FOR IMMEDIATE RELEASE
Ferbruary 1, 2005

ANALYSIS OF RETIREMENT TREND DATA

Decline in Replacement Rates Coupled with Decrease in Defined Benefit Plan Coverage Pose Retirement Security Challenges

On the eve of President Bush's State of the Union address where he is certain to address the impending retirement crisis in our nation, it is important that our political leaders take note that much of the crisis lies in managing retirement savings so that they provide income that lasts a lifetime.  Policymakers must look at encouraging lifetime annuitization if they want to fully address the scope of today's retirement problem. 

Most financial planners recommend a 70-80 percent replacement rate of pre-retirement income to avoid a drop in living standards during retirement.  Three troubling trends suggest that this will be hard for many Americans:

1. Social Security replacement rates are lower than they were for prior generations.
   Security payments and other retirement income (i.e. pensions, 401(k), etc.) are not intended to be a specific dollar amount. Instead, they are designated to replace a portion or percentage of the worker's pre-retirement earnings. This percentage is called a "replacement rate."¹ For example, if a worker earns $50,000 per year and then retires and receives $35,000 annually from Social Security benefits, retirement plans, and other income, then the worker has a 70 percent replacement rate.
   
   Today, Social Security replaces only 42 percent of pre-retirement income. By current estimates that number will continue to fall in the coming years.²   As a result, boomer beneficiaries will receive a significantly smaller portion of their pre-retirement income than retirees in the last 25 years or so, meaning Americans must turn to other substantial forms of retirement income to supplement Social Security or face declines in their standards of living. 
   
2. The availability of employer-provided defined benefit plans is on the decline. 
   Traditionally, defined benefit and defined contribution plans - better known as employer-based retirement plans -- have helped make up the difference between the goal of a 70-80 percent replacement rate and the 42 percent rate that Social Security provides.³  However, there has been a gradual and significant decline in the percentage of Americans covered by defined benefit plans. 
   
   The percentage of full-time employees in medium and large private establishments who are covered by defined benefit plans has fallen from 80 percent in 1985 to just 36 percent in 2000 as the trend shifts from offering defined benefit plans (i.e. pension plans) to defined contribution plans (e.g. 401(k) plans).⁴   Moreover, those who participate in defined contribution plans normally do not have a way to convert their account balances to a steady stream of income that will last throughout retirement.
   
3. A majority of Americans do not have access to employer-sponsored retirement plans. Only 42% of the 151.1 million workers in the U.S. have access to any employer-based retirement plan.⁵

Source: Department of Labor,
www.bls.gov/opub/cwc/cm20030325tb01.htm

The result -- fully addressing the retirement challenges in this country necessitates greater attention to encouraging consumers to invest some of their independent savings in retirement vehicles like lifetime annuities that will guarantee a paycheck for life.

Taken together, the reduced guaranteed replacement rate of Social Security and the reduced availability of employer-provided defined benefit plans mean that the 77 million baby boomers are at risk of retiring with a smaller proportion of their retirement income being guaranteed to last their lifetimes than their parents. The problem is even greater for minorities and women.  Minority groups (such as Hispanics and African-Americans) have less pension coverage than Caucasian males.  Consider the following statistics:

• About 75 percent of minority beneficiaries rely on Social Security for at least half of their retirement income.⁶ Nearly 50 percent of minority beneficiaries rely on Social Security for 90 percent or more of their retirement income.⁶ 
• Women have a longer life expectancy than males but there is a roughly 10% difference between male and female access to pensions and defined contribution plans.⁷
  

One solution being posed to help solve this retirement security challenge is a new tax incentive for individuals that would encourage investments made with after tax dollars in annuity products that make payments guaranteed for life.  The proposal, called the Retirement Security for Life Act, which was introduced in  the House of Representatives and the Senate in the last Congress and is expected to be introduced again in the 109th Congress, would encourage all Americans, including those who don't have access to employer-based retirement programs, to make their retirements more secure by getting a steady paycheck for life. For more information, visit www.paycheckforlife.org.
Notes:
1. Social Security Administration www.ssa.gov/kc/fact_sheet_14print.htm
2. Munnell, Alicia.  "The Declining Role of Social Security."  Center for Retirement Research at Boston College, February 2003, Number 6.
3. Brown, Jeffrey.  "The New Retirement Crisis."  Americans for Secure Retirement Coalition (November 2004).
4. Department of Labor- Bureau of Labor Statistics www.bls.gov/opub/cwc/cm20030325tb01
5. Employee Benefit Research Institute estimates from the 2004 March Current Population Survey
6. Hendley, Alexa and Natasha Bilimoria.  "Minorities and Social Security: An Analysis of Racial and Ethnic Differences in the Current Program." Social Security Bulletin, Volume 62, Number 2 (1999).
 
DEFINING RETIREMENT INCOMEReplacement Rate:  The percentage of a worker's pre-retirement annual earnings that he or she will receive as annual income in retirement. Defined benefit plan: An employer-provided retirement plan that uses a specific, predetermined formula to calculate the amount of an employee's guaranteed future benefit that will be paid in periodic installments and last the employee's entire life.1 Defined contribution plan:  An employer-provided retirement plan in which the employer makes specified contributions to individual employee accounts, but the amount of the retirement benefit is not specified.

Lifetime Annuitization: Converting a sum of money into a series of payments that are guaranteed to last as long as you live.