This volume tracks the effects on accumulating pension wealth and its distribution of the shift by employers away from defined benefit (DB) plans to greater reliance on defined contribution (DC) plans over the last 30 years. The analysis is based primarily on compilations of the 1983, 1989, 2001 and 2007 versions of the Survey of Consumer Finances (SCF) conducted by the U.S. Federal Reserve Board. While the main focus of the analysis is on the shift from DB to DC plans, Wolff estimates and traces the evolving path of several other measures of accumulating wealth and their distribution over the period. He develops projections to 2009 in order to assess the implications of the financial market declines in the 2 years subsequent to the final data measurement available when he did the study. In the latter stages of the volume, he estimates the implications of the changing wealth picture on the retirement income adequacy prospects of various segments of the population. Adequacy is considered in both absolute terms (against the poverty line) and relative terms (against a target of 75% of preretirement income). In the final chapter, he provides some summary conclusions and offers a number of policy proposals to address various issues he identifies throughout the analysis.
The analysis begins with a summary look at the marketable wealth and net worth of households over time and across various components of the population. His results follow the patterns that have been reported elsewhere that wealth and income in the United States is concentrated among the richer segments of society. His results suggest that income has become more concentrated over time on a more consistent pattern than wealth.
In turning to measures of retirement wealth, Wolff estimates DB pension wealth and Social Security wealth. For retirees, he estimates the value of benefits over the SCF participants’ remaining life expectancies. For those not yet retired, he estimates pension benefits for current plans covering survey respondents and up to five prior plans. For plans covering workers at the time of the survey, he projects forward earnings and service under the plan until anticipated retirement date. For Social Security, he uses the lifetime earnings stream and anticipated retirement date to calculate benefits for individual workers. The projected pension and Social Security benefits are discounted back to a present value at the time of the respective SCF survey years.
The results in each of the survey years show a consistent pattern of DC wealth to be more concentrated than DB wealth. For example, in 1983, the Gini coefficient of DC accounts for 47–64-year-olds was 0.732 versus 0.507 for DB wealth holders. While the concentration of DC wealth declined somewhat in subsequent years, the shift out of DB into DC plans resulted in the combined coefficient of 0.524 increasing to 0.617 in 2007. For pension account holders aged 65 and over, the combined coefficient rose from 0.466 to 0.642.
The shift away from DB plans was generally more adverse for lower earners, those with less education and younger workers. While overall retirement plan wealth grew rapidly during the 1989–2001 period, it grew much more slowly during the 2001–2007 period and fell back sharply in the projections to 2009. The first decade of the new millennium, Wolff concludes, was a lost decade. Against a standard of 75% of preretirement income as an adequate retirement income level, only 44% of households in the 47–64 age range in 2007 project to have adequate retirement income; for African American and Hispanic households, 42%; and for those with less than 12 years of education, 35%.
The book is filled with tables of results and will be a useful reference for many who wish to analyze the evolution of the U.S. retirement system. It is a difficult text to follow in places because the dialogue is often a line by line recitation of the tabular results. I believe the projections are misleading because they are based on plan formulas without considering whether funding was sufficient to finance the implied benefits. The projections are based on unrealistic assumptions in regard to both DB plans and Social Security.
For example, the projections of the DB benefits for the 1980s versions of the SCF assume that workers’ would stay with their existing plans until retirement and earn benefits in accordance with what was predominantly a system based on earnings toward the end of workers’ careers when the surveys were taken. Public policy during the 1980s, however, pushed private employers to fund their plans based on current service and salary at the time of each annual valuation. I testified as early as 1990 before the jurisdictional committees in Congress that this funding policy would likely lead to the curtailment of benefits later in contemporary workers’ careers. It seemed to me that if we were not saving to pay benefits based on future salary rates against completed service that the deferred cost might result in employers being unwilling or unable to make up the difference later. Many employers were thrown into ‘contribution holidays’ by the regulatory changes in the 1980s. These were perpetuated by the same financial markets that drove up workers’ DC wealth during the 1990s that Wolff documents. In the case of the DC accounts, the retrenchment of the financial markets in the new millennium took back some of that ‘paper’ wealth. However, projecting 1980s DBs based on ultimate salaries a couple of decades later suggested those benefits would be protected although there was reason to believe they would not be. In fact, the curtailment of the employer-sponsored DB component of the retirement system was the essence of much of the transformation of the system and the implications that Wolff explores in his analysis. While the issues raised here likely skew Wolff's results comparing the generational groupings, it may have less significant effects on results within the group comparisons by education, race, earnings levels and so forth.
In the case of Social Security, it seems equally questionable to be projecting current-law benefits for younger generations of workers. The system is underfunded over the next 75 years to the tune of 2.67% of covered payroll or about 20% of the cost rate under the most recent valuation and is projected to be underfunded on a cash-flow basis by at least 4% of covered employment by 2030. It is not clear when policy-makers will take up adjusting the program to bring it back into sustainable balance but it is clear that the economics of the program have to change for many of the workers considered in the analysis and some of the changes are likely to result in benefit reductions for younger workers.
In his policy conclusions, Wolff suggests that the benefits of the employer-sponsored component of the system are so inequitably distributed that we should scrap the current approach of tax preferences encouraging creation and use of these plans and shift to a mandatory saving system with tax credits to finance benefits for lower earners. He suggests that the government should guarantee rates of return for at least a portion of the accumulated savings in the system.
The analysis throughout the volume is based on potential current formula outputs of the components of the system and ignores inputs necessary to finance them. While this may be a common approach to assessing the retirement system, it ignores the true ramifications of its operations over time. If inputs are brought into the picture, some of the general conclusions here and elsewhere may lead to somewhat different perspectives than those presented. For example, it is well known that the U.S. Social Security system is now paying many retirees benefits that are actuarially less valuable than value of the lifetime contributions on their earnings. For single individuals and two-earner couples, the negative transfer aspects of Social Security are accentuated. These same people, coincidentally, happen to be the ones who receive somewhat larger benefit from the tax treatment of their participation in qualified retirement savings plans. When the net benefits of the tax treatment of private retirement savings are considered in combination with the net investments that workers are making through Social Security participation, the distribution of benefits from the combined systems does not look nearly as skewed one direction or the other as that from the component elements viewed individually.
If we wish to end up with a coherent retirement policy, we need to consider the various elements of our retirement systems in concert and we should also consider both inputs and outputs today and in the future realizing that the current status quo is out of balance as we do so.
