A Post-Crisis Assessment of Retirement Income Adequacy for Baby Boomers and Gen Xers

Jack VanDerhei, Research Director of the Employee Benefit Research Institute

Jack VanDerhei's work estimating the percent of American households "at risk" of not having saved enough for retirement has been widely cited by the news media and his academic peers. He is the creator of the EBRI Retirement Readiness Rating™ (RRR) and the 2010 version of the EBRI Retirement Security Project Model®. This paper utilizes the EBRI Retirement Readiness Rating™ (RRR) and the 2010 version of the EBRI Retirement Security Project Model® to answer two key questions about the impact of the drop in stock market and real estate values that accompanied Great Recession from which we are only just beginning to emerge.

DETERMINING THOSE "AT RISK" OF INSUFFICIENT RETIREMENT INCOME:

The analysis in this paper was designed to answer two questions:
  1. What percentage of U.S. households became "at risk" of insufficient retirement income as a result of the financial market and real estate crisis in 2008 and 2009?

  2. Of those who are at risk, what additional savings do they need to make each year until retirement age to make up for their losses from the crisis?

KEY FINDINGS:

  • Range at risk: The percentage of households that would not have been "at risk" without the 2008-2009 crisis but that ended up "at risk" varies from a low of 3.8 percent to a high of 14.3 percent.

  • 50-50 chance of adequacy: Looking at all Early Boomer households that would need to save an additional amount (over and above the savings already factored into the baseline model), the median percentage of additional compensation for these households desiring a 50 percent probability of retirement income adequacy would be 3.0 percent of compensation each year until retirement age to account for the financial and housing market crisis in 2008 and 2009.

  • 90 percent chance of adequacy: Looking at all Early Boomer households that would need to save an additional amount (over and above the savings already factored into the baseline model), the median percentage of additional compensation for these households desiring a 90 percent probability of retirement income adequacy would be 4.3 percent of compensation.

  • Range of adequacy: Looking only at Early Boomer households that would need to save an additional amount (over and above the savings already factored into the baseline model), that had account balances in defined contribution plans and IRAs as well as exposure to the real estate crisis in 2008 and 2009 shows a median percentage of 5.6 percent for a 50 percent probability and 6.7 percent for a 90 percent probability of retirement income adequacy.
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About Jack VanDerhei

Jack VanDerhei is the research director of the Employee Benefit Research Institute (EBRI), a private, nonprofit, nonpartisan organization committed to original public policy research and education on economic security and employee benefits. He is also the director of both the EBRI Defined Contribution and Participant Behavior Research Program and the EBRI Retirement Security Research Program. He has been with EBRI since 1988.

Research

Dr. VanDerhei has more than 100 publications devoted to employee benefits and insurance, but his major areas of research focus on the financial aspects of private defined benefit and defined contribution retirement plans. He is currently analyzing a database with annual observations since 1996 of over 20 million 401(k) participants from more than 50,000 plans. This has already resulted in publications with respect to: Future publications will begin to exploit the longitudinal nature of the database.

He testified in October 2008 before the House Education and Labor Committee on The Impact of the Financial Crisis on Workers’ Retirement Security and since that time has been posting periodic valuations on 401(k) Balances and Changes Due to Market Volatility.

Computer Modeling

He has also constructed a simulation model to forecast future retirement income for birth cohorts between 1935 and 1975. This model has already been used to help individual states predict the percentage of retirees (by age, gender and family status) that will have inadequate income to provide for specific post-retirement purchases (such as housing and health care expenditures). He has also used the model to forecast the probable financial impact of modifying the existing system with respect to company stock in 401(k) plans. Portions of this analysis were used in his testimony to the House Education and the Workforce Subcommittee on Employer-Employee Relations and further refinements were included in his testimony to the Senate Finance Committee and the House Ways and Means Committee.

He has also used the model to demonstrate the importance of pooling longevity risk for a congressional hearing on “Strengthening Pension Security: Examining the Health and Future of Defined Benefit Pension Plans. He has expanded the model to provide national estimates of retirement adequacy as well as estimates of additional savings rates that would be required to ensure adequacy at various confidence levels. The results of these simulations were presented at the U.S. Senate Special Committee on Aging hearing on “Retirement Planning: Do We Have A Crisis In America?”

Awards, Memberships, and Media Coverage

In 2008 he was named by Treasury & Risk as one of the 100 Most Influential People in Finance. He has won awards for the best feature article in the Journal of Risk and Insurance for “An Empirical Analysis of PBGC Premiums under the Omnibus Budget Reconciliation Act of 1987,” and in the Risk Management and Insurance Review for “Potential Consequences for Employers of Social Security Privatization: Public Policy Research Implications” (with Kelly Olsen).

He is the editor of Benefits Quarterly and “Search for a National Retirement Income Policy” (University of Pennsylvania Press), a member of the National Academy of Social Insurance, a member of the Board of Outside Scholars for the University of Michigan Retirement Research Center, a member of the BNA Pension & Benefit Publications Advisory Board and on the Advisory Board of the Pension Research Council at the Wharton School. He was a co-author of the sixth, seventh and eighth editions of “Pension Planning: Pension, Profit-Sharing, and Other Deferred Compensation Plans” (Irwin/McGraw-Hill).

Dr. VanDerhei was featured on the PBS Frontline special: Can You Afford to Retire? He has appeared on NBC Nightly News, WealthTrack, CNN, CNBC, MSNBC and NPR's All Things Considered and has been quoted extensively in major news publications.

He has made numerous presentations on retirement security topics for academic as well as national professional conferences and is often called upon to provide briefings for Capitol Hill staffers and research staff for federal agencies. He has also served on or consulted for a number of working groups involved in overseeing the development of pension simulation models.

He received his BBA and MBA from the University of Wisconsin-Madison and his M.A. and Ph.D. from the Wharton School of the University of Pennsylvania.