The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis

Abstract

For years, EBRI research has documented and quantified the role of Social Security, defined benefit and private retirement accounts on retirement income adequacy for Baby Boomers and Gen Xers in the United States. This paper summarizes that research and presents new evidence on the importance of 401(k) plans for workers currently entering the workforce. EBRI’s modeling shows a substantial improvement in the probability of attaining a financially successful retirement if workers are eligible for automatic enrollment in a 401(k) plan, compared with voluntary enrollment. Assuming current Social Security benefits are not reduced, between 83 and 86 percent of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have sufficient 401(k) accumulations that, combined with Social Security retirement benefits, will be able to replace at least 60 percent of their age-64 wages and salary on an inflation-adjusted basis. When the threshold for a financially successful retirement is increased to 70 percent replacement of age-64 income, 73-76 percent of these workers will still meet that threshold, relying only on 401(k) and Social Security combined. At an 80 percent replacement rate, 67 percent of the lowest-income quartile will still meet the threshold; however, the percentage of those in the highest-income quartile deemed to be “successful” relying on just these two retirement components slips to 59 percent. When the same analysis is conducted for automatic enrollment 401(k) plans (with an annual 1 percent automatic-escalation provision and empirically derived opt-outs), the probability of success increases substantially: 88-94 percent at a 60 percent threshold; 81-90 percent at a 70-percent replacement threshold; and 73-85 percent at an 80 percent threshold.

The PDF for the above title, published in the January 2014 issue of EBRI Notes, also contains the fulltext of another January 2014 EBRI Notes article abstracted on SSRN: “The Cost of Spousal Health Coverage.”

Keywords: 401(k) plans, Automatic enrollment, Automatic contribution escalation, Defined benefit plans, Employment-based benefits, Pension plan coverage, Retirement income, Retirement income adequacy, Social Security benefits, Voluntary enrollment

JEL Classification: D31, D91, J26, J33