate of return) Source: Tabulations from the EBRI/ERF Retirement Income Projection Model (2/23/2006 Version)

25. Median Percentage of a Worker’s Annual Pay Needed to Offset the Impact of a Pension Freeze in 2006, by Pension Plan Type and Current Age (assumes 8% annual rate of return) Source: Tabulations from the EBRI/ERF Retirement Income Projection Model (2/23/2006 Version)

26. Fixed 4.43% of Pay Plan Cost -Entry age 30 –The Price of pay Equity

27. How much do you need to save if you work until 67? • Starting at age 20 and saving consistently for 47 years will support a long life at rates some are now saving, without annuity purchase. • Waiting until 40 or 50 moves the numbers up. • A life income annuity helps keep them lower as you only need enough to get you to average life expectancy. Source: Ballpark E$timate Worksheet, www.choosetosave.org

28. Individual savings shortfalls for meeting basic expenses • Definition of basic expenses • basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care provider • Next two slides shows results by: • Birth cohort • Income quartile • Function of all future years of work, not just current year or year prior to retirement • We assume individuals want a better than 50/50 chance of having “sufficient” retirement income to cover basic expenses • Model both a 75 and 90 percent confidence level

29. Median Percentage of Compensation That Must Be Saved Each Year Until Retirement For a 75% Confidence Level For Funds To Cover Basic Expenses* When Combined With Simulated Retirement Wealth by Birth Cohort and Income Quartile(Limited to 25%; assumes current Social Security and housing equity is never liquidated) Income quartile * Basic expenses = basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care provider Source: EBRI-ERF Retirement Security Projection Model.

30. Median Percentage of Compensation That Must Be Saved Each Year Until Retirement For a 90% Confidence Level For Funds To Cover Basic Expenses* When Combined With Simulated Retirement Wealth by Birth Cohort and Income Quartile(Limited to 25%; assumes current Social Security and housing equity is never liquidated) Income quartile * Basic expenses = basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care provider Source: EBRI-ERF Retirement Security Projection Model.

31. Would an additional 5% of compensation be sufficient for most pre-retirees to have “sufficient” funds to cover basic expenses*? • Previous two slides only showed the medians for the various groups • Also showed results as a function of just age and income • See figures 2 and 3 in Issue Brief for results that include a breakout by gender/family status at retirement • Next slide shows the percentage of simulated life-paths in each cohort that would have “sufficient” retirement income if they saved 5 percent of compensation each year until retirement • This is in addition to any retirement income/wealth simulated in the mode * Basic expenses = basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care provider

32. Percentage of Retirees Estimated to Have Sufficient Retirement Income/Wealth to cover Basic Expenses* by Saving 5% of Compensation Each Year From 2003 Until Retirement

33. Percent of 65+ With Pension and Annuity Income 1988-2002 Source: EBRI CPS tabulations, EBRI Notes v24n12, 12/03 13% are from Public Employers

34. SSA Income DominatesSources of retiree income by age (2004) Source: Current Population Survey, Bureau of the Census

35. SSA Grows in Importance With Age – Income from Work PersistsPercentage of total income by age for the retired population (2004) Source: Current Population Survey, Bureau of the Census

36. Public Policy Implications • Social Security Becomes More Important Not Less – Even for the Haves’ • Medicare Becomes Primary Source for the Haves’ • Growing Gap Between Public Worker (retiree) and Private Worker (retiree) Benefits • As Employer Provision/Payment Declines Pressure on/for Government Programs Grows • Re-Regulation? New Paternalism? National Health Insurance? Mandated Savings? Trade Reversal?

37. Can DC Plans Provide Adequacy?

38. Average Participant Before-Tax Contribution Rates by Age and Salary, 1999(percent of salary) Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (see Holden and VanDerhei (October 2001))

39. Average Account Balance Among 401(k) Participants from Year-End 1999 Through Year-End 2004 by Age Source: Holden and VanDerhei, "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2004,“ forthcoming

40. Here’s the retirement income the current DC system may replace by the 2030’s…for continuous participants 56% 43% 33% 23% LowestIncome Quartile 2 Quartile 3 HighestIncome All Eligible Workers (Without Automatic Enrollment) Sources: Tabulations from Holden and VanDerhei (2005)

41. Increase from Automatic Enrollment (6% Contribution Rate; Life-Cycle Fund) All Eligible Workers (Without Automatic Enrollment) Here is what might be achieved -- with two key reforms – auto-enrollment and lifecycle funds 63% 58% 55% 52% 7% 15% 22% 29% 56% 43% 33% 23% LowestIncome Quartile 2 Quartile 3 HighestIncome Sources: Tabulations from Holden and VanDerhei (2005)

42. Combined with SSA- Continuous Participation and Preservation 104% 86% 79% 81%

43. Median Replacement Rates for 401(k) Accumulations* for Participants Reaching Age 65 Between 2030 and 2039(percent of final five-year average salary) 39.4 Income Quartile at Age 65 *The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances. Source: Tabulations from the EBRI/ICI 401(k) Accumulation Projection Model

44. Want the facts? • www.ebri.org • Don’t Want to Work Forever? • www.ChoosetoSave.org