Falling Short:

The Coming Retirement Challenge

and What Congress Is Doing
Andrew D. Eschtruth
Associate Director for External Relations,
Center for Retirement Research at Boston College

“Understanding Public and Private Pensions”

National Press Foundation.
Washington, DC
December 3, 2018
 Congress has recently generated a flurry of
bipartisan activity on retirement security.

Retirement Enhancement and Savings Act of 2018

Retirement Security Flexibility Act of 2018 The Butch Lewis Act

Lifetime Income Disclosure Act Refund to Rainy Day Savings Act

Increasing Access to a Secure Retirement Act of 2017
Retirement Savings Lost and Found Act of 2018
Joint Select Committee on Solvency of Multiemployer Pension Plans

Savings Enhancement by Alleviating Leakage in 401(k) Savings Act

Executive Order on Strengthening Retirement Security

Strengthening Financial Security Through Short-Term Savings Accounts Act of 2018

1
While the legislative proposals move in the
right direction, the problem is really big.
The National Retirement Risk Index, 2004-2016
100%

75%

53% 52% 50%

50% 45% 44%

25%

0%
2004 2007 2010 2013 2016

Source: Alicia H. Munnell, Wenliang Hou, and Geoffrey T. Sanzenbacher. 2018. “National Retirement Risk Index Shows Modest
Improvement in 2016. Issue in Brief 18-1. Center for Retirement Research at Boston College.

2
2
Goals of this presentation
• Define the dimensions of the problem.
o Retirement needs are increasing.
o Retirement resources are shrinking.

• Put existing legislation into context of a comprehensive

solution involving:
o Social Security;
o 401(k) plans;

o Coverage;

o Home equity; and

o Working longer.

3
One reason people need increased income is
that they are living a lot longer.
Cohort Life Expectancy at Age 65, 1960-2020

25
Men 21.7
Women 20.2
20 18.8 19.3
17.4 17.5
14.7
15
13.2

10

0
1960 1980 2000 2020
Source: U.S. Social Security Administration. 2018. Social Security Trustees Report.

4
But they are only working a bit longer, so
the retirement span is growing.
Average Years in Retirement for Men, 1962-2050
95
Life expectancy
90 Average retirement age
85

80
21 years
75
20 years
18 years
70
13 years
65

60

Note: Average retirement defined as when 50 percent of individuals are not participating in the labor force. Life expectancy is cohort life
expectancy at age 65 from the Social Security
Trustees Report.
Sources: Authors’ estimates from U.S. Bureau of Labor Statistics. Current Population Survey, 1962-2017; and U.S. Social Security
Administration. 2017. Social Security Trustees Report.

5
In addition, people need more because
retiree health care costs are high and rising.
Medicare Part B and D Premiums and Out-of-Pocket Payments
as Percentage of Average Social Security Benefits, 1985-2030
30%
27.8%

22.0%
20% 18.2%
Est.
11.2%
10% Est.

0%
1985 2000 2015 2030

Note: Dotted bars indicate the estimated cost to beneficiaries of prescription drugs if Medicare Part D had been in existence during that
period.
Source: Centers for Medicare & Medicaid Services. 2018. Medicare Trustees Report.

6
At the same time, the U.S. retirement system
is contracting.

Retirement Income

Employer-Sponsored
Social Security Individual Saving
Pensions

Defined Contribution
Defined Benefit Plans
- 401(k) - Plans

7
Social Security will replace a shrinking share
of pre-retirement earnings.
Social Security Replacement Rates for Average Earner Retiring at Age 65, 1985, 2000, 2015, and 2030

60%
Reported replacement rate (retirement at age 65)
After Part B+D SMI deduction
After personal income taxation
42%41%
39% 40%
40% 37% 36%36% 36%
32%
30%

20%

0%
1985 2000 2015 2030

8
And employer plans have shifted from
defined benefit to 401(k).
Workers with Plan Coverage by Type of Plan, 1983, 1998, and 2016

80%
73%
1983
62% 60% 1998
60%
2016

40%

24% 26%
20% 17% 16%
12%
10%

0%
Defined benefit only Defined contribution Both
only

Sources: Author’s calculations based on U.S. Board of Governors of the Federal Reserve System, Survey of Consumer Finances, 1983,
1998, and 2016.

9
401(k)s could work well, but many people
make mistakes at every step.
Prevalence of 401(k) Mistakes
99%
100%

75%
52% 48%
50%
25%
25% 20%

0%
Individuals Individuals Assets in Loss if assets Individuals
not contributing high-fee due to who do not
participating 6 percent or funds leakages annuitize
in 401(k) less

Sources: Author’s calculations based on Survey of Consumer Finances, 2013; Vanguard. 2018. “How America Saves 2018;” Investment
Company Institute. 2018. “ICI Research Perspective.” 24(4); and Alicia H. Munnell and Anthony Webb. 2015. “The Impact of Leakages
from 401(k)s and IRAs.” Working Paper 2015-2. Center for Retirement Research at Boston College.

10
And these mistakes erode their balances.
Impact of Fees, Leakages, and Contributions on 401(k)/IRA Balances, 2016

$400,000
$364,000 Fees
$304,000
Leakages
$228,000
Intermittent
contributions
$200,000
$160,000 Immature
system
$104,000

$0
Hypothetical Observed*

Source: Author’s calculations.

11
As a result, even many with an account have
only modest 401(k)/IRA assets.

401(k)/IRA Balances for Median Working Household with a 401(k),

Ages 55-64, by Income Quintile, 2016

Percentage with a Median 401(k)/IRA

Income quintile 401(k) balance
Lowest 25% $26,700
2nd 45 72,000
3rd 58 104,000
4th 62 335,400
Highest 70 780,000
Total 52% $135,000

Source: Author’s calculations from the U.S. Board of Governors of the Federal Reserve System, Survey of Consumer Finances, 2016.

12
Beyond the challenges with 401(k)s, less than
half of private sector workers have a plan.

Percentage of Private Sector Workers Ages 25-64

Participating in an Employer-Sponsored Pension, 1979-2017
100%

75%

50%

25%

0%

Source: U.S. Census Bureau. Current Population Survey, 1980-2017.

13
Workers at small employers are much more
likely to be uncovered.
Percentage of Private Sector Workers Who Are Uncovered by Firm Size, 2018
80%
74%

60%

45%
40%

20%

0%
Fewer than 100 employees More than 100 employees

Source: Author’s calculations from U.S. Census Bureau, Current Population Survey March Supplement, 2018.

14
And plans aimed at appealing to small
employers have not moved the needle.
Percentage of Private Sector Workers Enrolled in a 401(k) or a SEP/SIMPLE Plan, 2018

50%

40% 38%

30%

20%

10%

1%
0%
401(k) plans SEP/SIMPLE plan

Source: Author’s calculations from the U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, 2018.

15
Lack of coverage is important as people don’t
save on their own except in their house…

Wealth of Typical Household with Head Ages 55-64, 2016

$500,000
$450,063

$400,000

$300,000

$200,000 $152,919
$99,900
$100,000
$44,974
$17,055 $10,886 $17,783
$0
Social Defined Primary Defined Financial Business Other
Security benefit house contribution assets

Source: Alicia H. Munnell. 2017. “401(k)/IRA Holdings in 2016: An Update from the SCF.” Issue in Brief 17-18. Center for Retirement
Research at Boston College.

16
…and almost no one plans to tap their home
equity.
Percentage of People Who Plan to Use Home Equity for Living Expenses, 2007

100%
Hundreds

75%

50%

25%

5% 7% 6%
0%
50-54 55-59 60-65
Ages

Source: Alicia H. Munnell, Jean-Pierre Aubry, and Mauricio Soto. 2007. “Do People Plan to Tap Their Home Equity in Retirement?” Issue
in Brief 7-7. Center for Retirement Research at Boston College.

17
What can Congress do?

• Fix Social Security.

• Improve and strengthen 401(k) plans.

• Eliminate the coverage gap.

• Promote the house as a retirement asset.

• Encourage people to work longer.

18
The first step is to shore up Social Security.

Projected Social Security Income and Cost Rates, as a Percentage of Taxable Payroll, 1990-2092

20%

16%

12%

8%

4% Income rate
Cost rate

0%
1990 2010 2030 2050 2070 2090

Source: 2018 Social Security Trustees Report.

19
The 75-year deficit can be eliminated with a
2.84 percentage-point rise in payroll taxes.
Social Security’s 75-Year Deficit as a Percentage of Taxable Payroll, 1983-2018
4%
2.84%
3%

2%

1%

0%

-1%
1983 1988 1993 1998 2003 2008 2013 2018
Source: 2018 Social Security Trustees Report.

20
But a host of options exist for fixing
Social Security’s finances.

Conventional Revenue and Benefit Options for Improving Social Security’s Finances

Revenue increases Benefit reductions

Impact on Impact on
Option Option
75-year shortfall 75-year shortfall
Increase payroll tax 100 % Reduce COLA by 1 percentage point 64 %
Remove earnings cap 68 Progressive price indexing 54
Include health care premiums in base 32 Raise Full Retirement Age to 70 27
Increase income taxation of benefits 7 Increase earnings years from 35 to 40 15
Include uncovered state/local workers 6 Reduce benefits for high earners 12

Source: Social Security Administration, Office of the Chief Actuary. 2018. Summary of Provisions that Would Change the Social Security
Program.

21
What do bipartisan legislative proposals do?
Problem solved?

• Fix Social Security. No

• Improve and strengthen 401(k) plans.

• Eliminate the coverage gap.

• Promote the house as a retirement asset.

• Encourage people to work longer.

22
The first step for 401(k)s is to encourage
more saving by making them fully automatic.

Percentage of 401(k) Plans with Automatic Enrollment and Automatic Escalation

Percentage of Plans Percentage of Automatic Enrollment Plans
with Automatic Enrollment, 2017 that Increase Default Deferrals over Time, 2015

22%
30%
46%

54%

48%
With Without With Without Voluntary

Sources: Vanguard. 2018. “How America Saves 2018;” and Plan Sponsor Council of America. 2016. “59th Annual Survey of Profit Sharing
and 401(k) Plans.”

23
A smaller change is to show people how
their assets will translate to lifetime income.

$100,000  $460/month
(in 401(k)/IRA assets) (in retirement)

Note: The monthly income estimate is for a joint and survivor annuity for a 65-year-old husband with a 63-year old wife.
Source: ImmediateAnnuities.com.

24
The second step is to reduce $ leaking out.

Annual Leakages as a Percentage of Assets, 2017

0.6%
0.5%

0.4% 0.4%
0.3%
0.3%

0.2%

0.0%
Cashed-out Hardship Post59
Post 59½
1/2 Loan
withdrawal withdrawal

Source: Author’s estimates. Allocations to specific leakage channels are based on Vanguard. 2018. “How America Saves 2018: A Report
on Vanguard 2016 Defined Contribution Plan Data.” The total level of leakages is based on Alicia H. Munnell and Anthony Webb. 2015.
“The Impact of Leakages from 401(k)s and IRAs.” Working Paper 2015-2. Center for Retirement Research at Boston College.

25
One way to curb leakages is to make it easier
to roll over savings to a new plan.

Private Retirement Assets by Plan, Trillions of Dollars, 2018 Q1

$10 $9.2

$8
$6.3
$6
Trillions

$4 $3.4

$2

$0
DB plans DC plans IRAs

Source: U.S. Board of Governors of the Federal Reserve System, Flow of Funds Accounts, 2018.

26
Another way to curtail leakages is to
establish precautionary savings accounts.
• Repeated surveys show that many households live paycheck to
paycheck and have only minimal precautionary savings.

• As a result, they withdraw money early from 401(k)s to cover

an emergency, like a car accident or a water tank bursting.

• Proposed legislation would encourage employers to establish

“sidecar” accounts to 401(k)s so that workers could
accumulate precautionary saving via payroll deduction.

27
Leakages could also be discouraged by
raising the penalty-free withdrawal age to 62.

Proposed

Current

59 ½
1/2 60 61 62
Age

28
A final issue with 401(k)s is how people will
draw down their assets in retirement.

People Build Up Assets While Working…and Draw Them Down While Retired

29
People may well cling to their assets rather
than draw down too fast.
Percentage of Remaining Median Assets in 2002 for Singles Ages 72-81 in 1995,
by Permanent Income Quintile
100%
92%

77%
75% 72%
64%

50%

25%
14%

0%
Bottom Second Third Fourth Top

Source: Mariacristina De Nardi, Eric French, and John Bailey Jones. 2009. “Life Expectancy and Old Age Savings.” American Economic
Review: Papers and Proceedings 99(2): 110-115.

30
One solution is to allow 401(k) participants
to build up lifetime income as they save.
• In 2014, the Treasury Department explicitly allowed plan
sponsors to include annuities in target date funds as a default
or regular investment alternative.

• Proposed legislation would:

o offer a safe harbor to fiduciaries for the selection of a
provider; and
o improve the portability of lifetime income between
401(k) plans.

31
How do existing legislative proposals
address the problems in 401(k)s?
Existing Congressional Proposals
Goal Proposed action Relevant bill
1. Require 401(k) statements to include “Retirement Enhancement and Savings Act”
lifetime income. (S.2526)
2. Create new safe harbor to persuade
“The Retirement Security Flexibility Act.”
Encourage more saving more plans to adopt auto-enrollment and
(S.3221)
auto-escalation.
“Lifetime Income Disclosure Act” (H.R.
2055)
“Strengthening Financial Security Through
1. Create “sidecar accounts.”
Short-Term Savings Accounts” (S.3218)
Reduce leakages 2. Pre-commit tax refunds to savings. “Refund to Rainy Day Savings Act” (S.3220)
“Savings Enhancement by Alleviating
Leakage in 401(k) Savings Act” (H.R. 2030)
1. Provide safe harbor for choosing “Retirement Enhancement and Savings Act”
Encourage lifetime provider. (S.2526)
income options 2. Make it easier to move lifetime income “Increasing Access to a Secure Retirement
to new plan. Act” (H.R. 4604)
Source: Author’s analysis of current legislative activity.

32
What do bipartisan legislative proposals do?
Problem solved?

• Fix Social Security. No

• Improve and strengthen 401(k) plans. Somewhat

• Eliminate the coverage gap.

• Promote the house as a retirement asset.

• Encourage people to work longer.

33
Many have proposals to cover the half of
private sector workers without a plan.
• USA Retirement Funds (former Senator Harkin)

• SAFE Retirement Plans (Center for American Progress)

• Retirement Security Plan (Bipartisan Policy Center Commission)

• Guaranteed Retirement Accounts (Teresa Ghilarducci/Tony James)

• START Accounts (Gary Koenig, Jason Fichtner, and William Gale)

• Auto-IRA Plans (Retirement Security Project)

34
Auto-IRAs even got a little traction, as they
were proposed by the Obama Administration.

35
But, with no federal action, states have
begun stepping in.
States That Have Enacted Retirement Saving Programs, as of June 2018

No legislation enacted
Voluntary payroll deduction IRA enacted
MEP enacted
Auto-IRA enacted
Marketplace enacted
Source: Author’s analysis.

36
Oregon is the first state up and running.

• Workers without an employer plan are automatically enrolled

at a default contribution rate of 5 percent, with automatic
escalation up to 10 percent.

• The first $1,000 in savings is invested in a capital preservation

fund, with additional savings invested in an age-based target
date fund.

• Participants can withdraw their contributions at any time with

no penalty.

37
Initial results from Oregon are now available.
Participation in OregonSaves

Non-participants,
30.8%

Contributing
participants,
Non-contributing 62.3%
participants,
6.9%

Source: Author’s and recordkeeper’s calculations from OregonSaves administrative data.

38
At the federal level, the action has focused
on multiple employer plans (MEPs).
• MEPs allow firms to band together to establish a retirement savings
plan, reducing the administrative burden and costs.
• Several bills would make MEPs more attractive by eliminating
rules that:
o require firms to share a common bond; and
o can disqualify an entire plan if one member violates a rule.
• In addition to the legislation, the Department of Labor and the IRS
are pursuing the same goals through the regulatory process.

39
What do bipartisan legislative proposals do?
Problem solved?

• Fix Social Security. No

• Improve and strengthen 401(k) plans. Somewhat

• Eliminate the coverage gap. A bit

• Promote the house as a retirement asset.

• Encourage people to work longer.

40
One lever retirees can control on their own is
tapping their home equity.

Net Housing Wealth and 401(k)/IRA Wealth, in Trillions of Dollars, 2016

$20

$15.8
$14.0
$15

$10

$5

$0
Primary house 401(k)/IRA assets

Source: U.S. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, 2018.

41
To date, experts have focused on two options:
downsize or take a reverse mortgage.

Source: Steven A. Sass, Alicia H. Munnell, and Andrew D. Eschtruth. 2014. Using Your House for Income in Retirement. Center for
Retirement Research at Boston College.

42
Another tool is state property tax deferrals.

• Homeowners 65+ could defer property taxes until they die.

• Simple sign-up: just check a box on the property tax bill.

• State would transfer funds to municipalities to cover full cost.

• Interest rate would equal state’s borrowing cost plus a buffer.

• State would be repaid when homeowner sells house or dies.

43
What do bipartisan legislative proposals do?
Problem solved?

• Fix Social Security. No

• Improve and strengthen 401(k) plans. Somewhat

• Eliminate the coverage gap. A bit

• Promote the house as a retirement asset. No

• Encourage people to work longer.

44
Working longer is the most powerful lever,
and people can still enjoy a lengthy retirement.

Retirement Age Equal to Age-65 Retirement in 1940,

Based on Rising Life Expectancy (In Years: Months)
Age at which ratio of expected retirement to
Year
working years remains constant
1940 65:00
1950 65:11
1960 66:08
1970 67:06
1980 68:00
1990 68:06
2000 69:00
2010 69:07
2020 70:02
2030 70:08
Note: For the ratio of expected retirement to working years, people are assumed to start work at 20.
Source: Author’s calculations using U.S. Social Security Administration. 2004. Life Table Functions Based on the Alternative 2 Mortality
Probabilities in the 2004 Trustees Report (unpublished).

45
Working longer helps in three ways.

Increased Ratio of Working

Social Security Benefits Up 76% 401(k) Assets Nearly Double
to Retirement Years

160% $200 $186 5

132% 4:1
$160 4
120%
Thousands
$120 3
75% $100
80% 2:1
$80 2
40%
$40 1

0% $0 0
62 70 62 70 62 70
Age Age Age

Sources: Author’s calculations; and Charles D. Ellis, Alicia H. Munnell, and Andrew D. Eschtruth. 2014. Falling Short: The Coming
Retirement Crisis and What to Do About It. Oxford University Press.

46
By itself, working until age 70 would do the
trick for most people.
Cumulative Readiness by Retirement Age
100%

75%
SS benefits available
at age 62
50%

DB plans
available at age 55
25%

0%
50 55 60 65 70 75 80 85 90

Source: Alicia H. Munnell, Anthony Webb, Luke Delorme, and Francesca Golub-Sass. 2012. “National Retirement Risk Index: How Much
Longer Do We Need to Work?” Center for Retirement Research at Boston College.

47
What could Congress do?

• Launch a broad educational campaign to clarify that age 70 is

the nation’s “full” retirement age for the highest benefit under
Social Security.

• Expand the Earned Income Tax Credit for childless taxpayers.

• Educate employers about the business case for older workers.

48
What do bipartisan legislative proposals do?
Problem solved?

• Fix Social Security. No

• Improve and strengthen 401(k) plans. Somewhat

• Eliminate the coverage gap. A bit

• Promote the house as a retirement asset. No

• Encourage people to work longer. No

49
Conclusion
• Congress has generated a flurry of bipartisan activity on
retirement security.

• While these proposals are generally positive, they only have a

narrow target.

• They largely ignore the coverage gap.

• They completely ignore Social Security, home equity, and

working longer.

• Without a more comprehensive approach, many of today’s

workers will remain at risk of falling short in retirement.

50