1. 0 The State of US Retirement Plans The State of US Retirement Plans Dallas L. Salisbury Dallas L. Salisbury President and CEO President and CEO Employee Benefit Research Institute Employee Benefit Research Institute Maxwell MPA, 1973 and ABD, 1976 Maxwell MPA, 1973 and ABD, 1976 www.ebri.org www.ebri.org www.ebri.org NPF September 18, 2007 NPF September 18, 2007

2. 1 EBRI Founded 1978 Founded 1978 Current Team of 15 and Budget of $4.5 million Current Team of 15 and Budget of $4.5 million No Change of Mission Since 1978 No Change of Mission Since 1978 On Sixth Generation of Representatives from Outside Organizations On Sixth Generation of Representatives from Outside Organizations www.ebri.org and www.choosetosave.org www.ebri.org and www.choosetosave.org www.ebri.orgwww.choosetosave.org www.ebri.orgwww.choosetosave.org

3. 2 EBRI Mission: To contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI Methods: Research, Publications, Education, Web Tools and Dissemination, No Position Advocacy or Solutions Advocacy – A Neutral Source for All Sides of a Debate – “Just the Facts”

4. 3 The EBRI Difference Research and analysis without position advocacy. Research and analysis without position advocacy. Primary focus on universe and national data. Primary focus on universe and national data. Use of results by organizations and individuals on all sides of issues because of non-advocacy approach. Use of results by organizations and individuals on all sides of issues because of non-advocacy approach. Broad-based financial support from organizations across the spectrum of interests/ideologies and all sectors. Broad-based financial support from organizations across the spectrum of interests/ideologies and all sectors.

5. 4 Agenda Public Policy Influence Public Policy Influence Demographic Influence Demographic Influence Employer Directions Employer Directions Implications Implications Can DC Plans Provide Adequacy? Can DC Plans Provide Adequacy?

6. 5 Public Policy Influence o PPA of 2006 and shift from government desire for DB plans to neutral o o Government focus on the individual  “ownership society”  SSA IA’s  “universal” IRA  PPA automation of plans

7. 6 Demographic Influences

8. 7 Population 2000

9. 8 Population 2100

10. 9 Labor Force New Young Entrant Decline (Average Annual Gain)

11. 10 U.S. Job Growth vs. Workforce Growth 2006 (per BLS projection)

12. 11 Percentage of Older Long Tenure Workers Drops From 23% to 19% - Gold Watches?

13. 12 Source: Annuity 2000 Mortality Table, American Society of Actuaries. Figures assume you are in good health. Longevity Builds on Longevity Couple (Both Age 65) Female Age 65 Age 92 50% chance of one survivor Male Age 65 Age 88 94 100 Age 8592 100 50% chance25% chance 50% chance25% chance of one survivor 97 100 95 90 85

14. 13 Employer Directions

15. 14 Health Spending Up; Retirement Contributions Down

16. 15 High Job Turnover Economy – Participation Gaps No plan available Not participating Participating Employee Benefit Research Institute

17. 16 Pension Participation Rates by Firm Size Source: March 2005 Current Population Survey tabulations.

18. 17

19. 18 Labor Market Trends Mean Future Decline ClassRetMedDentalVisionDrug White C 6158422452 Blue C 5161392556 Service2227171225 FullTime6066452759 PartT19129611 Union8583675177 Non-U4649331944 1-993743241437 100+6765513261 Source: Bureau of Labor Statistics

20. 19 Individual Implications

21. 20 And increased health care costs have caused many to have financial difficulties. Decrease your contributions to a retirement plan, such as a 401(k), 403(b) or 457 plan, or an IRA Have difficulty paying for other bills Decrease your contributions to other savings Use up all or most of your savings Borrow money Have difficulty paying for basic necessities, like food, heat, and housing Percentage Saying Yes

22. 21 Fixed 4.43% of Pay Plan Cost - Entry age 30 –The Price of pay Equity

23. 22 How much do you need to save if you work until 67? Starting at age 20 and saving consistently for 47 years will support a long life at rates some are now saving, without annuity purchase. Starting at age 20 and saving consistently for 47 years will support a long life at rates some are now saving, without annuity purchase. Waiting until 40 or 50 moves the numbers up. Waiting until 40 or 50 moves the numbers up. A life income annuity helps keep them lower as you only need enough to get you to average life expectancy. A life income annuity helps keep them lower as you only need enough to get you to average life expectancy. Source: Ballpark E$timate Worksheet, www.choosetosave.org

24. 23 Individual savings shortfalls for meeting basic expenses Definition of basic expenses –basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care provider Next two slides shows results by: –Birth cohort –Income quartile Function of all future years of work, not just current year or year prior to retirement We assume individuals want a better than 50/50 chance of having “sufficient” retirement income to cover basic expenses –Model both a 75 and 90 percent confidence level

25. 24 Median Percentage of Compensation That Must Be Saved Each Year Until Retirement For a 75% Confidence Level For Funds To Cover Basic Expenses* When Combined With Simulated Retirement Wealth by Birth Cohort and Income Quartile (Limited to 25%; assumes current Social Security and housing equity is never liquidated) Income quartile * Basic expenses = basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care provider Source: EBRI-ERF Retirement Security Projection Model.

26. 25 Median Percentage of Compensation That Must Be Saved Each Year Until Retirement For a 90% Confidence Level For Funds To Cover Basic Expenses* When Combined With Simulated Retirement Wealth by Birth Cohort and Income Quartile (Limited to 25%; assumes current Social Security and housing equity is never liquidated) Income quartile * Basic expenses = basic living expenses and any expense associated with an episode of care in a nursing home or from a home health care provider Source: EBRI-ERF Retirement Security Projection Model.

27. 26 Percent of 65+ With Pension and Annuity Income 1988-2002 Source: EBRI CPS tabulations, EBRI Notes v24n12, 12/03 13% are from Public Employers

28. 27 SSA Income Dominates Sources of retiree income by age (2004) Source: Current Population Survey, Bureau of the Census

29. 28 SSA Grows in Importance With Age – Income from Work Persists Percentage of total income by age for the retired population (2004) Source: Current Population Survey, Bureau of the Census

30. 29 Public Policy Implications Social Security Becomes More Important Not Less – Even for the Haves’ Social Security Becomes More Important Not Less – Even for the Haves’ Medicare Becomes Primary Source for the Haves’ Medicare Becomes Primary Source for the Haves’ Growing Gap Between Public Worker (retiree) and Private Worker (retiree) Benefits Growing Gap Between Public Worker (retiree) and Private Worker (retiree) Benefits As Employer Provision/Payment Declines Pressure on/for Government Programs Grows As Employer Provision/Payment Declines Pressure on/for Government Programs Grows Re-Regulation? New Paternalism? National Health Insurance? Mandated Savings? Trade Reversal? Re-Regulation? New Paternalism? National Health Insurance? Mandated Savings? Trade Reversal?

31. 30 Can DC Plans Provide Adequacy?

32. 31 Average Participant Before-Tax Contribution Rates by Age and Salary, 1999 (percent of salary) Source: EBRI/ICI Participant-Directed Retirement Plan Data Collection Project (see Holden and VanDerhei (October 2001))

33. 32 Average Account Balance Among 401(k) Participants from Year-End 1999 Through Year-End 2006 by Age Source: "401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2006,“ August 2007

34. 33 Here’s the retirement income the current DC system may replace by the 2030’s…for continuous participants Sources: Tabulations from Holden and VanDerhei (2005) 23% 33% 43% 56% Lowest Income Quartile 2Quartile 3Highest Income All Eligible Workers (Without Automatic Enrollment)

35. 34 23% 33% 43% 56% 29% 22% 15% 7% Here is what might be achieved -- with two key reforms – auto-enrollment and lifecycle funds Sources: Tabulations from Holden and VanDerhei (2005) Lowest Income Quartile 2Quartile 3Highest Income Increase from Automatic Enrollment (6% Contribution Rate; Life-Cycle Fund) All Eligible Workers (Without Automatic Enrollment) 52% 55% 58% 63%

36. 35 104% 86% 81% 79% Combined with SSA- Continuous Participation and Preservation

37. 36 Median Replacement Rates for 401(k) Accumulations* for Participants Reaching Age 65 Between 2030 and 2039 (percent of final five-year average salary) * The 401(k) accumulation includes 401(k) balances at employer(s) and rollover IRA balances. Source: Tabulations from the EBRI/ICI 401(k) Accumulation Projection Model 39.4 Income Quartile at Age 65

38. 37 Drivers of Gridlock Concern over future funding and benefit levels of Social Security and Medicare and Medicaid LTC Concern over future funding and benefit levels of Social Security and Medicare and Medicaid LTC Long term fiscal imbalance and its implications for tax levels and for tax incentives for health care and retirement savings Long term fiscal imbalance and its implications for tax levels and for tax incentives for health care and retirement savings Decline of employer provision of retiree life income annuity streams and retiree health Decline of employer provision of retiree life income annuity streams and retiree health Implications for competitiveness of mandates on employers Implications for competitiveness of mandates on employers Implications for economic growth and consumer spending of mandates on employees Implications for economic growth and consumer spending of mandates on employees Lack of individual understanding of the magnitude of the savings needed for retirement and the resulting lack of preparation Lack of individual understanding of the magnitude of the savings needed for retirement and the resulting lack of preparation Absence of employee/employer/voter support for: Absence of employee/employer/voter support for: –Mandated savings –Mandated life income streams –Increased taxes on “me/us” to pay for programs (existing or new) Absence of public trust in “government” or “special interests” to be honest Absence of public trust in “government” or “special interests” to be honest

39. 38 What Does The Future Hold? Applies to firms, families, nations…….

40. 39 www.ebri.orgwww.ebri.org and www.choosetosave.org www.choosetosave.org www.ebri.orgwww.choosetosave.org Dallas L. Salisbury President and CEO Employee Benefit Research Institute www.ebri.orgwww.ebri.org and www.choosetosave.org www.choosetosave.org www.ebri.orgwww.choosetosave.org