New EBRI Research: Baby Boomers to Face Financial Challenges in Retirement

Apr 30, 2001, 01:00 ET from Employee Benefit Research Institute

    WASHINGTON, April 30 /PRNewswire/ -- Baby boomers' retirement income will
 be less certain and have fewer guarantees than that of many earlier retirees
 because of the shift away from "traditional" defined benefit pensions,
 according to a new research report by the nonpartisan Employee Benefit
 Research Institute (EBRI).
     The April EBRI Issue Brief features original research on the long-term
 implications of the growth of defined contribution plans (such as 401(k)
 plans) and the decline of defined benefit plans for future retirees.  It
 focuses on the expected increase in retirees' reliance on income from sources
 that are not guaranteed for life -- a change that puts many Americans at
 increased risk of outliving their resources if they do not plan wisely and
 save for retirement.
     "This report quantifies and projects the sources of retirement income that
 Americans are likely to depend on, how those sources are changing, and the
 very real risk that many Americans face of outliving their money," Salisbury
 said.
     The report presents results from EBRI's Retirement Income Projection Model
 that quantify how much the importance of individual account plans (such as
 401(k)s) is expected to increase because of these changes in private
 retirement plan patterns.  For example, EBRI's model shows that:
 
     *  For today's retirees with either defined benefit, defined contribution
        and/or IRAs, approximately 39 percent of pension wealth for males would
        be available from defined benefit plans and 49.7 percent for females;
        defined contribution and cash balance plans would provide 33.2 percent
        for men and 32.5 percent for women; and IRA's would provide
        27.8 percent for men and 17.8 percent for women.
 
     *  For the youngest baby boom males (born in 1964) the analysis finds that
        26.4 percent of their pension wealth will be provided through defined
        benefit plans, a decline of 32.4 percent compared with today's
        retirees, while their female counterparts will see their defined
        benefit pension wealth fall to 37.2 percent, a decline of 25 percent.
        Defined contribution plans will provide 33.7 percent of the retirement
        wealth for men in this birth cohort, and 31.9 percent for women, the
        analysis found.  IRAs will expand their role the most, reaching
        39.9 percent for men and 30.9 percent for women.
 
     The EBRI analysis noted that the shift to defined contribution plans was
 due to changes in the work force and business environment.  For employees,
 defined contribution plans benefits are less age-sensitive, in that benefits
 payable upon job termination to younger workers are usually higher under
 defined contribution plans than under traditional defined benefit plans.
 Also, years of service under defined benefit plans with age and service
 requirements are not usually transferable from employer to employer.
 
     Some of the report's other main findings:
 
     *  A reason for public policy concern about income adequacy for future
        retirees is that Social Security's age for payment of full-retirement
        benefits is rising, and projected long-term financial shortfall could
        result in a reduction in the current-law benefit promises made to
        future generations of retirees.  Another reason is that fewer baby
        boomers will be retiring with "traditional" pension annuities that
        historically have been the predominant source of pension-provided
        retirement income.  This raises the question of whether individual
        decisions on "spending or saving" pension distributions will lead to
        retirement income.
 
     *  Results from the EBRI Retirement Income Projection Model show, for both
        men and women, an appreciable drop in the percentage of private
        retirement income that will be paid as an annuity.  Consequently, there
        is a clear increase in the proportion of retirement assets that
        retirees -- rather than pension plan managers -- will have to manage.
        This shift in responsibility involves the individual (rather than the
        pension plan) bearing the risk of investment losses.
 
     *  Since most retirees' non-Social Security retirement income will be
        withdrawn as a lump sum or in self-initiated periodic payments, rather
        than as a monthly paycheck for life arriving from the pension plan,
        retirees will need either to purchase an annuity from an insurance
        company or carefully manage their individual rate of spending in order
        to make their assets last throughout their retirement years.
 
     "The dramatic growth of 401(k)-type retirement plans that pay in lump-sum
 distributions rather than annuities, and the increasing payment of lump sums
 from defined benefit pension plans, means that individuals are increasingly
 responsible for decisions that will determine their future retirement: Whether
 to spend it immediately -- or whether to roll over and save the lump sum, how
 to invest it, and how fast they can spend it in retirement and not outlive the
 money," said EBRI President and CEO Dallas Salisbury.  "More workers than ever
 will have the opportunity for pension-provided income to supplement Social
 Security -- and they will also have the opportunity to have it disappear by
 personal decision long before they die."
     Salisbury added: "This report serves to underline the tremendous
 importance of expanding financial literacy education, beginning at the
 earliest possible ages, and extending it to today's worker and retirees.  The
 shift to a personal responsibility retirement model will only be successful if
 financial literacy rises."
 
     EBRI Issue Briefs are monthly topical periodicals providing expert
 evaluations of employee benefit issues and trends, including critical analyses
 of employee benefit policies and proposals.  Members of the press may request
 complimentary copies of EBRI Issue Brief no 232, "The Changing Face of Private
 Retirement Plans," from Alicia Willis at (202) 775-9132.  Reporters may also
 obtain an executive summary of the report at www.ebri.org/ebripubs.htm .
 Full-text copies of the report are available online by contacting Danny Devine
 (202) 775-6308, e-mail: devine@ebri.org for the "press only" password.  Others
 may purchase copies for $25 prepaid or pdfs for $7.50 prepaid by calling
 (202) 775-9132.
     EBRI is a private, nonprofit, nonpartisan public policy research
 organization based in Washington, DC.  Founded in 1978, its mission is 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 does not lobby and does not take positions on legislative
 proposals.  EBRI receives funding from individuals, employers of all types,
 unions, foundations, and government.
 
                     MAKE YOUR OPINION COUNT -  Click Here
                http://tbutton.prnewswire.com/prn/11690X24492788
 
 

SOURCE Employee Benefit Research Institute
    WASHINGTON, April 30 /PRNewswire/ -- Baby boomers' retirement income will
 be less certain and have fewer guarantees than that of many earlier retirees
 because of the shift away from "traditional" defined benefit pensions,
 according to a new research report by the nonpartisan Employee Benefit
 Research Institute (EBRI).
     The April EBRI Issue Brief features original research on the long-term
 implications of the growth of defined contribution plans (such as 401(k)
 plans) and the decline of defined benefit plans for future retirees.  It
 focuses on the expected increase in retirees' reliance on income from sources
 that are not guaranteed for life -- a change that puts many Americans at
 increased risk of outliving their resources if they do not plan wisely and
 save for retirement.
     "This report quantifies and projects the sources of retirement income that
 Americans are likely to depend on, how those sources are changing, and the
 very real risk that many Americans face of outliving their money," Salisbury
 said.
     The report presents results from EBRI's Retirement Income Projection Model
 that quantify how much the importance of individual account plans (such as
 401(k)s) is expected to increase because of these changes in private
 retirement plan patterns.  For example, EBRI's model shows that:
 
     *  For today's retirees with either defined benefit, defined contribution
        and/or IRAs, approximately 39 percent of pension wealth for males would
        be available from defined benefit plans and 49.7 percent for females;
        defined contribution and cash balance plans would provide 33.2 percent
        for men and 32.5 percent for women; and IRA's would provide
        27.8 percent for men and 17.8 percent for women.
 
     *  For the youngest baby boom males (born in 1964) the analysis finds that
        26.4 percent of their pension wealth will be provided through defined
        benefit plans, a decline of 32.4 percent compared with today's
        retirees, while their female counterparts will see their defined
        benefit pension wealth fall to 37.2 percent, a decline of 25 percent.
        Defined contribution plans will provide 33.7 percent of the retirement
        wealth for men in this birth cohort, and 31.9 percent for women, the
        analysis found.  IRAs will expand their role the most, reaching
        39.9 percent for men and 30.9 percent for women.
 
     The EBRI analysis noted that the shift to defined contribution plans was
 due to changes in the work force and business environment.  For employees,
 defined contribution plans benefits are less age-sensitive, in that benefits
 payable upon job termination to younger workers are usually higher under
 defined contribution plans than under traditional defined benefit plans.
 Also, years of service under defined benefit plans with age and service
 requirements are not usually transferable from employer to employer.
 
     Some of the report's other main findings:
 
     *  A reason for public policy concern about income adequacy for future
        retirees is that Social Security's age for payment of full-retirement
        benefits is rising, and projected long-term financial shortfall could
        result in a reduction in the current-law benefit promises made to
        future generations of retirees.  Another reason is that fewer baby
        boomers will be retiring with "traditional" pension annuities that
        historically have been the predominant source of pension-provided
        retirement income.  This raises the question of whether individual
        decisions on "spending or saving" pension distributions will lead to
        retirement income.
 
     *  Results from the EBRI Retirement Income Projection Model show, for both
        men and women, an appreciable drop in the percentage of private
        retirement income that will be paid as an annuity.  Consequently, there
        is a clear increase in the proportion of retirement assets that
        retirees -- rather than pension plan managers -- will have to manage.
        This shift in responsibility involves the individual (rather than the
        pension plan) bearing the risk of investment losses.
 
     *  Since most retirees' non-Social Security retirement income will be
        withdrawn as a lump sum or in self-initiated periodic payments, rather
        than as a monthly paycheck for life arriving from the pension plan,
        retirees will need either to purchase an annuity from an insurance
        company or carefully manage their individual rate of spending in order
        to make their assets last throughout their retirement years.
 
     "The dramatic growth of 401(k)-type retirement plans that pay in lump-sum
 distributions rather than annuities, and the increasing payment of lump sums
 from defined benefit pension plans, means that individuals are increasingly
 responsible for decisions that will determine their future retirement: Whether
 to spend it immediately -- or whether to roll over and save the lump sum, how
 to invest it, and how fast they can spend it in retirement and not outlive the
 money," said EBRI President and CEO Dallas Salisbury.  "More workers than ever
 will have the opportunity for pension-provided income to supplement Social
 Security -- and they will also have the opportunity to have it disappear by
 personal decision long before they die."
     Salisbury added: "This report serves to underline the tremendous
 importance of expanding financial literacy education, beginning at the
 earliest possible ages, and extending it to today's worker and retirees.  The
 shift to a personal responsibility retirement model will only be successful if
 financial literacy rises."
 
     EBRI Issue Briefs are monthly topical periodicals providing expert
 evaluations of employee benefit issues and trends, including critical analyses
 of employee benefit policies and proposals.  Members of the press may request
 complimentary copies of EBRI Issue Brief no 232, "The Changing Face of Private
 Retirement Plans," from Alicia Willis at (202) 775-9132.  Reporters may also
 obtain an executive summary of the report at www.ebri.org/ebripubs.htm .
 Full-text copies of the report are available online by contacting Danny Devine
 (202) 775-6308, e-mail: devine@ebri.org for the "press only" password.  Others
 may purchase copies for $25 prepaid or pdfs for $7.50 prepaid by calling
 (202) 775-9132.
     EBRI is a private, nonprofit, nonpartisan public policy research
 organization based in Washington, DC.  Founded in 1978, its mission is 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 does not lobby and does not take positions on legislative
 proposals.  EBRI receives funding from individuals, employers of all types,
 unions, foundations, and government.
 
                     MAKE YOUR OPINION COUNT -  Click Here
                http://tbutton.prnewswire.com/prn/11690X24492788
 
 SOURCE  Employee Benefit Research Institute