Review of Previous Summits and Current Status of Retirement Savings

Saving for Your Golden Years: Trends, Challenges and Opportunities
Vice President and U.S. Director of Benefits Consulting Watson Wyatt Worldwide Arlington, Virginia

Sylvester J. Schieber

Overview
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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
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“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
Percentage
12 10 8 6 4 2 0 -2    1974       1979       1984       1989       1994       1999       2004   
Source: US Department of Commerce, Bureau of Economic Affairs, National Income and Product Accounts.

What Is Golden?
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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
Retirement income goal relative to earnings 100% 80% 60% 40% 20% 0%
15,000 35,000 55,000 75,000 95,000 Social Security, as currently structured, fills a considerable part of the income goal. Still, there is a considerable gap.

Social Security

Preretirement earnings level

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
Retirement income goal relative to earnings 100% 80% 60% 40% 20% 0%
15,000 35,000 55,000 75,000 95,000

Other sources Social Security

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 Less than 40% 40 to 59% 60 to 79% 80 to 99% 100% or more Don’t know Median estimate by those responding Pay of <$35K 1.8% 10.0 20.7 21.1 29.8 16.7 Pay of $35K to $75K 1.3% 14.9 36.4 25.6 13.0 8.8 Pay of $75K+ 1.7% 18.9 45.1 22.1 7.0 5.1

88.7

76.2

71.9

Source: Watson Wyatt Worldwide, 2004 Retirement Attitude Survey.

The Mechanics of Retirement Saving
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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

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The Mechanics of Retirement Saving
Accumulated wealth
800,000 600,000 400,000 200,000 0
25 29 37 41 45 49 57 61 65 69 73 77 81 33 53

The Mechanics of Retirement Saving
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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

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Given Our National Demographics and the Mechanics of What We Should Be Saving, We Can Estimate What Savings Rates Should Be
Retirement saving rate as percentage of personal income

10% 8% 6% 4% 2% 0% 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

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
Billions of dollars
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 1985 1988 1991 1994 1997 2000 2003 IRAs Federal gov't S&L gov't Private DC Private DB

Source: Federal Reserve Board, Flow of Funds Accounts.

Pension Participation Rates by Workers’ Ages
70% 60% 50% 40% 30% 20% 10% 0% 25-34 35-49 50-59 60-64 65+ Full time Part 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
Assumes age 65 retirement.
Percent of earnings to be saved each year
40% 30% 20% 10% 0%
0 0 00 0 00 00 0 00 0 00 0 0 5, 00 5, 00 5, 00 ,0 ,0 00 $9 5, $3 5 $4 5 $1 $2 $5 $6 $7 $8 05 , $1 5, 5, 5, 00 0

Age 30 Age 40 Age 50

Preretirement earnings level
Source: 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.

Pension Participation Rates by Workers’ Annual Earnings Levels
80% 60% 40% 20% 0% Full time Part time

< $15k

$15-35k

$35-60k

$60-90k

$90k +

Source: March 2005 Current Population Survey tabulations.

Social Security Financing Under Current Law
Percent of covered pay 25 20 15 10 5 0 2000 Income Expense

2010

2020

2030

2040

2050

2060

2070

Distribution of Financial Wealth Among Near Elderly in 1994*
Wealth Retirement Purchasing Power Holding Personal Social Pension Distribution Assets Security Wealth Bottom 10th
*

3%

94 %

3%

Note: Does not include housing.

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).

Distribution of Financial Wealth Among Near Elderly in 1994*
Wealth Retirement Purchasing Power Holding Personal Social Pension Distribution Assets Security Wealth Bottom 10th At 1/3 up
*

3% 18

94 % 63

3% 19

Note: Does not include housing.

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).

Distribution of Financial Wealth Among Near Elderly in 1994*
Wealth Holding Distribution Bottom 10th At 1/3 up At 2/3 up Top 10th
*

Retirement Purchasing Power Personal Social Pension Assets Security Wealth 3% 18 30 65 94 % 63 36 10 3% 19 34 25

Note: Does not include housing.

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).

Pension Participation Rates by Firm Size
80% 60% 40% 20% 0% Full time Part time

1-9

10-24

25-99

100-499

500-999

1000+

Source: March 2005 Current Population Survey tabulations.

Distribution of Wealth Holding by People Ages 53 to 63 in 1994
Accumulated wealth not including Social Security 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Lifetime earnings decile
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.

Wealth Percentile

50th

Distribution of Wealth Holding by People Ages 53 to 63 in 1994 Based on Lifetime Earnings Level
Accumulated wealth not including Social Security
1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Wealth Percentile 90th

70th 50th 30th 10th Lifetime earnings decile

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
Financial wealth not including pensions, IRAs, 401(k)s 250,000
200,000 150,000 100,000 50,000 0 -50,000 1st 2nd 3rd 4th 5th 6th 7th 8th Lifetime earnings decile 9th 10th

Wealth Percentile 90th

70th 50th 30th 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.

Saving for Our Golden Years
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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?

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