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A presentation for the National Press Foundation

September 19, 2007

Barbara D. BovbjergDirector

Education, Workforce, and Income Security

Retirement Readiness: What Americans Do and Don’t Know about Retirement

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Economic Security in Retirement

• Adequate retirement income• Social Security• Pensions• Savings• Earnings from continued employment

(e.g., part-time)

• Affordable health care• Medicare• Retiree health care

• Long-term care (a hybrid)

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Elderly Households’ Source of Income

Savings13%

Pensions19%

Earnings26%

Social Security39%

Other3%

Source: Income of the Population 55 or Older, 2004 (Washington, D.C.: SSA, Office of Research and statistics, 2006).

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Percentage of Elderly Households Receiving Each Type of Income

89

55

41

24

0102030405060708090

100

Social Security Savings Pensions Earnings

Percentage of elderly households

Source: Income of the Population 55 or Older, 2004 (Washington, D.C.: SSA, Office of Research and statistics, 2006).

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Three Stages of the Retirement Process

• Preparation For Retirement (Accumulation Phase)

• Decision to Retire – when should one leave the labor market and to what degree (binary vs. continuous view of retirement)

• Spending Down During Retirement (Decumulation Phase)

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Preparation for Retirement:

Social Security

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Social Security and Medicare’s Hospital Insurance Trust Funds Face Cash Deficits

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

2005 2010 2015 2020 2025 2030 2035 2040

Calendar year

Medicare HI cash flow Social Security cash flow

Medicare HIcash deficit

2007

Social Securitycash deficit

2017

Billions of 2007 dollars

Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration and Office of the Actuary, Centers for Medicare and Medicaid Services.

Note: Projections based on the intermediate assumptions of the 2007 Trustees’ Reports. The CPI is used to adjust from current to constant dollars.

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Potential Fiscal Outcomes Under Baseline Extended Revenues and Composition of Spending as a Share of GDP

0

10

20

30

40

50

2006 2015 2030 2040Fiscal year

Percent of GDP

Net interest Social Security Medicare & Medicaid All other spending

Revenue

Source: GAO’s August 2007 analysis.

Notes: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2017 mainly due to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased revenue from tax-deferred retirement accounts. After 2017, revenue as a share of GDP is held constant—implicitly assuming that action is taken to offset increased revenue from real bracket creep, the AMT, and tax-deferred retirement accounts.

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Life Expectancy at Age 65

Source: Felicitie C. Bell and Michael L. Miller, “Life Tables for the United States Social Security Area 1900-2100,” Actuarial Study No. 120, http://www.ssa.gov/OACT/NOTES/as120/TOC.html.

Years

0

2

4

6

8

10

12

14

16

18

20

22

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Men Women

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Fertility Rate Hovers Around the Replacement Rate

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2.6

Source: U.S. Census Bureau, Statistical Abstract of the United States: 2007 (126th Edition) Washington, DC, 2006; http://www.census.gov/statab/www/, table No. 81.

Note: The total fertility rate is the number of births that 1,000 women would have in their lifetime if, at each year of age, they experienced the birth rates occurring in the specified year.

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Aged Population as a Share of Total U.S. Population Continues to Grow

Percent of total population aged 65 and over

Source: Office of the Chief Actuary, Social Security Administration.

Note: Projections based on the intermediate assumptions of the 2007 Trustees’ Reports.

0

5

10

15

20

25

1950 1975 2000 2025 2050 2075

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Preparation for Retirement:

Pensions and Savings

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The Number of DC Plans Have Increased While the Number of DB Plans Have Decreased

170 163132

102 84 69 59 50 47 47 41

462

570599 598

619 624661

683 687653

711

0

100

200

300

400

500

600

700

800

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Pla

ns

(th

ou

sa

nd

s)

Defined benefit plans Defined contribution plans

Source: U.S. Department of Labor (1985 – 2003 data); Investment Company Institute (2005 estimates).Note: The Investment Company Institute’s estimates for 2005 are based on the Department of Labor, Form 5500 Annual reports, and other information.

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As DB Plan Participation Has Fallen, DC Plan Participation Has Grown

29 28 27 26 2523 23 23 22 21 21

3335 34

3639

42

4850

52 5255

0

10

20

30

40

50

60

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Ac

tiv

e p

art

icip

an

ts (

mill

ion

s)

Defined benefit plans Defined contribution plans

Source: U.S. Department of Labor (1985 – 2003 data); Investment Company Institute (2005 estimates).Note: The Investment Company Institute’s estimates for 2005 are based on the Department of Labor, Form 5500 Annual reports, and other information.

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Annual Saving Required for a35-Year Old, with Social Security

Required Contribution: Percentage of Gross Income

FemaleMale

Source: GAO analysis, based on Social Security Administration data.Note: The chart shows the percentage of gross salary 35-year old male and female earning an average wage in 2005 would need to withhold so that the individual would accumulate funds sufficient, along with scheduled social security benefits, to provide retirement income equal to 75% of his or her pre-retirement income. The projections are based on economic assumptions from the 2005 Social Security Trustees Report for inflation (2.8%), real wage growth (1.1%), real interest rate (3%), and nominal interest rate (5.8%).

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Falling Personal Saving RatePercentage of disposable personal income

Source: Bureau of Economic Analysis.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2006

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Decision to Retire

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Federal Retirement Age-Related Rules

Sources: GAO (analysis); Art Explosion (images).

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Average Effective Retirement Age Has Been Decreasing

Source: OECD analysis of Census Bureau data.Note: This is a 5-year moving average based on labor force participation data in the Current Population Survey. For each 5-year period ending in the year shown in the figure, the effective age of retirement corresponds to the average age of exit for all labor force participants initially aged 40 and over who were no longer in the labor force 5 years later.

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Why Older Americans Don’t Work Longer

• Cultural Expectation to Retire in mid-60s and Mixed Signals from Federal Policy

• Older Americans Perceive Few Employment Opportunities

• Most Employers Do Not Make a Special Effort to Hire and Retain Older Workers

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Mixed Signals from Federal Policy

• Social Security early retirement age is 62

• Many private pensions have similar or lower eligibility ages

• Medicare eligibility age is 65

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Older Americans Perceive Few Employment Opportunities

• Few older workers felt they had opportunities for partial retirement

• Most older workers and retirees saw low wage, low skilled jobs as their primary employment opportunities

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Special Effort is Not Made to Hire or Retain Older Workers

• Many employers say they are willing to implement policies to recruit and retain older workers, but few have actually done so

• Employers cite barriers, such as federal pension regulations, to flexible employment options for older workers

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Labor Force Participation Has Been Increasing

Labor force participation rate

Source: United States Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, http://www.bls.gov/data/

0

1020

30

4050

60

7080

90

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

Men 55-64 Men 65+ Women 55-64 Women 65+

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Spending Down During Retirement

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Most Retirees Received Annuities, But Direct Rollovers Increasing

Percent of retirees who received benefit payoutsa

Note: For our analysis, “retirees with pensions” are survey respondents who reported leaving a preceding-wave job to retire and reported receiving a pension payout from that job. Figures in subcategories should not be added because some respondents report receiving multiple pension payouts. aIncludes respondents who received pension benefit payouts from both DB and DC plans.bFor retirees with DB plans, includes respondents who expect to receive benefits in the future. For those with DC plans, includes respondents who reported leaving their assets in a plan account.

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Factors Affecting Payout Options Offered and/or Elected

• Worker preferences for the type of plan they want and/or how they receive benefits

• Lack of consumer knowledge and understanding about annuitization and key risks they will face in retirement

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Importance of Information and Education

• Helping participants to understand longevity risk and the importance of saving

• Helping participants/retirees understand financial risks that they will face in retirement

• Helping participants understand annuities

• Strategies/advice for managing retirement income during retirement

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Government Can Help: GAO Recommendations

• Provide Financial Education/Information

• assist in evaluation of financial literacy programs by serving as an information clearinghouse, setting some standardized benchmarks, and helping nonprofits build an evaluation infrastructure.

• Encourage Working Longer

• consider changes to laws, programs, and policies that support retirement security, including retirement ages, in order to provide a set of signals that work in tandem to encourage work at older ages.

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Government Can Help: GAO Recommendations

• Bolster the Pension System

• require all sponsors of participant-directed plans to disclose fee information of 401(k) investment options to participants in a way that facilitates comparison among the options.

• require that 401(k) service providers disclose to plan sponsors the compensation that providers receive from other service providers.

• require plan sponsors to report a summary of all fees that are paid out of plan assets or by participants.

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Government Can Help: GAO Recommendations

• Reform Social Security: In choosing among proposals, policymakers should consider three basic criteria:

• the extent to which the proposal achieves sustainable solvency and how the proposal would affect the economy and the federal budget;

• the balance struck between the twin goals of individual equity (rates of return on individual contributions) and income adequacy (level and certainty of benefits); and

• how readily such changes could be implemented, administered, and explained to the public.

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Barbara D. Bovbjerg

Director, Education Workforce, and Income Security Issues

bovbjergb@gao.gov

www.gao.gov

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