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. Organization of Our Chapter
Introduction
The Transition from Defined Benefit to Defined Contribution Plans
Changes in the Tax Treatment of Pensions
Administrative Issues
Behavioral Economics, Financial Literacy and Conflicts of Interest
The Challenges Ahead
Conclusions

3. Background on 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

4. Background on 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

5. Background on 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),

6. Pensions, IRAs & Annuities
U.S. has a voluntary pension system
$34.0 Trillion Retirement Savings in 2018
$15.5 trillion in defined benefit plans
$7.0 trillion in defined contribution plans
$8.8 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),

7. The Transition from Defined Benefit to Defined Contribution Plans
The decline in DB plans
The growth in 401(k)-type DC plans
Rollovers from 401(k)s to IRAs

8. The Decline in DB Plans
Employee Retirement Income Security Act of 1974 (ERISA)
Factors contributing to the shift
Funding and accounting requirements
Administrative and other costs, and
Workforce-related demographic changes and preferences

9. The Growth in 401(k)-Type DC Plans
401(k) plans are the most popular
Individuals can contribute up to $19,000 in 2019
Administrative costs are lower
No requirements to pay insurance premiums
No actuarial computations
Retirees usually take lump-sum distributions, not annuities
Or rollover the balance into an IRA

10. Rollovers from 401(k)s to IRAs
When a worker with a DC plan, changes jobs, that worker can:
Keep the plan with the former employer;
Take a lump sum;
Paying a 10-percent penalty if before age 55
Roll over the account assets to the plan of a new employer if the plan of the new employer permits; or
Roll over the account assets to an IRA

11. Changes in the Tax Treatment of Pensions
Most Pensions: Exempt/Exempt/Taxable (EET)
Employer contributions to a pension are not taxable to the employee
The pension fund’s earnings are tax-exempt
Employees pay tax only when they receive distributions in retirement
Individual Retirement Accounts (IRAs)
Individuals can contribute up to $6,000 to an IRA
Individuals over age 50 can contribute another $1,000
Like private pensions, IRA earnings are tax-exempt, & distributions are taxable.

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. Administrative Issues
Funding
Decreased use of employer stock
Automatic Features
Contribution, Escalating Amounts, Investments in Qualified Default Investment Alternative, Distribution as Lump Sum
Efficiency
Pressure on fiduciaries has decreased fees and costs, which are not directly regulated or capped
Complexity
Perspectives vary between employers and employees and between pre-and post-retirement periods
Liquidity
Has increased due to changes in tax treatment and the shift to DC plans
High compared to other countries.

15. Behavioral Economics, Financial Literacy, and Conflicts of Interest
Low levels of financial literacy
Weak regulation of conflicts of interest in the financial advice industry

16. Challenges Ahead
Expanding Coverage and Shift Away from Single-Employer Plans
Auto-portability
July 2019 approval of a vendor’s automatic portability program
Funding Multiemployer Plans
Lifetime Income Solutions

17. Conclusions No significant change in coverage
Increased complexity for participants
Increased liquidity
Retirement gap estimated at between $4 and $28 trillion, and increasing

18. 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 the Robert L. Dixon Collegiate Professor of Business and the Arthur F. Thurnau Professor of Business Law at the University of Michigan’s Ross School of Business, Ann Arbor, Michigan, ;
John A. Turner is the Director of the Pension Policy Center, 3713 Chesapeake St. NW, Washington, DC ; ;