1. The Evolution of the U.S. Pension System: 1994–2019
Jonathan Barry Forman (“Jon”)
University of Oklahoma
Dana M. Muir
University of Michigan
John A. Turner
Pension Policy Center
 European Network for Research on Supplementary Pensions (ENRSP)
Seminar on
25 Years of (Supplementary) Pensions
Friday, 6 September 2019
Antwerp, Belgium

2. Overview of the U.S. Economy
Population ~ 327 million
Gross Domestic Product, 2018 ~ $21 trillion
$61,372 Median Household Income in 2017
$47,060 Average Wage in 2019
2019 Federal Poverty Guidelines
$12,490 for a one-person household
$16,910 for a two-person household

3. Retirement Income in the U.S.
48.6 million retirees in 2014
66.4 million in 2025
82.1 million in 2040
Sources of Retirement Income
Social Security
Pensions
Individual Retirement Accounts (IRAs)
Annuities
Individual savings & a savings withdrawal plan

4. Social Security Social Security
Inflation-adjusted pension benefits
44.5 million retirees in July of 2019
$1,472 per month, average benefit
Social Security typically replaces ~ 35% of preretirement income
Supplemental Security Income for the poor
2.3 million elderly beneficiaries
$459 per month, average benefit
*Social Security Administration, Monthly Statistical Snapshot, July 2019 (Aug. 2019),

5. Pensions, IRAs & Annuities
U.S. has a voluntary pension system
$34.0 Trillion Retirement Savings in 2018
$15.5 trillion in defined benefit plans
$7.3 trillion in defined contribution plans
$79.3 trillion in IRAs
$2.6 trillion in annuities
Only about half of American workers have a pension
66% of private-sector workers have access
49% participated
Participation in IRAs is even lower
Individuals rarely buy annuities
Board of Governors of the Federal Reserve System, Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts: First Quarter tbl.L.117 (June 6, 2019),

6. Pensions: Favorable Tax Treatment
Employer contributions to a pension are not taxable to the employee
The pension fund’s earnings on those contributions are tax-exempt
Employees pay tax only when they receive distributions of their pension benefits in retirement
Exempt/Exempt/Taxable (EET)

7. Defined Benefit Plans
Employer promises employees a specific benefit at retirement.
Benefits often tied to years of service (yos) & final average pay (fap)
E.g., a worker who retires after 30 years of service with final average pay of $100,000 would receive a pension of $60,000 a year for life ($60,000 = 2% × 30 yos × $100,000 fap)
Default pay-out in the form of a life annuity

8. Defined Contribution Plans
Employer may contribute, say, 5% of pay to an account for the worker
E.g., a worker who earned $100,000 in a given year would have $5,000 contributed to an individual investment account for her ($5,000 = 5% × $100,000)
401(k) plans are the most popular
Individuals can also contribute, up to $19,000 in 2019
Retirees usually take lump-sum distributions, not annuities
Or rollover the balance into an IRA

9. Individual Retirement Accounts (IRAs)
In 2019, individuals can contribute and deduct up to $6,000 to an IRA
Individuals over age 50 can contribute and deduct another $1,000 (for a total of up to $7,000)
Like private pensions, IRA earnings are tax-exempt, & distributions are taxable.

10. Major Shift from Defined Benefit Plans to Defined Contribution Plans
Employee Retirement Income Security Act of 1974 (ERISA)
Factors contributing to the shift::
(a) funding and accounting requirements
(b) administrative and other costs, and
(c) workforce-related demographic changes and preferences

11. The Growth in 401(k)-Type Defined Contribution Plans
Administrative costs are lower
No requirements to pay insurance premiums
No actuarial computations

12. Roth IRAs and Roth 401(k) Plans
Tax/Exempt/Exempt (TEE) approach
Roth IRAs
Contributions are not deductible (T)
Instead, withdrawals are tax-free (E)
(and earnings are tax-exempt) (E)
Roth 401(k)s
Contributions are not excludable
Distributions are tax-free

13. Other Tax Changes Little incentive for low-wage workers to save:
Very little wage growth in real wages over the last 25 or 30 years
Their income tax rates have declined—to just 10 or 15%
Since 2002, there is a tax credit of up to $1,000 for low- and moderate-income savers
but the credit is not refundable
There is a $500 tax credit for small businesses that adopt new pension plans (for up to three years)

14. Dana, Insert your slides, in your format here, or after this blank slide

15. About the Authors
Jonathan Barry Forman (“Jon”) is the Kenneth E. McAfee Centennial Chair in Law at the University of Oklahoma College of Law, 300 Timberdell Road, Norman, Oklahoma, 73019; ;
Dana M. Muir is
John A. Turner is the Director of the Pension Policy Center, 3713 Chesapeake St. NW, Washington, DC ; ;