Review of Previous Summits and Current Status of Retirement Savings

Sylvester J. SchieberVice President and U.S. Director of Benefits Consulting

Watson Wyatt WorldwideArlington, Virginia

Review of Previous Summits and Current Status

of Retirement SavingsSaving for Your Golden Years:

Trends, Challenges and Opportunities

Overview

Broad conclusions from prior summits and recent savings experience

Saving for our “golden years”: theory and reality

Populations particularly at risk Focus of the sessions during this summit

Conclusions from Summits I and II

“Americans must save more today if they are to realize the dream of a financially secure retirement” (Summary report from the first summit)

“Americans are saving too little—often dangerously too little… This problem is especially acute for women and minorities.” President George W. Bush

Personal Saving Rate as a Percentage of Disposable Income in the United States Since the Passage of ERISA

-202468

1012

   1974       1979       1984       1989       1994       1999       2004   

Percentage

Source: US Department of Commerce, Bureau of Economic Affairs, National Income and Product Accounts.

What Is Golden?

Older American’s Act (P.L. 89-73, 1965) states that older people should enjoy “an adequate income in retirement in accordance with the American standard of living.”

President’s Commission on Pension Policy (1981) held that “pretirement living standards should be measured in terms of preretirement disposable income.” This takes into account» Work-related expenses including taxes» Different expenditure needs while working versus the

retirement period—e.g., educating children, health consumption, and so forth

Modern Day Analysts and Retirement Planners Put Target Retirement Income at Around 70 to 80 Percent of Preretirement Earnings for People to Maintain Living Standards

0%

20%

40%

60%

80%

100%

15,000 35,000 55,000 75,000 95,000

Social SecurityRetirement income goal relative to earnings

Preretirement earnings level

Social Security, as currently structured, fills a considerable part of the income goal. Still, there is a considerable gap.

Modern Day Analysts and Retirement Planners Put Target Retirement Income at Around 70 to 80 Percent of Preretirement Earnings for People to Maintain Living Standards

0%

20%

40%

60%

80%

100%

15,000 35,000 55,000 75,000 95,000

Other sourcesSocial Security

Retirement income goal relative to earnings

Preretirement earnings level

Annual Retirement Income Required to Live Comfortably in Retirement Anticipated by Those 50 and Older and Participating in a Retirement Plan

Percentage of Annual Income Pay of <$35K

Pay of $35K to $75K Pay of $75K+

Less than 40% 1.8% 1.3% 1.7%40 to 59% 10.0 14.9 18.960 to 79% 20.7 36.4 45.180 to 99% 21.1 25.6 22.1100% or more 29.8 13.0 7.0Don’t know 16.7 8.8 5.1

Median estimate by those responding 88.7 76.2 71.9

Source: Watson Wyatt Worldwide, 2004 Retirement Attitude Survey.

The Mechanics of Retirement Saving Assume this worker knows what the future holds Consider a 25-year-old worker Earning $35,000 per year Expects pay raises of 4 percent per year until

reaching age 65 when she retires Will live to age 81½ Needs to save to provide a benefit in retirement

equal to 35 percent of earnings

The Mechanics of Retirement Saving

0

200,000

400,000

600,000

800,000

Accumulated wealth

The Mechanics of Retirement Saving We know that workers don’t know the future with

certainty They don’t all start working at 25 and saving Some earn a lot, others a little Pay raises are irregular Retirement ages, life expectancies and

consumption needs vary But this worker may be about average in many

regards

Given Our National Demographics and the Mechanics of What We Should Be Saving, We Can Estimate What Savings Rates Should Be

0%

2%

4%

6%

8%

10%

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Retirement saving rate as percentage of personal income

The Reality

In 2005, for the first time since the Great Depression (1932-1933) the personal savings rate in the United States was negative!

At the individual level the picture is more varied.

Workers’ Accumulating Retirement Assets

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1985 1988 1991 1994 1997 2000 2003

IRAsFederal gov'tS&L gov'tPrivate DCPrivate DB

Billions of dollars

Source: Federal Reserve Board, Flow of Funds Accounts.

Pension Participation Rates by Workers’ Ages

0%10%20%

30%40%50%60%70%

25-34 35-49 50-59 60-64 65+

Full timePart time

Source: March 2005 Current Population Survey tabulations.

Savings Rates Required to Fill Income Target Gap Given Current Social Security Law by Age at Which Savings Commences Assuming DB Pension

0%

10%

20%

30%

40%Age 30Age 40Age 50

Percent of earnings to be saved each year

Preretirement earnings levelSource: Dan M. McGill, Kyle N. Brown, John J. Haley and Sylvester J. Schieber, Fundamentals of Private Pensions, eighth ed. (Oxford: Oxford University Press, 2005), p. 432.

Assumes age 65 retirement.

Pension Participation Rates by Workers’ Annual Earnings Levels

0%

20%

40%

60%

80%

< $15k $15-35k $35-60k $60-90k $90k +

Full timePart time

Source: March 2005 Current Population Survey tabulations.

Social Security Financing Under Current Law

0

5

10

15

20

25

2000 2010 2020 2030 2040 2050 2060 2070

IncomeExpense

Percent of covered pay

Distribution of Financial Wealth Among Near Elderly in 1994*

Wealth Retirement Purchasing Power Holding Personal Social PensionDistribution Assets Security Wealth

Bottom 10th 3 % 94 % 3 %

Derived from James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Savings Adequacy,” in Mitchell, Hammond, and Rappaport, eds., Forecasting Retirement Needs and Retirement Wealth (University of Pennsylvania Press, 2000).

*Note: Does not include housing.

Distribution of Financial Wealth Among Near Elderly in 1994*

Wealth Retirement Purchasing Power Holding Personal Social PensionDistribution Assets Security Wealth

Bottom 10th 3 % 94 % 3 %

At 1/3 up 18 63 19

Derived from James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Savings Adequacy,” in Mitchell, Hammond, and Rappaport, eds., Forecasting Retirement Needs and Retirement Wealth (University of Pennsylvania Press, 2000).

*Note: Does not include housing.

Distribution of Financial Wealth Among Near Elderly in 1994*

Wealth Retirement Purchasing Power Holding Personal Social PensionDistribution Assets Security Wealth

Bottom 10th 3 % 94 % 3 %

At 1/3 up 18 63 19

At 2/3 up 30 36 34

Top 10th 65 10 25

Derived from James F. Moore and Olivia S. Mitchell, “Projected Retirement Wealth and Savings Adequacy,” in Mitchell, Hammond, and Rappaport, eds., Forecasting Retirement Needs and Retirement Wealth (University of Pennsylvania Press, 2000).

*Note: Does not include housing.

Pension Participation Rates by Firm Size

0%

20%

40%

60%

80%

1-9 10-24 25-99 100-499 500-999 1000+

Full timePart time

Source: March 2005 Current Population Survey tabulations.

Distribution of Wealth Holding by People Ages 53 to 63 in 1994

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Accumulated wealth not including Social Security

Lifetime earnings decile

WealthPercentile

50th

Source: Steven F. Venti and David A. Wise, “The Cause of Wealth Dispersion at Retirement: Choice or Chance,” American Economic Review (May 1998), vol. 88, no. 2, pp. 185-191.

Distribution of Wealth Holding by People Ages 53 to 63 in 1994 Based on Lifetime Earnings Level

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Accumulated wealth not including Social Security

Lifetime earnings decile

WealthPercentile

90th

70th

50th30th

10th

Source: Steven F. Venti and David A. Wise, “The Cause of Wealth Dispersion at Retirement: Choice or Chance,” American Economic Review (May 1998), vol. 88, no. 2, pp. 185-191.

Distribution of Non-Pension Financial Wealth Held by People Ages 53 to 63 in 1994 Based on Lifetime Earnings Level

-50,000

0

50,000

100,000

150,000

200,000

250,000

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Financial wealth not including pensions, IRAs, 401(k)s

Lifetime earnings decile

WealthPercentile

90th

70th

50th30th10th

Source: Steven F. Venti and David A. Wise, “The Cause of Wealth Dispersion at Retirement: Choice or Chance,” American Economic Review (May 1998), vol. 88, no. 2, pp. 185-191.

Saving for Our Golden Years

How do we get younger people engaged in saving sooner and more?

How do we get more retirement savings opportunities for low-wage earners?

How do we offer greater retirement savings opportunities to workers with small employers?

How can we facilitate extended working opportunities to those nearing retirement ages who need to work or want to work?