Background

Retirement income in the United States includes Social Security benefits,  asset income, pension benefits, and earnings. Over the last 40 years,  receipt of Social Security has become almost universal while receipt of  asset income has increased modestly, receipt of private pensions has  tripled, and receipt of government pensions has increased by 50 percent.  However, a smaller proportion of aged households received earnings in  2000 than in 1962. (See fig. 1.) All of these components of retirement  income have been affected by the major regulatory, labor market, and  demographic changes that have taken place in the last 40 years.
Legislative changes have expanded the pension and personal saving  options available to workers. The Employee Retirement Income Security  Act (ERISA) of 1974 provided certain minimum standards and broad new  protections of employee benefits plans, including provisions for individual  retirement accounts (IRA). Subsequent legislation revised some provisions  of ERISA, further expanding the possibilities for workers to have access to  pension income in retirement and established new types of employer- sponsored pension plans, such as 401(k) plans.
Legislative changes have also focused on the financing problems of Social  Security. In the late 1970s and early 1980s, legislative action regarding  Social Security attempted to solve this financing problem by raising taxes,  curtailing future benefits, raising the retirement age, and trying to increase  work incentives. However, the financing of future Social Security benefits  is still an issue, and further action will need to be taken to either increase  the program’s revenues, decrease its expenditures, or both.
The labor market conditions facing young workers today differ  significantly from those facing earlier generations of workers. Changes in  earnings, women’s labor force participation, and pension coverage over  the last 40 years have altered the context within which workers save for  retirement. Real earnings increased throughout the 1960s, slowed  considerably in the 1970s, remained relatively stagnant during the 1980s  and much of the 1990s, and may have started to rise in the late 1990s. For  some groups of workers, such as production or nonsupervisory workers,  average weekly earnings adjusted for inflation declined over most of the  time period following the early 1970s. (See fig. 2.) For young workers  facing stagnant or declining real earnings, saving for retirement might have  become more difficult than it was for those who entered the labor market  when real earnings were growing.
In addition, over the last 40 years, more women have entered the labor  force. They entered regardless of their marital status—the labor force  participation rates of married women, for example, increased from   32 percent in 1960 to 61 percent in 1999. (See fig. 3.) This means a larger  share of women in younger cohorts is working and likely to qualify for  Social Security and pensions based on their own earnings. This also means  an increase in the share of married couple households that have two  earners, which could increase the potential for household retirement  saving.
The composition of pension coverage also changed during this period. The  estimated share of private wage and salary workers participating in a DB  plan as their primary pension plan declined from 39 percent in 1975 to   21 percent in 1997, while the share participating in a DC plan as their  primary pension plan increased from 6 percent to 25 percent. (See fig. 4.)  The decline in DB pension plan coverage and the increase in DC pension  plan coverage over the past 3 decades means that more of the  responsibility for retirement saving has shifted to individual workers from  employers.
Demographic changes over the last 40 years have also altered the  circumstances of workers as they save for retirement. Educational  attainment, for example, has increased over time. In 1960, only about   8 percent of the population 25 years of age and older had a college degree.  By 1999, 25 percent of the population 25 years or older were college  graduates. (See fig. 5.) The increase in educational attainment over time  could facilitate increased saving among those younger workers who attain  higher education. The composition of households has also changed over  this period with the share of households headed by a married couple  decreasing. In 1960, 74 percent of all households were comprised of  married couple families. By 1999 this had fallen to 53 percent. At the same  time, the percentage of one-person households increased from 13 percent  to 26 percent of all households. (See fig. 6.) Median incomes are typically  lower for families headed by a single female or for single person  households. In addition, life expectancy has increased across the  generations. The greater life expectancy of the younger generations could  mean that the retirement income of the Baby Boom and Generation X  would need to support a larger number of years.
The retirement security of today’s workers will also be affected by  changes in the cost and provision of health care. Over the last 40 years, the  provision of health benefits has become more expensive for employers as  generous benefits have combined with higher utilization rates, a growing  elderly population, and a rapidly increasing cost of service. In response to  these increased costs, many employers have begun to limit the health  benefits provided, either by terminating their plans, restricting benefits, or  reducing their share of the premium. As a result, future retirees are likely  to pay more of the costs of their health care. Consequently, today’s  workers might have to work longer, save more, or both, to ensure  sufficient access to health benefits. In addition to paying more for  privately sponsored health benefits, today’s current workers might also  pay more in retirement for Medicare. Medicare costs are continuing to rise  with the result that either benefits will have to be reduced or monthly  premiums will have to be increased.
Given all these demographic changes, as well as regulatory and economic  changes, analysis of retirement income is increasingly dependent on good  estimates, which in turn require adequate data. In a recent report on  needed improvements in retirement income data, we identified data  improvements that experts say are a priority for the study of retirement  income. In particular, experts cited data from employers on employee  benefits, as well as linkages between individual and household surveys  and administrative data, as being helpful for estimating future retirement  income.

	Baby Boom and Generation X Workers Have More Assets and More Debt Than Current Retirees Had at Similar Ages

Baby Boom and Generation X households headed by individuals aged 25 to  34 have greater accumulated assets, adjusted for inflation, than current  retirees had when they were the same age but they also have more debt.  The large increase in assets between current retirees—the Pre-Baby Boom  generation—and the Baby Boom is due mainly to increases in home equity  and increases in the rate of home ownership. The modest increase in  assets between the Baby Boom and Generation X can be accounted for in  large part by the increase in the ownership and value of DC retirement  accounts, because SCF data do not reflect the value of benefits from DB  pension plans. While the percentage of households with debt has changed  very little across the generations, the real total debt levels have more than  doubled between current retirees and Generation X workers. Yet, for most  young Baby Boom and Generation X households, assets exceed debts and  the net worth of these households with positive net worth is 60 percent  greater than that of current retirees at similar ages. However, particularly  for Generation X, greater life expectancy may require more assets to cover  more years in retirement and greater assets may also be required to  support higher standards of living. Within each generation, the distribution  of net worth across households is affected by economic and demographic  characteristics. Specifically, those who do not own their own home, are  less educated, or are single, have less in net worth.

		Increases in Home Equity and Ownership are Responsible for Most of the Increase in Assets Across the Generations

For households headed by a 25- to 34-year old, both the median value of  total assets (in 1998 dollars) and the percentage of households with assets  increased across the generations. (See fig. 7.) The median value of total  assets for the Baby Boom and Generation X is more than 50 percent  greater than that for the Pre-Baby Boom generation. While our analysis  indicates that asset levels increase across the generations, it does not take  into account the expectation of rising standards of living. Generation X,  for example, could have greater assets than those of previous generations  and still feel that these assets are insufficient for the lifestyle they want or  expect.
For households headed by a 25- to 34-year old, the increase in assets  across the generations can be attributed mainly to housing and DC  retirement accounts. (See fig. 7.) As we have noted, our measure of assets  does not include the value of benefits from DB pension plans and, to the  extent that a larger percentage of the Pre-Baby Boom and the Baby Boom  than Generation X is covered by DB plans, will underestimate the true  value of assets for the Pre-Baby Boom and the Baby Boom relative to  Generation X. The large increase in total asset accumulation between the  Pre-Baby Boom and the Baby Boom is largely due to increases in home  equity and increases in the rate of home ownership. The median value of  housing assets increased from $72,890 for the Pre-Baby Boom to $78,583  for the Baby Boom, while the percentage of households owning their own  home increased from 39 to 45 percent. The modest increase in total asset  accumulation between the Baby Boom and Generation X can be  accounted for in large part by the increase in the ownership and value of  retirement accounts. The median value of DC retirement accounts  increased from $2,947 for the Baby Boom to $8,003 for Generation X, while  the percentage of households with retirement accounts increased from   20 percent to 46 percent. The increased percentage of households with  retirement accounts reflects changes in the types of pension plans offered  by employers. Between 1983 and 1997, the percentage of workers covered  by primary DC pension plans, under which the worker has a retirement  account, increased from 11 percent to 25 percent while the percentage of  workers covered by DB pension plans declined from 35 percent to 21  percent.
Financial and nonfinancial assets contribute only modestly to the increase  in total assets across the generations. (See fig. 8.) Financial assets include  savings accounts, mutual funds, and stocks and bonds while nonfinancial  assets include vehicles, business interests, and nonresidential real estate.  The median value of financial assets varies between less than $2,000 for  the Pre-Baby Boom generation and $4,000 for the Baby Boom. A greater  percentage of households in the younger cohorts have financial assets  than was the case for current retirees. The median value of nonfinancial  assets is greater than that for financial assets in each of the generations  and has increased across the cohorts. While the ownership of nonfinancial  assets increased for the Baby Boom, relative to current retirees, it  decreased for Generation X relative to both the Baby Boom and current  retirees.
The degree to which the younger cohorts will be able to add to the assets  that we observe when they are ages 25 to 34 will be affected by a number  of demographic and economic factors. Individuals have control over some  of these factors. For example, they can determine how much education  they receive, how long they work, whether both spouses in a couple work,  how much they save while they are working, and whether they stay  married or get divorced. On the other hand, individuals have no direct  control over the rate of growth of real wages, the performance of the  overall economy, the rate of return on financial assets, changes in housing  prices, shifts in pension coverage and generosity of benefits, the state of  the health care system, changes in life expectancy, and the resolution to  the funding shortfall for Social Security and Medicare. One of the  resolutions to the funding shortfall for both Social Security and Medicare  is to increase the payroll tax that employees and employers pay. An  increase in the payroll tax, of course, reduces the amount of an  individual’s disposable income available to both consume and save. On the  other hand, if individuals expected Social Security benefits to be reduced,  they might increase their personal saving in order to offset this reduction  in benefits. Likewise, increases in life expectancy may also require  increased saving in order to provide for a greater number of years in  retirement or might induce people to work longer.

		The Younger Generations, Especially Generation X, Have Higher Levels of Debt Than Current Retirees Did at Similar Ages

For households headed by a 25- to 34-year old, overall debt levels increase  across the generations. (See fig. 9.) The median level of debt for the Baby  Boom is 38 percent greater than that for the Pre-Baby Boom generation  while Generation X’s median level of debt is 146 percent greater than that  of the Pre-Baby Boom generation and 78 percent greater than that of the  Baby Boom. The percentage of households with debt changed very little,  however, remaining at roughly 83-84 percent across the generations. Thus,  those households that go into debt are going into debt more deeply with  each new generation.
The increase in debt levels between the Baby Boom and Generation X was  due largely to increases in housing debt. The median value of housing  debt increased between the Baby Boom and Generation X by 61 percent.  The percentage of households with housing debt changed very little  between these two generations, however, remaining at roughly 40 percent.
The amount of debt carried by a household will affect the value of its net  worth. For households headed by a 25- to 34-year old, the percentage of  households with positive net worth and the median value of positive net  worth increased between the Pre-Baby Boom and Generation X; however,  the median value of negative net worth is also much higher for Generation  X. (See fig. 10.) The median value of net worth for households with  positive net worth increased by 60 percent between the Pre-Baby Boom  and the two younger generations. The percentage of households with  negative net worth is smaller for the two younger generations than for  current retirees when they were young. However, the median value of net  worth for households with negative net worth is about four times larger  for Generation X than for the Baby Boom or the Pre-Baby Boom.

		Within Each Generation, the Value of Net Worth Is Lower for Those Who Do Not Own Their Own Home, Are Less Educated, or Are Single

The younger generations in general have experienced an increase in net  worth relative to current retirees at the same age, with the Baby Boom  having a median net worth three times that of the older generation and  Generation X having a median net worth two and a half times that of  current retirees. However, there are some groups within these cohorts that  have not benefited as much as others. (See table 1.) For example, the  median net worth for Baby Boom and Generation X homeowners is  between $17,000 and $35,000 greater than that for Pre-Baby Boom  homeowners; for nonhomeowners, net worth between the older and  younger cohorts differs by only $2,300 to $3,700. Median net worth has  increased across the cohorts for all education levels, but much less so for  those without a high school degree. Both single headed households and  households headed by a married couple have seen  increases in net worth;  however, the increases have been much smaller for single headed  households. These trends have increased the disparity in net worth within  the younger generations compared to the Pre-Baby Boom.
Another measure of the well-being of different generations is the ratio of  net worth, or wealth, to income. Median ratios of wealth to income for  households headed by a 25- to 34-year old are presented in table 2. The  Baby Boom and Generation X have higher wealth-to-income ratios than  current retirees had at similar ages. This suggests that households in the  younger generations have been able to accumulate more wealth than was  the case for current retirees. The ratios also reflect the differences across  demographic groups within generations. Within each generation, ratios of  wealth to income are higher for the well-educated, the married, and  homeowners.

	Generation X and the Baby Boom Are Estimated to Have Similar Levels of Real Retirement Income, but Generation X Could Have Lower Replacement Rates

In our simulations, Generation X and the Baby Boom have similar levels  of retirement income in real terms (adjusted for inflation). Social Security  benefit levels for Generation X and the Baby Boom will depend on how the  Social Security funding shortfall is resolved. The shift to greater DC  pension coverage does not have much effect on the pension income of  Generation X relative to the Baby Boom. However, replacement rates for  Generation X are estimated to be lower than for the Baby Boom under  each scenario we considered, suggesting retirement income for  Generation X may not keep up with the rising standard of living, absent  increases in other sources of retirement income, or increases in rates of  return.

		Cross-generational Comparisons of Retirement Income Levels Will Be Affected by the Resolution to the Social Security Funding Shortfall

Our simulations suggest that Generation X will have real retirement  income that is similar or somewhat higher than the Baby Boom,  depending on how the Social Security funding shortfall is resolved. If the  shortfall is resolved by increasing the program’s revenues to maintain  scheduled benefits, then Generation X is estimated to have somewhat  higher real retirement income at age 62 than the Baby Boom generation.  (See table 3.) Because our simulations assume that real earnings increase  over time, Generation X would have higher Social Security benefits than  the Baby Boom. However, if the shortfall is resolved through gradual  benefit reductions over time, then Generation X is estimated to have real  retirement income levels at age 62 that are more similar to those of the  Baby Boom. (See table 4.) Because the benefit reductions increase over  time, they would have more impact on Generation X than on the Baby  Boom, leading to slightly lower Social Security benefits for Generation X  relative to the Baby Boom.
Changes to the Social Security system could also affect other forms of  retirement income, especially those not considered here. If program  revenues were increased by raising Social Security payroll taxes, then  individuals would have less disposable income to save for retirement. This  could take the form of decreases in personal saving or lower contributions  to DC pension plans. Instead, if general revenues were used, the funding of  other programs could be affected, which could lower some individuals’  income from other income support programs, such as Supplemental  Security Income (SSI). The timing and implementation of the changes to  the Social Security system are also relevant since action taken later rather  than sooner would necessitate larger tax increases or benefit reductions  and the impact on Generation X could be even greater.

		Generation X and the Baby Boom May Have Similar Levels of Pension Income Even When Pension Coverage Shifts from DB to DC Plans

Generation X and the Baby Boom are estimated to have similar levels of  pension income when our simulations assume that the rate of DB and DC  pension coverage is constant over time. (See table 4.) DC account  balances are annuitized at retirement to facilitate comparisons. While  Generation X’s simulated higher earnings might have suggested higher  pension income as well, they may have been too young to completely  benefit from the strong stock market of the 1990s. The assumption that the  rate of pension coverage is constant over time has not been the experience  of private pensions in the United States over the last 25 years. DB coverage  has declined, and DC coverage has increased.
Generation X and the Baby Boom are estimated to have similar levels of  pension income even when our simulations assume Generation X only has  access to DC pension plans. (See table 5.) While assuming that all  pension coverage will shift to DC plans represents the extreme case, it  does provide a bound to our estimates. These simulations provide some  insight into the impact that the continuing shift from DB to DC pension  coverage might have on retirement income for Generation X, since the  final outcome of this shift is uncertain.

		Replacement Rates Lower for Generation X Relative to the Baby Boom

In our simulations, Generation X has a lower earnings replacement rate  than the Baby Boom (see table 6) even though the Baby Boom and  Generation X are estimated to have similar levels of retirement income.  Our assumption of increasing earnings over time leads to Generation X  having a lower replacement rate. The largest difference between the  cohorts, in terms of replacement rates, occurs under the Social Security  benefit reduction scenario since benefit levels are falling more for  Generation X while earnings are unchanged. While the shift in pension  coverage raises the level of retirement income for Generation X, it does  not change the replacement rate.
The earnings replacement rate is an indicator of how well individuals are  doing at maintaining their pre-retirement standard of living. While our  estimated replacement rates do not cover all individuals in each  generation or include all forms of retirement income, they still might  indicate a decline in the standard of living during retirement for  Generation X. However, this does not take into account that retirement  income may increase because of behavioral changes or other external  factors. Since Generation X is still relatively young, it is possible that some  members of this cohort may change their behavior and save more or work  longer. Also, variations in rates of return could be greater than expected,  causing some individuals in our simulations to experience higher asset  returns. Any of these factors could raise retirement income and, possibly,  Generation X’s replacement rate. If this were to occur, the difference in  replacement rates between the Baby Boom and Generation X could be  smaller than we estimate.

	The Distribution of Retirement Income Will Vary within Generations, and Certain Groups Will Be More Likely to Have Lower Retirement Incomes

Our simulations suggest that retirement income will vary significantly  within both Generation X and the Baby Boom. Retirement income will also  vary by demographic group, with income being lower for the less educated  and single women.

		The Distribution of Retirement Income Will Vary within Both Generation X and the Baby Boom

Simulated retirement income will vary widely across households within  both Generation X and the Baby Boom. For example, if married  households in Generation X were arranged from lowest to highest in terms  of their retirement incomes at age 62, the top 20 percent would receive  over 40 percent of all retirement income while the bottom 20 percent  would receive less than 7 percent. (See fig. 11.) The disparity between the  top 20 percent and bottom 20 percent is even larger for single persons.  Because retirement income is closely linked to earnings, which are known  to vary significantly, this degree of variation in estimated retirement  income is not surprising.
When examining the sources of retirement income, simulated pension  benefits are less evenly distributed than simulated Social Security benefits.  Married couples in the top 20 percent in terms of pension benefits receive  over 58 percent of all pension benefits while those in the bottom 20  percent receive no benefits at all, as shown for Generation X in figure 12.  In comparison, married couples in the top 20 percent in terms of Social  Security benefits receive about 31 percent of all Social Security benefits,  while those in the bottom 20 percent receive about 10 percent.
Pension benefits are less evenly distributed for at least two reasons. First,  by design, the Social Security benefit formula is more generous toward  low-income and disabled workers, in contrast to pensions, which tend to  play a larger role in the retirement income of higher earning workers.  Second, some workers have no pension coverage while nearly all workers  are covered by Social Security. In our simulations, 20 percent of married  households and 33 percent of single individuals in Generation X receive no  pension benefits. The median retirement income for married households  where at least one member has a pension is almost twice as large as the  median for married households where neither member has a pension. (See  fig. 13.) The percentage difference between those with pensions and  without pensions is even larger for single persons.

		Retirement Income Varies by Demographic Group

Simulated retirement income varies by educational attainment, marital  status, and gender. Simulated retirement income is lower for those with  less education, as shown for Generation X in figure 14. The median  retirement income for married high school dropouts is about 43 percent  less than the median for married college graduates. The percentage  difference between single high school dropouts and single college  graduates is even larger. The less educated have lower Social Security and  pension benefits due to lower lifetime earnings and lower rates of pension  coverage. In our simulations for Generation X, 66 percent of married  couples without high school degrees receive pension benefits as opposed  to 87 percent of married college graduates.
Simulated retirement income also varies by marital status with divorced  and never married individuals having lower retirement incomes than  widows and married couples. (See table 7.) Median retirement incomes for  never married persons and divorced persons are about 23 percent less and  32 percent less, respectively, compared to that of widows. Median  household retirement incomes for never married persons and divorced  persons are about 58 percent less and 63 percent less, respectively,  compared to that of married couples. Retirement incomes are less for  never married persons and divorced persons, even if one compares  retirement income per household member.
How widows and married couples compare in terms of retirement income  depends on the measure of income used. Widows have lower median  retirement income than married couples using household income as the  measure, but greater median retirement income using income per  household member as the measure. (See table 7.) Whether or not married  couples have a higher standard of living than widows depends on how  much they save by sharing their expenses.
Simulated retirement income is lower for single women than for single  men, as shown for Generation X in figure 15. The median retirement  income for single women is about 31 percent less than the median for  single men. Again this is due to lower lifetime earnings and a lower rate of  pension coverage. Sixty-three percent of single women in Generation X  receive pension benefits as opposed to 74 percent of single men.
Variation in simulated retirement income suggests some members of both  generations may be at greater risk of retiring with insufficient resources.  Assessing the sufficiency of simulated retirement income is difficult  because we do not simulate assets, earnings in retirement, and SSI and  other public assistance programs. However, retirees who earned low  earnings over their working years may not have substantial assets or  earnings in retirement, and SSI provides only a very modest level of  support and is restricted to the poorest of retirees.

	Concluding Observations

Our analysis of wealth at ages 25 to 34 and our simulations of Social  Security and pension benefits at age 62 suggest that both the Baby Boom  and Generation X are likely to have similar levels of retirement income in  real terms, but that level may not support Generation X’s future living  standards. Our analysis also indicates that across the generations, similar  subgroups of the population are most vulnerable in retirement.
The levels of retirement income that Baby Boom and Generation X  workers will actually receive depend in part upon their own behavior,  such as how long they work or how much they save, and in part upon  factors they cannot control, such as the performance of the overall  economy, the rate of return on financial investments, and changes in  Social Security and health care financing. Individuals’ behavior, and future  economic events, may vary significantly from the assumptions underlying  our models, especially for those workers who still have many years to  work before retirement. In addition, estimates of future retirement income  depend on adequate data on individuals’ earnings, wealth, and pensions,  not all of which are easily captured in existing data sets. Further, rising  expectations about consumption, leisure and health care in retirement  (and the costs of meeting these expectations) could require higher  replacement rates for Generation X than for the Baby Boom in order to  maintain the standards of living they achieved while working.
Government policy can potentially have an important effect on individuals’  retirement income. Policies that encourage individuals to acquire more  education and training, to work longer and to save more can help ensure  higher retirement incomes in the future. Also, any reform that  policymakers undertake with regard to the Social Security program or  health care financing will have repercussions for the retirement income of  Generation X and the younger half of the Baby Boom. Our work suggests  the importance of all these policy actions reflecting a coordinated  approach to future retirement income, and that they be made soon enough  so the affected individuals will have adequate time to adjust their work  and saving behavior accordingly. Finally, the continued vulnerability of  certain segments of the population to inadequate resources at retirement  suggests that successful retirement income policies would take potential  impacts on these groups into consideration.

	Agency Comments

We provided a draft of this report to SSA, Labor, and Treasury. All three   provided technical comments, which we have incorporated as appropriate.
We are sending copies of this report to the Social Security Administration,  the Department of Labor, and the Department of the Treasury. We will also  make copies available to others on request. In addition, the report will be  available at no charge on GAO’s Web site at http://www.gao.gov.
If  you have any questions concerning this report, please contact Barbara  Bovbjerg at (202) 512-7215. See appendix III for other contacts and staff  acknowledgments.
Barbara D. Bovbjerg  Director, Education, Workforce      and Income Security Issues.

Appendix I: Scope and Methodology

To gain an understanding of what today’s workers might expect to receive  in terms of retirement income, we compared the wealth of current  workers with that of current retirees, at similar points in their lives, and  estimated the pension and Social Security benefits that the Baby Boom  and Generation X might receive. To analyze personal wealth we used the  Survey of Consumer Finances, a survey of U.S. households sponsored by  the Board of Governors of the Federal Reserve System. To analyze how  workers from the Baby Boom and Generation X compare in terms of the  retirement income they can expect to receive and the likely distribution  across workers within the Baby Boom and Generation X, we simulated  expected retirement income at age 62.

	Analysis of Personal Wealth

To analyze personal wealth, we used the Survey of Consumer Finances  (SCF), a triennial survey of U.S. households sponsored by the Board of  Governors of the Federal Reserve System with the cooperation of the U.S.  Department of the Treasury. The SCF provides detailed information on  U.S. households’ balance sheets and their use of financial services, as well  as on their pensions, labor force participation, and demographic  characteristics as of the time of the interview. The SCF also collects  information on households’ total cash income, before taxes, for the  calendar year preceding the survey. Because the survey is expected to  provide reliable information both on assets that are fairly common—such  as houses—as well as on assets that are owned by relatively few—such as  closely held businesses—the SCF uses a sample design that includes a  standard, geographically based random sample and a special over sample  of relatively wealthy families. Weights are used to combine information  from the two samples to make estimates for the full population. The 1962  SCF was conducted by the Census Bureau and surveyed 3,551 households.  The 1983 SCF was conducted by the Survey Research Center of the  University of Michigan and surveyed 3,824 households. The 1998 SCF was  conducted by the National Opinion Research Center at the University of  Chicago and surveyed 4,309 households.
Using the SCF, we analyzed how marital status, education, and  homeownership are related to the wealth of households headed by a 25- to  34-year old. Using the 1962, 1983, and 1998 SCFs, we examined the  ownership and level of household savings for current retirees (born  between 1925 and 1945), the Baby Boom (born between 1946 and 1964),  and Generation X (born between 1965 and 1976) when each generation  was 25 to 34 years old. We selected this age group because this is the only  age group for which we have data on personal wealth in each of the three  generations.
Our measure of personal wealth includes tax favored retirement saving,  such as individual retirement accounts (IRA) and 401(k)s and other thrift  type plans, as well as savings that are not specifically dedicated to  retirement but may enhance retirement income, such as liquid financial  assets (checking accounts, savings accounts, money market deposit  accounts, and money market mutual funds), other financial assets  (certificates of deposit, mutual funds, stocks, and bonds), housing assets,  and nonhousing assets (nonresidential real estate, business interests, and  vehicles). We also looked at housing liabilities and nonhousing liabilities  (credit cards, installment loans, and other debts). For each component of  personal wealth, we calculated the percentage of households owning that  type of wealth as well as the median value. We looked separately at assets  and debt and then combined them to calculate individual net worth.
For studies in which the focus is on saving or net worth, the SCF is  preferable to other household income surveys, such as the Panel Study of  Income Dynamics (PSID) or the Survey of Income and Program  Participation (SIPP). The SCF has more detailed information about wealth  holding, better distributional characteristics, less item nonresponse, and  fewer imputed variables than the PSID or the SIPP. However, the SCF,  like all surveys, is subject to sampling errors, reporting errors, and  nonresponse errors. Sampling errors result from the fact that survey  estimates are based on a sample of the population rather than on a  complete census of the population. Reporting errors arise because  respondents may not understand what is wanted, may not know the  information requested, or may be reluctant to reveal their actual income or  wealth. Nonresponse errors arise when the family selected for  participation is not available to be interviewed, either because they refuse  to participate or cannot be contacted.
Further, the sample sizes for the SCF are relatively small compared with  surveys such as the Current Population Survey. For our analysis, we are  concerned with the fact that small samples are vulnerable to bias from  observations not representative of the population as a whole. For all of  these reasons, our numbers should be interpreted with some caution.

	Analysis of Simulated Retirement Income

To analyze how workers from the Baby Boom and Generation X compare  in terms of the retirement income they can expect to receive and the likely  distribution across workers within the Baby Boom and Generation X, we  simulated expected retirement income at age 62. Our measure of  retirement income consists of pension income, Social Security benefits,  and spouse’s earnings. It does not include personal savings, earnings in  retirement, health benefits, or income from other income support  programs (e.g., Supplemental Security Income). For our simulations, we  used the Social Security and Accounts Simulator (SSASIM), Genuine  Microsimulation of Social Security and Accounts (GEMINI), and Pension  Simulator (PENSIM) simulation models. GEMINI estimated Social Security  benefits and PENSIM estimated pension income from defined benefit and  defined contribution plans for the 1955 birth cohort (Baby Boom) and the  1970 birth cohort (Generation X) and their spouses. Retirement income  and its components were discounted to 2001 dollars, allowing us to make  comparisons across cohorts in terms of the level of retirement income.  However, these comparisons do not give an indication of standards of  living in retirement. To make this comparison, we looked at the earnings  replacement rate, calculated as retirement income at age 62 divided by  earnings at age 61 for retired workers who worked at age 61 and whose  spouse, if married, was the same age.
To examine the distribution of retirement income within both generations,  we calculated the degree of variation by arranging households by  retirement income and finding the proportion of that income received by  each quintile. To compare groups by demographics, we calculated median  retirement income by educational attainment, gender, and marital status.  Due to the difference in household size, we performed most of the above  calculations separately for married couples and singles—those widowed,  divorced, or never married—at age 62. When examining retirement income  by marital status we calculated both household income and income per  household member.
SSASIM is a Social Security policy simulation model developed by the  Policy Simulation Group (PSG). The initial version of the model was  developed under a series of contracts from the Social Security  Administration as part of the 1994-96 Advisory Council on Social Security.  SSASIM consists of two models, a macro model of aggregate program  finances, and an embedded micro model of selected cohort individuals. In  addition to current law policy, the model can simulate a variety of policy  reforms, from incremental changes to broader structural reforms that  would introduce individual accounts into the broader Social Security  system.
GEMINI is a policy microsimulation model also developed by the PSG.  GEMINI is useful for analyzing the lifetime implications of Social Security  policies for a large sample of people born in the same year and can  simulate different reform features for their effects on the level and  distribution of benefits. GEMINI uses as input birth cohort samples  generated by PENSIM so as to represent the demographic and economic  characteristics of historical birth cohorts. Also, GEMINI incorporates the  same kind of Old Age, Survivor and Disability Insurance (OASDI) program  logic as used in the micro model of SSASIM, with almost all assumption  and policy parameters read from a SSASIM input database. GEMINI  produces output files that contain detailed information about the life  events and annual OASDI program experience of each individual in the  cohort sample.
For our report, the PSG produced the GEMINI output files using the same  1955 and 1970 birth cohorts used in PENSIM for both a scheduled and  funded Social Security scenario (see following paragraphs for more  details.) The PENSIM and GEMINI output files were then merged, yielding  an output file containing yearly Social Security benefits, pension income,  and spouse’s earnings from age 62 until death for each member of the  cohort.
PENSIM is a pension policy simulation model that is being developed by  the PSG to analyze lifetime coverage and adequacy issues related to  employer-sponsored pension plans. The development of PENSIM has been  funded since 1997 by the Office of Policy and Research at the Employee  Benefits Security Administration of the U.S. Department of Labor. PENSIM  produces a random sample of simulated life histories for 100,000 people in  a birth cohort and for their spouses who may have been born in a different  year. The members of the birth cohort experience demographic and  economic events, the incidence and timing of which vary by age, gender,  education, disability, and employment status. The types of life events that  are modeled in PENSIM include:    demographic events (birth, death);    schooling events (leaving school at a certain age, receiving a certain  educational credential);  family events (marriage, divorce, childbirth);  initial job placement;  job mobility events (earnings increases while on a job, duration of a job,  movement to a new job, or out of the labor force);    pension events (becoming eligible for plan participation, choosing to  participate, becoming vested, etc.); and  retirement events.
For our report, we specified a DB and DC pension plan, which the PSG  entered into PENSIM to be used with the 1955 and 1970 birth cohorts to  simulate pension benefits for the Baby Boom and Generation X. These  simulations were conducted under both a sunset and no sunset pension  scenario as well a scenario where Generation X only had access to DC  pensions (see following discussion for more details).

		Defined Benefit Plan

Our simulations assume a single type of DB pension plan for all workers  covered by such a plan. This plan’s structure is similar to the most  common type of DB pension plan in the private sector.
In terms of structure, this plan has an eligibility requirement (consisting of  a minimum age of 21 and 1 year of service) and 5 years cliff vesting. The  plan’s normal retirement age is 62 for workers with any years of service,  and it has an early retirement option, with early retirement benefits  beginning at age 55 for workers with 10 years of service. If a worker  chooses to retire early there is a linear early retirement reduction of 5  percent per year (e.g., if a worker retires at age 55, he would receive 65  percent of the normal retirement benefit). The plan pays a monthly  benefit at retirement, rather than a lump sum.
In terms of the calculation of benefits, the traditional DB plan calculates  benefits using a final average pay formula, such as:  X% * average Y years earnings at the end of career or when highest * years  of service.
Surveys of DB plans in the United States indicate that, typically, the  percentage credit (X%) is in the range of 1-1.75 percent. For this report  we chose 1.25 percent. The most common definition of final average pay is  the high consecutive 5 years of earnings. Therefore, the formula that we  use to calculate DB benefits is:  1.25% * average of high consecutive 5 years pay * years of service.

		Defined Contribution Plan

In our simulations of DC plans, all individuals covered by a DC pension  plan are covered by the same plan. This plan’s structure is similar to the  most common type of DC pension plan in the private sector.
In terms of structure, this plan has an eligibility requirement (consisting of  a minimum age of 21 and 1 year of service) and 5 year graded vesting. At  retirement, individuals annuitize their account balances, with married  individuals purchasing a joint and one-half survivor annuity and single  individuals purchasing a single life annuity.
Employees can contribute up to 12 percent of their earnings and the  employer match 50 percent of the employees’ contributions up to 5  percent. Employees can invest their contributions in their choice of  equities and fixed income assets, where the fixed income assets will  consist of Treasury bonds and corporate bonds. Employees who leave  before retirement can choose to have their account balances rolled over  into another retirement account. In our simulations, rollover decisions are  based on the data in table 11.
Assumptions also need to be made regarding participation and  contribution rates, and asset allocation. Tables 8-11 provide information  on the assumptions used for each of these factors. Table 8 provides data  on participation rates by age and salary.
Data on contribution rates by age and salary are shown in table 9.
Table 10 provides data on average asset allocation rates by age and  investment options.
Data on the distribution of assets at termination by asset levels is shown in  table 11.

		Alternative Scenarios for Pensions and Social Security

			Pensions

Our simulations considered several scenarios for pension benefits. One  assumed that the sunset provision in the Economic Growth and Tax Relief  Reconciliation Act (EGTRRA) of 2001 holds and the other that the  provisions in EGTRRA, which raise the limits on both DB and DC plans, do  not sunset. We also considered the scenario where the shift in coverage  reached its extreme and Generation X only had access to DC plans.

			Social Security

Our simulations of expected Social Security benefits consider two  different scenarios for resolving the funding shortfall. One scenario  assumes scheduled benefits are paid while payroll taxes are increased to  levels that support those benefits. Our scheduled benefits scenario  increases the payroll tax once and immediately by the amount of the  OASDI actuarial deficit as a percent of payroll so that benefits under the  current system can continue to be paid throughout the simulation period.
The other scenario, the funded benefits scenario, assumes that benefits are  reduced to levels supportable by current payroll tax rates. The benefit  reductions used in this scenario reduce the primary insurance amount  (PIA) formula factors by equal percentage point reductions (by 0.319 each  year for 30 years) for those newly eligible in 2005, subjecting earnings  across all segments of the PIA formula to the same reduction.

		Assumptions and Limitations of the Simulation Analysis

Simulating retirement income almost 30 years into the future requires  many assumptions and simplifications and, consequently, our simulations  have a number of limitations. A primary limitation of our analysis is that  our simulations do not include important components of retirement  income such as personal savings, earnings in retirement, health benefits,  and other public assistance programs such as SSI. Including personal  savings might reduce retirement income for Generation X relative to  retirement income for the Baby Boom if the post-1980 decline in personal  savings rates continues. Including earnings in retirement might increase  Generation X’s retirement income relative to the Boomers income if wages  increase over time or if people in the future are more likely to work in  retirement. From a distributional perspective, including personal savings  would probably increase the upper quintile’s share of retirement income  while including public assistance programs such as SSI would benefit the  bottom of the distribution. Another component of well-being in retirement  that we do not estimate are private and public health benefits. Including  health benefits might reduce Generation X’s standard of living in  retirement relative to the Baby Boom due to falling health benefits and  rising health care costs over time  An important assumption driving our results is that real wages grow over  time. We assume real wages grow at 1.0 percent per year, following the  2001 Social Security Trustees Report’s intermediate assumption. If,  instead, wages stagnate as in the 1980s and 1990s, then retirement income  for Generation X relative to retirement income for the Baby Boom might  be lower than our estimates.
Another critical assumption is the relative rate of DB and DC pension  coverage. Over the last 25 years pension coverage has been shifting from  DB to DC pensions. However, due to the uncertainty in predicting future  relative coverage rates, our simulations either assume a constant rate of  DB and DC coverage over time or only DC coverage for Generation X. The  likely outcome is somewhere in between.
An important omission under the scheduled Social Security benefit  scenario is the impact of higher taxes or general revenue transfers on  other sources of retirement income. Increased taxes or general revenue  transfers will most likely be necessary to pay Social Security benefits as  scheduled under current law. Tax increases might reduce saving for  retirement and general revenue transfers might reduce funding for other  government retirement programs such as SSI, Medicare, or Medicaid. The  impact of tax increases may be larger for Generation X than for the Baby  Boom because they will pay higher taxes for more years.
Another limitation is the sensitivity of estimated DC benefits to our  assumptions about future rates of return. We assume individuals’ rates of  returns vary randomly around average rates projected by the Office of the  Chief Actuary at SSA. If average rates of return in the future are  significantly different, then actual DC benefits could differ substantially  from our simulations. While the model allows returns to vary  stochastically by individuals, it cannot capture fluctuations in overall  market rates of return. An ill timed stock market downturn could result in  either generation’s DC benefits being significantly lower than simulated.  Retirement income for Generation X could be more sensitive to future  rates of return than retirement income for the Baby Boom, if the trend  toward DC pensions continues.
Another limiting assumption is that our simulations only include one kind  of DB and DC plan, which clearly does not capture the full complexity of  pension plans. We attempted to choose the characteristics of each to be  typical of today’s pension plans. If they are not truly representative or if  the characteristics of DB and DC plans change over time, then our results  could be biased. In particular, the finding that the shift to DC plans only  has a very modest effect on pension benefits may depend on our choice of  plans.
While educational attainment has been increasing over time, this is not  captured by the simulations. Both generations are assumed to achieve the  same level of education as 35- to 44-year olds in the 1997 Current  Population Survey. Higher levels of education for Generation X could  increase their retirement income relative to the Baby Boom.
From a distributional perspective, the simulations are limited, in that they  do not capture differences across the generations in the variation of  earnings. By some measures, earnings disparity has been increasing over  the last 20 years, which could potentially lead to more variation in  retirement income for Generation X.
The simulations assume the same cohort life expectancies as the 2001  Social Security Trustees Report’s intermediate cost projection. Marital  status at age 62 is calibrated to unpublished projections from the SSA’s  Office of the Chief Actuary. Assumed life expectancies may be too low, as  some have argued that the Trustees underestimate future improvements in  mortality rates. Increased life expectancies would reduce DC benefits in  our simulations because retirees would have to pay higher prices when  annuitizing their retirement accounts.
Our simulations of retirement income do not take taxation into account.  Incorporating taxes would not only lower disposable income, but would  also reduce variation in income because federal tax rates are progressive  and because only relatively higher income households are required to pay  tax on their Social Security benefits.
Finally, we are only able to simulate retirement income for two illustrative  birth cohorts as opposed to entire generations.  The 1955 and 1970 birth  cohorts may not fully capture the experiences of the Baby Boom and  Generation X, respectively.

Appendix II: Alternative Scenarios

For our analysis of estimated retirement income, we used two different  scenarios for the changes to the pension limits under EGTRRA. One  assumed that the sunset provision in EGTRRA holds and the other that the  provisions, which raise the limits on both DB and DC plans, do not sunset.

	Retirement Income Under the No-Sunset Pension Scenario

The following tables show estimated retirement income under the no- sunset pension scenario. Extending pension contribution limits beyond  2010 increases real retirement income and replacement rates for  Generation X relative to real retirement income and replacement rates for  the Baby Boom.
Table 12 shows the estimated median monthly household retirement  income at age 62 under a scheduled (tax increase) Social Security scenario  and a constant rate of DB and DC pension coverage.
Estimated median monthly household retirement income at age 62 under a  funded (benefit reduction) Social Security scenario and a constant rate of  DB and DC pension coverage is shown in table 13.
Table 14 shows the simulated median monthly household retirement  income at age 62 under a funded (benefit reduction) Social Security  scenario and Generation X having only DC pension coverage.
Replacement rates for the Baby Boom and Generation X under the  different Social Security and pension coverage scenarios are shown in  table 15.

	Distributional Figures and Tables for the Baby Boom and for Generation X under Alternative Scenarios

The distribution of simulated retirement income is very similar across the  generations and across scenarios. For both generations and in all  scenarios, retirement income is estimated to vary widely, pension benefits  are less evenly distributed than Social Security benefits, and the less  educated, single women, and those without pensions have lower  retirement incomes.
Figures 16-20 and table 16 show the estimated distribution of retirement  income for the Baby Boom assuming funded Social Security benefits, no  extension of raised pension contribution limits beyond 2010, and a  constant rate of DB and DC pension coverage over time. These are the  same assumptions used for Generation X in figures 11-15 and table 7. We  do not emphasize a comparison of the distributions across generations  because our models do not capture differences across generations in the  variation of earnings. By some measure earnings disparity has been  increasing over the last 20 years, which may result in retirement income  varying more in Generation X than in the Baby Boom.
Figures 21-25 and table 17 show the estimated distribution of retirement  income for Generation X assuming funded Social Security benefits, no  extension of raised pension contribution limits beyond 2010, and all  pensions are DC pensions.
Figures 26-30 and table 18 show the estimated distribution of retirement  income for Generation X assuming funded Social Security benefits,  extension of raised pension contribution limits beyond 2010, and a  constant rate of DB and DC pension coverage over time.
Figures 31-35 and table 19 show the estimated distribution of retirement  income for Generation X assuming scheduled Social Security benefits, no  extension of raised pension contribution limits beyond 2010, and a  constant rate of DB and DC pension coverage over time.

Appendix III: GAO Contacts and Staff Acknowledgments

	GAO Contacts

	Staff Acknowledgments

In addition to those named above, the following individuals made  significant contributions to this report: Michael J. Collins, Gordon Mermin,   Janice Peterson, Brendan Cushing-Daniels, Barbara Alsip and Patrick  DiBattista, Education, Workforce, and Income Security Issues; Grant  Mallie, Applied Research and Methods; and Marylynn Sergent, Strategic  Issues.

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Summary:
Why GAO Did This Study

Today's workers will rely to a large extent on Social Security, private pensions, and personal wealth for their retirement income. But some analysts question whether these sources will provide sufficient retirement income to maintain workers' standards of living once they leave the labor force. Indeed, the Social Security trust funds are projected to become exhausted in 2042, at which time, unless action is taken, Social Security will not be able to pay scheduled benefits in full. To gain an understanding of what today's workers might expect to receive in terms of retirement income, GAO was asked to examine (1) how the personal wealth of Baby Boom (born between 1946 and 1964) and Generation X (born between 1965 and 1976) workers compare with what current retirees had at similar ages, (2) how workers from the Baby Boom and Generation X compare in terms of the pension and Social Security benefits they can expect to receive, and (3) the likely distribution of pension and Social Security benefits across workers within the Baby Boom and Generation X.

What GAO Found

Baby Boom and Generation X households headed by an individual aged 25 to 34 have greater accumulated assets, adjusted for inflation, than current retirees had when they were the same age, but also more debt. Most of the large increase in assets between current retirees and the Baby Boom is due to increased ownership and equity in housing. Contributions to defined contribution pension plans play a role in explaining the modest increase in assets between the Baby Boom and Generation X, in part, because GAO's data do not allow it to consider the value of benefits from defined benefit pension plans. Workers from Generation X are estimated to have similar levels of retirement income in real terms (adjusted for inflation) at age 62 as their counterparts in the Baby Boom, but Generation X may be able to replace a smaller percentage of their pre-retirement income. Whether Social Security benefits for Generation X are higher or lower than those for the Baby Boom will depend on how the Social Security funding shortfall is resolved. With regard to pensions, Generation X and the Baby Boom are estimated to have similar levels of pension income even with a continued shift from defined benefit to defined contribution pension coverage. Retirement income will vary within both Generation X and the Baby Boom households, and certain groups will be more likely to have lower retirement incomes. As one might expect, given significant variation in workers' earnings, if households were arrayed from lowest to highest in terms of estimated total retirement income, those in the top 20 percent would receive a substantially larger proportion of income compared with those in the bottom 20 percent. Retirement income is lower for the less educated and single women.