The Success of the U.S. Retirement System

Abstract

Key Findings: The U.S. retirement system has successfully provided adequate retirement resources to generations of Americans. Studies that examine spending, income, and wealth conclude that households, on average, maintain their standard of living in retirement. By some measures, retirees appear to be better off than other segments of the population: in 2011, a lower percentage of the population aged 65 or older lived in poverty (9 percent) than the percentage aged 18 to 64 (14 percent) or the percentage younger than 18 (22 percent).

To date, successive generations of retirees have been better off than previous generations. Analysis shows that, on average, more-recent generations of households have higher levels of resources to draw on in retirement than previous generations. Other measures also indicate improvements in retiree well-being. For example, the poverty rate among people aged 65 or older has declined rom nearly 30 percent in 1966 to 9 percent in 2011.

The shift in private-sector retirement plans from predominantly defined benefit (DB) plans to predominantly defined contribution (DC) plans is unlikely to reduce retirement preparedness. The extent to which previous generations of retired households relied on income generated by private sector DB plans is often exaggerated. Since 1975, the prevalence of income generated by private-sector retirement plans of all types (measured by both the share of retirees with the income and the amount of income) has increased substantially. In fact, because they are better suited to the mobile U.S. workforce, several studies conclude that the shift from DB plans to DC plans in the private sector will increase retirement resources for most households.

The focus of household saving changes over the life cycle. In 2010, only 14 percent of households younger than 35 reported that retirement was their primary savings goal, compared with nearly half of households aged 50 to 64. Younger households typically are focused on other goals: 32 percent of households younger than 35 reported that saving for education, homes, or other large purchases was their primary saving goal. Because households may choose to save for retirement when older, it is difficult to assess retirement preparedness for households that are not in or near retirement.

Rather than the traditional three-legged stool analogy, a pyramid is a more accurate depiction of the resources Americans rely on in retirement. The retirement resource pyramid has five components: Social Security; home-ownership; employer-sponsored retirement plans (DB and DC); IRAs; and other assets. Households do not rely on each resource equally; the composition of the retirement resource pyramid varies across households.

Social Security benefits provide a broad base of resources for nearly all retirees. Social Security has evolved into a system that provides substantial retirement resources throughout the income and wealth distribution, and provides the primary retirement resource for workers with low lifetime earnings. For workers born in the 1940s, Social Security is projected to replace 70 percent of average lifetime earnings for the bottom 20 percent of earners and 29 percent of average lifetime earnings for the top 20 percent of earners.

For many households, the homes they live in represent the second most important retirement resource after Social Security. Older households are more likely to own their homes; more likely to own their homes without mortgage debt; and, if they still have mortgages, are more likely to have small mortgages relative to the value of their homes. Retired households typically access this resource simply by living in their homes and not paying rent.

Employer-sponsored retirement plans and IRAs play a complementary role to Social Security benefits, increasing in importance for households for whom Social Security replaces a smaller share of earnings. Nevertheless, employer-sponsored plans and IRAs are an important resource for households regardless of income or wealth. In 2010, about 80 percent of near-retiree households had accrued benefits in retirement plans or IRAs. Nearly half of near-retiree households with income less than $30,000; 71 percent of near-retiree households with income of $30,000 to $54,999; and 94 percent of near-retiree households with income of $55,000 or more had retirement accumulations.

Keywords: Retirement, Social Security, 401(k), retirement plans

JEL Classification: D14, D91, J32, H24, H31, H55