1 A presentation for the National Press Foundation September 19, 2007 Barbara D. Bovbjerg Director Education, Workforce, and Income Security Retirement Readiness: What Americans Do and Don’t Know about Retirement

2 Economic Security in Retirement Adequate retirement income Social Security Pensions Savings Earnings from continued employment (e.g., part-time) Affordable health care Medicare Retiree health care Long-term care (a hybrid)

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

4 Percentage of Elderly Households Receiving Each Type of Income Source: Income of the Population 55 or Older, 2004 (Washington, D.C.: SSA, Office of Research and statistics, 2006).

5 Three Stages of the Retirement Process Preparation For Retirement (Accumulation Phase) Decision to Retire – when should one leave the labor market and to what degree (binary vs. continuous view of retirement) Spending Down During Retirement (Decumulation Phase)

6 Preparation for Retirement: Social Security

7 Social Security and Medicare’s Hospital Insurance Trust Funds Face Cash Deficits Medicare HI cash deficit 2007 Social Security cash deficit 2017 Billions of 2007 dollars Source: GAO analysis of data from the Office of the Chief Actuary, Social Security Administration and Office of the Actuary, Centers for Medicare and Medicaid Services. Note: Projections based on the intermediate assumptions of the 2007 Trustees’ Reports. The CPI is used to adjust from current to constant dollars.

8 Potential Fiscal Outcomes Under Baseline Extended Revenues and Composition of Spending as a Share of GDP Revenue Source: GAO’s August 2007 analysis. Notes: In addition to the expiration of tax cuts, revenue as a share of GDP increases through 2017 mainly due to (1) real bracket creep, (2) more taxpayers becoming subject to the AMT, and (3) increased revenue from tax-deferred retirement accounts. After 2017, revenue as a share of GDP is held constant—implicitly assuming that action is taken to offset increased revenue from real bracket creep, the AMT, and tax-deferred retirement accounts.

9 Life Expectancy at Age 65 Source: Felicitie C. Bell and Michael L. Miller, “Life Tables for the United States Social Security Area ,” Actuarial Study No. 120, Years

10 Fertility Rate Hovers Around the Replacement Rate Source: U.S. Census Bureau, Statistical Abstract of the United States: 2007 (126th Edition) Washington, DC, 2006; table No Note: The total fertility rate is the number of births that 1,000 women would have in their lifetime if, at each year of age, they experienced the birth rates occurring in the specified year.

11 Aged Population as a Share of Total U.S. Population Continues to Grow Percent of total population aged 65 and over Source: Office of the Chief Actuary, Social Security Administration. Note: Projections based on the intermediate assumptions of the 2007 Trustees’ Reports.

12 Preparation for Retirement: Pensions and Savings

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

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

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

16 Falling Personal Saving Rate Percentage of disposable personal income Source: Bureau of Economic Analysis.

17 Decision to Retire

18 Federal Retirement Age- Related Rules Sources: GAO (analysis); Art Explosion (images).

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

20 Why Older Americans Don’t Work Longer Cultural Expectation to Retire in mid- 60s and Mixed Signals from Federal Policy Older Americans Perceive Few Employment Opportunities Most Employers Do Not Make a Special Effort to Hire and Retain Older Workers

21 Mixed Signals from Federal Policy Social Security early retirement age is 62 Many private pensions have similar or lower eligibility ages Medicare eligibility age is 65

22 Older Americans Perceive Few Employment Opportunities Few older workers felt they had opportunities for partial retirement Most older workers and retirees saw low wage, low skilled jobs as their primary employment opportunities

23 Special Effort is Not Made to Hire or Retain Older Workers Many employers say they are willing to implement policies to recruit and retain older workers, but few have actually done so Employers cite barriers, such as federal pension regulations, to flexible employment options for older workers

24 Labor Force Participation Has Been Increasing Labor force participation rate Source: United States Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey,

25 Spending Down During Retirement

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

27 Factors Affecting Payout Options Offered and/or Elected Worker preferences for the type of plan they want and/or how they receive benefits Lack of consumer knowledge and understanding about annuitization and key risks they will face in retirement

28 Importance of Information and Education Helping participants to understand longevity risk and the importance of saving Helping participants/retirees understand financial risks that they will face in retirement Helping participants understand annuities Strategies/advice for managing retirement income during retirement

29 Government Can Help: GAO Recommendations Provide Financial Education/Information assist in evaluation of financial literacy programs by serving as an information clearinghouse, setting some standardized benchmarks, and helping nonprofits build an evaluation infrastructure. Encourage Working Longer consider changes to laws, programs, and policies that support retirement security, including retirement ages, in order to provide a set of signals that work in tandem to encourage work at older ages.

30 Government Can Help: GAO Recommendations Bolster the Pension System require all sponsors of participant-directed plans to disclose fee information of 401(k) investment options to participants in a way that facilitates comparison among the options. require that 401(k) service providers disclose to plan sponsors the compensation that providers receive from other service providers. require plan sponsors to report a summary of all fees that are paid out of plan assets or by participants.

31 Government Can Help: GAO Recommendations Reform Social Security: In choosing among proposals, policymakers should consider three basic criteria: the extent to which the proposal achieves sustainable solvency and how the proposal would affect the economy and the federal budget; the balance struck between the twin goals of individual equity (rates of return on individual contributions) and income adequacy (level and certainty of benefits); and how readily such changes could be implemented, administered, and explained to the public.

32 Barbara D. Bovbjerg Director, Education Workforce, and Income Security Issues Contact Us