Pension participation, wealth, and income

Abstract

Using data from the 1992, 1998, 2004, and 2010 waves of the Health and Retirement Study (HRS), this paper compares pension participation, pension wealth, projected retirement income, and replacement rates attributable to past service, by pension type for households ages 51-56. The analysis includes workers' pension coverage during both current and past jobs. Defined contribution (DC) wealth is simply the current account balance. DC income is calculated by projecting current plan balances to retirement, assuming no further contributions, and assuming that households then annuitize. Defined benefit (DB) wealth and income are calculated by apportioning projected benefits to past and future service. This paper found that: (1) Overall participation is significantly lower in 2010 than in previous waves; the increase in DC participation has not offset the decline in DB participation. (2) Both mean and median pension wealth in 2010 were larger than in 1992, but lower than in 1998 and 2004. (3) DC wealth is more skewed towards the top quartile than DB wealth. In 2010, the top quartile held 35 percent of DB compared to 52 percent of DC wealth. (4) Because DC participants must purchase an actuarially unfair annuity and faced low annuity rates from falling interest rates, the shift to DC plans has produced a decline in the ratio of income to wealth. (5) The decline in the income-to-wealth ratio would have been even greater if expected retirement ages had not increased. (6) But, despite later retirement, the ratio of projected retirement income to the highest five years of 51-56 earnings declined substantially from 1998-2010 because earnings have risen. The policy implications of this paper are: (1) Employer-sponsored plans are providing less today than in the past, so policymakers should consider ways to improve coverage and outcomes. (2) When restoring balance to Social Security finances, policymakers need to recognize that future retirees will be more dependent on Social Security than those in the past.