Measuring Retirement Income Adequacy: Calculating Realistic Income Replacement Rates

A key weakness of many retirement income models is that they use average estimates for life expectancy, and, consequently, provide workers with only a 50 percent chance of having adequate income in retirement. The Employee Benefit Research Institute (EBRI) has developed a new model - the EBRI/ERF Retirement Security Projection Model® (RSPM) - that incorporates a wide range of data in order to produce a far more inclusive and refined projection of likely retirement income. In projecting retirement income needs, the new EBRI model incorporates three of the most critically important, but difficult-to-model, retirement risks: investment risk, or how individuals' assets will perform during retirement; longevity risk, or how long an individual expects to live; and catastrophic health care costs, which have the potential to wipe out retirement savings. The EBRI model finds that the amount of money Americans will need for an adequate retirement varies widely based on individual factors and often is substantially higher than previously estimated. This paper presents the results obtained by utilizing the concepts already adopted by RSPM for the entire population of certain age cohorts and applying them to stylized examples. These results will provide useful information for individuals attempting to include such crucial factors as longevity, investment, and health care risk into their retirement planning process.

Defined Benefit Plan Freezes: Who's Affected, How Much, and Replacing Lost Accruals

This paper quantifies how workers are likely to be affected by pension freezes, and how much they would have to save in a 401(k) plan - whether provided by their employer and/or saved by themselves - to offset the loss of accrued benefits from the pension freeze. The analysis notes that how an individual worker might be affected by a pension freeze varies widely, based on the unique nature of each pension plan and the terms of each plan that is frozen; the variation in workers' age, and tenure; and future investment results. The analysis presents its findings in terms of additional compensation (in a 401(k) plan, whether provided by an employer or worker) needed to cover the accruals lost to a pension freeze. In some cases, the pension plan sponsor offsets the pension freeze by increasing its match in the workers' 401(k) plan, but each case is different, and in some cases the lost pension benefit is not replaced.

Taxed Beyond Relief, Rising taxes, shrinking nest eggs and other surprises force some to make hard choices

Philadelphia Inquirer

 A computer study by Temple University professor Jack VanDerhei found that six out of 10 people will not have enough money for retirement

ERISA At 30: The Decline of Private-Sector Defined Benefit Promises and Annuity Payments? What Will It Mean?

This paper begins with an overview of the private defined benefit plan system, with an emphasis on the various types of retirement income risk that exist and whether they are addressed (and if so, how effectively) by various plan designs. The focus then turns to issues concerning sponsoring, funding, and providing benefits to participants under the private defined benefit system. Pension accounting and its potential impact on the plan sponsor's income statement is described first, followed by the minimum funding requirements for qualified defined benefit plans. Cash balance plans are treated next and the available empirical evidence regarding their potential impact on plan participants is reviewed. Finally, the paper uses variants of the EBRI-ERF Retirement Income Projection Model (RIPM) and Retirement Security Projection Model (RSPM) to provide quantitative assessments of the future financial security implications of various types of moves away from defined benefit promises and from annuity payments ("traditional" employer-provided pensions) - a long-term trend that has been well-documented since the enactment of the Employee Retirement Income Security Act (ERISA) in 1974, and which has been accelerating in recent years for a variety of reasons. This analysis provides preliminary results on the impact of benefit accrual freezes for pension plans, modifications to cash balance plans, lump-sum distributions of retirement benefits, and payment of retirement accumulations as life annuities. Decisions are needed on the status of cash balance pension plans, permanent funding rules, and interest rates to be used in plan calculations, accounting treatment related to using smoothing versus mark-to-market for investment returns and interest rates, and rules and premiums under Title IV of ERISA and the Pension Benefit Guaranty Corporation. Until these kinds of policy decisions are made, further erosion of the defined benefit system can be expected to continue.

Retirement Planning: Do We Have a Crisis in America?

Statement for the Senate Special Committee on Aging Hearing on Retirement Planning: Do We Have a Crisis in America?
Results From the EBRI-ERF Retirement Security Projection Model

Jan. 27, 2004

Can America Afford Tomorrow's Retirees: Results from the EBRI-ERF Retirement Security Projection Model

American retirees will have at least $45 billion less in retirement income in 2030 than what they will need to cover basic expenditures and any expense associated with an episode of care in a nursing home or from a home health care provider. The aggregate deficit in retiree income during the decade ending 2030 will be at least $400 billion. These findings are from an analysis by the Employee Benefit Research Institute (EBRI) in collaboration with the Milbank Memorial Fund, known as the EBRI-ERF Retirement Security Projection Model.