Retirement Income
Intergenerational Comparisons of Wealth and Future Income
Gao ID: GAO-03-429 April 25, 2003
Today's workers will rely to a large extent on Social Security, private pensions, and personal wealth for their retirement income. But some analysts question whether these sources will provide sufficient retirement income to maintain workers' standards of living once they leave the labor force. Indeed, the Social Security trust funds are projected to become exhausted in 2042, at which time, unless action is taken, Social Security will not be able to pay scheduled benefits in full. To gain an understanding of what today's workers might expect to receive in terms of retirement income, GAO was asked to examine (1) how the personal wealth of Baby Boom (born between 1946 and 1964) and Generation X (born between 1965 and 1976) workers compare with what current retirees had at similar ages, (2) how workers from the Baby Boom and Generation X compare in terms of the pension and Social Security benefits they can expect to receive, and (3) the likely distribution of pension and Social Security benefits across workers within the Baby Boom and Generation X.
Baby Boom and Generation X households headed by an individual aged 25 to 34 have greater accumulated assets, adjusted for inflation, than current retirees had when they were the same age, but also more debt. Most of the large increase in assets between current retirees and the Baby Boom is due to increased ownership and equity in housing. Contributions to defined contribution pension plans play a role in explaining the modest increase in assets between the Baby Boom and Generation X, in part, because GAO's data do not allow it to consider the value of benefits from defined benefit pension plans. Workers from Generation X are estimated to have similar levels of retirement income in real terms (adjusted for inflation) at age 62 as their counterparts in the Baby Boom, but Generation X may be able to replace a smaller percentage of their pre-retirement income. Whether Social Security benefits for Generation X are higher or lower than those for the Baby Boom will depend on how the Social Security funding shortfall is resolved. With regard to pensions, Generation X and the Baby Boom are estimated to have similar levels of pension income even with a continued shift from defined benefit to defined contribution pension coverage. Retirement income will vary within both Generation X and the Baby Boom households, and certain groups will be more likely to have lower retirement incomes. As one might expect, given significant variation in workers' earnings, if households were arrayed from lowest to highest in terms of estimated total retirement income, those in the top 20 percent would receive a substantially larger proportion of income compared with those in the bottom 20 percent. Retirement income is lower for the less educated and single women.
GAO-03-429, Retirement Income: Intergenerational Comparisons of Wealth and Future Income
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Report to the Ranking Minority Member, Subcommittee on Employer-
Employee Relations, Committee on Education and the Workforce, House of
Representatives:
United States General Accounting Office:
GAO:
April 2003:
Retirement Income:
Intergenerational Comparisons of Wealth and Future Income:
GAO-03-429:
GAO Highlights:
Highlights of GAO-03-429, a report to Ranking Minority Member,
Subcommittee on Employer-Employee Relations, Committee on Education
and the Workforce, House of Representatives
Why GAO Did This Study:
Today‘s workers will rely to a large extent on Social Security, private
pensions, and personal wealth for their retirement income. But some
analysts question whether these sources will provide sufficient
retirement income to maintain workers‘ standards of living once they
leave the labor force. Indeed, the Social Security trust funds are
projected to become exhausted in 2042, at which time, unless action is
taken, Social Security will not be able to pay scheduled benefits in
full.
To gain an understanding of what today‘s workers might expect to
receive in terms of retirement income, GAO was asked to examine (1) how
the personal wealth of Baby Boom (born between 1946 and 1964) and
Generation X (born between 1965 and 1976) workers compare with what
current retirees had at similar ages, (2) how workers from the Baby
Boom and Generation X compare in terms of the pension and Social
Security benefits they can expect to receive, and (3) the likely
distribution of pension and Social Security benefits across workers
within the Baby Boom and Generation X.
What GAO Found:
Baby Boom and Generation X households headed by an individual aged 25
to 34 have greater accumulated assets, adjusted for inflation, than
current retirees had when they were the same age, but also more debt.
Most of the large increase in assets between current retirees and the
Baby Boom is due to increased ownership and equity in housing.
Contributions to defined contribution pension plans play a role in
explaining the modest increase in assets between the Baby Boom and
Generation X, in part, because GAO‘s data do not allow it to consider
the value of benefits from defined benefit pension plans.
Workers from Generation X are estimated to have similar levels of
retirement income in real terms (adjusted for inflation) at age 62 as
their counterparts in the Baby Boom, but Generation X may be able to
replace a smaller percentage of their preretirement income. Whether
Social Security benefits for Generation X are higher or lower than
those for the Baby Boom will depend on how the Social Security funding
shortfall is resolved. With regard to pensions, Generation X and the
Baby Boom are estimated to have similar levels of pension income even
with a continued shift from defined benefit to defined contribution
pension coverage.
Retirement income will vary within both Generation X and the Baby Boom
households, and certain groups will be more likely to have lower
retirement incomes. As one might expect, given significant variation in
workers‘ earnings, if households were arrayed from lowest to highest in
terms of estimated total retirement income, those in the top 20 percent
would receive a substantially larger proportion of income compared with
those in the bottom 20 percent. Retirement income is lower for the less
educated and single women.
www.gao.gov/cgi-bin/getrpt?GAO-03-429.
To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Barbara D. Bovbjerg at (202) 512-7215.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Baby Boom and Generation X Workers Have More Assets and More Debt Than
Current Retirees Had at Similar Ages:
Generation X and the Baby Boom Are Estimated to Have Similar Levels of
Real Retirement Income, but Generation X Could Have Lower Replacement
Rates:
The Distribution of Retirement Income Will Vary within Generations, and
Certain Groups Will Be More Likely to Have Lower Retirement Incomes:
Concluding Observations:
Agency Comments:
Appendix I: Scope and Methodology:
Analysis of Personal Wealth:
Analysis of Simulated Retirement Income:
Appendix II: Alternative Scenarios:
Retirement Income Under the No-Sunset Pension Scenario:
Distributional Figures and Tables for the Baby Boom and for Generation
X under Alternative Scenarios:
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: The Median Value of Net Worth for Households Headed by a 25-to
34-Year Old--Differences by Homeownership, Marital Status, and
Education:
Table 2: Median Value of Wealth-to-Income Ratios for Households Headed
by a 25-to 34-Year Old--Differences by Homeownership, Marital Status,
and Education:
Table 3: Median Monthly Household Retirement Income and Its Major
Components, at Age 62, if Social Security Shortfall Addressed by
Increasing Revenues:
Table 4: Median Monthly Household Retirement Income and Its Major
Components, at Age 62, if Social Security Shortfall Addressed by
Reducing Benefits:
Table 5: Median Monthly Household Retirement Income and Its Major
Components, at Age 62, if Social Security Shortfall Addressed by
Reducing Benefits and Generation X Having Only DC Pension Plans:
Table 6: Median Household Replacement Rates for Baby Boom and
Generation X:
Table 7: Median Monthly Household Retirement Income at Age 62 by
Marital Status for Generation X, in 2001 Dollars:
Table 8: Participation Rates by Age and Salary, 2001:
Table 9: Contribution Rates by Age and Salary, 1999:
Table 10: Average Asset Allocation Rates by Age and Investment Options,
2000:
Table 11: Assets at Termination, 2000:
Table 12: Median Monthly Household Retirement Income and its Major
Components, at Age 62, if Social Security Shortfall Addressed by
Increasing Revenues:
Table 13: Median Monthly Household Retirement Income and its Major
Components, at Age 62, if Social Security Shortfall addressed by
Reducing Benefits:
Table 14: Median Monthly Household Retirement Income and its Major
Components, at Age 62, if Social Security Shortfall Addressed by
Reducing Benefits and Generation X Having Only DC Pension Plans:
Table 15: Median Household Replacement Rates for Baby Boom and
Generation X:
Table 16: Median Monthly Household Retirement Income at Age 62 by
Marital Status for the Baby Boom, in 2001 Dollars:
Table 17: Median Monthly Household Retirement Income at Age 62 by
Marital Status for Generation X When All Pensions are DC Pensions, in
2001 Dollars:
Table 18: Median Monthly Household Retirement Income at Age 62 by
Marital Status for Generation X with Extension of Raised Pension
Contribution Limits, in 2001 Dollars:
Table 19: Median Monthly Household Retirement Income at Age 62 by
Marital Status for Generation X with Scheduled Social Security
Benefits, in 2001 Dollars:
Figures:
Figure 1: Percentage of the Aged Receiving Income, by Source:
Figure 2: Average Weekly Earnings for Production or Nonsupervisory
Workers, Adjusted for Inflation:
Figure 3: Labor Force Participation Rates of Married Women:
Figure 4: Estimated Private Wage and Salary Worker Participation Rates
Under DB and DC Pension Plans:
Figure 5: Levels of Education Completed by Individuals Age 25 and Over:
Figure 6: Percentage of Households by Household Composition:
Figure 7: Median Value of Total Assets, Retirement Accounts, and
Housing Assets, and the Percentage of Households with these Assets for
Households Headed by a 25-to 34-Year-Old:
Figure 8: Median Value of Total Assets, Financial Assets, and
Nonfinancial Assets, and the Percentage of Households with These Assets
for Households Headed by a 25-to 34-Year Old:
Figure 9: Median Value of Debt and the Percentage of Households with
Debt for Households Headed by a 25-to 34-Year Old (Total Debt, Housing
Debt, Financial Debt, and Other Debt):
Figure 10: Median Value of Positive and Negative Net Worth and the
Percentage of Households with Net Worth for Households Headed by a 25-
to 34-Year Old:
Figure 11: Proportion of Household Retirement Income for Each Quintile
of the Retirement Income Distribution at Age 62 for Generation X:
Figure 12: Proportion of Household Pension Benefits and Household
Social Security Benefits for Each Quintile of the Pension Benefit and
Social Security Benefit Distributions at Age 62 for Generation X:
Figure 13: Median Monthly Household Retirement Income at Age 62 for
Generation X by Pension Status:
Figure 14: Median Monthly Household Retirement Income at Age 62 by
Educational Attainment for Generation X:
Figure 15: Median Monthly Retirement Income at Age 62 by Gender for
Single Person Households for Generation X:
Figure 16: Proportion of Household Retirement Income for Each Quintile
of the Retirement Income Distribution at Age 62 for the Baby Boom:
Figure 17: Proportion of Household Pension Benefits and Household
Social Security Benefits for Each Quintile of the Pension Benefit and
Social Security Benefit Distributions at Age 62 for the Baby Boom:
Figure 18: Median Monthly Household Retirement Income at Age 62 by
Pension Status for the Baby Boom:
Figure 19: Median Monthly Household Retirement Income at Age 62 by
Educational Attainment for the Baby Boom:
Figure 20: Median Monthly Retirement Income at Age 62 by Gender for
Single Person Households for the Baby Boom:
Figure 21: Proportion of Household Retirement Income for Each Quintile
of the Retirement Income Distribution at Age 62 for Generation X When
All Pensions Are DC Pensions:
Figure 22: Proportion of Household Pension Benefits and Household
Social Security Benefits for Each Quintile of the Pension Benefit and
Social Security Benefit Distributions at Age 62 for Generation X When
all Pensions are DC Pensions:
Figure 23: Median Monthly Household Retirement Income at Age 62 by
Pension Status for Generation X When All Pensions Are DC Pensions:
Figure 24: Median Monthly Household Retirement Income at Age 62 by
Educational Attainment for Generation X When All Pensions Are DC
Pensions:
Figure 25: Median Monthly Retirement Income at Age 62 by Gender for
Single Person Households for Generation X When All Pensions are DC
Pensions:
Figure 26: Proportion of Household Retirement Income for Each Quintile
of the Retirement Income Distribution at Age 62 for Generation X with
Extension of Raised Pension Contribution Limits:
Figure 27: Proportion of Household Pension Benefits and Household
Social Security Benefits for Each Quintile of the Pension Benefit and
Social Security Benefit Distributions at Age 62 for Generation X with
Extension of Raised Pension Contribution Limits:
Figure 28: Median Monthly Household Retirement Income at Age 62 by
Pension Status for Generation X with Extension of Raised Pension
Contribution Limits:
Figure 29: Median Monthly Household Retirement Income at Age 62 by
Educational Attainment for Generation X with Extension of Raised
Pension Contribution Limits:
Figure 30: Median Monthly Retirement Income at Age 62 by Gender for
Single Person Households for Generation X with Extension of Raised
Pension Contribution Limits:
Figure 31: Proportion of Household Retirement Income for Each Quintile
of the Retirement Income Distribution at Age 62 for Generation X with
Scheduled Social Security Benefits:
Figure 32: Proportion of Household Pension Benefits and Household
Social Security Benefits for Each Quintile of the Pension Benefit and
Social Security Benefit Distributions at Age 62 for Generation X with
Scheduled Social Security Benefits:
Figure 33: Median Monthly Household Retirement Income at Age 62 by
Pension Status for Generation X with Scheduled Social Security
Benefits:
Figure 34: Median Monthly Household Retirement Income at Age 62 by
Educational Attainment for Generation X with Scheduled Social Security
Benefits:
Figure 35: Median Monthly Retirement Income at Age 62 by Gender for
Generation X for Single Person Households with Scheduled Social
Security Benefits:
Abbreviations:
DB: defined benefit:
DC: defined contribution:
EGTRRA: Economic Growth and Tax Relief Reconciliation Act of 2001:
ERISA: Employee Retirement Income Security Act of 1974:
GEMINI: Genuine Microsimulation of Social Security and Accounts:
IRA: individual retirement account:
OASDI: Old Age, Survivor and Disability Insurance:
PENSIM: Pension Simulator:
PIA: primary insurance amount:
PSG: Policy Simulation Group:
PSID: Panel Study of Income Dynamics:
SCF: Survey of Consumer Finances:
SIPP: Survey of Income and Program Participation:
SSASIM: Social Security and Accounts Simulator:
SSI: Supplemental Security Income:
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United States General Accounting Office:
Washington, DC 20548:
April 25, 2003:
The Honorable Robert Andrews
Ranking Minority Member
Subcommittee on Employer-Employee Relations
Committee on Education and the Workforce
House of Representatives:
Dear Mr. Andrews:
Today's workers will rely to a large extent on Social Security, private
pensions, and personal wealth for their retirement income. But some
analysts question whether these sources will provide sufficient
retirement income to maintain workers' standards of living once they
leave the labor force.[Footnote 1] Indeed, the Social Security trust
funds are projected to become exhausted in 2042, at which time, unless
action is taken, Social Security will not be able to pay scheduled
benefits in full.[Footnote 2] Pension coverage has remained at about 50
percent of the workforce for decades while the composition of that
coverage has shifted from defined benefit (DB) plans to defined
contribution (DC) plans.[Footnote 3] As a result of this shift, an
increasing share of the responsibility for providing for one's
retirement income has shifted from the employer to the employee.
Finally, workers today are saving a smaller proportion of their incomes
than earlier generations did. Yet, if current workers are to maintain
their standards of living and meet increasing health care costs in
retirement, they need to save more.
These trends suggest that today's younger workers might reach
retirement unable to maintain the standards of living they had achieved
while working. Additionally, there may be a greater strain on
retirement assets if younger workers spend more years in retirement due
to greater life expectancy. To gain an understanding of what today's
workers might expect to receive in terms of retirement income, you
asked us to examine (1) how the wealth of Baby Boom and Generation X
workers compares with what current retirees (pre-Baby Boom generation)
had as young adults, (2) how workers from the Baby Boom and Generation
X compare in terms of the pension and Social Security benefits they can
expect to receive, and (3) the likely distribution of pension benefits
and Social Security benefits for all workers within the Baby Boom and
Generation X. The Baby Boom generation includes those born between 1946
and 1964, Generation X includes those born between 1965 and 1976, and
we define the Pre-Baby Boom generation as those born between 1925 and
1945.
To compare wealth across all three generations, we used the Federal
Reserve Board's Survey of Consumer Finances (SCF), a nationally
representative database containing detailed information on assets and
debt, and compared the ownership and median levels of different types
of assets and debt for 25-to 34-year olds in each generation. We
selected this age group because it is important to compare each of the
generations at the same life-cycle stage and this is the only age group
for which we have data on wealth for all three generations.[Footnote 4]
This comparison enabled us to assess the extent to which the Baby Boom
and Generation X have been able to accumulate wealth, some or all of
which can be used to finance consumption in retirement. However, our
wealth measure does not include the future values of Social Security or
pensions.[Footnote 5] Therefore, to complement our analysis of the
younger generations' wealth, we simulated future retirement income for
the Baby Boom and Generation X. To illustrate the levels and
distribution of retirement income that current workers can expect to
receive at age 62, we used the Policy Simulation Group's (PSG)
models[Footnote 6] to simulate some components of retirement income--
Social Security benefits, pension income, and the earnings of spouses
not yet retired. Under contract to us, the PSG used Pension Simulator
(PENSIM) to estimate pension benefits and Genuine Microsimulation of
Social Security and Accounts (GEMINI) to estimate Social Security
benefits for two illustrative birth cohorts--Baby Boomers born in 1955
and Generation Xers born in 1970. These simulations are based on the
Social Security Trustees' 2001 intermediate economic and actuarial
assumptions. While our simulations provide estimates of future
retirement income, there is a considerable amount of uncertainty
involved with these estimates. Since these estimates could change
significantly, depending on assumptions used and behavioral responses,
they should not be considered predictions.
In order to bound our estimates of retirement income, we considered
different scenarios for Social Security and pensions. We used two
scenarios for estimating Social Security benefits: (1) scheduled
benefits are paid and (2) funded benefits are paid.[Footnote 7] We also
considered two scenarios for pension benefits, one assuming that both
the Baby Boom and Generation X had the same DB and DC pension plan
coverage and the other that Generation X workers with pensions had only
DC pensions. We compared the two younger generations under these
various scenarios because the retirement income of these younger
generations will be affected by policy decisions on Social Security and
pensions. Changes in Social Security and pension benefits, in turn,
will affect the amount that the Baby Boom and Generation X need to
save.
We conducted our work between April 2002 and April 2003 in accordance
with generally accepted government auditing standards. A more detailed
discussion of our scope and methodology appears in appendix I.
Results in Brief:
Baby Boom and Generation X households headed by individuals aged 25 to
34 have greater accumulated assets, adjusted for inflation, than
current retirees had when they were the same age, but also more debt.
Most of the large increase in assets between current retirees and the
Baby Boom is due to increased ownership and equity in housing.
Contributions to DC pension plans play a role in explaining the modest
increase in assets between the Baby Boom and Generation X, in part
because SCF data do not reflect the value of future benefits from DB
pension plans. Of the three groups, members of Generation X carry the
most debt. Yet, for Baby Boom and Generation X households with positive
net worth (assets exceed debt) at age 25 to 34, net worth is 60 percent
greater than that of current retirees when they were the same age.
However, particularly for Generation X, greater life expectancy may
require more assets to cover more years in retirement and greater
assets may also be required to support higher standards of living.
Additionally, within each generation, some people will not do as well
as others. Specifically, those who do not own their home, are less
educated, or are single, have less net worth.
Our simulations suggest that Generation X workers will have similar
levels of retirement income in real terms (adjusted for inflation) at
age 62 as their counterparts in the Baby Boom generation, but
Generation X may be able to replace a smaller percentage of their
preretirement income. Whether Social Security benefits for Generation X
are higher or lower than those for the Baby Boom generation will depend
on how the Social Security funding shortfall is resolved. If scheduled
benefits were maintained by increasing program revenues, then
Generation X could receive higher Social Security benefits in constant
dollars than the Baby Boom generation, but at the possible cost of
higher taxes and a reduced capacity to save during their working lives.
If benefits were reduced to levels payable by current payroll tax
rates, then Generation X could receive somewhat lower Social Security
benefits than the Baby Boom generation. With regard to pensions,
Generation X and the Baby Boomers are estimated to have similar levels
of retirement income. A continued shift from DB to DC pension coverage
does not appear to have much effect on the relative pension income of
Generation X and the Baby Boom. With respect to replacement rates,
however, Generation X is estimated to be able to replace a smaller
percentage of preretirement income than the Baby Boom. The lower
replacement rates for Generation X might translate into a decline in
their standard of living at retirement, absent increases in retirement
income related to behavioral changes (e.g., increases in savings,
working longer), or external factors (e.g., increases in rates of
return on assets).
Retirement income will vary within both Generation X and the Baby Boom
generation and certain groups will be more likely to have lower
retirement incomes. As one might expect, given significant variation in
workers' earnings, if households were arrayed from lowest to highest in
terms of estimated retirement income, those in the top 20 percent would
receive a substantially larger proportion of income compared with those
in the bottom 20 percent. Retirement income is lower for the less
educated and for single women.
Background:
Retirement income in the United States includes Social Security
benefits, asset income, pension benefits, and earnings. Over the last
40 years, receipt of Social Security has become almost universal while
receipt of asset income has increased modestly, receipt of private
pensions has tripled, and receipt of government pensions has increased
by 50 percent. However, a smaller proportion of aged households
received earnings in 2000 than in 1962. (See fig. 1.) All of these
components of retirement income have been affected by the major
regulatory, labor market, and demographic changes that have taken place
in the last 40 years.
Figure 1: Percentage of the Aged Receiving Income, by Source:
[See PDF for image]
Note: The aged include couples and nonmarried persons age 65 or older.
[End of figure]:
Legislative changes have expanded the pension and personal saving
options available to workers.[Footnote 8] The Employee Retirement
Income Security Act (ERISA) of 1974 provided certain minimum standards
and broad new protections of employee benefits plans, including
provisions for individual retirement accounts (IRA). Subsequent
legislation revised some provisions of ERISA, further expanding the
possibilities for workers to have access to pension income in
retirement and established new types of employer-sponsored pension
plans, such as 401(k) plans.
Legislative changes have also focused on the financing problems of
Social Security. In the late 1970s and early 1980s, legislative action
regarding Social Security attempted to solve this financing problem by
raising taxes, curtailing future benefits, raising the retirement age,
and trying to increase work incentives. However, the financing of
future Social Security benefits is still an issue, and further action
will need to be taken to either increase the program's revenues,
decrease its expenditures, or both.
The labor market conditions facing young workers today differ
significantly from those facing earlier generations of workers. Changes
in earnings, women's labor force participation, and pension coverage
over the last 40 years have altered the context within which workers
save for retirement. Real earnings increased throughout the 1960s,
slowed considerably in the 1970s, remained relatively stagnant during
the 1980s and much of the 1990s, and may have started to rise in the
late 1990s. For some groups of workers, such as production or
nonsupervisory workers, average weekly earnings adjusted for inflation
declined over most of the time period following the early 1970s. (See
fig. 2.) For young workers facing stagnant or declining real earnings,
saving for retirement might have become more difficult than it was for
those who entered the labor market when real earnings were growing.
Figure 2: Average Weekly Earnings for Production or Nonsupervisory
Workers, Adjusted for Inflation:
[See PDF for image]
[End of figure]
In addition, over the last 40 years, more women have entered the labor
force. They entered regardless of their marital status--the labor force
participation rates of married women, for example, increased from
32 percent in 1960 to 61 percent in 1999. (See fig. 3.) This means a
larger share of women in younger cohorts is working and likely to
qualify for Social Security and pensions based on their own earnings.
This also means an increase in the share of married couple households
that have two earners, which could increase the potential for household
retirement saving.
Figure 3: Labor Force Participation Rates of Married Women:
[See PDF for image]
[End of figure]
The composition of pension coverage also changed during this period.
The estimated share of private wage and salary workers participating in
a DB plan as their primary pension plan declined from 39 percent in
1975 to
21 percent in 1997, while the share participating in a DC plan as their
primary pension plan increased from 6 percent to 25 percent. (See fig.
4.) The decline in DB pension plan coverage and the increase in DC
pension plan coverage over the past 3 decades means that more of the
responsibility for retirement saving has shifted to individual workers
from employers.
Figure 4: Estimated Private Wage and Salary Worker Participation Rates
Under DB and DC Pension Plans:
[See PDF for image]
[End of figure]
Demographic changes over the last 40 years have also altered the
circumstances of workers as they save for retirement. Educational
attainment, for example, has increased over time. In 1960, only about
8 percent of the population 25 years of age and older had a college
degree. By 1999, 25 percent of the population 25 years or older were
college graduates. (See fig. 5.) The increase in educational attainment
over time could facilitate increased saving among those younger workers
who attain higher education. The composition of households has also
changed over this period with the share of households headed by a
married couple decreasing. In 1960, 74 percent of all households were
comprised of married couple families. By 1999 this had fallen to 53
percent. At the same time, the percentage of one-person households
increased from 13 percent to 26 percent of all households. (See fig.
6.) Median incomes are typically lower for families headed by a single
female or for single person households. In addition, life expectancy
has increased across the generations.[Footnote 9] The greater life
expectancy of the younger generations could mean that the retirement
income of the Baby Boom and Generation X would need to support a larger
number of years.
Figure 5: Levels of Education Completed by Individuals Age 25 and Over:
[See PDF for image]
[End of figure]
:
Figure 6: Percentage of Households by Household Composition:
[See PDF for image]
[End of figure]
The retirement security of today's workers will also be affected by
changes in the cost and provision of health care. Over the last 40
years, the provision of health benefits has become more expensive for
employers as generous benefits have combined with higher utilization
rates, a growing elderly population, and a rapidly increasing cost of
service. In response to these increased costs, many employers have
begun to limit the health benefits provided, either by terminating
their plans, restricting benefits, or reducing their share of the
premium. As a result, future retirees are likely to pay more of the
costs of their health care. Consequently, today's workers might have to
work longer, save more, or both, to ensure sufficient access to health
benefits. In addition to paying more for privately sponsored health
benefits, today's current workers might also pay more in retirement for
Medicare. Medicare costs are continuing to rise with the result that
either benefits will have to be reduced or monthly premiums will have
to be increased.
Given all these demographic changes, as well as regulatory and economic
changes, analysis of retirement income is increasingly dependent on
good estimates, which in turn require adequate data. In a recent report
on needed improvements in retirement income data, we identified data
improvements that experts say are a priority for the study of
retirement income.[Footnote 10] In particular, experts cited data from
employers on employee benefits, as well as linkages between individual
and household surveys and administrative data, as being helpful for
estimating future retirement income.
Baby Boom and Generation X Workers Have More Assets and More Debt Than
Current Retirees Had at Similar Ages:
Baby Boom and Generation X households headed by individuals aged 25 to
34 have greater accumulated assets, adjusted for inflation, than
current retirees had when they were the same age but they also have
more debt. The large increase in assets between current retirees--the
Pre-Baby Boom generation--and the Baby Boom is due mainly to increases
in home equity and increases in the rate of home ownership. The modest
increase in assets between the Baby Boom and Generation X can be
accounted for in large part by the increase in the ownership and value
of DC retirement accounts, because SCF data do not reflect the value of
benefits from DB pension plans.[Footnote 11] While the percentage of
households with debt has changed very little across the generations,
the real total debt levels have more than doubled between current
retirees and Generation X workers. Yet, for most young Baby Boom and
Generation X households, assets exceed debts and the net worth of these
households with positive net worth is 60 percent greater than that of
current retirees at similar ages. However, particularly for Generation
X, greater life expectancy may require more assets to cover more years
in retirement and greater assets may also be required to support higher
standards of living. Within each generation, the distribution of net
worth across households is affected by economic and demographic
characteristics. Specifically, those who do not own their own home, are
less educated, or are single, have less in net worth.
Increases in Home Equity and Ownership are Responsible for Most of the
Increase in Assets Across the Generations:
For households headed by a 25-to 34-year old, both the median value of
total assets (in 1998 dollars) and the percentage of households with
assets increased across the generations.[Footnote 12] (See fig. 7.) The
median value of total assets for the Baby Boom and Generation X is more
than 50 percent greater than that for the Pre-Baby Boom
generation.[Footnote 13] While our analysis indicates that asset levels
increase across the generations, it does not take into account the
expectation of rising standards of living.[Footnote 14] Generation X,
for example, could have greater assets than those of previous
generations and still feel that these assets are insufficient for the
lifestyle they want or expect.
For households headed by a 25-to 34-year old, the increase in assets
across the generations can be attributed mainly to housing and DC
retirement accounts. (See fig. 7.) As we have noted, our measure of
assets does not include the value of benefits from DB pension plans
and, to the extent that a larger percentage of the Pre-Baby Boom and
the Baby Boom than Generation X is covered by DB plans, will
underestimate the true value of assets for the Pre-Baby Boom and the
Baby Boom relative to Generation X. The large increase in total asset
accumulation between the Pre-Baby Boom and the Baby Boom is largely due
to increases in home equity and increases in the rate of home
ownership. The median value of housing assets increased from $72,890
for the Pre-Baby Boom to $78,583 for the Baby Boom, while the
percentage of households owning their own home increased from 39 to 45
percent. The modest increase in total asset accumulation between the
Baby Boom and Generation X can be accounted for in large part by the
increase in the ownership and value of retirement accounts. The median
value of DC retirement accounts increased from $2,947 for the Baby Boom
to $8,003 for Generation X, while the percentage of households with
retirement accounts increased from
20 percent to 46 percent. The increased percentage of households with
retirement accounts reflects changes in the types of pension plans
offered by employers. Between 1983 and 1997, the percentage of workers
covered by primary DC pension plans, under which the worker has a
retirement account, increased from 11 percent to 25 percent while the
percentage of workers covered by DB pension plans declined from 35
percent to 21 percent.
Figure 7: Median Value of Total Assets, Retirement Accounts, and
Housing Assets, and the Percentage of Households with these Assets for
Households Headed by a 25-to 34-Year-Old:
[See PDF for image]
Note: GAO analysis based on data from the Survey of Consumer Finances.
The median for housing assets is larger than the median for total
assets because these medians come from two different distributions.
Total assets include bank accounts and automobiles as well as housing,
so the distribution of the value of total assets ranges from assets
with relatively low values, such as bank accounts and other financial
assets, to assets with relatively high values, such as houses. The
distribution for housing assets includes only those households owning a
home, whereas the distribution for total assets includes all households
with any type of asset, including those who do not own homes.
[End of figure]:
Financial and nonfinancial assets contribute only modestly to the
increase in total assets across the generations. (See fig. 8.)
Financial assets include savings accounts, mutual funds, and stocks and
bonds while nonfinancial assets include vehicles, business interests,
and nonresidential real estate. The median value of financial assets
varies between less than $2,000 for the Pre-Baby Boom generation and
$4,000 for the Baby Boom. A greater percentage of households in the
younger cohorts have financial assets than was the case for current
retirees. The median value of nonfinancial assets is greater than that
for financial assets in each of the generations and has increased
across the cohorts. While the ownership of nonfinancial assets
increased for the Baby Boom, relative to current retirees, it decreased
for Generation X relative to both the Baby Boom and current retirees.
Figure 8: Median Value of Total Assets, Financial Assets, and
Nonfinancial Assets, and the Percentage of Households with These Assets
for Households Headed by a 25-to 34-Year Old:
[See PDF for image]
Note: GAO analysis based on data from the Survey of Consumer Finances.
[End of figure]:
The degree to which the younger cohorts will be able to add to the
assets that we observe when they are ages 25 to 34 will be affected by
a number of demographic and economic factors. Individuals have control
over some of these factors. For example, they can determine how much
education they receive, how long they work, whether both spouses in a
couple work, how much they save while they are working, and whether
they stay married or get divorced. On the other hand, individuals have
no direct control over the rate of growth of real wages, the
performance of the overall economy, the rate of return on financial
assets, changes in housing prices, shifts in pension coverage and
generosity of benefits, the state of the health care system, changes in
life expectancy, and the resolution to the funding shortfall for Social
Security and Medicare. One of the resolutions to the funding shortfall
for both Social Security and Medicare is to increase the payroll tax
that employees and employers pay. An increase in the payroll tax, of
course, reduces the amount of an individual's disposable income
available to both consume and save. On the other hand, if individuals
expected Social Security benefits to be reduced, they might increase
their personal saving in order to offset this reduction in benefits.
Likewise, increases in life expectancy may also require increased
saving in order to provide for a greater number of years in retirement
or might induce people to work longer.
The Younger Generations, Especially Generation X, Have Higher Levels of
Debt Than Current Retirees Did at Similar Ages:
For households headed by a 25-to 34-year old, overall debt levels
increase across the generations. (See fig. 9.) The median level of debt
for the Baby Boom is 38 percent greater than that for the Pre-Baby Boom
generation while Generation X's median level of debt is 146 percent
greater than that of the Pre-Baby Boom generation and 78 percent
greater than that of the Baby Boom. The percentage of households with
debt changed very little, however, remaining at roughly 83-84 percent
across the generations. Thus, those households that go into debt are
going into debt more deeply with each new generation.
The increase in debt levels between the Baby Boom and Generation X was
due largely to increases in housing debt.[Footnote 15] The median value
of housing debt increased between the Baby Boom and Generation X by 61
percent. The percentage of households with housing debt changed very
little between these two generations, however, remaining at roughly 40
percent.
Figure 9: Median Value of Debt and the Percentage of Households with
Debt for Households Headed by a 25-to 34-Year Old (Total Debt, Housing
Debt, Financial Debt, and Other Debt):
[See PDF for image]
Note: GAO analysis based on data from the Survey of Consumer Finances.
The median for housing debt is larger than the median for total debt
because these medians come from two different distributions. Total debt
includes credit card and installment debt as well as housing debt.
Because the distribution of the value of total debt includes relatively
low levels of nonhousing debt as well as the higher levels of housing
debt, the median will be lower than the median for housing debt.
Nonhousing debt includes debt for other residential property, such as
vacation homes, debt for nonresidential real estate, business debt,
credit card debt, and installment loans. Other debt includes loans
against pensions, loans against life insurance, and margin loans.
[End of figure]
The amount of debt carried by a household will affect the value of its
net worth. For households headed by a 25-to 34-year old, the percentage
of households with positive net worth and the median value of positive
net worth increased between the Pre-Baby Boom and Generation X;
however, the median value of negative net worth is also much higher for
Generation X. (See fig. 10.) The median value of net worth for
households with positive net worth increased by 60 percent between the
Pre-Baby Boom and the two younger generations. The percentage of
households with negative net worth is smaller for the two younger
generations than for current retirees when they were young. However,
the median value of net worth for households with negative net worth is
about four times larger for Generation X than for the Baby Boom or the
Pre-Baby Boom.
Figure 10: Median Value of Positive and Negative Net Worth and the
Percentage of Households with Net Worth for Households Headed by a 25-
to 34-Year Old:
[See PDF for image]
Note: GAO analysis based on data from the Survey of Consumer Finances.
Net worth is defined as assets minus debt. If assets are greater than
debt, the household has positive net worth. If debt is greater than
assets, the household has negative net worth. Therefore, the positive
and negative net worth columns will not sum to total net worth since
they are based on different distributions.
[End of figure]:
Within Each Generation, the Value of Net Worth Is Lower for Those Who
Do Not Own Their Own Home, Are Less Educated, or Are Single:
The younger generations in general have experienced an increase in net
worth relative to current retirees at the same age, with the Baby Boom
having a median net worth three times that of the older generation and
Generation X having a median net worth two and a half times that of
current retirees. However, there are some groups within these cohorts
that have not benefited as much as others. (See table 1.) For example,
the median net worth for Baby Boom and Generation X homeowners is
between $17,000 and $35,000 greater than that for Pre-Baby Boom
homeowners; for nonhomeowners, net worth between the older and younger
cohorts differs by only $2,300 to $3,700. Median net worth has
increased across the cohorts for all education levels, but much less so
for those without a high school degree. Both single headed households
and households headed by a married couple have seen increases in net
worth; however, the increases have been much smaller for single headed
households. These trends have increased the disparity in net worth
within the younger generations compared to the Pre-Baby Boom.
Table 1: The Median Value of Net Worth for Households Headed by a 25-to
34-Year Old--Differences by Homeownership, Marital Status, and
Education:
In 1998 dollars.
Homeowners; Median: Pre-Baby Boom (1962): $25,594; Median: Baby Boom
(1983): $60,521; Median: Generation X (1998): $43,100.
Nonhomeowners; Median: Pre-Baby Boom (1962): 982; Median: Baby Boom
(1983): 4,699; Median: Generation X (1998): 3,300.
Less than high school; Median: Pre-Baby Boom (1962): 815; Median: Baby
Boom (1983): 4,658; Median: Generation X (1998): 2,500.
High school graduate; Median: Pre-Baby Boom (1962): 10,044; Median:
Baby Boom (1983): 17,195; Median: Generation X (1998): 17,920.
College graduate; Median: Pre-Baby Boom (1962): 23,953; Median: Baby
Boom (1983): 36,569; Median: Generation X (1998): 30,020.
Married; Median: Pre-Baby Boom (1962): 9,165; Median: Baby Boom (1983):
31,677; Median: Generation X (1998): 34,501.
Not married; Median: Pre-Baby Boom (1962): 0; Median: Baby Boom (1983):
7,160; Median: Generation X (1998): 5,750.
All households; Median: Pre-Baby Boom (1962): $6,072; Median: Baby Boom
(1983): $19,504; Median: Generation X (1998): $15,500.
Source: GAO analysis based on data from the Survey of Consumer Finances.
[End of table]
Another measure of the well-being of different generations is the ratio
of net worth, or wealth, to income. Median ratios of wealth to income
for households headed by a 25-to 34-year old are presented in table 2.
The Baby Boom and Generation X have higher wealth-to-income ratios than
current retirees had at similar ages. This suggests that households in
the younger generations have been able to accumulate more wealth than
was the case for current retirees. The ratios also reflect the
differences across demographic groups within generations. Within each
generation, ratios of wealth to income are higher for the well-
educated, the married, and homeowners.
Table 2: Median Value of Wealth-to-Income Ratios for Households Headed
by a
25-to 34-Year Old--Differences by Homeownership, Marital Status, and
Education:
Homeowner; Median: Pre-Baby Boom (1962): 0.641; Median: Baby Boom
(1983): 1.343; Median: Generation X (1998): 1.044.
Nonhomeowners; Median: Pre-Baby Boom (1962): 0.052; Median: Baby Boom
(1983): 0.167; Median: Generation X (1998): 0.151.
Less than high school; Median: Pre-Baby Boom (1962): 0.029; Median:
Baby Boom (1983): 0.216; Median: Generation X (1998): 0.159.
High school graduate; Median: Pre-Baby Boom (1962): 0.278; Median: Baby
Boom (1983): 0.525; Median: Generation X (1998): 0.586.
College graduate; Median: Pre-Baby Boom (1962): 0.510; Median: Baby
Boom (1983): 0.799; Median: Generation X (1998): 0.743.
Married; Median: Pre-Baby Boom (1962): 0.261; Median: Baby Boom (1983):
0.755; Median: Generation X (1998): 0.742.
Not married; Median: Pre-Baby Boom (1962): 0.000; Median: Baby Boom
(1983): 0.299; Median: Generation X (1998): 0.268.
All households; Median: Pre-Baby Boom (1962): 0.214; Median: Baby Boom
(1983): 0.562; Median: Generation X (1998): 0.523.
Source: Federal Reserve Board.
Note: GAO analysis based on data from the Survey of Consumer Finances.
[End of table]:
Generation X and the Baby Boom Are Estimated to Have Similar Levels of
Real Retirement Income, but Generation X Could Have Lower Replacement
Rates:
In our simulations, Generation X and the Baby Boom[Footnote 16] have
similar levels of retirement income in real terms (adjusted for
inflation). Social Security benefit levels for Generation X and the
Baby Boom will depend on how the Social Security funding shortfall is
resolved. The shift to greater DC pension coverage does not have much
effect on the pension income of Generation X relative to the Baby Boom.
However, replacement rates for Generation X are estimated to be lower
than for the Baby Boom under each scenario we considered, suggesting
retirement income for Generation X may not keep up with the rising
standard of living, absent increases in other sources of retirement
income, or increases in rates of return.
Cross-generational Comparisons of Retirement Income Levels Will Be
Affected by the Resolution to the Social Security Funding Shortfall:
Our simulations suggest that Generation X will have real retirement
income[Footnote 17] that is similar or somewhat higher than the Baby
Boom, depending on how the Social Security funding shortfall is
resolved.[Footnote 18] If the shortfall is resolved by increasing the
program's revenues[Footnote 19] to maintain scheduled benefits, then
Generation X is estimated to have somewhat higher real retirement
income at age 62 than the Baby Boom generation. (See table 3.) Because
our simulations assume that real earnings increase over time,[Footnote
20] Generation X would have higher Social Security benefits than the
Baby Boom. However, if the shortfall is resolved through gradual
benefit reductions over time,[Footnote 21] then Generation X is
estimated to have real retirement income levels at age 62 that are more
similar to those of the Baby Boom. (See table 4.) Because the benefit
reductions increase over time, they would have more impact on
Generation X than on the Baby Boom, leading to slightly lower Social
Security benefits for Generation X relative to the Baby Boom.
Table 3: Median Monthly Household Retirement Income and Its Major
Components, at Age 62, if Social Security Shortfall Addressed by
Increasing Revenues:
Retirement income; Baby Boom: $3,147; Generation X: $3,365.
Pension income (DB and DC); Baby Boom: $962; Generation X: $942.
Social Security benefits; Baby Boom: $1,366; Generation X: $1,549.
Source: GEMINI/PENSIM.
Note: Median values at age 62 discounted to 2001 dollars and DC account
balances annuitized at retirement. Not all components of retirement
income are shown. Pension income is measured across all individuals in
the cohort. Median pension income for those covered by a pension is
$1,495 for the Baby Boom and $1,440 for Generation X. In our
simulations, the rates of return for DC pension contributions vary over
time and by individual. Median spousal earnings for those spouses
working are $3,295 for the Baby Boom and $3,375 for Generation X.
[End of table]:
Changes to the Social Security system could also affect other forms of
retirement income, especially those not considered here. If program
revenues were increased by raising Social Security payroll taxes, then
individuals would have less disposable income to save for retirement.
This could take the form of decreases in personal saving or lower
contributions to DC pension plans. Instead, if general revenues were
used, the funding of other programs could be affected, which could
lower some individuals' income from other income support programs, such
as Supplemental Security Income (SSI). The timing and implementation of
the changes to the Social Security system are also relevant since
action taken later rather than sooner would necessitate larger tax
increases or benefit reductions and the impact on Generation X could be
even greater.
Table 4: Median Monthly Household Retirement Income and Its Major
Components, at Age 62, if Social Security Shortfall Addressed by
Reducing Benefits:
Retirement income; Baby Boom: $3,011; Generation X: $2,991.
Pension income (DB and DC); Baby Boom: $962; Generation X: $942.
Social Security benefits; Baby Boom: $1,234; Generation X: $1,199.
Source: GEMINI/PENSIM.
Note: Median values at age 62 discounted to 2001 dollars and DC account
balances annuitized at retirement. Not all components of retirement
income are shown. Pension income is measured across all individuals in
the cohort. Median pension income for those covered by a pension is
$1,495 for the Baby Boom and $1,440 for Generation X. In our
simulations, the rates of return for DC pension contributions vary over
time and by individual. Median spousal earnings for those spouses
working are $3,295 for the Baby Boom and $3,375 for Generation X.
[End of table]:
Generation X and the Baby Boom May Have Similar Levels of Pension
Income Even When Pension Coverage Shifts from DB to DC Plans:
Generation X and the Baby Boom are estimated to have similar levels of
pension income when our simulations assume that the rate of DB and DC
pension coverage is constant over time.[Footnote 22] (See table 4.) DC
account balances are annuitized at retirement to facilitate
comparisons. While Generation X's simulated higher earnings might have
suggested higher pension income as well, they may have been too young
to completely benefit from the strong stock market of the 1990s.The
assumption that the rate of pension coverage is constant over time has
not been the experience of private pensions in the United States over
the last 25 years. DB coverage has declined, and DC coverage has
increased.
Generation X and the Baby Boom are estimated to have similar levels of
pension income even when our simulations assume Generation X only has
access to DC pension plans.[Footnote 23] (See table 5.) While assuming
that all pension coverage will shift to DC plans represents the extreme
case, it does provide a bound to our estimates. These simulations
provide some insight into the impact that the continuing shift from DB
to DC pension coverage might have on retirement income for Generation
X, since the final outcome of this shift is uncertain.
Table 5: Median Monthly Household Retirement Income and Its Major
Components, at Age 62, if Social Security Shortfall Addressed by
Reducing Benefits and Generation X Having Only DC Pension Plans:
Retirement income; Baby Boom: $3,011; Generation X: $3,096.
Pension income (DB and DC); Baby Boom: $962; Generation X: $984.
Social Security benefits; Baby Boom: $1,234; Generation X: $1,199.
Source: GEMINI/PENSIM.
Note: Median values at age 62 discounted to 2001 dollars and DC account
balances annuitized at retirement. Not all components of retirement
income are shown. Pension income is measured across all individuals in
the cohort. Median pension income for those covered by a pension is
$1,495 for the Baby Boom and $1,700 for Generation X. In our
simulations, the rates of return for DC pension contributions vary over
time and by individual. Median spousal earnings for those spouses
working are $3,295 for the Baby Boom and $3,375 for Generation X.
[End of table]:
Replacement Rates Lower for Generation X Relative to the Baby Boom:
In our simulations, Generation X has a lower earnings replacement
rate[Footnote 24] than the Baby Boom (see table 6) even though the Baby
Boom and Generation X are estimated to have similar levels of
retirement income. Our assumption of increasing earnings over time
leads to Generation X having a lower replacement rate. The largest
difference between the cohorts, in terms of replacement rates, occurs
under the Social Security benefit reduction scenario since benefit
levels are falling more for Generation X while earnings are unchanged.
While the shift in pension coverage raises the level of retirement
income for Generation X, it does not change the replacement
rate.[Footnote 25]
The earnings replacement rate is an indicator of how well individuals
are doing at maintaining their pre-retirement standard of living. While
our estimated replacement rates do not cover all individuals in each
generation or include all forms of retirement income, they still might
indicate a decline in the standard of living during retirement for
Generation X. However, this does not take into account that retirement
income may increase because of behavioral changes or other external
factors. Since Generation X is still relatively young, it is possible
that some members of this cohort may change their behavior and save
more or work longer.[Footnote 26] Also, variations in rates of return
could be greater than expected, causing some individuals in our
simulations to experience higher asset returns. Any of these factors
could raise retirement income and, possibly, Generation X's replacement
rate. If this were to occur, the difference in replacement rates
between the Baby Boom and Generation X could be smaller than we
estimate.
Table 6: Median Household Replacement Rates for Baby Boom and
Generation X:
Social Security Tax Increase Scenario, Constant DB/DC; Baby Boom:
74.6%; Generation X: 68.1%.
Social Security Benefit Reduction Scenario, Constant DB/DC; Baby Boom:
70.7%; Generation X: 60.4%.
Social Security Benefit Reduction Scenario, Generation X only has DC;
Baby Boom: 70.7%; Generation X: 60.2%.
Source: GEMINI/PENSIM.
Note: The replacement rate is calculated as retirement income at age 62
divided by earnings at age 61 for retired workers who worked at age 61
and whose spouses, if married, were the same age. Some but not all of
the difference in replacement rates between generations may be
explained by the difference in the normal retirement age.
[End of table]:
The Distribution of Retirement Income Will Vary within Generations, and
Certain Groups Will Be More Likely to Have Lower Retirement Incomes:
Our simulations suggest that retirement income will vary significantly
within both Generation X and the Baby Boom. Retirement income will also
vary by demographic group, with income being lower for the less
educated and single women.
The Distribution of Retirement Income Will Vary within Both Generation
X and the Baby Boom:
Simulated retirement income will vary widely across households within
both Generation X and the Baby Boom.[Footnote 27] For example, if
married households in Generation X were arranged from lowest to highest
in terms of their retirement incomes at age 62, the top 20 percent
would receive over 40 percent of all retirement income while the bottom
20 percent would receive less than 7 percent. (See fig. 11.)[Footnote
28] The disparity between the top 20 percent and bottom 20 percent is
even larger for single persons. Because retirement income is closely
linked to earnings, which are known to vary significantly,[Footnote 29]
this degree of variation in estimated retirement income is not
surprising.
Figure 11: Proportion of Household Retirement Income for Each Quintile
of the Retirement Income Distribution at Age 62 for Generation X:
[See PDF for image]
Note: Retirement income includes Social Security benefits, pension
benefits, and earnings of younger spouses. Single individuals include
those divorced, widowed, or never married at age 62. Simulations assume
all workers retire completely at age 62, Social Security benefits are
reduced to funded levels, no extension of raised pension contribution
limits, and constant rates of coverage over time for DB and DC
pensions.
[End of figure]
:
When examining the sources of retirement income, simulated pension
benefits are less evenly distributed than simulated Social Security
benefits. Married couples in the top 20 percent in terms of pension
benefits receive over 58 percent of all pension benefits while those in
the bottom 20 percent receive no benefits at all, as shown for
Generation X in figure 12. In comparison, married couples in the top 20
percent in terms of Social Security benefits receive about 31 percent
of all Social Security benefits, while those in the bottom 20 percent
receive about 10 percent.
Figure 12: Proportion of Household Pension Benefits and Household
Social Security Benefits for Each Quintile of the Pension Benefit and
Social Security Benefit Distributions at Age 62 for Generation X:
[See PDF for image]
Note: Retirement income includes Social Security benefits, pension
benefits, and earnings of younger spouses. Single individuals include
those divorced, widowed, or never married at age 62. Simulations assume
all workers retire completely at age 62, Social Security benefits are
reduced to funded levels, no extension of raised pension contribution
limits, and constant rates of coverage over time for DB and DC
pensions.
[End of figure]:
Pension benefits are less evenly distributed for at least two reasons.
First, by design, the Social Security benefit formula is more generous
toward low-income and disabled workers, in contrast to pensions, which
tend to play a larger role in the retirement income of higher earning
workers.[Footnote 30] Second, some workers have no pension coverage
while nearly all workers are covered by Social Security. In our
simulations, 20 percent of married households and 33 percent of single
individuals in Generation X receive no pension benefits. The median
retirement income for married households where at least one member has
a pension is almost twice as large as the median for married households
where neither member has a pension. (See fig. 13.) The percentage
difference between those with pensions and without pensions is even
larger for single persons.
Figure 13: Median Monthly Household Retirement Income at Age 62 for
Generation X by Pension Status:
[See PDF for image]
Note: Retirement income includes Social Security and pension benefits
and earnings of younger spouses. Single individuals include those
divorced, widowed, or never married at age 62. Simulations assume all
workers retire completely at age 62, Social Security benefits are
reduced to funded levels, no extension of raised pension contribution
limits, and constant rates of coverage over time for DB and DC
pensions.
[End of figure]:
Retirement Income Varies by Demographic Group:
Simulated retirement income varies by educational attainment, marital
status, and gender. Simulated retirement income is lower for those with
less education, as shown for Generation X in figure 14. The median
retirement income for married high school dropouts is about 43 percent
less than the median for married college graduates. The percentage
difference between single high school dropouts and single college
graduates is even larger. The less educated have lower Social Security
and pension benefits due to lower lifetime earnings and lower rates of
pension coverage. In our simulations for Generation X, 66 percent of
married couples without high school degrees receive pension benefits as
opposed to 87 percent of married college graduates.
Figure 14: Median Monthly Household Retirement Income at Age 62 by
Educational Attainment for Generation X:
[See PDF for image]
Note: Retirement income includes Social Security benefits, pension
benefits, and earnings of younger spouses. Single individuals include
those divorced, widowed, or never married at age 62. Simulations assume
all workers retire completely at age 62, Social Security benefits are
reduced to funded levels, no extension of raised pension contribution
limits, and constant rates of coverage over time for DB and DC
pensions. Educational attainment for married couples is defined as the
attainment of the Generation X birth cohort member--the spouse may have
attained a different level of education.
[End of figure]:
Simulated retirement income also varies by marital status with divorced
and never married individuals having lower retirement incomes than
widows and married couples. (See table 7.) Median retirement incomes
for never married persons and divorced persons are about 23 percent
less and 32 percent less, respectively, compared to that of widows.
Median household retirement incomes for never married persons and
divorced persons are about 58 percent less and 63 percent less,
respectively, compared to that of married couples. Retirement incomes
are less for never married persons and divorced persons, even if one
compares retirement income per household member.[Footnote 31]
Table 7: Median Monthly Household Retirement Income at Age 62 by
Marital Status for Generation X, in 2001 Dollars:
Never married; Household income: $1,572; Income per
household member: $1,572.
Married; Household income: $3,757; Income per
household member: $1,878.
Widowed; Household income: $2,047; Income per
household member: $2,047.
Divorced; Household income: $1,389; Income per
household member: $1,389.
Source: GEMINI/PENSIM.
Note: Retirement income includes Social Security benefits, pension
benefits, and earnings of younger spouses. Simulations assume all
workers retire completely at age 62, Social Security benefits are
reduced to funded levels, no extension of raised pension contribution
limits, and constant rates of coverage over time for DB and DC
pensions.
[End of table]:
How widows and married couples compare in terms of retirement income
depends on the measure of income used. Widows have lower median
retirement income than married couples using household income as the
measure, but greater median retirement income using income per
household member as the measure. (See table 7.) Whether or not married
couples have a higher standard of living than widows depends on how
much they save by sharing their expenses.
Simulated retirement income is lower for single women than for single
men, as shown for Generation X in figure 15. The median retirement
income for single women is about 31 percent less than the median for
single men. Again this is due to lower lifetime earnings and a lower
rate of pension coverage. Sixty-three percent of single women in
Generation X receive pension benefits as opposed to 74 percent of
single men.
Figure 15: Median Monthly Retirement Income at Age 62 by Gender for
Single Person Households for Generation X:
[See PDF for image]
Note: Retirement income includes Social Security and pension benefits.
Single individuals include those divorced, widowed, or never married at
age 62. Simulations assume all workers retire completely at age 62,
Social Security benefits are reduced to funded levels, no extension of
raised pension contribution limits, and constant rates of coverage over
time for DB and DC pensions.
[End of figure]:
Variation in simulated retirement income suggests some members of both
generations may be at greater risk of retiring with insufficient
resources. Assessing the sufficiency of simulated retirement income is
difficult because we do not simulate assets, earnings in retirement,
and SSI and other public assistance programs. However, retirees who
earned low earnings over their working years may not have substantial
assets or earnings in retirement, and SSI provides only a very modest
level of support and is restricted to the poorest of retirees.
Concluding Observations:
Our analysis of wealth at ages 25 to 34 and our simulations of Social
Security and pension benefits at age 62 suggest that both the Baby Boom
and Generation X are likely to have similar levels of retirement income
in real terms, but that level may not support Generation X's future
living standards. Our analysis also indicates that across the
generations, similar subgroups of the population are most vulnerable in
retirement.
The levels of retirement income that Baby Boom and Generation X workers
will actually receive depend in part upon their own behavior, such as
how long they work or how much they save, and in part upon factors they
cannot control, such as the performance of the overall economy, the
rate of return on financial investments, and changes in Social Security
and health care financing. Individuals' behavior, and future economic
events, may vary significantly from the assumptions underlying our
models, especially for those workers who still have many years to work
before retirement. In addition, estimates of future retirement income
depend on adequate data on individuals' earnings, wealth, and pensions,
not all of which are easily captured in existing data sets. Further,
rising expectations about consumption, leisure and health care in
retirement (and the costs of meeting these expectations) could require
higher replacement rates for Generation X than for the Baby Boom in
order to maintain the standards of living they achieved while working.
Government policy can potentially have an important effect on
individuals' retirement income. Policies that encourage individuals to
acquire more education and training, to work longer and to save more
can help ensure higher retirement incomes in the future. Also, any
reform that policymakers undertake with regard to the Social Security
program or health care financing will have repercussions for the
retirement income of Generation X and the younger half of the Baby
Boom. Our work suggests the importance of all these policy actions
reflecting a coordinated approach to future retirement income, and that
they be made soon enough so the affected individuals will have adequate
time to adjust their work and saving behavior accordingly. Finally, the
continued vulnerability of certain segments of the population to
inadequate resources at retirement suggests that successful retirement
income policies would take potential impacts on these groups into
consideration.
Agency Comments:
We provided a draft of this report to SSA, Labor, and Treasury. All
three provided technical comments, which we have incorporated as
appropriate.
We are sending copies of this report to the Social Security
Administration, the Department of Labor, and the Department of the
Treasury. We will also make copies available to others on request. In
addition, the report will be available at no charge on GAO's Web site
at http://www.gao.gov.
If you have any questions concerning this report, please contact
Barbara Bovbjerg at (202) 512-7215. See appendix III for other contacts
and staff acknowledgments.
Sincerely yours,
Barbara D. Bovbjerg:
Director, Education, Workforce and Income Security Issues.
Signed by Barbara D. Bovbjerg:
[End of section]
Appendix I: Scope and Methodology:
To gain an understanding of what today's workers might expect to
receive in terms of retirement income, we compared the wealth of
current workers with that of current retirees, at similar points in
their lives, and estimated the pension and Social Security benefits
that the Baby Boom and Generation X might receive. To analyze personal
wealth we used the Survey of Consumer Finances, a survey of U.S.
households sponsored by the Board of Governors of the Federal Reserve
System. To analyze how workers from the Baby Boom and Generation X
compare in terms of the retirement income they can expect to receive
and the likely distribution across workers within the Baby Boom and
Generation X, we simulated expected retirement income at age 62.
Analysis of Personal Wealth:
To analyze personal wealth, we used the Survey of Consumer Finances
(SCF), a triennial survey of U.S. households sponsored by the Board of
Governors of the Federal Reserve System with the cooperation of the
U.S. Department of the Treasury. The SCF provides detailed information
on U.S. households' balance sheets and their use of financial services,
as well as on their pensions, labor force participation, and
demographic characteristics as of the time of the interview. The SCF
also collects information on households' total cash income, before
taxes, for the calendar year preceding the survey. Because the survey
is expected to provide reliable information both on assets that are
fairly common--such as houses--as well as on assets that are owned by
relatively few--such as closely held businesses--the SCF uses a sample
design that includes a standard, geographically based random sample and
a special over sample of relatively wealthy families. Weights are used
to combine information from the two samples to make estimates for the
full population. The 1962 SCF was conducted by the Census Bureau and
surveyed 3,551 households. The 1983 SCF was conducted by the Survey
Research Center of the University of Michigan and surveyed 3,824
households. The 1998 SCF was conducted by the National Opinion Research
Center at the University of Chicago and surveyed 4,309 households.
Using the SCF, we analyzed how marital status, education, and
homeownership are related to the wealth of households headed by a 25-to
34-year old. Using the 1962, 1983, and 1998 SCFs, we examined the
ownership and level of household savings for current retirees (born
between 1925 and 1945), the Baby Boom (born between 1946 and 1964), and
Generation X (born between 1965 and 1976) when each generation was 25
to 34 years old.[Footnote 32] We selected this age group because this
is the only age group for which we have data on personal wealth in each
of the three generations.
Our measure of personal wealth includes tax favored retirement saving,
such as individual retirement accounts (IRA) and 401(k)s and other
thrift type plans, as well as savings that are not specifically
dedicated to retirement but may enhance retirement income, such as
liquid financial assets (checking accounts, savings accounts, money
market deposit accounts, and money market mutual funds), other
financial assets (certificates of deposit, mutual funds, stocks, and
bonds), housing assets, and nonhousing assets (nonresidential real
estate, business interests, and vehicles).[Footnote 33] We also looked
at housing liabilities and nonhousing liabilities (credit cards,
installment loans, and other debts). For each component of personal
wealth, we calculated the percentage of households owning that type of
wealth as well as the median value. We looked separately at assets and
debt and then combined them to calculate individual net worth.
For studies in which the focus is on saving or net worth, the SCF is
preferable to other household income surveys, such as the Panel Study
of Income Dynamics (PSID) or the Survey of Income and Program
Participation (SIPP). The SCF has more detailed information about
wealth holding, better distributional characteristics, less item
nonresponse and fewer imputed variables than the PSID or the SIPP.
However, the SCF, like all surveys, is subject to sampling errors,
reporting errors, and nonresponse errors. Sampling errors result from
the fact that survey estimates are based on a sample of the population
rather than on a complete census of the population. Reporting errors
arise because respondents may not understand what is wanted, may not
know the information requested, or may be reluctant to reveal their
actual income or wealth. Nonresponse errors arise when the family
selected for participation is not available to be interviewed, either
because they refuse to participate or cannot be contacted.
Further, the sample sizes for the SCF are relatively small compared
with surveys such as the Current Population Survey. For our analysis,
we are concerned with the fact that small samples are vulnerable to
bias from observations not representative of the population as a whole.
For all of these reasons, our numbers should be interpreted with some
caution.
Analysis of Simulated Retirement Income:
To analyze how workers from the Baby Boom and Generation X compare in
terms of the retirement income they can expect to receive and the
likely distribution across workers within the Baby Boom and Generation
X, we simulated expected retirement income at age 62. Our measure of
retirement income consists of pension income, Social Security benefits,
and spouse's earnings. It does not include personal savings, earnings
in retirement, health benefits, or income from other income support
programs (e.g., Supplemental Security Income). For our simulations, we
used the Social Security and Accounts Simulator (SSASIM), Genuine
Microsimulation of Social Security and Accounts (GEMINI), and Pension
Simulator (PENSIM) simulation models. GEMINI estimated Social Security
benefits and PENSIM estimated pension income from defined benefit and
defined contribution plans for the 1955 birth cohort (Baby Boom) and
the 1970 birth cohort (Generation X) and their spouses. Retirement
income and its components were discounted to 2001 dollars, allowing us
to make comparisons across cohorts in terms of the level of retirement
income. However, these comparisons do not give an indication of
standards of living in retirement. To make this comparison, we looked
at the earnings replacement rate, calculated as retirement income at
age 62 divided by earnings at age 61 for retired workers who worked at
age 61 and whose spouse, if married, was the same age.
To examine the distribution of retirement income within both
generations, we calculated the degree of variation by arranging
households by retirement income and finding the proportion of that
income received by each quintile.[Footnote 34] To compare groups by
demographics, we calculated median retirement income by educational
attainment, gender, and marital status. Due to the difference in
household size, we performed most of the above calculations separately
for married couples and singles--those widowed, divorced, or never
married--at age 62. When examining retirement income by marital status
we calculated both household income and income per household
member.[Footnote 35]
SSASIM:
SSASIM[Footnote 36] is a Social Security policy simulation model
developed by the Policy Simulation Group (PSG). The initial version of
the model was developed under a series of contracts from the Social
Security Administration as part of the 1994-96 Advisory Council on
Social Security. SSASIM consists of two models, a macro model of
aggregate program finances, and an embedded micro model of selected
cohort individuals. In addition to current law policy, the model can
simulate a variety of policy reforms, from incremental changes to
broader structural reforms that would introduce individual accounts
into the broader Social Security system.
GEMINI:
GEMINI[Footnote 37] is a policy microsimulation model also developed by
the PSG. GEMINI is useful for analyzing the lifetime implications of
Social Security policies for a large sample of people born in the same
year and can simulate different reform features for their effects on
the level and distribution of benefits. GEMINI uses as input birth
cohort samples generated by PENSIM so as to represent the demographic
and economic characteristics of historical birth cohorts. Also, GEMINI
incorporates the same kind of Old Age, Survivor and Disability
Insurance (OASDI) program logic as used in the micro model of SSASIM,
with almost all assumption and policy parameters read from a SSASIM
input database. GEMINI produces output files that contain detailed
information about the life events and annual OASDI program experience
of each individual in the cohort sample.
For our report, the PSG produced the GEMINI output files using the same
1955 and 1970 birth cohorts used in PENSIM for both a scheduled and
funded Social Security scenario (see following paragraphs for more
details.) The PENSIM and GEMINI output files were then merged, yielding
an output file containing yearly Social Security benefits, pension
income, and spouse's earnings from age 62 until death for each member
of the cohort.
PENSIM:
PENSIM[Footnote 38] is a pension policy simulation model that is being
developed by the PSG to analyze lifetime coverage and adequacy issues
related to employer-sponsored pension plans. The development of PENSIM
has been funded since 1997 by the Office of Policy and Research at the
Employee Benefits Security Administration of the U.S. Department of
Labor. PENSIM produces a random sample of simulated life histories for
100,000 people in a birth cohort and for their spouses who may have
been born in a different year. The members of the birth cohort
experience demographic and economic events, the incidence and timing of
which vary by age, gender, education, disability, and employment
status. The types of life events that are modeled in PENSIM include:
* demographic events (birth, death);
* schooling events (leaving school at a certain age, receiving a
certain educational credential);
* family events (marriage, divorce, childbirth);
* disability events;
* initial job placement;
* job mobility events (earnings increases while on a job, duration of a
job, movement to a new job, or out of the labor force);
* pension events (becoming eligible for plan participation, choosing to
participate, becoming vested, etc.); and:
* retirement events.
For our report, we specified a DB and DC pension plan, which the PSG
entered into PENSIM to be used with the 1955 and 1970 birth cohorts to
simulate pension benefits for the Baby Boom and Generation X. These
simulations were conducted under both a sunset and no sunset pension
scenario as well a scenario where Generation X only had access to DC
pensions (see following discussion for more details).
Defined Benefit Plan:
Our simulations assume a single type of DB pension plan for all workers
covered by such a plan. This plan's structure is similar to the most
common type of DB pension plan[Footnote 39] in the private
sector.[Footnote 40]
In terms of structure, this plan has an eligibility requirement
(consisting of a minimum age of 21 and 1 year of service) and 5 years
cliff vesting. The plan's normal retirement age is 62 for workers with
any years of service, and it has an early retirement option, with early
retirement benefits beginning at age 55 for workers with 10 years of
service. If a worker chooses to retire early there is a linear early
retirement reduction of 5 percent per year (e.g., if a worker retires
at age 55, he would receive 65 percent of the normal retirement
benefit).[Footnote 41] The plan pays a monthly benefit at retirement,
rather than a lump sum.
In terms of the calculation of benefits, the traditional DB plan
calculates benefits using a final average pay formula, such as:
X% * average Y years earnings at the end of career or when highest *
years of service.
Surveys of DB plans in the United States indicate that, typically, the
percentage credit (X%) is in the range of 1-1.75 percent.[Footnote 42]
For this report we chose 1.25 percent. The most common definition of
final average pay is the high consecutive 5 years of earnings.
Therefore, the formula that we use to calculate DB benefits is:
1.25% * average of high consecutive 5 years pay * years of service.
Defined Contribution Plan:
In our simulations of DC plans, all individuals covered by a DC pension
plan are covered by the same plan. This plan's structure is similar to
the most common type of DC pension plan[Footnote 43] in the private
sector.[Footnote 44]
In terms of structure, this plan has an eligibility requirement
(consisting of a minimum age of 21 and 1 year of service) and 5 year
graded vesting.[Footnote 45] At retirement,[Footnote 46] individuals
annuitize their account balances,[Footnote 47] with married individuals
purchasing a joint and one-half survivor annuity and single individuals
purchasing a single life annuity.
Employees can contribute up to 12 percent of their earnings[Footnote
48] and the employer match 50 percent of the employees' contributions
up to 5 percent.[Footnote 49] Employees can invest their contributions
in their choice of equities and fixed income assets, where the fixed
income assets will consist of Treasury bonds and corporate
bonds.[Footnote 50] Employees who leave before retirement can choose to
have their account balances rolled over into another retirement
account. In our simulations, rollover decisions are based on the data
in table 11.
Assumptions also need to be made regarding participation and
contribution rates, and asset allocation. Tables 8-11 provide
information on the assumptions used for each of these factors. Table 8
provides data on participation rates by age and salary.
Table 8: Participation Rates by Age and Salary, 2001:
Age: $40,000-$60,000:
6.8%; >$60,000-$80,000: 7.4%; >$80,000-$100,000: 6.8%; >$100,000:
4.8%.
Age: 30-39; $20,000-$40,000: 6.2%; >$40,000-$60,000:
6.8%; >$60,000-$80,000: 7.2%; >$80,000-$100,000: 6.9%; >$100,000:
5.1%.
Age: 40-49; $20,000-$40,000: 6.7%; >$40,000-$60,000:
7.1%; >$60,000-$80,000: 7.3%; >$80,000-$100,000: 6.8%; >$100,000:
5.0%.
Age: 50-59; $20,000-$40,000: 7.6%; >$40,000-$60,000:
8.3%; >$60,000-$80,000: 8.2%; >$80,000-$100,000: 7.3%; >$100,000:
5.1%.
Age: 60+; $20,000-$40,000: 8.5%; >$40,000-$60,000:
9.3%; >$60,000-$80,000: 9.0%; >$80,000-$100,000: 7.9%; >$100,000:
5.1%.
Source: Contribution Behavior of 401(k) Plan Participants, Sarah Holden
and Jack VanDerhei, ICI Perspective, vol. 7/no. 4, October 2001 and
Research Report: How Well Are Employees Saving and Investing in 401(k)
Plans, Hewitt Financial Services, 2001.
Note: Since high income individuals are constrained by limits on total
contributions within a given year, and the rates in this table fall at
higher salary levels, we used the data for the >$60,000 to $80,000
salary range for those salaried above $80,000. In order to use these
contribution rates in our simulations, the salary categories listed in
the table were normalized by dividing by the average wage index in
1999.
[End of table]
:
Table 10 provides data on average asset allocation rates by age and
investment options.
Table 10: Average Asset Allocation Rates by Age and Investment Options,
2000:
Age: 20-29; Equity Funds: 77.7%;
Balanced Funds: 8.0%;
Bond Funds: 7.1%;
Money Funds: 5.8%.
Age: 30-39; Equity Funds: 78.7%; Balanced Funds: 8.6%; Bond Funds: 6.4%;
Money Funds: 4.7%.
Age: 40-49; Equity Funds: 74.1%; Balanced Funds: 9.7%;
Bond Funds: 7.7%; Money Funds: 6.1%.
Age: 50-59; Equity Funds: 67.4%; Balanced Funds: 10.8%;
Bond Funds: 9.3%; Money
Funds: 8.4%.
Age: 60+; Equity Funds: 55.8%; Balanced Funds: 12.5%;
Bond Funds: 13.8%; Money Funds: 12.4%.
Source: 404(k) Plan Asset Allocation, Account Balances, and Loan
Activity in 2000, Sarah Holden and Jack VanDerhei, ICI Perspectives,
vol. 7/no. 5, November 2001.
Note: Because the model we used has different investment categories
than those listed in the table, money funds were put into Treasury
bonds, bond funds were put into corporate bonds, and balanced funds
were split evenly between equities and corporate bonds. Percentages in
the table are percent of account balances.
[End of table]:
Data on the distribution of assets at termination by asset levels is
shown in table 11.
Table 11: Assets at Termination, 2000:
Assets: