1.4: Financial Security
Financial Security for an Aging Population Other Information:
Providing retirement income security in the United States has traditionally been a shared responsibility of government, employers,
and individual workers. However, the burgeoning federal deficit—especially in federal retirement programs such as Social Security
and Medicare—and declining coverage of employer-provided pension plans suggest a shift in responsibility to individual workers
for ensuring an adequate and secure retirement. These trends are the outgrowth of broader developments associated with population
aging, global competition, and labor market trends and are unlikely to abate in the near future. With the baby boom generation
poised to move into retirement beginning in 2008, the Congress will need more information on the economic, financial, and
social implications of these trends to ensure that the government, employers, and workers share retirement risk in an equitable
and efficient manner. Such information will also aid workers in making informed retirement planning decisions, including the
decisions regarding when and how to retire and invest their savings. Since 1960, life expectancy at age 65 has increased by
over 3 years. By 2050, persons aged 65 and over will account for over 20 percent of the total U.S. population, up from about
13 percent in 2000. Consequently, people are expected to spend more time in retirement. These trends are adversely affecting
the sustainability of pay-as-you-go-financed federal retirement programs. Although the Social Security trust funds are not
expected to be depleted until 2040, the strains on government finances will begin as early 2017 when the program starts to
pay out more than it takes in each year. Given current benefit and revenue streams, the federal retirement programs are unsustainable
over the long run, and the federal government is going to have to make some hard choices in reforming them. To the extent
that such reforms reduce benefits to workers, this will affect the level of financial resources they can draw upon during
retirement. Employer-provided pensions have been and remain an important contributor to American retirement security, with
private pension benefits accounting for about 10 percent of the total income received by persons 65 years of age and older.
Yet, like the federal retirement programs, the national employer-provided pension system is also facing serious financial
challenges. The past two decades have seen a dramatic decline in the number of defined benefit pension plans and the percentage
of the private labor force covered by these plans. Historically, defined benefit plans have been an important and stable source
of retirement income, typically providing monthly payments throughout the retirement life of the participant. The decline
means that workers approaching retirement will have to make up the difference in income from another source, most likely from
personal saving or extending work life. Meanwhile, the role of defined contribution plans in the private pension system has
increased dramatically, but this trend has not necessarily led to increases in coverage. The number of defined contribution
plans rose from 341,000 in 1980 to 653,000 in 2003, covering 64.1 million workers and retirees. As of 2006, 54 percent of
all workers in private industry were offered a defined contribution plan. However, participation in such plans is typically
voluntary, and many covered employees choose not to participate. In 2006, only 43 percent of all workers in private industry
chose to participate in such a plan—an 80 percent participation rate among those offered a defined contribution plan. Despite
the outlook for federal retirement programs and employer-sponsored pension plans, individuals have so far not filled in the
gap with personal saving. Only 44 percent of families headed by someone aged 55 to 64 owned an Individual Retirement Account,
and among these families, median Individual Retirement Account balances were $60,000. From 2000 to 2005, meanwhile, personal
saving as a percentage of disposable income averaged just 1.3 percent—one-sixth the postwar average. In 2006, the saving rate
was -1.0 percent, the lowest level in almost 50 years. Helping to depress the saving rate has been the widespread "leakage"
of retirement assets to support nonretirement consumption. Through 2003, for example, 21.6 percent of recipients of lump sum
pension distributions reported diverting some part of their pension to support consumption. In response to these challenges,
many workers may need to stay in the labor market past today’s typical retirement age, which is at about age 62 for both men
and women. Greater labor force participation by older workers would benefit the economy by filling anticipated skill gaps
and by allowing workers to accumulate more assets and delay the drawdown of assets for retirement. This trend may already
be under way. In 2003, almost 33 percent of men aged 65 to 69 participated in the labor force, up from 26 percent in 1990;
similarly, the participation rate for women in the same age group rose from 17 percent to almost 23 percent during this period.
However, while many employers indicate a willingness to recruit or retain older workers, most employers are not currently
engaged in these practices. To date, most employers have not made the types of changes—such as establishing alternative work
and schedule arrangements or allowing phased retirement—that would accommodate the needs and preferences of older workers.
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