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S. HRG. 112–582 

RETIREMENT (IN)SECURITY: EXAMINING THE 

RETIREMENT SAVINGS DEFICIT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC POLICY 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE CURRENT GAP BETWEEN WHAT AMERICANS WILL 

NEED FOR RETIREMENT AND WHAT THEY ARE ON TRACK TO SAVE, 

REVIEWING THE SIZE AND SCOPE OF THIS GAP AND HOW THE RECENT ECONOMIC CRISIS AND OTHER ECONOMIC FACTORS HAVE IMPACTED THIS DEFICIT AND AMERICANS’ RETIREMENT SAVINGS AND 

SECURITY 

MARCH 28, 2012 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON ECONOMIC POLICY

JON TESTER, Montana, Chairman 

DAVID VITTER, Louisiana, Ranking Republican Member 

MARK R. WARNER, Virginia 

KAY HAGAN, North Carolina 

TIM JOHNSON, South Dakota 

ROGER F. WICKER, Mississippi 

MIKE JOHANNS, Nebraska 

ALISON O’DONNELL, Subcommittee Staff Director 

TRAVIS JOHNSON, Republican Subcommittee Staff Director 

(II)
C O N T E N T S 

WEDNESDAY, MARCH 28, 2012 

Page 

Opening statement of Chairman Tester ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Vitter ................................................................................................... 2 

Senator Akaka .................................................................................................. 14 

WITNESSES 

Michael Calabrese, Senior Research Fellow, New America Foundation ............. 3 

Prepared statement .......................................................................................... 20 

Jack Vanderhei, Ph.D., Director of Research, Employee Benefit Research Institute .................................................................................................................... 5 

Prepared statement .......................................................................................... 32 

James G. Rickards, Senior Managing Director, Tangent Capital Partners, 

LLC ........................................................................................................................ 7 

Prepared statement .......................................................................................... 88 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Prepared statement submitted by the Financial Services Roundtable ............... 101 

Prepared statement submitted by the AARP ........................................................ 104 

Putnam Investments paper: ‘‘Resisting the policy threat to retirement savings’’ ....................................................................................................................... 119 

Prepared statement submitted by the American Council of Life Insurers ......... 127 

(III)

(1) 

RETIREMENT (IN)SECURITY: EXAMINING THE 

RETIREMENT SAVINGS DEFICIT 

WEDNESDAY, MARCH 28, 2012 

U.S. SENATE, 

SUBCOMMITTEE ON ECONOMIC POLICY, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee convened at 2:32 p.m., in room 538, Dirksen 

Senate Office Building, Hon. Jon Tester, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN JON TESTER 

Senator TESTER. I want to call to order this hearing of the Economic Policy Subcommittee, a hearing titled, ‘‘Retirement Security,’’ or maybe I should say ‘‘Insecurity: Examining the Retirement 

Savings Deficit.’’ 

I look forward to hearing from our witnesses this afternoon about 

the retirement savings deficit in America, that is, the shortfall between what Americans are saving for retirement and what they 

will need to live comfortably in retirement. 

The facts are a bit unsettling. The most often cited studies peg 

the size of this deficit in the trillions of dollars. Only 14 percent 

of the folks are confident that they will have enough money to live 

comfortably in retirement. The majority of working adults, more 

than 75 million workers, do not participate in any private retirement savings plan at all, and according to a recent report from one 

of our witnesses, the majority of American workers has not even 

tried to calculate how much they will need to save for retirement. 

For some time, trends have indicated that Americans have been 

saving less, participating less in retirement savings plans, and living longer. We cannot escape our demographics, and we know that 

the retirement of the Baby Boomers will place additional strains on 

Social Security and Medicare. 

But we find ourselves confronting an even greater retirement security challenge today. In 2008, the financial crisis, the economic 

meltdown that followed, and the decline in housing values have, 

not surprisingly, widened the retirement savings gap and aggravated many Americans’ sense of insecurity about retirement. Workers unable to find jobs due to the weak economy do not contribute 

to employer-provided retirement plans, reducing future retirement 

income and security. Market conditions not only impacted retirement assets and accumulation, but also hurt enrollment in retirement savings plans. And the bursting of the housing bubble effec-
2 

tively ended our ability to rely on the ever-increasing home values 

to provide retirement security. 

The implications of the economic crisis for workers are clear. 

Americans must work longer, save more, or spend less in retirement in order to retire with sufficient retirement savings. 

We spend an awful lot of time here in the Senate focused on how 

to reduce our deficit and strengthen Social Security and Medicare, 

but the bottom line is that regardless of any potential changes to 

these programs, Americans are simply not saving enough for retirement. 

Since 2008, we have taken steps to improve the economy and restore confidence in capital markets, but we still have work to do 

to address this retirement savings challenge. And before that savings deficit grows much further, we have an opportune moment to 

take a closer look at this issue. We will examine the retirement 

savings gap, its nature and scope, and what the major trends are. 

We will consider the impact of the economic crisis on workers’ savings and security and what the economic impact is of the growing 

retirement savings gap on capital and labor markets. And we will 

see how workers have responded and what that means about what 

we can expect as the Baby Boomer generation heads into retirement and better understand what some of the more effective and 

efficient strategies are to encourage greater retirement savings so 

that workers can confidently take retirement planning into their 

own hands. 

It is a complicated issue, but today’s hearing really gives us a 

chance to look more closely at a critical issue of retirement savings 

and security in hopes that we can all come away with a keener 

sense of the scope, scale of the problem, and come to grips with it. 

With that, I turn it over to my friend, Senator Vitter, for his 

opening statement. 

STATEMENT OF SENATOR DAVID VITTER 

Senator VITTER. Thank you, Senator Tester, for calling this hearing. It certainly is a very, very important topic. And welcome and 

thanks to all of our witnesses. I look forward to mostly listening 

and I appreciate you all being here and offering your thoughts. 

This is a very serious concern and a very serious challenge and 

I would invite you all to offer your thoughts on as wide a range 

of helpful areas as possible, certainly including the following. I am 

concerned, along with others, that one real and significant impact 

of the Fed’s prolonged zero interest rate policy is a real hit on retirees and others who depend on that sort of investment and interest 

income, if you all could comment on that. 

Certainly, any thoughts you have on Social Security reform. We 

need Social Security reform, first of all, to ensure the continued viability and solvency of the system, but I also think we need expanded flexibility and some new models and new options to offer 

folks who are in their working years now to build toward retirement. 

And finally, tax policy and what we can do in the tax area. Some 

obvious examples, like increasing IRA limits, but there are other 

things, as well, and I would invite any ideas you have in that area. 
3 

And with that, I will be all ears and look forward to your comments. Thank you. 

Senator TESTER. Thank you, Senator Vitter. 

I would like to welcome our witnesses, a distinguished panel of 

scholar and experts on retirement issues, and I want to thank you 

for your willingness to testify this afternoon. 

First, Mr. Calabrese is a Senior Research Fellow affiliated with 

the asset-building program at the New America Foundation located 

right here in Washington, D.C. Previously, Mr. Calabrese served as 

General Counsel of the Congressional Joint Economic Committee, 

Director of the Domestic Policy Programs at the Center for National Policy, and as a pension employee benefits counsel at the national AFL–CIO. Welcome, Mr. Calabrese. 

Next, we have Dr. VanDerhei, who is a Research Director of the 

Employee Benefit Research Institute, EBRI, a Washington-based 

private, nonprofit organization conducting 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. Welcome, Mr. VanDerhei. 

And last but certainly not least, we have Mr. Rickards, and he 

is the Senior Managing Director of Tangent Capital Partners, an 

investment bank based in New York specializing in alternative 

asset management solutions. He is a counselor, economist, and investment advisor with 35 years of experience with several firms, 

including Citibank, RBS, Long-Term Capital Management, and 

Caxton Associates, and I want to welcome you, Mr. Rickards. 

Each witness will have 5 minutes for oral statements and their 

written testimony will be made a part of the record in its complete. 

So with that, Mr. Calabrese, would you please get us started. 

STATEMENT OF MICHAEL CALABRESE, SENIOR RESEARCH 

FELLOW, NEW AMERICA FOUNDATION 

Mr. CALABRESE. OK. Good afternoon. Thank you, Mr. Chairman 

and Senator Vitter, for this opportunity to testify. It is great to see 

that this Subcommittee is taking up this important topic. 

There is no question that a widening retirement savings gap is 

creating widespread insecurity. Most individuals are simply not 

saving enough over their working life to supplement the meager 

benefits that they will receive from Social Security. 

One barometer, the National Retirement Risk Index, indicates 

that a majority, 51 percent, of working-age households are at risk 

of not having enough retirement income to maintain their pre-retirement level of consumption. Most worrisome are adults over 45. 

The index shows 41 percent of early Boomers and 48 percent of late 

Boomers are at risk. 

These shortfalls represent the cumulative trillions that the 

Chairman mentioned. They estimated a couple of years ago a $6.6 

trillion retirement income deficit, which is according to the Center 

for Retirement Research, which created the index. This $6.6 trillion 

is roughly $22,000 per capita and represents the present value of 

the saving and investment shortfall needed to ensure, on average, 

retirement security for every American. 
4 

What accounts for this enormous savings gap? I believe America’s real retirement security crisis is not Social Security solvency 

or the many big firms terminating or freezing their traditional pension plans. The larger problem is that a majority of working adults 

do not participate in any retirement saving plan, whether a traditional pension, 401(k), or IRA. Participation in employer-sponsored 

plans peaked in the late 1970s and appears to be at its lowest level 

in more than 30 years. Employer-sponsored plans cover fewer than 

half of all private sector workers, leaving a projected majority of 

Boomers possibly more dependent on Social Security than their 

parents’ generation is today. 

Coverage and participation rates are also strikingly lower among 

workers who are low-income, young, work part-time, or work at 

small firms. The result of excluding half the Nation from automatic 

workplace saving is that nearly two-thirds of those 65 and older 

rely on Social Security for a majority of their income and 40 percent rely on Social Security for 90 percent or more of their income, 

a dependency ratio that is even greater for widows. 

Not surprisingly, the lowest earning 40 percent of working adults 

are accumulating very little in the way of financial assets. Elderly 

and the lowest-income quintile receive, on average, only about 5 

percent of their income from either pension or assets. And because 

retirees with low career earnings receive minimal Social Security 

benefits, about a third of the elderly on Social Security fall below 

the individual poverty line. 

So how are America’s seniors coping with this savings deficit? 

For those 65 and older, rising income from remaining in or reentering the workforce is replacing steadily declining income from 

nonpension assets. Since the mid-1980s, the share of income for 

Americans 65 and older coming from wages has doubled, while the 

share from asset income has plummeted to about 12 percent, the 

lowest level in half a century. 

This trend toward more wage income for seniors seems to confirm opinion surveys showing that a steadily growing portion of the 

workforce will at least try to continue to work at least part-time 

beyond normal retirement age. And while working past age 65 or 

70 may not seem so bad to us, according to a McKinsey study, in 

2007, nearly half of all Boomers were working in physically demanding jobs, including 18 percent in construction and production 

jobs, and another 14 percent in physically demanding service sector 

jobs, such as police, fire, and food production. Only 21 percent of 

Boomers are professionals. 

While remaining employed will help compensate for rising disparity in ownership of income-producing assets, it will also impact 

labor markets by potentially reducing the availability of work opportunity and rising real wages for younger workers. 

The single most important thing policymakers can do to narrow 

this retirement savings gap is facilitate access to automated payroll 

deduction savings plans accessible to all. The fact that so few workers save regularly in IRAs reinforces what demonstration projects 

in asset building among low-income families have found, that it is 

not primarily access to savings accounts that spur participation, 

but what I call the four ‘‘I’’s: Inclusion, incentives, infrastructure, 

and inertia. 
5 

So I will just wrap up by explaining what I mean by this. By inclusion, I mean eligibility and design criteria that allow every 

working adult not currently able to participate in a qualified employer plan to contribute. We need stronger tax incentives for saving that are more targeted toward lower-income earners who find 

it most difficult to save and whose savings actually add to net national saving. We need an account-based infrastructure that enables every worker to save by automated payroll deduction and facilitates career-long account portability. And finally, we need default options that convert myopia into positive inertia through 

automatic enrollment and payroll deduction, automatic escalation, 

automatic asset allocation, automatic rollovers, and automatic 

annuitization. 

At the end of my testimony, I also mention some other options 

for encouraging saving across the lifetime, such as children’s savings accounts, but I will stop there. Thank you. 

Senator TESTER. Thank you, Mr. Calabrese. 

Dr. VanDerhei. 

STATEMENT OF JACK VANDERHEI, PH.D., DIRECTOR OF 

RESEARCH, EMPLOYEE BENEFIT RESEARCH INSTITUTE 

Mr. VANDERHEI. Mr. Chairman, Mr. Ranking Member, Members 

of the Subcommittee, I am Jack VanDerhei, Research Director of 

the Employee Benefit Research Institute. EBRI is a nonpartisan institute that has been conducting original research on retirement 

and health benefits for the past 34 years. EBRI does not take policy positions and does not lobby. 

My testimony today will focus on the size of Americans’ retirement saving gap, the extent to which its deficit has been impacted 

by economic conditions over the past several years, and the most 

effective strategies to encourage and facilitate greater savings for 

retirement. The testimony draws on extensive research conducted 

by EBRI on these topics over the past 13 years with its Retirement 

Security Projection Model as well as annual analysis of behavior of 

tens of millions of individual participants from tens of thousands 

of 401(k) plans dating back in some cases as far as 1996. 

Measuring retirement income adequacy is an extremely important and complex topic, and EBRI started to provide this type of 

measurement in the late 1990s. Figure 1 of my written testimony 

shows that when we modeled the Baby Boomers and Gen Xers earlier this year, 43 to 44 percent of the households were projected to 

be at risk of not having adequate retirement income for even basic 

retirement expenses plus uninsured health care costs. Even though 

this number is quite large, the good news is that it is five to 8 percentage points lower than what we found in 2003. It would be my 

pleasure to explain in more detail later why American households 

are better off today than they were 9 years ago, even after the financial and real estate market crises in 2008 and 2009. 

Who is most at risk? Figure 2 in my testimony shows that, not 

surprisingly, lower-income households are much more likely to be 

at risk for insufficient retirement income. The 2012 baseline at-risk 

ratings for early Boomers range from 87 percent for the lowest-income households to only 13 percent for the highest-income households. 
6 

Figure 4 shows the conditional average retirement income deficits by age, family status, and gender for Baby Boomers and Gen 

Xers. The average individual conditional deficit number ranges 

from approximately $70,000 for families to $95,000 for single females and $105,000 for single females. In aggregate terms, that 

would be $4.3 trillion for all Baby Boomers and Gen Xers in 2012. 

Last year, EBRI published a report analyzing the percentage of 

U.S. households who became at risk of insufficient retirement income as a result of the financial market and real estate market crisis in 2008 and 2009. As one would expect, the answer to this question depends to a large extent on the size of the account balance 

the household had in defined contribution plans and/or IRAs as 

well as their relative exposure to fluctuations in the housing market. The resulting percentages of households that would not have 

been at risk without the 2008–2009 crisis that ended up at risk 

varies from a low of 3.8 percent to a high of 14.3 percent. 

It is difficult to imagine any voluntary strategy more effective at 

dealing with retirement income security than increasing the likelihood of eligibility in a qualified retirement plan. Figure 8 of my 

written testimony shows the importance of defined benefit plans for 

retirement income adequacy, and Figure 9 shows a similar analysis 

for 401(k) plans. We see that the number of future years the workers are eligible for participation in a defined contribution plan 

makes a tremendous difference in their at-risk ratings, even after 

adjusting for the worker’s income quartile. When the results for 

Gen Xers were aggregated across all income categories, those with 

no future years of eligibility are simulated to run short of money 

61 percent of the time, whereas those with 20 or more years of future eligibility would only experience this situation 18 percent of 

the time. 

EBRI research has shown repeatedly the traditional type of 

401(k) plan under current tax incentives has the potential to generate a sum that, when combined with Social Security benefits, 

would replace a sizable portion of the employee’s pre-retirement income for those with continuous coverage. Our research has also 

shown that the automatic enrollment type of 401(k) plan, when 

combined with automatic escalation provisions, appears to have the 

potential to produce even larger retirement accumulations for most 

of those covered by such plans. 

Recently, however, there have been proposals to modify the existing tax incentives for defined contribution plans by either capping 

the annual contributions or changing the before-tax nature of employee and employer contributions in exchange for a Governmentmatching contribution. In September of 2011, the Senate Finance 

Committee held a hearing that focused to a large extent on the second type of proposal. EBRI presented preliminary evidence at that 

time of the possible impact of such a proposal on future 401(k) accumulations. 

In recent months, results from two surveys have allowed EBRI 

to more precisely model these effects in view of a specific proposal, 

and last week, we published our new results showing the average 

percentage reductions in 401(k) account balances at retirement age 

due to expected modifications of plan sponsors and participants in 

response to this proposal. Figure 17 in my written testimony shows 
7 

a 22 percent reduction in 401(k) balances at retirement for those 

currently 26 to 35 in the lowest-income quartile, and those are the 

ones who are most at risk for insufficient retirement income. 

The results are even more dramatic for small plans. Figure 18 

in my testimony shows the average reduction for the lowest-income 

quartile in the two smallest plan size categories are 36 and 40 percent. 

In conclusion, given that the financial fate of future generations 

of retirees appears to be so strongly tied to whether they are eligible to participate in employer-sponsored retirement plans, the logic 

of modifying either completely or marginally the incentive structure of employees and/or employers for defined contributions plans 

at this time needs to be thoroughly examined. The potential increase of at-risk percentages resulting from either employer modifications to existing plans or a substantial portion of low-income 

households decreasing or eliminating future contributions to savings plans needs to be analyzed carefully when considering the 

overall impact of such proposals. 

Thank you, and I look forward to your questions. 

Senator TESTER. Thank you, Dr. VanDerhei. 

Mr. Rickards. 

STATEMENT OF JAMES G. RICKARDS, SENIOR MANAGING 

DIRECTOR, TANGENT CAPITAL PARTNERS, LLC 

Mr. RICKARDS. Mr. Chairman and Mr. Ranking Member and 

Members of the Subcommittee, thank you for inviting me to testify 

today, and I appreciate this opportunity to speak to you on a subject of the utmost importance to the U.S. economy. 

A significant portion of income security for retirees comes from 

earnings on savings. While savings themselves are important, it is 

the earnings on the savings compounded over decades that makes 

the difference between a comfortable retirement and barely getting 

by. Since retirees properly favor safe investments, such as certificates of deposit and money market funds, over risky investments, 

such as stocks, it follows that Federal Reserve interest rate policy 

is a key determinant of the adequacy of retirement income security. 

The Federal Reserve lowered interest rates to zero in December 

2008 and rates have remained at that level ever since. The Fed has 

declared an intention to keep short-term interest rates near zero 

through late 2014. Keeping rates near zero for 6 years is unprecedented. It should come as no surprise that an unprecedented policy 

should have unprecedented results. 

There is evidence that the Fed’s policy is leaving the U.S. economy worse off when compared to a more normalized interest rate 

regime. Some of these deleterious effects on retirement income security include the following. 

The zero rate policy represents a wealth transfer from retirees 

and savers to banks and leveraged investors. The zero rate policy 

deprives retirees of income and depletes their net worth through 

inflation. This lost purchasing power exceeds $400 billion per year 

and cumulatively exceeds $1 trillion since 2007. 

The zero rate policy is designed to inject inflation into the U.S. 

economy. However, it signals the opposite. It signals the Fed’s fear 
8 

of deflation. Americans understand this signal and hoard savings, 

even at painfully low rates. 

The Fed’s zero rate policy is designed to keep nominal interest 

rates below inflation, a condition called ‘‘negative real rates.’’ This 

is intended to cause lending and spending, as the real cost of borrowing is negative. For savers, the opposite is true. When real returns are negative, the value of savings erodes. This is a non legislated tax on savers. The Fed’s policy says to savers, in effect, if you 

want a positive return, invest in stocks. This gun to the head of 

savers ignores the relative riskiness of stocks versus bank accounts. Stocks are volatile, subject to crashes, and not right for 

many retirees. To the extent many are forced to invest in stocks, 

a new bubble is being created. 

Solutions are straightforward. The Fed should raise interest 

rates immediately by one-half of 1 percent and signal that other 

rate increases will be coming. The Treasury should signal that they 

support the Fed’s move and support a strong dollar, as well. The 

Fed and Treasury should commit to facilitate the conversion of savings into private sector investment by closing or breaking up toobig-to-fail banks. This will facilitate the creation of clean new 

banks capable of making commercial loans to small businesses and 

entrepreneurs. 

The result over time would be to replace a consumption and 

debt-driven economy with an investment-driven economy that rewards prudence and protects the real value of the hard-earned assets of retirees. It is false to suppose that monetary policy is a 

choice between encouraging savings, which reduces aggregate demand, and discouraging savings to increase aggregate demand. In 

a well-functioning banking system, savings can be a source of real 

returns for savers and a source of aggregate demand through investment. 

As late as the 1980s, money-center banks operating through syndicates made 7-year commercial loans to finance massive private 

sector investments in projects like the Alaska pipeline, new fleets 

of Boeing 747 aircraft, and other critical infrastructure. These 

projects were financed with the savings of everyday Americans, including retirees. Savers received a positive return on their money. 

Today, the United States does not have a well functioning banking system because of regulatory failures by the Fed. The conveyor 

belt between savings and investment provided by the banks is broken. With the repeal of Glass-Steagall in 1999 and derivatives regulation in 2000, the door was opened to break down traditional 

lending functions and allow banks to become leverage machines for 

securitization and proprietary trading. Securitization breaks the 

bond between lender and borrower because the bank cares only 

about selling the loans, not collecting on them at maturity. This destroys the incentive to allocate capital to the most productive longterm uses. Productive private sector investment and capital formation have been the victims. 

It is not too late to turn back from the Fed’s inflationary policies 

and restore the link between savings and investment. The path to 

improved income security for retirees consists of raising interest 

rates in stages to provide positive real returns to savers, breaking 
9 

up too-big-to-fail banks that pose systemic risk, offering real price 

stability. Two percent inflation is not benign, it is cancerous. 

The United States is mired in a swamp of seemingly unpayable 

debt. In these circumstances, there are only three ways out: Default, inflation, and growth. The first is unthinkable. The second is 

the current path that the Fed is pursuing in stealth. The third is 

the traditional path of the American people. Growth does not begin 

with consumption. It begins with investment. 

America’s retirees are ready, willing, and able to provide the savings needed to fuel investment and growth. All they ask in return 

is stable money, positive returns, and a friendly investment climate. The Fed’s policy of money printing and negative returns is 

anathema to investment and growth. Until the Fed’s war on savers 

is ended, income security for retirees will be an illusion. 

Thank you for this opportunity to testify and I look forward to 

any questions. 

Senator TESTER. Well, thank you, Mr. Rickards. I thank you and 

thank all of the panelists for their testimony and insights. It is 

very much appreciated. 

I would ask the Clerk to put 7 minutes on the clock, if you might. 

I think we will have enough time to get through most all the questions that folks have. 

I am going to start with a 30,000-foot perspective of the problem 

of retirement security and it goes to all of you, to help us get a 

broad picture of the savings deficit. Clearly, one of the biggest challenges is the fact that so many Americans are not asking themselves the question about how much am I going to need when I get 

to retirement. And they may not be asking other questions along 

with that as they go forth. And so ignorance may be bliss, but I 

doubt it. How can we get Americans to start asking themselves the 

question about retirement savings and how much are they going to 

need for the future, and we will start with you, Mr. Calabrese. 

Mr. CALABRESE. Well, of course, education—— 

Senator TESTER. I need you to turn your microphone on. Thank 

you. 

Mr. CALABRESE. OK. It is. One thing, and I am sure Dr. 

VanDerhei will speak more about it, there has been an effort in the 

private sector to do an education campaign, which I think has been 

very useful, but, of course, it is not reaching far enough, obviously. 

The better way would be to start in the schools, that really, we 

should find a way, and I do not know exactly how to do this, given 

the local character of education, whether there is some sort of Federal impetus for this or not, but we should really be building these 

days into middle and high school education some sort of financial 

literacy because there have been recent surveys done that show 

that the majority of American adults do not comprehend compound 

interest at all, cannot even calculate interest in many respects. 

And so people just need to really understand these concepts better, and this is a much different world now than, say, 50 years ago, 

where you really do need to understand some of these things as a 

basic, you know, just to get by in life. And so I think building that 

financial literacy into a high school education would be a really important first step, in addition to the things that Jack had mentioned that the private sector is doing. 
10 

Senator TESTER. Dr. VanDerhei. 

Mr. VANDERHEI. Well, I certainly agree with that. I do think it 

is very important, though, that the kind of information that people 

who have to make those decisions today—while I completely agree 

that for people still in the educational modality, they should get 

that type of training, but we have a situation today where only 42 

percent of individuals that we have surveyed virtually every year 

for the past 20 have even attempted to make a guess at what they 

need for retirement. 

This is becoming a very difficult type of assessment for many individuals as you realize. When people primarily had defined benefit 

plans and Social Security, it was relatively easy to figure out 

whether or not they were on track. Today, as more and more of 

them are going to defined contribution, they are ending up with a 

lump sum account balance and many of them have great difficulties trying to make the calculation of what would that lump sum 

buy me in terms of monthly income when I hit retirement age. 

There are several proposals available as far as how one could go 

about doing that, but until we get to the point where, indeed, the 

vast majority of individuals do have that financial literacy, I think 

it is incumbent upon employers, providers, people in the public policy research section to try to come up with relatively easy to operate Web sites that could very quickly let somebody know whether 

or not they are on track, if they are not on track, how much more 

do they need to start saving each year, and let them do the ‘‘what 

if’’ scenarios between should I push back retirement age, should I 

increase my contribution today. Get something that is easy for people to understand so they will actually go and use it and start asking more questions. 

Senator TESTER. OK. Mr. Rickards. 

Mr. RICKARDS. Senator, the fellow panelists have mentioned various measures to encourage savings and design features to do that, 

such as automatic enrollment, and I applaud that. But your question, which is very straightforward, how much am I going to need, 

there are tried and true methods for calculating that. You go to 

your financial advisor. They say, how old are you? They come up 

with some life expectancy. They make some assumptions about returns, et cetera, and they can tell you how much you need to save 

to reach those goals. 

The problem is, most of those assumptions are extremely flimsy, 

and to illustrate that point, imagine we are back in 1999 and asking your question, Senator, and someone who put their money in 

stocks and a 401(k) plan, and let us say someone else, not as financially literate, bought gold. The person who bought gold made 700 

percent. The person who bought stocks made zero. Now, I am not 

projecting that into the future. I just put that point out there to 

illustrate that it is all in the assumptions, and until we have stable 

money and better Fed policy, I do not see how any investor can answer the question intelligently because we do not know what the 

dollars are going to be worth. 

Senator TESTER. Good point. I just want to follow up just a little 

bit. You said that the models are out there, and this can apply to 

all of you because you know I am a farmer in my real life and I 

am not sure I would know how to determine how much money I 
11 

am going to need when I retire, to be honest with you. Living in 

Big Sandy, Montana, is a whole heck of a lot different than living 

in Washington, D.C. And the costs it would cost me to live there 

and Washington, D.C., are different. 

Are there actually models out there that if somebody was just 

out of college, and assuming they are going to live in the same 

area—which is a tough assumption right out of the shoot—that 

could tell you what is going to happen, because there are so many 

varying factors out there. There is inflation. There is energy prices. 

I mean, my goodness, there is just variance after variance and how 

can you predict somebody who is 21-years old, what they are going 

to need when they are 45 years down the road? Do you have any 

insight into that? 

Mr. RICKARDS. The short answer is you cannot predict exactly, 

Senator, but you can engage in portfolio construction, pick assets, 

and diversify the assets in such a way that over long periods of 

time, they tend to track or perform well relative to various outcomes, some stocks, some bonds, some precious metals, some hard 

assets, et cetera. So you do not know the answer, but you try to prepare for all weather, so to speak. 

Senator TESTER. Got you. All right. Would anybody else like to— 

Dr. VanDerhei. 

Mr. VANDERHEI. Senator, I certainly agree with that. The important point, though, is you do not want to bury the individual in so 

much uncertainty that they are frozen from doing anything in the 

first place. 

Senator TESTER. Right. 

Mr. VANDERHEI. You want to get them into a situation where 

they start contributing, and hopefully as they get further down the 

process, get a much more accurate assessment of where they need 

to be. 

Senator TESTER. OK. 

Mr. CALABRESE. I would just say that what may be most important is if we could get this sort of automatic savings system, you 

know, if everybody had an automatic enrollment into a payroll deducted saving plan with the right defaults, because if your employer and the Government are saying—because they are defaulting you, they are saying, now, here is what you should be doing. 

So even if you are 23, they are starting you at 6 percent of your 

pay and escalating you, say, to 10 percent, well, that is giving you 

an idea that, yes, that is what the experts think you should be 

doing. And you may not know whether your income is going to double or triple over the next 30 or 40 years. You may not know where 

you are going to end up living. But if you can hit that benchmark 

which you ought to be defaulted into, you will be in pretty good 

shape. 

The other thing which I should have mentioned earlier is another 

good starting point would be to reinstate the annual statement 

from Social Security, because we used to at least see, you know, get 

the thing in the mail each year, which we are not. And what would 

be a nice thing is if they could begin sending that either in addition 

or alternatively by email, they could include links to things like the 

Choose to Save retirement calculator that EBRI sponsors, because 
12 

then you could actually connect people directly to these engines 

where they can begin doing these calculations. 

Senator TESTER. Very good. Thank you. 

Senator Vitter. 

Senator VITTER. Thank you, Mr. Chairman, and thank you all 

again. 

Is it clear that this problem is worsening long term when you 

factor out the recent recession and the current really sort economy? 

I assume that is an immediate factor. But to talk about long-term 

trends, you sort of have to back that out. So is it clear once you 

back that out that the problem is getting worse? 

Mr. VANDERHEI. If I could, we did our first national assessment 

back in 2003 and updated it in 2010 and found actually a significant reduction in the percentage of households who were at risk, 

even though we had just gone through the 2008–2009 financial 

market crisis. The number one reason for that, and I realize this 

is something one needs to think about for a second, is that what 

group is most at risk? It is the low income. 

There was something very, very valuable that happened between 

2003 and 2010 and that was the Pension Protection Act in 2006. 

What it did was make automatic enrollment types of 401(k) plans 

much more popular for plan sponsors to adopt. And if you go back 

and look at the participation rates for the low-income individuals, 

again, the ones most at risk, you find situations where they virtually double, from being in the 40 percent range to the high-80 or 

low-90 percent range. What that one factor alone has done in projecting out future retirement income for the low-income has been 

absolutely phenomenal. 

So if you go back pre-PPA, pre-2006, you have seen a marked improvement because of what the employers have done to help the 

low-income. But I will agree, if you go back and look just at the 

2008 and 2009 years by themselves, certainly, the financial market 

and the real estate market crises have anywhere from 3 to 14 percentage points increased those that are considered to be at risk. 

Going forward is actually dependent almost more than anything 

else on what happens with respect to uninsured health care in retirement. Nursing home costs, as I am sure you are aware, are a 

very, very large exposure. Families that get to retirement age with 

what seems to be an appropriate amount of financial resources, 

after one or two spells of expanded times in an expensive nursing 

home can very easily chew through those amounts. 

Senator VITTER. Quickly, because I do not want to use up all my 

time, do you all have any other responses to my first question? 

Mr. CALABRESE. Yes. Just to back up what Jack said is that the 

biggest change in participation in an employer plan over the past 

30 years has simply been—you can see it almost percent by percent, is the shift from defined benefit to defined contribution, right, 

from traditional pension to 401(k), because what has happened is 

that although the overall participation rate at about 50 percent has 

been relatively level, the participation rate among the lowest third 

by income has fallen by about ten to 12 percentage points, and that 

is because when employers had traditional plans, they automatically put everybody into it and saved on their behalf. Now, you 
13 

need to choose to save, and so the lower-wage workers are not 

doing that as much and that is really hurting the overall picture. 

Senator VITTER. OK. 

Mr. RICKARDS. And I would say Dr. VanDerhei’s projections are 

certainly correct about the benefits of automatic enrollment. It increased participation, increased savings. I take far less comfort 

than he from how that will play out, because it all depends on longterm growth assumptions. Your savings do not do you any good if 

you are not going to get returns, and in sort of a hostile business 

environment, there is no reason to expect the future returns will 

match the past, and I think the 12-year stretch in the stock market 

from 1999 to 2011 bears that out. 

Senator VITTER. OK. That sort of goes to my next question for 

Mr. Calabrese and Dr. VanDerhei. Have you done any calculation 

or do you have any comments about the impact of the Fed’s zero 

interest rate policy, which is unprecedented, certainly, in terms of 

its longevity, on this problem? 

Mr. VANDERHEI. Actually, right after we did our 2010 study, the 

Wall Street Journal called me up and asked me almost specifically 

the same question. Our baseline rate of return numbers were relatively high in a nominal sense compared to what you have today, 

8.9 percent for equities and 6.3 percent for fixed income on a 

stochastic basis. The Wall Street Journal asked if we could lower 

that to a nominal 6 percent for equities and 2.4 percent for fixed 

income. 

At that time, our at-risk percentages were 47 percent. Putting in 

this new low interest rate scenario that they wanted modeled increased the percentage of early Boomers from 47 percent all the 

way up to a situation where 59 percent of them would be at risk. 

So there would be a very large increase in those households that 

we would consider to be at risk because of that particular policy. 

Senator VITTER. So that, you could say from that rough calculation, has roughly grown the problem 25 percent? 

Mr. VANDERHEI. Correct. 

Senator VITTER. OK. Mr. Calabrese, do you have any comment? 

Mr. CALABRESE. Yes. I have no independent data on that. I 

would just note that, of course, a low interest rate policy would 

have a very differential effect depending on whether you are already retired or saving, particularly the older workers shifting assets into fixed income, because folks who are already retired, of 

course, have benefited from a bull market in bonds. But those who 

are shifting assets and new saving into fixed income, of course, are 

feeling that pinch. 

Senator VITTER. OK. And probably the final question, this help, 

this improvement in terms of the changes that were made that encouraged a lot more automatic enrollment, what does that suggest 

about a logical next step to reasonably encourage even more automatic enrollment or similar gains in participation? What policy 

would reasonably be the next step? 

Mr. VANDERHEI. It may be that you are in a period now where 

employers are still sorting out from a cost-benefit standpoint 

whether or not they want to go with automatic enrollment. The one 

thing you have to remember is that although the good news is you 

increase participation rates, the downside for employers is if you 
14 

have a matching contribution, that means it is going to cost them 

more. And I think there are a lot of employers who are still waiting 

to see, perhaps looking at their competitors, perhaps looking at 

what these participants actually end up doing, whether they think 

automatic enrollment is correct for them from a business standpoint. 

Mr. RICKARDS. Senator, I would add, when you say automatic enrollment, my question would be, enrollment into what? I applaud 

automatic enrollment and the incentive to save, but if you are just 

going—and plan sponsors are extremely reluctant to offer any alternatives or any investments other than traditional stock/bond 

portfolios, and if those are going to be—if we are in the middle of 

another stock bubble, and my view is we are, that is another disappointment for investors. So unless there are some other things 

they can invest in, prudently managed, but precious metals, pools 

of hedge funds, things that are a little nontraditional, then they 

could just be setting up for another fall. All that savings and all 

that wealth could be wiped out in a stock market crash. 

Senator VITTER. Thank you. 

Senator TESTER. Thank you, Senator Vitter. 

Senator Akaka. 

STATEMENT OF SENATOR DANIEL K. AKAKA 

Senator AKAKA. Thank you very much, Mr. Chairman, for holding this hearing. I would like to say aloha and welcome our witnesses to the hearing today. 

As defined benefit pensions become less common and many families have little retirement savings, I am very concerned that many 

senior citizens will face financial insecurity as they age. 

The current retirement system, signed by President Reagan in 

1986, has served as a model for modern pensions, combining a 

small defined benefit, a 401(k)-style plan with matching contributions, and Social Security. Since that time, private sector pension 

participation has fallen dramatically. In my view, Congress must 

focus on addressing the nationwide retirement savings gap, shoring 

up systems that provide some guaranteed benefit to workers, and 

promoting individual savings. 

As a longtime advocate for enhancing our Nation’s financial literacy, I believe it is critical to ensure that people have the knowledge and support to effectively save for retirement. We must work 

with employers and the financial industry to educate employees 

and also to make it easier for the average American to save for his 

or her retirement. 

This question is for Mr. Calabrese and Dr. VanDerhei. It is often 

a challenge to encourage employee participation in any retirement 

savings plan, especially for younger and lower-income employees. 

In 2009, Congress passed legislation to automatically enroll Federal employees in the Thrift Savings Plan unless they opt out. You 

both mentioned automatic enrollment in your testimony. I would 

like to hear more about how automatic enrollment helps individuals save for retirement. 

Mr. CALABRESE. OK. Well—— 

Senator AKAKA. Mr. Calabrese. 
15 

Mr. CALABRESE. Right. I will start, and I know that Jack will be 

able to give an update on the data since they run a database of 

401(k) plans that keeps track. But the most recent data I had seen 

was that of the roughly 45 percent of 401(k) plans that use automatic enrollment, they were seeing an improvement of about 30 

percentage points in the overall participation rate. And of course 

when you are picking up people, you are picking up disproportionately the middle to lower range because the affluent have a very 

high participation rate to begin with. So it is very, very helpful. 

There is a bit of a controversy, though, about the initial contribution rate, where it should be set, because about—the Wall Street 

Journal, for example, I think about a year ago had basically criticized the fact that the initial contribution rates for the majority of 

plans were set at 3 percent, and this was encouraged, in effect, by 

the Pension Protection Act, which in allowing this while giving a 

safe harbor cited 2 to 4 percent as the range. And so, really, we 

would agree with the Journal that 6 percent as an initial default 

contribution is much better, because actually, at 3 percent, a majority of workers, even if they are consistently saving, would not 

reach even 80 percent of their target for retirement income adequacy. 

Senator AKAKA. Dr. VanDerhei. 

Mr. VANDERHEI. Well, I certainly agree with most of that. We 

have seen a tremendous increase in the overall projected accumulations for 401(k) balances when they move from the old style voluntary system to the automatic enrollment. 

I think the other question one wants to focus on is basically if 

you do start them at those relatively low default contribution rates, 

is there another procedure, such as automatic escalation, that is 

going to be valuable in getting people back to where they need to 

be long-term. There is, unfortunately, as mentioned, the upside 

that the participation rates especially among the low-income and 

the young increase substantially, but because of inertia, which 

works to the benefit of many employees—because once you put 

somebody in they are very unlikely to opt out—once you put somebody in at a particular contribution rate, they are also very unlikely to move from that on their own. And you have had this anchoring effect, and, in fact, many individuals on the upper income 

side would have been contributing at a higher rate had they voluntarily made that election as opposed to the automatic election. 

But in terms of what is going on in the private sector among 

large sponsors, we now find 58 percent of large 401(k) sponsors 

have now moved to automatic enrollment and the other nice advantage about automatic enrollment in many cases is you get around 

the problem of allowing participants to necessarily direct their own 

investments. You find a substantial proportion of young individuals 

who will not put anything in equities. You find a substantial portion of the older people who have very, very high equity allocations. 

And you find still today, even after Enron, some people who will 

basically have almost all of their portfolios in company stock. 

The reason automatic enrollment has worked so well, in addition 

to defaulting them in and defaulting their contribution, you also in 

most cases default them into usually a target date fund which is 

professionally managed and will have an age-appropriate asset al-
16 

location, and as the markets fluctuate, put them back to where at 

least professionals think the correct asset allocation should be. 

Senator AKAKA. Thank you very much for your responses. Thank 

you, Mr. Chairman. 

Senator AKAKA. Thank you, Senator Akaka. 

This is a question for Mr. Calabrese. Your testimony highlights 

what the challenges are facing employees that work for small businesses. They may not have the staff, the resources, the time to 

craft, manage retirement plans for their workers like the larger 

companies do. Montana being a small business State, 75 percent of 

our workers work for companies that have less than 100 employees 

and many of those need to take retirement into their own hands. 

The question is for you, and the other two can respond if they 

would like. How are small business employees and proprietors saving for retirement, or are they just simply not doing it? 

Mr. CALABRESE. Yes. So, currently, the GAO had identified the 

categories of workers that are participating at very low rates, and 

in addition to the very young, very low income is people who work 

at small business. So a majority of small firms are not sponsoring 

these qualified retirement plans, and that is the reason that, you 

know, we have been suggesting that the automatic IRA concept is 

a very good one, because particular if you—you could exempt businesses that have fewer than, say, five or ten employees, but certainly anybody bigger than that, almost—more than 90 percent are 

using payroll services, for example. And we found that there are 

empty fields. They do paycheck deposit automatically, and it is just 

as easy to automate at marginal cost a saving into an automatic 

IRA without having to go jump through any of the regulatory 

hoops. You do the sponsor, an actual qualified plan. 

Senator TESTER. So, and maybe I do not understand the automatic enrollment. I assume what you just said was automatic enrollment would happen for businesses over five or ten employees. 

The question I have, I guess, revolves around if there is extra 

money laying around, it usually goes to health care in a business, 

to try to provide them with that benefit. Would this have—look, we 

have got two problems here, and they may be like this. The automatic enrollment and the opportunity for increasing savings from 

retirement, all three of you said will work, assuming that the investment is put in the right spot. I guess the question is, has anybody done any analysis to see if this would have a negative or positive impact on a job market with it being another benefit? I hate 

to play the devil’s advocate, but—— 

Mr. CALABRESE. Right. Right. Oh, sure. Well, it would depend 

what you require. The automatic IRA concept actually does not require employers to make any contribution. 

Senator TESTER. OK. 

Mr. CALABRESE. So there would really be no cost to them, and, 

in fact, the bipartisan bills that have been put in typically provide 

a small tax credit even to cover the payroll accounting expense—— 

Senator TESTER. Got you. 

Mr. CALABRESE.——to the extent that there is one. And, in fact, 

some proponents of the automatic IRA would preclude employer 

contributions, although we think that employers should at least 

have the option to contribute. 
17 

Senator TESTER. Absolutely. OK. 

I guess if you were going to—and you may repeat yourself on 

this, and that is fine—give me the top one or three things that you 

would do if you were sitting in my chair to help solve this problem, 

what would they be, and we will just go down the line. You first, 

Mr. Calabrese. 

Mr. CALABRESE. OK. Well, the first, and this may not, unfortunately, not be squarely under your jurisdiction, is this notion of a 

universal automatic payroll deposit saving program that is accessible to every American worker. So, in other words, if your employer—you could exempt employers who are eligible, actually eligible to participate. So, for example, they have worked the year at 

a firm that sponsors a qualified plan, like a 401(k). But everyone 

else should be able to get into one of these portable career accounts, the automatic IRA idea. 

Second, I mentioned children’s savings accounts. I think if we 

start—and that would speak toward the literacy issue, as well. 

New America had a proposal which has been introduced as bipartisan legislation over the years, the ASPIRE Act for children’s savings accounts. It starts them off with a $500 contribution. Ideally, 

you would have some tax incentives for families to contribute with 

the idea that that could grow by age 18 to really help pay for at 

least a State-level college education or to invest in a first home or 

to seed retirement saving. 

And then the third thing is I think we need more initiatives to 

help bank the unbanked. So there was the proposal—there have actually been trials that began out in San Francisco, Bank on USA, 

for example, which the Treasury Department—the Obama administration had proposed to fund for a larger demonstration project. I 

do not believe that has happened yet. But that sort of thing is good 

to get people into the system. 

Senator TESTER. OK. Dr. VanDerhei. 

Mr. VANDERHEI. Well, I will give you three suggestions in no 

particular order. The first two deal with automatic enrollment, and 

almost by historical accident, we have ended up where we are 

today with respect to default contribution rates with automatic escalation being around 3 percent. If there was something the Government could do to help employers understand that going above 

3 percent not only is more likely to help employees reach their 

goals, but is going to be sort of a safe harbor in terms of plan design, I think that would be ideal. 

Another thing is with respect to automatic escalation. We did not 

really get a chance to go into that, but if you start people at a relatively low three or 6 percent and then put them in a program 

where automatically their contribution rates go up 1 percent per 

year until a specific level unless they opt out. Unfortunately, under 

today’s safe harbors, the maximum you can allow that to go to 

automatically is 10 percent. I would dare say most financial professionals would say 10 percent from the employees plus perhaps a 3- 

percent match from the employer still is not going to be sufficient, 

especially in the low rate of return environment. And if you could 

allow those automatic escalation programs to continue beyond 10 

percent, I think that would be great. 
18 

Third, risk management techniques at retirement. Again, I think 

so many individuals just use sort of a 50–50 chance of I will be OK 

if I have X dollars when I hit age 65. You have got longevity risk 

and you have got catastrophic health care risk that needs to be 

dealt with. There are many, many reasons, some legitimate and 

some perhaps not, that employers do not want to become involved 

in helping employees with the longevity risk. If you could have situations in which, for example, annuities or longevity insurance 

could be provided through the plan and employers would feel safe 

doing that, I think you would reach a situation where people have 

a much better cap on what they would need in terms of a prolonged 

lifespan. 

Senator TESTER. OK. Mr. Rickards. 

Mr. RICKARDS. Senator, I have three suggestions. The first, simply call upon the Fed to give us sound money, and the importance 

of that is money is how we count and make all these other decisions. We have heard talk today about target date funds, portfolio 

diversification, et cetera, and these all involve price signals and 

those price signals go into these complicated calculations. But without sound money, the price signal, the input and the output is all 

meaningless. So I would start there. 

The second is a broader set of investment options. I certainly applaud automatic enrollment and things we have heard about today, 

but we need to get beyond traditional stocks and bonds because 

they are vulnerable to these bubble environments, and the way you 

prevent that is with some other hedges, such as precious metals, 

alternatives, real estate, perhaps. 

And the third, I agree with my co-panelists, financial literacy is 

critical. I have enormous confidence in the ability of the American 

people to make smart decisions about their own money, but financial expertise is no different than any other expertise. You need 

some training and some familiarity with it. 

Senator TESTER. Well, I want to thank you. Actually, we are 

going into another area that is something that I, quite frankly, 

think about personally, and that is the impact on my inability to 

save enough money is going to impact me working longer, which 

is going to impact the job market, which is going to—when I sell 

off what investments I have, what impact is that going to have on 

the investment markets, and the list goes on and on and on. And 

if I am in that boat, there are probably a lot of other folks that are 

in that boat, too. 

I just want to thank you all for your testimony today. I very 

much appreciate you coming in and giving us your insights and 

your perspectives about retirement savings and security issues facing this country. I think the picture is clear from each one of you. 

It is concerning in each different area, and unquestionably, I think, 

much needs to be done to communicate facts and data that you 

folks have provided here today, along to those preparing for retirement, and I hope this hearing will raise an awareness of this challenge and facilitate education to improve this Nation’s retirement 

preparedness, confidence, and security. There are bills out there 

that I am hopeful will surface to the top and get written up that 

we can flesh out and really address some of these issues. 
19 

And so I look forward to working with you all in the future to 

discuss some of these issues and hopefully do some things that will 

be good to help move the country forward as far as it goes through 

retirement security. 

The hearing record will remain open for 7 days for any additional 

comments and for any questions that might be submitted for the 

record. 

Once again, thank you all for being here. This hearing is adjourned. 

[Whereupon, at 3:34 p.m., the hearing was adjourned.] 

[Prepared statements and additional material supplied for the 

record follow:] 
20 

Testimony of 

Michael Calabrese 

Senior Research Fellow, Asset Building Program 

New America Foundation 

Before the 

Economic Policy Subcommittee 

Committee on Banking. Housing and Urban Affairs 

United States Senate 

Retirement (In)security: Examining the Retirement Savings Deficit 

March 28, 2012 

Thank you, Mr. Chairman and members of the Committee, for this opportunity to testify today. 

I am a Senior Research Fellow at the New America FOWldation, a nonpartisan policy institute 

here in Washington. New America's Asset Building Program develops and incubates innovative 

policy proposals to enable low- and middle-income families in the U.S. and aroWld the world to 

accumulate savings, access financial services, develop financial capability, and build and protect 

productive assets across the life course. 

There is no question that a widening retirement savings gap, exacerbated by rising longevity and 

health care costs, is creating widespread insecurity. Most individuals are simply not saving 

enough over their working life to supplement the meager benefits they will receive from Social 

Security. America's real retirement security crisis is not Social Security solvency or the many 

big firms freezing or terminating their traditional pension plans. The larger problem is that the· 

majority of American adults do not participate in any retirement saving plan-whether pension 

or 40 1 (k) or Individual Retirement AccoWlt (IRA). Participation in employer-sponsored plans 

peaked in the late 1970s and appears to be at its lowest level in more than 30 years. Employersponsored plans cover fewer than half of all private sector workers, leaving a projected majority 

of baby boomers and Generation Xers even more dependent on Social Security than their 

parents' generation is today. Coverage and participation rates are strikingly lower among 

workers who are low-income, yOWlg, work part-time, or work at small firms. 

Although the focus today is saving for retirement, it's important as well for policymakers to view 

this deficit as the culmination of a generalized savings gap. Individuals and families have 

multiple savings needs that become more or less salient at different stages of life. Establishing a 

saving habit, regardless of purpose, increases economic security in the near term and better 

positions an individual or couple to achieve a secure retirement decades down the road. 

Research and demonstration projects have shown that even those with very low incomes have 

been able to save when given access to meaningful savings incentives and institutional support 

structures. This insight means that policies that facilitate saving and asset building from 

childhood through retirement can pay large social and economic dividends. At the end of this 

testimony I mention a number of policy innovations that speak to this broader context. 
21 

The Retirement Saving Deficit 

The result of excluding half the nation from an automatic, managed and subsidized private 

saving plan is that too many individuals and families are headed toward retirement age with little 

more than Social Security's safety net. Today nearly two-thirds of beneficiaries rely on Social 

Security for a majority of their income. More troubling is that more than one-third of 

beneficiaries (36%) rely on Social Security for 90 percent or more of their income-a 

dependency ratio that is even greater for widows (46%). I This reliance on Social Security has 

increased in recent years and is likely to increase further as fewer and fewer retirees receive 

traditional pension income. The Center for Retirement Research estimates that the replacement 

rate of pre-retirement income levels is between 20 and 30 percent lower, respectively, among 

retired couples and single people who do not have pension income2 

For those 65 and older, rising income from continuing to work is replacing steadily declining 

income from non-pension assets. As the chart just below indicates, since the mid-1980s the 

share of income for Americans 65 and older coming from wages has doubled (rising steadily to 

30%) while the share from asset income has plummeted from more than 25 percent to about 12 

percent, the lowest level in half a century. Meanwhile, the share of income from pensions and 

Social Security has been relatively flat over the past decade. 

Shares of aggregate income, by source, for economic units age 65 and older (SSA) 

Percent 50r--------------------------------------------------------------, 

45r-------------------------------------------------------------~ 

35~----~~~--------------------------------------------------~ 

30~~~~------------~~--------------------_=~~ 

25~----------~~~------~~----~~ __ r_------------~~~--------~ 

10~ --------------------------------------------------------~ 

5r-----~~ I Other (includi~~~~~~~~~~~~~ ng o~ ______ ~ __ Sh_p~U_b_li si nce~) ____________________________________________ -" 

62 67 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 

Year 

This seems to confirm what some recent opinion surveys have shown, which is that a steadily 

growing portion of the workforce will continue to work at least part-time well beyond the 

"normal" retirement age of 65 or even 67 (as it phases in for Social Security). While remaining 

employed will help compensate for a rising disparity in the ownership of income-producing 

2 
22 

assets (outside of retirement accounts), it will also impact labor markets by potentially reducing 

the availability of work, opportunity and rising real wage levels for younger workers. 

Not surprisingly, the lowest-earning 40 percent of working adults are accumulating very little in 

the way of financial assets. Elderly in the lowest income quintile receive on average only about 

5 percent of their income from either pension or asset income. And because retirees with low 

career earnings, or substantial time out of the work force, receive minimal Social Security 

benefits, the Urban Institute estimates that about 36 percent of the elderly received benefits in 

2009 that fell below the individual poverty line3 Among those over 65 in the top 20 percent by 

income, earnings provide the largest (and growing) source of income (45%), while income from 

pensions and other assets is about 35 percent. 

Shares of aggregate income for lowest antI highest income quintiles by source, 2010 (SSA) 

_ Social Security D Asset income _ Cash putjic assistance 

_ Pensions D Earnings D Other 

19.1% 

Lowest quintile Highest quintile 

Of course, the problem of a widening retirement saving deficit is not limited to relatively lowwage earners ending up overly dependent on Social Security and Medicare to make ends meet 

once they stop working. The National Retirement Risk Index (NRRI) indicates that a majority 

(51 percent) of working-age households are "at risk" of not having enough retirement income to 

maintain their pre-retirement level of consumption. Based on a 2009 update of the Federal 

Reserve's most recent triennial Survey of Consumer Finances, the NRRI measures the 

percentage of working-age households that are at risk of being unable to maintain their preretirement standard of living. The most recent NRRI suggests a worsening trend, with 41 

percent of Early Boomers, 48 percent of Late Boomers, and 56 percent ofGen Xers "at risk" of 

not saving enough to maintain their standard ofliving in retirement 4 These "at risk" estimates 

rise if health care cost inflation is factored in. 

3 
23 

These shortfalls represent a cumulative $6.6 trillion "retirement income deficit" according to the 

Center for Retirement Research, which created the NRRl.5 This $6.6 trillion (roughly $22,000 

per capita) represents the present value of the saving and investment shortfall needed to ensure, 

on average, retirement security for every American. When the Center adjusted the Fed's 

household financial survey data in late 2009 to account for the economic downturn, it found that 

the overall share of households "at risk" had jumped 7 percentage points since 2007, to 51 

percent. This reflected the impact of declining home equity values due to the bursting of the 

housing bubble, the stock market crash, and the ongoing rise in Social Security's full retirement 

age (as the new age 67 threshold phases in). 

The Retirement Readiness Rating, calculated by the Employee Benefit Research Institute, 

similarly estimates that nearly one-half of Early Boomers (47.2 percent) and 44.5 percent of Gen 

Xers are on track to retire without sufficient income to pay for both "basic" cost of living 

expenses and uninsured health care costs.6 

While there is a range of views about what income replacement rates are "adequate" and how 

precisely to measure the nation's retirement saving gap, there is no question that tens of millions 

of working-age adults, including one-third or more of those over age 50, are not accumulating 

nearly enough financial assets to maintain their standard of living while compensating as well for 

the likelihood of a longer life span and far higher out-of-pocket medical costs than current or ' 

previous generations of retirees. 

Limitations of the Current Employer-Based System 

Quite simply, pensions are how Americans save. With over $16 trillion in assets, traditional 

pension trusts and 401 (k)-style saving plans account for the vast majority of financial assets 

accumulated by households as well as a vital source of patient capital for American business. 

For workers with access to either a DB or DC plan, America's employer-based private pension 

system provides powerful saving incentives-both tax breaks and employer contributions-as 

well as the convenience and discipline of automatic payroll deduction. 

The transformation of the American private pension system over the past 25 years from 

traditional, employer-paid defined benefit plans (DBs) to predominantly voluntary, contributory 

plans has widened the nation's retirement saving deficit. As we've turned into more of a do-ityourself 40 1 (k) nation, several flaws in the employer-based system have been exacerbated. One 

is inclusion. Employer-sponsored plans cover fewer than half of all private sector workers, 

leaving more than 75 million workers-including a disproportionate share oflow-income, parttime, small business and minority employees, as well as the self-employed-without an easy, 

automatic, incentivized and professionally-managed infrastructure to facilitate saving throughout 

a career. 

Only 43.2 percent of all private-sector workers age 25-to-64 participated in an employersponsored retirement plan in 2008, a striking decline from the 50.3 percent participation rate in 

2000.7 Only 55.4 percent of workers in their prime saving years (age 45 to 64) participate in a 

retirement plan. The percentage of private sector workers whose employer even sponsors a plan 

(whether or not they are eligible or participate) fell to 53.2 percent in 2008. One result is that 

4 
24 

roughly one-third of all households accumulate no pension plan saving during their entire work 

life and end up relying almost exclusively on Social Security.s 

While participation is somewhat higher among full-time workers (51 percent), participation rates 

are also strikingly lower among workers who are low-income, young, work part-time, or work at 

small firms. Approximately 85 percent of Americans without a pension benefit at work shared 

one or more of these four characteristics, according to a General Accounting Office study. 

Minorities also participate at substantially lower rates, primarily because they are less likely to 

work at a firm that sponsors a pension or 401 (k)-type plan.9 While 56.6 percent of whites 

employed full-time and year-round participated in employer-sponsored plans in 2008, black and 

Hispanic workers participated at rates 10 and 26 percentage points lower, respectively. IO 

Not surprisingly, pension coverage is lowest among workers whose savings would truly add 

to net national saving: workers who earn less than the median wage. Even if a lower-wage 

worker is inclined to save, fewer than 40 percent of private sector workers in the bottom income 

quartile work for a firm that sponsors a retirement plan, while 72 percent of top quartile earners 

work at firms offering qualified plan coverage, typically a 401 (k) with employer matching 

contributions. I I 

Pension Participation Rate for Private Sector Male Workers Age 25-64 

at Employers with Pensions, by Earnings Tercile, 1979-2008 

100% ,---------------------------------

- -----,:=-----------==----- 80% 1-

40% +---------------------~--~up-~~rt~er~c~ile 

--Middletercile 

20% +-------------L ..... Lowertercile 

{:b" {:b<' {:bOJ ~"J _C'\'O ,,<l! ,,<l! ,,<l! r6l '),'V 

Year 

Source: Karamcheva and Sanzenqacher. calculations from 1980-2008 CPS. 

A second, related problem is the lack of pension portability. Labor market mobility is increasing 

and job tenure is steadily decreasing. The typical worker will change jobs seven or more times 

after age 25 and, even if they are fortunate enough to have pension coverage in every job, will 

face eight or more years of ineligibility for automatic saving and the incentive of matching 

deposits. Meanwhile, at least one in four U.S. workers are in non-standard work arrangements 

(part-time, temporary and contract workers) that rarely include pension coverage. While a "free 

5 
25 

agent" workforce may be good for productivity and flexibility, it makes the current payroll-based 

pension system increasingly inadequate. 

This lack of a system to facilitate seamless coverage contributes to low participation rates and 

accumulations. Even if a worker has coverage today, he or she may not have access to a plan 

next year in a new job. And even if the worker's new employer sponsors a plan, new hires are 

not eligible to participate for at least one year. The result is gaps in coverage. And although a 

long-tenured worker in a traditional pension plan will vest in monthly income for life (or a lump 

sum), those who terminate in less than five years can end up with no retirement accumulation at 

all for that period. 

A third fundamental flaw in the current system is tax incentives that are not targeted on the 

public policy goal of promoting retirement saving at the margin - and, in particular, on nudging 

the middle-to-Iow-income earners who have the greatest difficulty sacrificing current income for 

saving. A tax deduction for saving will typically contribute $35 in federal expense for every 

$100 saved by a top-bracket eamer - and no subsidy at all for most of the lowest-earning 40 

percent who would be more powerfully motivated by a matching tax credit deposited directly 

into their account (which would also serve to build their asset accumulation and not simply 

reduce their tax bill). While the affluent can respond to tax incentives for saving by shifting 

rather than actually increasing their net saving effort, households that would not otherwise save 

generate net new national saving. 

A final set of challenges relate to income adequacy and longevity. Even among those workers 

who are currently participating in a 401(k) or other defined contribution plans, saving is not 

continuous enough, accumulations are not large enough, and lump-sum withdrawals in 

retirement are often depleted too quickly, exacerbating the risk of outliving assets. Even an 

essentially voluntary saving system like the Auto-IRA needs to design in a set of "nudges" 

strong enough to push the typical middle- to lower-income worker toward a higher contribution 

rate (6 to 12 percent or more), reinforced by the incentive of additional matching contributions 

(from both tax credits and employer contributions), and converted as a default into a secure 

stream of income for life. 

We might at least expect the workers lucky enough to participate in 401 (k)-type plans to be 

accumulating significant savings. Among the subset of high-tax-bracket earners with steady 

access to a 401(k), this is the case. However, in general workers approaching retirement age are 

not accumulating enough saving to generate adequate income throughout retirement. According 

to a Congressional Research Service analysis of the Fed's most recent Survey of Consumer 

Finance, the median value in 2007 of all retirement accounts owned by households headed by 

persons 55 to 64 was $100,000. For a 65-year-old man, $100,000 would be sufficient to purchase 

a level, single-life armuity paying out $700 per month for life (based on interest rates in 2009). 

Because women have longer average life expectancies, a 65-year-old woman could generate 

armuity income of only $650 per month. 12 

Not surprisingly, 40 I (k) participation and accumulation rates in the bottom three quintiles of the 

earning distribution are far lower. Even among longer-tenured 401(k) participants in their 50s 

6 
26 

and 60s who are earning between $40,000 and $60,000 the median account balance was just over 

$81,000 in 2009, according to the EBRI/ICI 401(k) database. J3 

Another reason that participation rates have declined, particularly among lower-income earners, 

is the simple fact that 401(k) plans are voluntary and typically require workers to make 

investment decisions they may feel unprepared to make. Unlike traditional DB pensions, with 

401 (k)-type plans individuals must choose to save. Unfortunately, the incentives are often not 

nearly compelling enough, particularly for low-income workers who, unlike high-income 

earners, receive little if any tax subsidy for saving. As a result, the shift from DB pensions -

which automatically enroll and contribute on behalf of all workers - to 401 (k)-type plans 

coincided with a sharp decline in pension participation among the lower-income workers and 

lower future accumulations. One recent study showed that although access to an employer plan 

has remained roughly the same since 1979, the participation rate among the lowest-earning third 

of workers has declined far more than among middle- or upper-income earners (see chart below). 

The trend toward automatic enrollment and default investment options in 401(k) plans, 

encouraged by the Pension Protection Act of 2006, is already showing progress in reversing this 

trend, especially among the middle-third of workers as ranked by income. However, even if 

middle- to lower-income workers who are currently eligible for a 401(k) in their current job 

participate, they are far less likely than high earners to have the consistent, career-long access to 

a good pension or 401(k). And since President Bush signed the Pension Protection Act of2006, 

little progress has been made in narrowing the nation's retirement saving deficit. 

Toward a More Inclusive and Seamless Retirement Saving System 

Every working American needs access to both a potent tax incentive to save and the 

infrastructure of automatic payroll deduction into a portable, professionally-managed account 

whether or not his current employer sponsors a retirement plan. The fact that so few workers 

save regularly in IRAs reinforces what demonstration projects in asset-building among lowincome families have found: it is not primarily access to a savings account that spurs 

participation, but the four "I's" -Inclusion, Incentives, Infrastructure, and Inertia. 

• Eligibility and design criteria that emphasizes inclusion, both permitting and encouraging 

every working adult not currently able to participate in a qualified employer-sponsored 

plan to contribute to their "career account" by payroll deduction, bank debit, tax refund 

designation, or other means. 

• A tax incentive for saving that is more inclusive-and targeted toward lower-income 

earners who find it most difficult to save-by expanding the Savers Credit, making it 

refundable and a more generous match for low-wage workers, and depositing it directly 

into the individual's account. 

• An account-based infrastructure that enables every worker to save by automatic payroll 

deduction and facilitates career-long portability through a central and low-cost default 

account and clearinghouse function. 

7 
27 

• Default options that convert myopia into positive inertia, through automatic enrollment 

and payroll deduction, automatic escalation, automatic asset allocation, automatic 

rollover, and automatic annuitization. 

The most promising legislative proposal to facilitate a universal saving system is the Automatic 

IRA, which would require employers that do not sponsor a qualified retirement plan to 

automatically enroll most of their employees in a payroll-deposit IRA account. Variations of this 

proposal have been discussed since 199914 and previously introduced in the House and Senate on 

a bipartisan basis. IS Although the Auto-IRA could be implemented without a change in tax 

incentives, a matching credit for initial saving by middle-to-Iow income workers could give 

nearly all Americans a saving vehicle as easy and appealing as a good 401(k) account is today. 

For example, in his 2008 campaign President Obama proposed expanding the existing Savers 

Credit "to match 50% of the first $1,000 of savings for families that earn under $75,000" and to 

make the credit refundable so that lower-income workers without income tax liability to offset 

could still receive a tax break for voluntary saving in any qualified retirement account. 16 

Despite the current fiscal squeeze, now is precisely the wrong time to back away from proposals 

to make our retirement saving system dramatically more inclusive and effective at stimulating 

substantial new saving that will spur growth and reduce dependency longer term. To 

meaningfully address our retirement security crisis, the Auto-IRA should be implemented as a 

more truly UniversaI401(k) system, with full access, robust incentives, a workable 

infrastructure, employer contributions, and an effective set of default features capable of 

maximizing savings behavior. 

Five policy design features would effectively transform the Auto-IRA into a more universal 

401(k) include: 

)- A refundable Savers Credit as a matching contribution deposited directly into the 

worker's account. The match rate should be higher for those less likely and able to 

save-and apply to at least the first $2,000 of savings each year. 

)- Every worker not currently eligible to save in a qualified plan should be included for 

automatic enrollment and mandatory payroll deduction by employers, or assisted in 

making deposits directly in the case of the self-employed and others without access to 

payroll withholding. 

)- A low-cost clearinghouse enabling career-long portability should be the default option 

available to every participant-and include special arrangements for the self-employed 

and others not eligible at work. Individuals should be able to choose to use a particular 

IRA provider, or to roll out balances later, but not the employer on their behalf. 

)- Employers should be able to contribute on a non-discriminatory basis (flat dollar or flat 

percentage amount for every eligible worker). Contribution limits should be higher than 

IRA limits, which are too low for middle-income earners to achieve an adequate 

replacement of pre-retirement earnings. 

8 
28 

}> Five defaultfeatures--enrollment, escalation, investment, rollovers, annuitizationneed to be required and robust, not left to the discretion of employers or financial 

providers. 

Under a universal saving plan with these key attributes, all workers not participating in an 

employer plan, including recent hires, part-time employees, and temporary and other contingent 

workers, would be automatically enrolled and contribute by payroll deduction, although an 

individual could opt out and choose not to save. The governrnent would match voluntary 

contributions by workers and their employers with refundable tax credits deposited directly into 

the worker's account. Workers participating in their employer's 401(k) or other qualified plan 

would receive stronger tax incentives to save, but otherwise see no difference. Contributions for 

workers not participating in an employer plan would be forwarded to a federally-chartered 

clearinghouse, which would manage small accounts at low cost and could even convert account 

balances into guaranteed income for life at retirement. 

A Wider View: Lifelong Saving and Asset Building 

The retirement savings deficit is not the only savings deficit that the American people face. 

Individuals and families have multiple savings needs that become salient at different stages of 

life. A policy agenda aimed at narrowing the retirement savings deficit will be most effective if 

it is informed by this reality. For young adults, the motivation to save for the purchase of a 

home, or for a child's higher education, or to insure against a future loss of income, may be far 

greater than for retirement. Indeed, these needs may actively prevent some individuals from 

committing to retirement savings. Establishing a saving habit, regardless of purpose, increases 

economic security in the near term and better positions that individual or couple to achieve a 

secure retirement decades down the road. Accordingly, a range of policy supports designed to 

target those who find it most challenging to save and invest is required. 

The retirement savings gap is the culmination of a generalized savings gap, a problem 

compounded by a lack of access to high-quality financial services. Research and demonstration 

projects in recent years have shown that even those with low incomes have been able to save 

when given access to meaningful savings incentives and institutional support structures. This 

insight means that policies that facilitate saving and asset building from childhood through 

retirement can pay large social and economic dividends. 

Expanding savings and asset ownership is especially consequential for families with lower 

incomes and limited resources. This is because the path toward upward economic mobility and 

stability is usually paved with assets that smooth income fluctuations or seed investments that 

payoff down the line. Research has shown that higher personal saving promotes the upward 

mobility of both individuals over their own lifetime as well as their children. For example, 71 

percent of children born to high-saving, low-income parents move up from the bottom income 

quartile over a generation, compared to only 50 percent of children from comparably low-income 

but low-saving households. 

In contrast, a lack of savings contributes to asset poverty, higher consumer debt levels and higher 

bankruptcy rates, all of which have negative ramifications both in the short run and for the odds 

9 
29 

of ending up with adequate saving in retirement. Asset-poor families are also far more likely to 

experience other economically disruptive events including divorce, involuntary job loss and 

health-related work limitations. 

Over the past decade New America's Assets Building Program has developed, tested and 

advocated a series of innovative policy initiatives and changes aimed at encouraging savings and 

asset ownerShip, opportunities for people who have limited resources at their disposal. While our 

Assets Agenda 7 describes a wider range of new federal policy proposals, as well as private 

sector financial innovations and efforts, I will touch on just a few in this testimony. 

Promote Savings Accounts from Birth and Childhood 

One very promising way to encourage savings is to begin the process early in life with children's 

savings accounts (CSAs). This approach can provide both widespread exposure to the savings 

process and a platform for future savings over the life course. 18 The key goal is the development 

of a savings habit - and to nudge young families toward internalizing a culture of savings. 

Recent research and successful demonstration projects suggest that children's savings accounts 

would increase a sense of financial inclusion; promote financial literacy and fiscal prudence; 

protect against economic shocks; improve access to education; improve health and education 

outcomes; contribute to the development of a "future orientation"; and, over the long term, 

improve livelihoods. Specific legislative and other policy initiatives promoting this goal include: 

The ASPIRE Act: The America Saving for Personal Investment, Retirement, and Education Act 

(ASPIRE Act) proposes a system ofnniversal children's savings accounts. Under the act, which 

was first introduced in 2005 with bipartisan support, the federal government would provide every 

child with an account at birth-a Lifetime Savings Account-endowed with $500 and backed by 

progressive, targeted incentives. Funds would be held in default investment plans, but account 

holders would have the option to roll out their resources to other account providers. At age 18, 

account holders could use accumulated funds to pay for college, buy a home, or build up a nest 

egg for retirement. 

PLUS Accounts: Children's accounts can also be linked explicitly to savings for retirement. 

The government could open a Portable, Lifelong and Universal Savings (PLUS) Account for 

every newborn at local financial institutions. These accounts would be endowed with a onetime 

deposit of$I,OOO and withdrawals limited to promoting retirement security. PLUS Accounts 

could be established for all working citizens under the age of 65, with a mandatory I percent of a 

worker's pretax paychecks withheld and automatically deposited into his or her account. In 

addition, workers would be allowed to voluntarily contribute up to 10 percent of their pretax 

income. Senator Jeff Sessions (R-AL) supported this idea in a Washington Post op-ed in 2006. 

Young Savers Accounts: Presently, there are no age restrictions on owning a Roth IRA, but 

since only individuals with earned income are eligible, most children are unable to take 

advantage of this tax-advantaged savings vehicle. Young Savers Accounts (YSAs) would create 

a "Kid's Roth"-a place for children's savings with favorable tax treatment. Like Roth lRAs, 

YSAs would permit penalty-free withdrawals for postsecondary education and the purchase of a 

first home. Contribution limits would be based on parents' eamed income, but contributions 

10 
30 

could be made by children, parents, grandparents, and others. Contributions to a child's YSA 

would count toward the parent's annual limit for Roth lRAs (now $5,000 for those 

aged 49 and under), so no new tax shelter has to be created. Contributions made by low-income 

families would qualify for the Saver's Credit and deposited directly into the account. Legislation 

proposing a very similar "401 Kids Savings Account" was introduced in the 111 th Congress 

(H.R. 30) and co-sponsored by 17 Republican representatives. 

Expanding Access to Quality Financial Services 

One reason the sort of automatic workplace saving system described above is needed is the lack 

of financial literacy and even of basic access to quality financial services among a substantial 

share of the population. An estimated 7.7 percent of the U.S. population, or 9.9 million 

households, lack a checking or savings account with an insured, mainstream financial institution. 

Nearly one of every five households eaming less than $25,000 a year is unbanked, and 70 

percent of the unbanked population makes less than $30,000 annually. 19 

A growing number of households are also considered to be under-banked. These households 

report having at least a basic bank account, but also rely on alternative financial services, such as 

a payday lender, check-casher, or car title loan, at least once within the past year. An estimated 

50 million consumers are considered under-banked. This sector's services typically charge high 

interest rates and upfront fees, and do not offer tools or opportunities to save or build wealth. 

Some recent pilot projects suggest promising alternatives to conquer this basic lack of access to 

mainstream and cost-effective financial services. One promising strategy is to create access 

points where individuals already spend time and transact business. This is the key focus of the 

AutoSave pilot, a workplace-focused effort to connect employees with savings accounts and 

direct deposit transactions dedicated to those accounts. While 401 (k)s are restricted, long-term 

and single purpose, AutoSave is aimed at initially promoting precautionary, uurestricted saving 

among individuals with very limited liquid assets. Just like the Auto-IRA, the AutoSave pilot 

uses principles grounded in behavioral economics (automation, ease of access, default options) to 

encourage and sustain saving among less experienced consumers.20 

Another promising approach is "Bank on USA," which began as a pilot project in San Francisco 

that brought together multiple stakeholders to try to remove barriers to bank account ownership 

and connect the unbanked with a financial institution. The program was a major success and has 

spawned similar efforts across the country. The Obama administration proposed creating a $50 

million "Bank On USA" grants program administered through the Treasury Department to 

promote this approach and related initiatives on a national level. 

Thank you for this opportunity to testify today and for the Committee's interest in this critical 

national issue. 

I Social Security Administration, Income of the Aged Chartbook, 2010 (released March, 2012). 

2 Alicia Munnell and Mauricio Soto, "How Much Pre-Retirement Income Does Social Security Replace?" Center for 

Retirement Research, Issue in Brief No. 35 (2005). 

11 
31 

'Melissa M. Favreault, "Why Do Some Workers Have Low Social Security Benefits?" The Urban Institute (2010); 

see also Melissa M. Favreault, "Workers with Low Social Security Benefits: Implications for Reform," The Urban 

Institute, Retirement Policy Program, Brief Series No. 29 (2010). 

4 Alicia Munnell, Anthony Webb and Francesca Golub-Sass, "The National Retirement Risk Index: After the 

Crash," Center for Retirement Research at Boston College, Issue In Brief9-22 (Oct. 2009), available at 

http://crr.bc.edulspecialprojects/nationalretirementriskindex.html. 

S See "The Retirement Income Deficit," Retirement USA, as calculated by Center for Retirement Research, available 

at htm:llwww.retirement-usa.orglretirement-income-deficit-O. 

6 Jack VanDerhei, "A Post-Crisis Assessment of Retirement Income Adequacy for Baby Boomers and Oen Xers," 

Employee Benefits Research Institute, Issue Brief No. 354 (Feb. 2011). 

7 Patrick Purcell, "Pension Sponsorship and Participation: Summary of Recent Trends," Congressional Research 

Service (Sept. 2009). CRS estimates are based on the U.S. Census Bureau's Current Population Survey (CPS). The 

2008 levels are also substantially lower than the late I 970s peak in private sector pension coverage; in 1979, 51 

percent of wage and salary workers age 25-64 participated. See Alicia Munnell and Laura Quinby, "Pension 

Coverage and Retirement Security," Center for Retirement Research, Issue in Brief No. 9-26 (Dec. 2009). 

8 Alicia Munnell and Laura Quinby, "Pension Coverage and Retirement Security," Center for Retirement Research, 

Issue in Brief No. 9-26 (Nov. 2009). 

9 See Alicia Munnell and Christopher Sullivan, "40 I (k) Plans and Race," Center for Retirement Research, Issue in 

Brief No. 9-24 (Nov. 2009). 

10 Ibid,atp.11. 

" Id, at p. 13. CPS data show that 73 percent of private sector workers in the highest earning quartile worked for an 

employer sponsoring a qualified plan, compared to only 59 percent among third quartile earners and 38 percent 

among workers in the lowest earning quartile. 

12 Patrick Purcell, Congressional Research Service, "Retirement Savings and Household Wealth in 2007," Report for 

Congress 7-5700 (April 8, 2009). 

13 Jack VanDerhei, Sarah Holden and Luis Alonso, "401(k) Plan Asset Allocation, Account Balances, and Loan 

Activity in 2009," Employee Benefits Research Institute, Issue Brief No. 350 (Nov. 2010), at pp. 20-21. 

14 In testimony to the House Education and Labor Committee in September, 2000, the author proposed requiring 

firms with more than 25 employees to offer "payroll deduction IRAs" to all "employees at firms without pension 

coverage who only have recourse to IRAs, " as well as to require "automatic plan enrollment" in 40 I (k)-type plans. 

Michael Calabrese, "How to Improve Pension Coverage for American Workers," Testimony before the 

Subcommittee on Employer-Employee Relations, House Committee on Education and the Workforce (September 

14,2000); see also Michael Calabrese, "Individual Career Accounts: Universal 40 I (k)s," Pension Rights Center, 

Proposal Summary presented at Conversation on Coverage conference (July I, 200 I). 

The Automatic IRA that is the focus of this paper, with an emphasis on default features such as automatic 

enrollment and investment, was developed by Mark Iwry, a former Brookings Institution scholar (currently at 

Treasury Department) and David John of the Heritage Foundation. See, e.g., Mark Iwry and David John, "Pursuing 

Universal Retirement Security through Automatic IRAs," Brookings Institution, Retirement Security Project Paper 

2007-2 (2007). 

IS 15 Bipartisan legislation based on the Iwry/John proposal- The Automatic IRA Act of 2007 - was introduced in 

the Senate (S. 1141) by Sens. Jeff Bingaman and Gordon Smith, and in the House (H.R. 2167) by Reps. Richard 

Neal and Phil English. The most recent Senate version of the bill was introduced in September 2011 by Senator 

Bingaman (D-NM) without a GOP co-sponsor. 

16 "Barack Obama's Plan to Strengthen Retirement Security," Obama for America, 20 08 campaign fact sheet. See 

also "Blueprint for Change: Barack Obama's Plan for America, Obama for America (2008), at 17, available at 

http://www.miafscme.orglPDF%20Files/ObamaBlueprintForChange.pdf. 

17 Reid Cramer, et aI., The Assets Agenda 2011: Policy Options to Promote Savings and Asset Development, The 

New America Foundation (20 I 0), available at 

http://assets.newamerica.netisites/newamerica.netifilesipolicydocsl Assets Agenda 20 II.pdf . 

18 See Reid Cramer and David Newville, "Children's Savings Accounts," New America Foundation (Dec. 2009); 

William Elliott III, "Why Policymakers Should Care About Children's Savings," New America Foundation and 

Center for Social Development (Jan. 2012). 

19 The Assets Agenda 2011, at 15. 

20 Ibid, at 14. 

12 
32 

T-171 

Senate Committee on Banking, Housing & Urban Affairs 

SUBCOMMITTEE ON ECONOMIC POLICY 

Hearing on: 

"Retirement (In)security: Examining the Retirement Savings Deficit" 

March 28, 2010 

538 Dirksen Senate Office Building 

Testimony by 

Jack VanDerhei, Ph.D. 

Research Director 

Employee Benefit Research Institute (EBRI) 

www.ebri.org 

e rl.Org 

mployee Benefit . 

The views expressed in this statement are solely those of Jack VanDerhei and should not be attributed to the 

Employee Benefit Research Institute (EBRI). the EBRI Education and Research Fund, any of its programs, officers, 

trustees, sponsors, or other staff. The Employee Benefit Research Institute is a nonprofit, nonpartisan, education and 

research organization established in Washington, DC, in 1978. EBRI does not take policy positions, nor does it lobby, 

advocate specific policy recommendations, or receive federal funding. 

EBRI 1100 13!fi St. NW #800 Washington, DC 20005 (202) 659-0670 www.ebrl.ofg 
33 

Retirement (In)security: Examining the 

Retirement Savings Deficit 

Jack VanDerhei, Research Director, Employee Benefit Research Institute 

Contents 

1 Introduction .......................................................................................................................................... 2 

2 What is the size of Americans' retirement savings gap? ...................................................................... 2 

2.1 How can this gap be best measured· are there specific metrics that should be considered? .... 2 

2.2 00 individuals understand how to calculate how much they will need for retirement? ............. 3 

3 To what extent has this deficit been impacted by economic conditions over the past several years?4 

3.1 Impact ofthe financial and housing market crisis in 2008 and 2009 on retirement readiness ... 4 

3.2 What factors in the decades prior to the crisis contributed most to retirement insecurity? ...... 5 

3.2.1 Coverage and participation in employment-based retirement plans .................................. 5 

3.2.2 Defined benefit freezes ......................................................................................................... 5 

3.2.3 Risk management techniques in retirement ........................................................................ 7 

4 What are the economic impacts of this deficit on capital and labor markets and on individuals? ..... 7 

4.1 To what extent has market volatility over the past several years impacted individuals' risk 

tolerance or asset allocations? ................................................................................................................. 7 

4.2 Are there other ways that individuals have responded to recent market conditions? ................ 9 

4.3 What are the long term impacts of recent market volatility on retirement savings? ................ 10 

4.4 To what extent will the retirement of the Baby Boomers impact capital and labor markets? .. 10 

5 What are the most effective and efficient strategies to encourage and facilitate greater savings for 

retirement? ................................................................................................................................................. 12 

5.1 Automatic enrollment ................................................................................................................. 12 

5.2 What incentives have the greatest bearing on the behavior of employers and employees ...... 13 

5.2.1 Tax incentives ...................................................................................................................... 13 

5.2.2 Impact of Employer Matches on 401(k) Saving .................................................................. 18 

6 Appendix A: Brief Description of RSPM .............................................................................................. 24 

7 Appendix B: Brief Chronology of RSPM .............................................................................................. 25 

8 References .......................................................................................................................................... 27 

9 Endnotes ............................................................................................................................................. 32 
34 

1 Introduction 

Mr. Chairman and members of the committee, thank you for your invitation to testify today on 

retirement security in America. I am Jack VanDerhei, research director of the Employee Benefit 

Research Institute. EBRI is a nonpartisan research institute that has been focusing on retirement and 

health benefits for the past 34 years. EBRI does not take policy positions and does not lobby. 

The testimony draws on the extensive research conducted by EBRI on these, topics over the last 13 years 

with its Retirement Security Projection Model'" as well as annual analysis of tens of millions of individual 

401(k) participants dating back in some cases as far as 1996. 

Today's testimony will deal with the following topics: 

• What is the size of Americans' retirement savings gap? 

• To what extent has this deficit been impacted by economic conditions over the past several 

years? 

• What are the economic impacts of the retirement savings deficit on capital and labor markets 

and on individuals? 

• What are the most effective and efficient strategies to encou rage and facilitate greater savings 

for retirement? 

2 What is the size of Americans' retirement savings gap? 

2.1 How can this gap be best measured· are there specific metrics that should be considered? 

The concept of measuring retirement security - or retirement income adequacy - is an extremely 

important topic. EBRI started a major project to provide this type of measurement in the late 1990s for 

several states that were concerned whether their residents would have sufficient income when they 

reached retirement age. After conducting studies for Oregon, Kansas and Massachusetts, we expanded 

the simulation model to a full-blown national model in 2003 and in 2010 updated it to incorporate 

several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment 

provisions for 401(k) plans and the recent crises in the financial and housing markets.' 

When we modeled the Baby Boomers and Gen Xers in 2012 (Figure 1) between 43.3-44.3 percent of 

those households were projected to have inadequate retirement income for even BASIC retirement 

expenses plus uninsured health care costs. Even though this number is quite large, the good news is 

that this is 5·8 percentage points LOWER than what we found in 2003. 

The improvement over the last nine years is largely due to the fact that in 2003 very few 401(k) sponsors 

used automatic enrollment (A E) provisions and the participation rates among the lower income 

employees (those most likely to be at risk) was quite low. With the adoption of AE in the past few years, 

these percentages have often increased to the high 80s or low 90s. 

Although there do not appear to be any major trends by age, Figure 2 $hows that the lower-income 

households are MUCH more likely to be at risk for insufficient retirement income (even though we 

model our basic retirement expenses as a function of the household's expected retirement income). The 

2012 baseline ratings for Early Boomers ranges from a projection that 87 percent of the lowest-income 

households are at risk to only 13 percent for the highest income households. Similar trends are 

evidenced for both the Late Boomers and Gen Xers. 

2 
35 

While the lack of retirement income adequacy for the lowest income households should be of great 

concern, even more alarming is the rate at which they will run "short" of money during retirement. As 

documented in VanDerhei and Copeland {July 2010),!! percent of early boomers in the lowest income 

quartile could run short of money within 10 vears after they retire. 2 

While knowing the percentage of households that will be at risk for inadequate retirement income is 

important for public policy analySiS, perhaps equally important is knowing just how large the 

accumulated deficits are likely to be. Figure 3 provides information on the average individual retirement 

income deficits by age cohort, as well as family status and gender, for baby boomers and Gen Xers. 

These numbers are present values at retirement age and represent the additional amount each 

individual in that group would need to have accumulated at age 65 to eliminate their expected defiCits 

in retirement (which could be a relatively short period or could last decades). The values for those on 

the verge of retirement (Early Boomers) vary from apprOXimately $22,000 (per individual) for married 

households, increasing to $34,000 for single males and $65,000 for single females. Even though the 

present values are defined in constant dollars, the Retirement Savings Shortfalls (RSS) for both genders 

increases for younger cohorts. This is largely due to the impact of assuming health care-related costs will 

increase faster than the general inflation rate. 

While the RSS values in Figure 3 may appear to be relatively small considering they represent the sum of 

the present values that may include decades of defiCits, it is important to remember that less than half 

of the households modeled were considered to be "at risk." In other words, the average RSS values 

represented in Figure 3 are reduced by households assumed to have zero deficits. Figure 4 portrays the 

average RSS values for those households where a non-zero deficit was simulated. Obviously, the RSS 

values in Figure 4 would be expected to be larger than the corresponding RSS values in Figure 3, 

sometimes considerably so. Now the values for Early Boomers vary from approximately $70,000 (per 

indiVidual) for married households, increasing to $95,000 for single males and $105,000 for single 

females. 

The aggregate deficit number with the current Social Security retirement benefits and the assumption 

that net housing equity is utilized "as needed" is estimated to be $4.3 trillion. 3 

2.2 Do individuals understand how to calculate how much they will need for retirement? 

Less than half of workers (42 percent) in the 2012 Retirement Confidence Survey (RCS)' report they 

and/or their spouse have tried to calculate how much money they will need to have saved so that they 

can live comfortably in retirement. This is comparable to most of the percentages measured from 2003-

2011, but lower than the 53 percent recorded in 2000 and the 47 percent in 2008 (Figure 5).5 

The likelihood of doing a retirement savings needs calculation increases with household income, 

education, and financial assets. In addition, married workers (compared with unmarried workers); those 

age 35 and older (compared with those age 25-34); retirement savers (compared with nonsavers); and 

participants in a defined contribution plan (compared with nonparticipants) more often report trying to 

do a calculation. 

The 2012 RCS showed that workers often guess at how much they will need to accumulate (42 percent), 

rather than doing a systematic retirement needs calculation. The propensity to guess or do their own 

calculation, together with current feelings of financial stress, may help to explain why the amounts that 

workers say they need to accumulate for a comfortable retirement appear to be rather low. Thirty-four 

percent of workers say they need to save less than $250,000 (up from 26 percent in 2007). Another 18 

percent mention a goal of $250,000-$499,999. Twenty percent think they need to save $500,000-

$999,999, while fewer than 1 in 10 each believe they need to save $1 million-$1.49 million (6 percent) 

or $1.5 million or more (9 percent) (Figure 6). Savings goals tend to increase as household income rises. 

3 
36 

Workers who have done a retirement savings needs calculation tend to have higher savings goals than 

do those who have not done the calculation. Twenty-two percent of workers who have done a 

calculation, compared with 9 percent ofthose who have not, estimate they need to accumulate at least 

$1 million for retirement. At the other extreme, 27 percent of those who have done a calculation, 

compared with 39 percent who have not, think they need to save less than $250,000 for retirement. 

Two-thirds of retirees (64 percent) indicate they did some type of financial planning for retirement. 

Thirty-four percent of these retirees say they began to plan 20 years or more before they retired and 27 

percent report beginning to plan between 10 and 19 years before retirement. However, 17 percent say 

they started planning five to nine years before retirement and 15 percent started less than five years 

before that point (Figure 7). 

3 To what extent has this deficit been impacted by economic conditions over the past several 

years? 

3.1 Impact of the financial and housing market crisis in 2008 and 2009 on retirement readiness 

The analysis in VanDerhei (February 2011) 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 market crisis in 2008 and 2oo9? 

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? 

As one would expect, the answer to the first question depends to a large extent on the size of the 

account balance the household had in defined contribution plans and/or IRAs as well as their relative 

exposure to fluctuations in the housing market. The resulting percentages of households that would not 

have been "at risk" without the 200S/9 crisis that ended up "at risk" vary from a low of 3.S percent to a 

high of 14.3 percent. 

The answer to the second question also depends on the size of account balances and exposure to the 

equity market; however, it is a more complicated question involving both the proximity of the 

household to retirement age (the closer to retirement age, the fewer years of additional savings 

available), the relative level of preretirement income, and the desired probability of adequate 

retirement income. 

Looking at all 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 Early 

Boomers 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 

200S and 2009. Similar values are 0.9 percent for late Boomers and 0.3 percent for Gen Xers. A 90 

percent probability of retirement income adequacy would require an even larger increase: The median 

percentage of additional compensation for Early Boomers desiring a 90 percent probability of 

retirement income adequacy would be 4.3 percent, to account for the financial and housing market 

crisis in 200S and 2009. 

Looking only at those households that had exposure to the market crisis in 200S and 2009 from all three 

fronts (defined contribution plans, IRAs, and net housing equity) shows a median percentage for Early 

Boomers of 5.6 percent for a 50 percent probability and 6.7 percent for a 90 percent probability of 

retirement income adequacy. Younger cohorts experience a similar increase, going from the allhousehold analysis to the more select group. 

4 
37 

3.2 What factors in the decades prior to the crisis contributed most to retirement insecurity? 

3.2.1 Coverage and participation in employment-based retirement plans 

Previous research by EBRI has demonstrated that one of the most important factors contributing to 

retirement income adequacy for the Boomers and Gen Xers is eligibility to participate in employmentbased retirement plans. VanDerhei (August 2011) provides information on how the relative value of the 

defined benefit accruals impact retirement income adequacy. Figure 8 categorizes any positive value for 

a defined benefit accrual into quartiles for each income group. The largest reduction in at-risk ratings 

between the highest and lowest income-specific defined benefit value quartiles takes place for the 

lowest-income quartile. For these households, the at-risk ratings drop 36 percentage points, from 82 

percent to 46 percent. Households in the second income quartile drop 25 percentage points (from an atrisk rating of 58 percent for those in the lowest defined benefit value quartile to 33 percent for those in 

the highest defined benefit value quartile) while those in the third and highest income quartile drop 24 

and 21 percentage pOints, respectively. 

VanDerhei (September 2010) provides similar information for eligibility in defined contribution plans for 

Gen Xers in 2012 (Figure 9). In this case we see that the number of future years the workers are eligible 

for participation in a defined contribution plan makes a tremendous difference in their at-risk ratings, 

even after adjusting for the worker's income quartile. For example, those in the lowest income quartile 

with no future years of eligibility are simulated to run short of money 86.8 percent of the time, whereas 

the same income cohort with twenty or more years of future eligibility would only experience this 

situation 61.1 percent of the time. A similar, albeit less dramatic, situation exists for the highest income 

quartile. In this case, those with no future years of eligibility in a defined contribution plan are 

simulated to run short of money 16.8 percent of the time, dropping to only 5.4 percent of the time for 

the highest income quartile with 20 or more years of eligibility. 

Copeland (October 2011) provides the percentage of the work force that has participated in an 

employment-based retirement plan from 1987-2010. Figure 10 shows that the even though the 

percentage of the population covered depends to a large extent on how the population is defined, the 

values within any work force subset has been relatively constant over this 24 year period. In 2010, 

slightly more than ~ (54.5 percent) of all full-time, full-year wage and salary workers ages 21-64 were 

participating in an employment-based retirement plan according to calculations based on the 2011 

March Current Population Survey. 6 However, when the same information is filtered to exclude workers 

with less than $10,000 in annual earnings as well as those working for employers with less than 100 

employees, the participation percentage in 2010 increases to 67.5 percent.7 

3.2.2 Defined benefit freezes 

The dawn of the new year in 2006 began with a flood of news reports about the "new" trend among 

private defined benefit plan sponsors of "freezing" their pension plans for current or new workers. In 

reality, these decisions have been quite prevalent in recent years, and are part of the well-documented 

and long-term decline of "traditional" pension plans; what's unusual is the large size of some of the 

employers that have recently announced pension freezes, and the frequency of the announcements. 

While it is obvious that pension plan freezes affect some workers negatively, it is not obvious which 

workers are affected, nor to what degree they are affected by a pension freeze. There are many reasons 

for this, most importantly the unique characteristics and terms of each pension plan and each freeze, 

and the age and characteristics of the workers. VanDerhei (March 2006) provides a detailed analysis of 

how pension freezes are likely to impact existing employees as a function of plan type and employee 

demographics. 

5 
38 

The literature documenting the evolution from defined benefit (pension) to defined contribution 

(primarily 401(k)-type) retirement plans over the last 20 years is replete with studies analyzing the 

change in the relative composition of plans and participants; however, very few have focused on the 

sizeable number of large plan sponsors that have had both defined benefit and defined contribution 

plans in place, certainly since the advent of the 401(k) plan in the early 1980s. For these employers, the 

primary decision in many cases is not whether to retain both forms of retirement plan, but the relative 

financial value of each in terms of future accruals or contributions. While this may not be considered to 

be an optimal choice for some sponsors, after recognizing certain legal and/or financial constraints, such 

as the inability to terminate an underfunded pension plan (with the exception of certain sponsors 

satisfying the bankruptcy conditions necessary to trigger pension insurance coverage by the Pension 

Benefit Guaranty Corporation, or PBGe) and the imposition of a 20 percent or 50 percent excise tax on 

the recoupment of excess assets in the case of a reversion, the best available choice may be to gradually 

reduce the relative value of the defined benefit plan in the future by the imposition of a pension freeze.s 

VanDerhei (March 2006) analyzes the financial consequences of a pension freeze for the general 

population of participants in private defined benefit plans in 2006. This is accomplished by utilizing the 

accumulation portion of the RSPM. Briefly, the model takes the current population of workers in the 

private sector in 2006, statistically attributes whether or not they are participating in a defined benefit 

plan and, if so, what type of plan and the attendant generosity parameters. 

The model incorporates a stochastic job tenure algorithm that provides information on how long the 

employee has already participated in the defined benefit plan and how much longer after 2006 he 'Or 

she is likely to remain with the employer. With this information, the reduction in the future estimated 

defined benefit income as a result of a pension freeze In 2006 can be estimated, and the indemnification 

contribution rate for each defined benefit participant can be determined. 

This calculation will be sensitive to the choice of the rates of return on various asset classes--and it is 

clear that there is no consensus on what future returns in the financial markets will be for the next 30 

years. Therefore, RSPM suppresses the stochastic rate of return mechanism typically employed by this 

type of analysis and substitutes a constant.rate of return of either 4 percent nominal per year or 8 

percent. This allows readers to choose which rate they believe is more likely for the future and use the 

corresponding set of results. 

In addition, one more modification is made by RSPM before undertaking this analysis. It is a wellknown fact that job tenure is longer for defined benefit participants than for either defined contribution 

partiCipants or workers in general, given the financial consequences of job change upon employees 

participating in a final-average defined benefit pension plan. Therefore, the typical tenure distributions 

are replaced with those for participants exclusively in defined contribution plans to account for the 

increased job mobility that is likely to accompany the pension freeze. 

4 percent rate af return: The median indemnification contribution rate for a career-average defined 

benefit pension plan is 11.6 percent, assuming a 4 percent rate of return (Figure 11). An indemnification 

contribution rate of 18.8 percent would be sufficient to cover 75 percent ofthe employees covered by 

this type of plan. The median rate for a final-average plan is larger, as expected: 13.5 percent, and the 

threshold rate for the 75th percentile increases to 21.0 percent. Cash balance plans have a median 

indemnification contribution rate of 4.6 percent, with a 75th percentile threshold rate of 6.3 percent 

using the current interest credits. These values increase to 5.7 percent and 7.3 percent if, instead, the 

cash balance plans are assumed to credit interest at the intermediate long-term assumption for the 

interest rate of the Treasury special public-debt obligation bonds issuable to the OASDI trust funds, as 

specified in the 2005 Trustees ofthe OASDI Trust Funds Report (5.8 percent). 

6 
39 

8 percent rate of return: If the rate of return assumption is increased to 8 percent nominal (Figure 

12), the median indemnification contribution rate for a career-average defined benefit plan is 6.6 

percent. An indemnification contribution rate of 14.8 percent would be sufficient to cover 75 percent of 

the employees covered by this type of plan. The median for a final-average plan is 8.1 percent and the 

75th percentile threshold increases to 16.0 percent. Cash balance plans have a median indemnification 

contribution rate of 2.7 percent, with a 75th percentile threshold of 4.5 percent using the current 

interest credits. These values increase to 3.1 percent and 5.2 percent if the cash balance plans are 

assumed to credit interest at 5.8 percent. 

Copeland and VanDerhei (2010) simulated the impact of such freezes on expected future pension 

wealth for new employees. looking at this portion of pension wealth provides one estimate of the 

impact on overall retirement wealth but it is incomplete, since many sponsors either increase employer 

DC contributions or set up new DC plans coincident with the pension freeze. Factoring in these 

enhanced DC contributions (if any), we estimate the net loss that future employees may experience is 

small overall, amounting to a 0.5-2 percentage point reduction in replacement rates. Some employees, 

as many as 30 percent of the under age 35 group, may even be better off in retirement due to the 

enhanced contributions. 

3.2.3 Risk management techniques in retirement 

Another factor that contributed to retirement insecurity in the last few decades is the sub-optimal risk 

management strategies chosen by individuals at retirement age. VanDerhei (September 2006) 

illustrates this in terms of a "building block" approach whereby investment risk, longevity risk and the 

risk of "stochastic" health care risks are added sequentially to a simulation model showing the overall 

strategies necessary to achieve a 50, 70 and 90 percent probability of success for stylized individuals at 

various retirement ages. 

While it is true that the first two risks enumerated above (investment and longevity) have, in many 

cases, been shifted from the employer to the employee as a consequence of the evolution from defined 

benefit structures to defined contribution plans,s these can be dealt with through a combination of postretirement investment strategies, as well as annuitization of some or all of the account balances at 

retirement.'O However, regardless of the asset allocation andlor degree of annuitization utilized by the 

retiree, there remains a considerable chance that they (or their spouse) may encounter a lengthy stay in 

a nursing home that may leave the family unit with a much higher probability of "running short" of 

money in retirement. VanDerhei (2005) uses the EBRI RSPM model to evaluate the impact of purchasing 

long-term care insurance on retirement income adequacy. The analysis suggests that this may be a 

particularly powerful risk management technique, especially for retirees in the second and third income 

quartiles.11 

4 What are the economic impacts of this deficit on capital and labor markets and on individuals? 

4.1 To what extent has market volatility over the past several years impacted individuals' risk 

tolerance or asset allocations? 

Figure 13 provides evidence from VanDerhei, Holden, Alonso and Bass (2011) on the average asset 

allocation of 401(k) participants from the EBRI/ICI Participant-Directed Retirement Plan Data Collection 

Project for selected years between 1999 and 2010, inclusive. Although any time-series comparison of 

asset allocation from this database needs to be accompanied by the caveat that the universe of data 

providers (as well as plan sponsors and participants) has gradually changed over this time period, the 

overall asset allocations to equity funds per se have fluctuated as one would expect with changes in the 

equity markets. Overall, 53 percent of 401(k) assets in the EBRI/ICI database were in equity funds at 

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40 

year-end 1999. This value decreased to 37 percent at the end of 2008 and then increased to 42 percent 

by year-end 2010. 

However, one needs to be extremely careful in interpreting these results since two other trends were 

taking place at the same time. First, the overall allocation to company stock decreased substantially 

during this period. In the 1999 EBRI/ICI database, almost l/S'h of aIl401(k) money (19 percent) was 

invested in company stock. By 2010, this value had decreased to only 8 percent. Moreover, during that 

period the percentage of newly-hired (those with two or fewer years of tenure) 401(k) participants in a 

plan offering company stock as an investment option that held company stock decreased from 61.0 

percent to 33.0 percent. 

During the same time there was a substantial change in the amount of money held in bal,mced funds, 

increasing from 7 percent in 1999 to 18 percent in 2010. looking at recently hired 401(k) participants 

provides a more focused method of analyzing the change in participant's investment choices without a 

confounding impact ofthe change in market values on current account balances. VanDerhei, Holden, 

Alonso and Bass (2011) find that, in 1999, 31.3 percent of recently hired 401(k) participants held 

balanced funds but that by 2010 this figure had increased to 63.0 percent. The EBRI/ICI data base was 

not able to bifurcate the balanced fund category into target date funds and non-target date balanced 

funds until 2006 but even during that five year period there has been a tremendous increase in the 

percentage of recently-hired participants holding these funds: 28.3 percent at year-end 2006, increasing 

to 47.6 percent by year-end 2010. 

Moreover, of the recently-hired participants investing in balanced or target date funds, the percentage 

choosing them as essentially their exclusive investment has increased dramatically. VanDerhei, Holden, 

Alonso and Bass (2011) found that in 1998, only 7.3 percent of recently-hired participants who invested 

in balanced funds had at least 90 percent of their portfolio in these funds. This value had increased to 

69.8 percent by 2010. When a similar analysis was done for target date funds in 2010, a total of 73.6 

percent of the newly-hired 401(k) participants holding target-date funds had at least 90 percent of their 

portfolio invested in target date funds. 

Comparing the overall 1998 average asset allocations of newly-hired 401(k) participants with those in 

2010, VanDerhei, Holden, Alonso and Bass (2011) find that aggregating across all age groups, equity 

funds decreased from 64.8 percent to 38.0 percent and company stock decreased from 8.6 percent to 

4.3 percent. However this was at least partially offset by an increase in balanced funds from 9.1 percent 

to 30.7 percent. 

Another possible area of interest would be participant trading activity during this period of time. In an 

analysis of Vanguard participants, Utkus and Young (2011) find that the percentage of participants 

trading in 2008 (16 percent) was actually lower than what it was in 2005 (19 percent) and similar to 

what it had been in 2007 (15 percent). The value decreased to only 13 percent in 2009. They also find 

that 27 percent of the participants traded over the 2007-2010 period but that only 3 'percent of the 

participants sold out of stocks entirely and that 1 percent traded to 100 percent equities. Five percent of 

the participants decreased equities by more than 10 percentage points during this period but that was 

partially offset by 4 percent of the participants who increased equities by 10 percentage points or more. 

While it is difficult to predict the extent to which market volatility over the past several years will have a 

long term impact on individuals' risk tolerance or asset allocations, the increasing utilization of AE since 

the passage of the Pension Protection Act of 2006 has resulted in more 401(k) assets invested in target 

date funds due to the qualified default investment alternative regulations. Moreover, given the relative 

inertia experienced with respect to asset allocation for participants automatically enrolled in 401(k) 

plans, this is likely to be the case even if AE utilization stays constant in the future. Therefore, there is 

8 
41 

every reason to expect that participant asset allocations will have less reaction to market volatility as the 

fund managers continue to rebalance during market cycles." 

4.2 Are there other ways that individuals have responded to recent market conditions? 

In an analysis of Vanguard participants, Utkus and Young (2011) find that the percentage of participants 

stopping contributions was 2.8 percent in 2005 and then decreased to 2.5 percent in 2006 and 2.4 

percent in 2007 before increasing slightly to 3.1 percent in 2008. The value decreased to 2.9 percent in 

2009 and was estimated to be only 2.0 percent in 2010. 

With respect to plan loans, in the 15 years that the EBRI/ICI database has been tracking loan activity 

among 401(k) plan participants, there has been little variation." From 1996 through 2008, on average, 

less than one-fifth of 401(k) participants with access to loans had loans outstanding. At year-end 2009, 

the percentage of participants who were offered loans with loans outstanding ticked up to 21 percent 

and remained at that level at year-end 2010. However, not all participants have access to 401(k) plan 

loans-factoring in aIl401(k) participants with and without loan access in the database, only 18 percent 

had a loan outstanding at year-end 2010. On average, over the past 15 years, among participants with 

loans outstanding, about 14 percent of the remaining account balance was taken out as a loan. 

The percentage of participants taking hardship withdrawals appears to have increased slightly during 

this period. In an analysis of Vanguard participants, Utkus and Young (2011) find that 1.7 percent of the 

participants took a hardship withdrawal in 2006. This value increased to 1.8 percent in 2007 and 2.0 

percent in 2008 before reaching 2.2 percent in 2009 and 2010. 

In the wake of the 2008 financial crisis, a number of employers chose to reduce, suspend, and/or 

terminate their matching contributions." A Towers Watson analysis of 260 companies that made 

changes to employer match contributions to deal with the recent economic crisis finds 231 originally 

suspended their matches, while 29 chose to reduce them. According to Towers Watson, the majority of 

the analyzed companies chose to reinstate their match (75 percent). Of those that reinstated their 

match, 105 companies (74 percent) reintroduced the original match amount. Among these plan 

sponsors, the most frequent match formula before and after the crisis was 50 percent of up to 6 percent 

of salary. The median duration for match suspensions was 12 months, for companies with quantifiable 

dates. Most companies reinstated their match after nine or 12 months. 

By the middle of 2009, almost 10 percent of Fidelity record kept defined contribution plans suspended or 

reduced their contribution dollars, although by December 2010, 55 percent of plan sponsors indicated 

they planned to reinstate their match within the next 12 months. Fidelity also reported that among 

larger companies, those with more than 5,000 employees, most (71 percent) had already reinstated or 

planned to reinstate their match. More than 60 percent of employers with a plan size of between 500-

999 employees had already reinstated or indicate they plan to reinstate their match - up from 38 

percent just 10 months earlier. As for employers with fewer than 1,000 workers, Fidelity noted that the 

applicable percentage was over 46 percent. 

In February of 2012, the IRS interim report of responses from its 401(k) Compliance Check Questionnaire 

revealed the number of 401(k) plan sponsors that:15 

• Suspended or discontinued matching contributions in their plans increased from 1 percent in 

2006 to 4 percent in 2008. 

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42 

Suspended or discontinued the non-elective contribution in their plans increased from 2 percent 

in 2006 to S percent in 2008. 

• Reduced non-elective contributions in their plans increased from 1 percent in 2006 to S percent 

in 2008. 

A common concern with respect to plan sponsors suspending their contributions is the potential impact 

on employee savings. For example, if an employee were contributing 6 percent of compensation to 

receive the maximum match from a plan with a 50 percent match on the first 6 percent of 

compensation, would a suspended match end up decreasing the total contribution for the employee 

from 9 percent to 6 percent, or would the reduced incentive drive this down below 6 percent (perhaps 

to zero)? 

In an attempt to provide preliminary evidence with respect to the impact of suspending employer 

contributions on employee behavior, VanDerhei (November 2009) analyzed aIl401(k) plans in the 

EBRI/ICI401(k) database with more than $160,000 in employer contributions in 2007,'6 and none in 

2008.'7 The percentage of 401(k) participants continuing to contribute in 2008 after a suspension in 

employer contributions was analyzed as function of a match rate proxy.'" 

For all plans with a match rate proxy of less than 50 percent, the percentage of 401(k) participants 

continuing to contribute in 2008 was at least 86 percent. However, the percentage decreased 

substantially for those with more generous match rate proxies. For participants with a match rate proxy 

between 50 and 100 percent, only 80 percent of the participants continued to contribute after the 

suspension. For those with match rate proxies in excess of 100 percent, the percentage was only 73 

percent. 

4.3 What are the long term impacts of recent market volatility on retirement savings? 

Figure 14 shows EBRI projections of the estimated percentage of consistent participants who have more 

money in their 401(k) accounts on March 1, 2012 than they did at the market high (October 8, 2007). 

The results are displayed by age and tenure and, as expected, 401(k) participants with relatively short 

tenure have a higher percentage of having recovered given that their ratio of contributions to account 

balance is likely to be much larger. Overall 9S percent of the participant balances were projected to 

have recovered to their level at the market high, though less than 90 percent of those with more than 

20 years of tenure were likely to have recovered to that level.'9 

4.4 To what extent will the retirement of the Baby Boomers impact capital and labor markets? 

This question is particularly problematic for several reasons. First, with respect to the impact on capital 

markets, assumptions will need to be made with respect to what the Baby Boomers will do with their 

asset allocations in retirement as well as the rate at which they will spend-down the assets in their 

retirement accounts. Unfortunately there is extremely limited information at the current time to allow 

informed estimates in this regard. However, as part of its research mission, EBRI's Center for Research 

on Retirement Income is currently integrating administrative records of millions of 401(k) participants 

with those of IRA account holders. One of the first publications from this endeavor (scheduled for later 

in 2012) will be to investigate the change in asset allocation at retirement and to track subsequent 

changes as retirees age. A follow-up study is planned that will begin to link successive years of the 

integrated defined contribution/IRA data and track the spend-down behavior of retirees as a function of 

several demographic and portfolio characteristics. 

10 
43 

Secondly, the impact on labor markets will depend to a large extent on when the Baby Boomers choose 

to retire (at least initially). Much of the public policy research in this area has assumed that employees 

will retire at age 65 and then attempt to assess the probability of "success." While success is certainly 

defined in several different ways, all of the models identify at least a significant percentage of the 

population as failing to meet that criteria. Since the genesis of the RSPM project in the late 1990s, the 

model had always assumed a retirement age of 65. While there was abundant evidence of many 

individuals retiring earlier (e.g., as soon as they became eligible for Social Security retirement benefits at 

age 62), the model was constructed to measure the households probability of retirement income 

adequacy ifthis temptation were avoided and retirement deferred to age 65.20 However, even with this 

admittedly optimistic assumption, the results in both 2003 and 2010 showed that the median additional 

percentage of compensation that would be required for retirement income adequacy at more than a 50 

percent probability would exceed 25 percent of compensation annually (until age 65) for many 

age/income combinations. 

As a result, the 2011 version of RSPM added a new feature that would allow households to defer 

retirement age past age 6S21 in an attempt to determine whether retirement age deferral is indeed 

sufficiently valuable to mitigate retirement income adequacy problems for most households (assuming 

the worker is physically able to continue working and that there continues to be a suitable demand for 

his or her skills). The answer, unfortunately, is not always "yes," even if retirement age is deferred into 

the 80s. 

Using the threshold of retirement income adequacy described above (essentially sufficient retirement 

income to pay for basic retirement expenses and uninsured medical costs for the entire retirement 

period), RSPM baseline results indicate that the lowest preretirement income quartile would need to 

defer retirement age to 84 before 90 percent ofthe households would have a SO percent probability of 

success. Although a significant portion of the improvement takes place in the first four years after age 

65, the improvement tends to level off in the early 70s before picking up in the late 70s and early 80s. 

Households in higher preretirement income quartiles start at a much higher level, and therefore have 

less improvement in terms of additional households reaching a 50 percent success rate as retirement 

age is deferred for these households. 

The problem with using a 50 percent probability of success, of course, is that households is in a position 

where they will "run short of money" in retirement one chance out of two. While most households (at 

least those that are cognizant of these risks) are likely to have a risk aversion level that would make this 

risk assumption untenable, switching to a higher probability of success will significantly reduce the 

percentage of households capable of satisfying the threshold at any given retirement age. For example, 

if the success rate is moved to a threshold of 70 percent, only 2 out of 5 households in the lowestincome quartile will attain retirement income adequacy even if they defer retirement age to 84. 

Increasing the threshold to 80 percent reduces the number of lowest preretirement income quartile 

households that can satiSfy this standard at a retirement age of 84 to approximately 1 out of 7. 

One of the factors that makes a major difference in the percentage of households satisfying the 

retirement income adequacy thresholds at any retirement age is whether the worker is still participating 

in a defined contribution plan after age 65. The increase in the percentage of households that are 

predicted to have adequate retirement income as a result of defined contribution partiCipation varies by 

retirement age, preretirement income quartile and probability of retirement income adequacy, but this 

factor alone results in at least a 10 percentage point difference in the majority of the retirement 

age/income combinations investigated. 

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44 

Another factor that has a tremendous impact on the value of deferring retirement age is whether 

stochastic post-retirement health care costs are excluded (or the stochastic nature is ignored). In 

essence, the true value of deferring retirement age is su bstantially muted if the full stochastic nature of 

nursing home and home health care costs is not appropriately modeled. This is especially true for those 

desiring a high probability of a successful retirement. Figure 18 shows that the value of deferring 

retirement age (even as much as 20 years), as those with at least an 80 percent probability of success 

decreases considerably when the impact of stochastic health care costs are excluded. For the lowest 

preretirement income quartile, the value of deferral (in terms of percentage of additional households 

that will meet the threshold by deferring retirement age from 65 to 84) decreases from 16.0 percent to 

3.8 percent by excluding these costs. The highest preretirement income quartile experiences a similar 

decrease, from 12.8 percent to 2.6 percent. 

5 What are the most effective and efficient strategies to encourage and facilitate greater savings 

for retirement? 

5.1 Automatic enrollment 

VanOerhei and Copeland (2008) simulated the impact of 401(k) sponsors changing from voluntary to 

automatic enrollment; however, given its close proximity to the passage of the Pension Protection Act of 

2006 (PPA) there was no way of knowing what the AE plan design parameters in that legislation would 

look like. As a result, the PPA safe harbor provision was used as a prototype in the 2008 study. 

Moreover, there was no way of knowing the plan design parameters of 401(k) sponsors that would 

subsequently choose to adopt AE. As determined in a joint EBRI/Mercer study (VanOerhei, July 2007), 

there is.a high correlation between those employers that choose to adopt AE for their 401(k) plans and 

those that froze/closed their defined benefit (OB) pension plans. Fortunately, EBRI was able to 

circumvent these limitations in late 2009 with data on actual retirement plan sponsor activity from 

Benefit SpecSelect'" (a trademark of Hewitt Associates LLC). 

VanOerhei (April 2010) Simulated the difference between AE and voluntary enrollment by comparing 

large 401(k) sponsors with actual plan design parameters. Figure 15 shows only post-2oo9 

accumulations (and rollovers) and, as expected, the simulated balances (as a multiple of final earnings) 

would be minimal for older age cohorts. However, for those with a major portion of their careers 

remaining, the differences in additional accumulations due to auto-enrollment prove to be quite 

significant; When workers currently ages 25-29 are compared, the median 401(k) balances increase 

from approximately 1.5 times final earnings under voluntary enrollment to more than 6.0 times final 

earnings in the auto-enrollment scenario. 

The 6.0 multiple in Figure 15 might appear to be too small to reach conventional retirement income 

targets. 22 Therefore, Figure 16 recasts the AE results from Figure 15 for just the youngest cohort and 

provides further breakouts by the number of years eligible for participation in a 401(k) plan as well as 

the relative income level. For those workers assumed to be eligible (whether or not they choose to 

participate) for more than 30 years, the median multiples range from approximately 7.6-8.5 times final 

salary, depending on salary level. 

VanOerhei and Lucas (2010) demonstrate the profound influence of plan design variables, as well as 

assumptions of employee behavior in auto-enrollment 401(k) plans. Even with a relatively simple 

definition of "success," large differences in success rates can be seen, depending on which plan design 

factors and employee behavior assumptions are used;23 

12 
45 

• The probability of success for the lowest-income quartile increases from the baseline probability of 

45.7 percent to 79.2 percent when all four factors are applied. 

• The impact on the highest-income quartile is even more impressive, with an increase in the 

probability of success from 27.0 percent to 64.0 percent. 

When viewed in isolation, it is clear that the impact of increasing the limit on employee contributions is 

much greater than any of the other three factors. However, the importance of including one or more 

additional factors, along with the increase in the limit on employee contributions, can more than double 

the impact of increasing the limit by itself. 

5.2 What incentives have the greatest bearing on the behavior of employers and employees 

5.2.1 Tax incentives 

Two major proposals have recently emerged that could have an impact on employment-based 

retirement plan designs, specifically 401(k) plans: 

• The National Commission on Fiscal Responsibility and Reform proposal on federal debt reduction, 

"The Moment of Truth," issued in December 2010. The document puts forth a tax reform plan that 

would modify private-sector retirement plans by capping annual "tax-preferred contributions to 

[the] lower of $20,000 or 20% of income" (page 31). This is often referred to as the "20/20 cap." 

• A plan (Gale, 2011) that would modify the existing tax treatment of both worker and employer 

401(k) contributions and introduce a flat-rate refundable credit that serves as a federal matching 

contribution into a retirement savings account. 

Some of the financial projections associated with these proposals have assumed status quo, meaning no 

behavioral changes by either the employers that sponsor 401(k) plans or the workers who participate in 

them if those proposals were to become a reality, and that current rates of worker deferrals, employer 

matching contributions, and plan availability would remain unchanged. 

Previous EBRI research has provided an initial quantification of how these proposals would likely affect 

individual participant retirement savings, by age and income.24 These earlier projections, however, were 

not based on survey evidence of how employers-the sponsors of private-sector 401(k) retirement 

plans-would be likely to react to potential changes in the tax trelltment of these contributions, or how 

those deciSions might, in turn, affect participant-savings accumulation. Additionally, while those 

projections incorporated the potential impact of the speCific provisions of the Gale proposal, they were 

based on worker responses to generic questions about changes to the taxability of 401(k) contributions. 

Integrating new data from plan sponsors, VanDerhei (March 2012) provides a perspective on the impact 

of a scenario where the current tax treatment of employer and worker pre-tax contributions was 

modified such that workers would have to pay federal taxes on these amounts currently, rather than on 

a deferred basis, as under current law, and participants would receive an 18 percent government match 

(as contemplated in the Gale proposal). 

In September 2011, the U.S. Senate Finance Committee held a hearing on "Tax Reform Options: 

Promoting Retirement Security." One of the primary topics during the hearing was an assessment of the 

potential benefits and consequences that may result from a proposal to modify the federal tax 

treatment of 401(k) plan contributions in exchange for a flat-rate government match. Gale (2011) 

updated a 2006 analysiS by Gale, Gruber, and Orszag and analyzed a plan that would change the 

treatment of retirement saving in three ways:2S 

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46 

"First, unlike the current system, workers' and firms' contributions to employer-based 401(k) 

accounts would no longer be excluded from income subject to taxation, contributions to IRAs 

would no longer be tax-deductible, and any employer contributions to a 401(k) plan would be 

treated as taxable income to the employee (just as current wages are). Second, all qualified 

employer and employee contributions would be eligible for a flat-rate refundable tax credit, 

given to the employee. Third, the credit would be deposited directly into the retirement saving 

account, as opposed to the current deduction, which simply results in a lower tax payment than 

otherwise." 

Regarding the proposed tax credit, Gale (2011) reports estimates from the Tax Policy Center for both an 

18 percent credit and a 30 percent credit. The paper includes a distributional analysis of the winners and 

losers under the two versions of the proposal; however, the underlying analysis holds retirement saving 

contributions constant for both employers and participants (page 6). Gale mentions that the proposal 

"could conceivably affect incentives for firms to offer 401(k)s or pensions" (page 7) but concludes that 

this seems unlikely. He also dismisses as likely overstated the concern that the tax credit/matches called 

for in the proposal may discourage employer matches to 401(k) plans, but offers no supporting data for 

this assumption 

These two papers provide an interesting analysis of a proposal with profound public-policy implications. 

The assumptions based on responses (or lack thereof), both from individual workers and the plan 

sponsors themselves, will likely be the focus of serious debate. Moreover, public policy consideration of 

this proposal will undoubtedly be subject to a cost-benefit analysis beyond the assumption that 

retirement savings contributions will remain constant on the part of participants and/or plan sponsors. 

On a cautionary note, it is admittedly very difficult to determine how those workers not currently 

covered and/or participating in a defined contribution plan would react to this set of incentives, and 

EBRI will continue to work with actual participant data to better assess some of the behavioral 

tendencies of this group. Until this type of information is available, it will be quite difficult to fully assess 

the "benefit" portion of the cost-benefit analysis suggested above. EBRI did provide an analysis of some 

of the likely "costs" in terms of reduced retirement benefits for those currently in the 401(k) system at a 

September 2011 Senate Finance Committee hearing. However, no information on plan sponsor reaction 

to the proposal was available at that time. Consequently, the 2011 EBRI analysis presented there was 

based on several alternative scenariOS.'· Moreover, the information used to model'potentiaI401(k) 

participant reaction to the proposal was limited to "an analysis of two new questions from the 21st 

wave of the Retirement Confidence Survey (RCS) reflecting how workers indicated they would likely 

react if they were no longer allowed to defer retirement savings plan contributions from taxable 

income.1I27 

5.2.1.1 New Survey Analysis 

5.2.1.1.1 Plan Sponsors 

In recent months, two surveys have provided additional information on potential responses from plan 

sponsors with respect to this type of proposed modification of the 401(k) system. A survey conducted 

on behalf of The Principal Financial Group (2011) determined that if workers' ability to deduct any 

amount of the 401(k) contribution from taxable income was eliminated, 65 percent of the plan sponsors 

responding to the survey would have less desire to continue offering their 401(k) plan.'s 

A separate survey by AliianceBernstein in 2011 provided plan sponsors with the following question and 

potential responses:" 

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47 

Suppose U.S. legislation were enacted such that employees were no longer allowed to deduct 

retirement savings plan contributions from their federal taxable income. In addition, suppose 

that the employee had to pay federal income tax on anything an employer contributed to the 

employee's retirement savings account in the year it was contributed. In exchange for this 

modification of the current tax incentives, assume the U.S. government would match 18% of 

whatever was contributed to a retirement savings plan. What do you believe would be the most 

likely change to your plan? 

No change 

Terminate our plan 

Reduce ou r average employer match 

• 1-24% 

• 25-49% 

• 50-74% 

75-100% 

Begin to provide an average fixed contribution 

Increase a current, average fixed contribution 

• 1-24% 

• 25-49% 

• 50-74% 

• 75-100% 

Don't know / not sure 

Other 

Responses were obtained from 1,018 plan sponsors grouped into the following size categories based on 

total retirement plan assets: 

1. <$1 million. 

2. $1 million-$10 million. 

3. $10 million-$50 million. 

4. $50 million-$250 million. 

5. $250 million-$500 million. 

6. >$500 million. 

5.2.1.1.2 Participants 

With respect to potential worker reactions to this proposal, a new set of questions concerning 

participant behavior in response to the specific federal tax modifications proposed in Gale (2011) was 

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48 

included in the 2012 RCS. Specifically, workers currently contributing to a workplace retirement plan 

were asked: 

1. Suppose you were no longer allowed to deduct your retirement savings plan contributions for 

federal income tax purposes and that anything your employer contributed to your retirement 

savings this year on your behalf was also treated as part of your taxable income. Suppose the 

government matched 18% of contributions so that for every $100 you or your employer 

contributed to your retirement savings plan this year, the government would contribute $18. 

What do you think you would be most likely to do?30 

a. Stop contributing altogether 

b. Reduce the amount you contribute 

c. Continue to contribute what you do now 

d. Increase the amount you contribute 

Follow-up questions were asked of those who indicated they would either increase or decrease the 

amount they currently contribute: 

2. By about how much do you think you would reduce your contribution? Would you: 

a. Reduce it by about a quarter 

b. Cut it in half, or 

c. Reduce it by about three-quarters 

3. By about how much do you think you would increase your contribution? Would you increase it 

by about 

a. A quarter 

b. Half 

c. Three-quarters, or 

d. Double it 

5.2.1.1.3 Impact on 401(k) Balances at Retirement Age31 

VanDerhei (March 2012) utilizes the defined contribution participant responses to the RCS questions 

above, as well as the plan sponsor responses to the AllianceBernstein survey, to parameterize the 

voluntary enrollment module of RSPM in order to estimate the likely impact of the proposed federal-tax 

modifications on projected 401(k) balances at retirement age, assuming the modifications took effect 

immediately. 

Prior to estimating the potential impact on accumulations resulting from 401(k) contribution changes, a 

set of baseline results first needs to be run to determine the likely values if the various tax reform 

options are not imposed on the current 401(k) system. The model used in this article is based on the 

401(k) voluntary-enrollment modules from RSPM. It is similar in many respects to the one used in 

Holden and VanDerhei (2002) in that it looks only at current 401{k) participants and does not attempt to 

include eligible nonparticipants32 or workers who are currently not eligible!3 However, unlike the 2002 

model, this analysis assumes no job turnover, withdrawals, or loan defaults.34 

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49 

Using the 401(k) voluntary enrollment modules from RSPM, VanDerhel shows in the November 2011 

Issue Brie/that the median real-replacement rates at age 67 from 401(k) balances exclusively for 

participants currently ages 25-29 by Income quartiles." The values vary from a low of 53 percent for the 

lowest-income quartile to a high of 77 percent for the highest-income quartile.36 The simulated rates of 

return are explained in more detail in VanDerhei and Copeland (2010), but they are based on a 

stochastic process with a mean equity return of 8.9 percent and a mean fixed-income return of 6.3 

percent (expressed in nominal terms). 

5.2.1.1.3.1 Age and Salary 

Figure 17 shows the baseline average percentage reductions in 401(k) account balances at Social 

Security normal retirement age due to expected modifications of plan sponsors and participants in 

reaction to the proposal to modify the federal tax treatment of employer and worker contributions for 

401(k) plans in exchange for an 18 percent match from the federal government, by age and age-specific 

salary quartiles.37 The average percentage reductions for the youngest cohort (those currently 26-35) 

are largest for those in the lowest-income quartile (22.2 percent).'8 The reductions for the youngest 

cohort decrease to 13.0 percent for those in the second·income quartile and reach a minimum of 6.1 

percent for those in the third-income quartile. The reductions increase to 10.8 percent for those in the 

highest-income quartile. 

Measuring the impact on older cohorts (those over age 35) is somewhat problematic in that the values 

are influenced by plan-sponsor and participant reactions to the tax proposal as well as the distribution 

of tenure with the current employer within each age group. For example, If a 401(k) participant In the 

oldest cohort (those currently 56-65) has recently changed jobs and has a relatively low account balance 

In his or her current 401(k) plan, any reported decrease in contributions would have a much larger 

Impact than It would on the same Individual (with the same survey response) had that worker not 

recently changed jobs and had a significantly larger 401(k) balance. Therefore, the analysis in VanDerhel 

(March 2012) filters out anyone over age 3S whose tenure with their current employer is less than their 

current age minus 30.3

' 

The average-percentage reductions for the "long-tenure" cohort currently ages 36-45 are again largest 

for those in the lowest-income quartile (24.9 percent). The reductions for this age cohort decrease to 

7.2 percent for those in the second-income quartile and then increase to 10.0 percent for those in the 

third-income quartile. The reductions increase to 17.1 percent for those In the highest-income quartile. 

The average-percentage reductions for the "long-tenure" cohort currently ages 46-55 are largest for 

those in the lowest-income quartile (21.1 percent). The reductions for this age cohort decrease to 9.9 

percent for those In the second-income quartile and then increase to 11.6 percent for those in the thirdincome quartile. The reductions increase to 14.1 percent forthose In the highest-income quartile. 

AnalysiS of the oldest cohort (those currently 56-65) show a marked decrease in the average percentage 

reductions for the "long-tenure" cohort In the lowest-income quartile (12.7 percent), although it should 

be noted that the average reduction will be most muted by previous account balances for 401(k) 

participants in this age group. Moreover, the lowest-income quartile no longer has the largest reduction, 

as the reduction for the second-income quartile is slightly larger at 13.3 percent. The reductions for this 

age cohort decrease to 11.4 percent for those in the third-income quartile and then decrease to 8.7 

percent for those in the highest-Income quartile. 

5.2.1.1.3.2 Plan Size 

An interesting finding of the AliianceBernstein survey of plan sponsors with respect to potential federal 

tax modifications is the impact of plan size on the expected plan sponsor response. The reasons to 

17 
50 

expect an increased sensitivity by smaller plans to federal tax modifications has previously been 

documented by others. 40 However, Figure 18 shows the average percentage reductions in 401(k) 

account balances at Social Security normal retirement age due to expected modifications in response to 

the proposal to modify the federal tax treatment of employer and worker contributions for 401(k) plans 

in exchange for an 18 percent match from the federal government, by plan size and age-specific salary 

quartiles for workers currently ages 26-35.41 For all four income quartiles, the average percentage 

reduction for plan sponsors in the two smallest plan size categories (less than $1 million and $1-$10 

million in assets) are more than 1.5 times the value of the average percentage reduction for plans 

sponsors in any of the larger-size categories. 

5.2.2 Impact of Employer Matches on 401(k) Saving 

It is understood that 401(k) plans differ from traditional employment-based defined benefit pension 

plans in that employees are permitted to make voluntary pre-tax contributions. Hence, the sensitivity of 

participation and contributions to plan characteristics-notably the employer matching rate-may play 

a critical role in retirement saving. 

It has long been assumed that matching employer contributions-the allure of "free money" to 

participants (and would-be participants)-provided a strong financial motivation to contribute to 

defined contribution plans, notably 401(k)s. Industry surveys have suggested that employee 

contribution levels tend to cluster around the matching levels-and that has reinforced the notion of a 

cause-and-effect connection. 

5.2.2.1 Reasons for employers to provide matching contributions 

Historically, providing employer matching contributions to 401(k) plans was thought to be a primary 

means of increasing the likelihood of passing the nondiscrimination (ADP) tests (Brady, 2006). However 

Ippolito (1997) provides an economic analysis of the feasibility of this approach and determines that an 

alternative explanation might be more plausible: In essence, employers use the 401(k) match to attract 

and retain a workforce with specific characteristics and matches are used to reward workers with lower 

discount rates. Mitchell, Utkus, and Yang (2006) posit that employee demand could be another 

alternative explanation, with the result that that highly compensated employees demand more 

generous tax-deferred employer matches. Both of these latter arguments see the employer match as a 

workforce management tool, rather than a regulatory response. 

5.2.2.2 Empirical studies on the impact of matching contributions on participation 

In the last 20 years, several empirical studies" have analyzed the effect of the existence of matching 

contributions on the probability of participating in 401(k) plans that use voluntary enrollment. The 

magnitude of the results vary considerably depending on the type of database used, the methodologies 

employed, and the assumptions utilized; however, the overall consensus is that, for 401(k) plans that 

have not employed automatic enrollment, an employer match has a positive impact on plan 

participation. 

An important caveat is that most available survey data do not contain detailed information on plan 

design. In an attempt to mitigate this problem, Mitchell, Utkus and Young (2007) use 2001 data on 500 

401(k) retirement plans covering nearly 740,000 employees to evaluate how employer matching 

incentives influence retirement saving. Their analysis of the impact of employer matching contributions 

on participation included two important innovations: First, they evaluated employee saving behavior 

separately for NHCEs and HCEs at the firm level. Second, in an attempt to deal with nonlinear 401(k) 

matching formulae (explained in more detail later), they bifurcated the formulae into an "incentive 

18 
51 

element" (the degree to which the employer matches various increments of employee compensation) 

and a "liquidity element" (indicating how much the employee must contribute in order to receive the 

entire employer incentive payment). 

The authors analyze the data with OLS regression and find that each $0.10 increase in the match rate 

raises NHCE participation rates by around 1 percentage point. However, for this group, the participation 

incentives are statistically insignificant between 3 and 6 percent of pay, and turn negative for matches 

above 6 percent of pay. 

The authors conclude that the incentive effects of employer matching contributions are quite small. 

Summarizing their empirical results as follows (Mitchell, Utkus and Young, 2007): 

The empirical model implies that close to 65 percent of NHCEs at the typical firm would join 

their 401(k) plan regardless of the presence of a match. Plan participation would be estimated 

to rise over a narrow range, by five to 15 percentage points, responding to a range of match 

offerings, from a modest ($0.2S per dollar on the first three percent of pay) to a very generous 

match ($1.00 per dollar up to six percent of pay). At the modal promised employer match ($0.50 

per dollar on six percent), over one-quarter of NHECs fails to participate in the 401(k) plan; even 

with a generous match, more than 20 percent still fails to join. 

Given that the participation percentages for certain groups of eligible participants (especially the young 

and low income) have increased substantially under automatic enrollment (AE), many have wondered 

whether the matching contributions would continue to be associated with higher participation rates 

under these plans. 

Beshears, Choi, Laibson, and Madrian (2007) estimated the employer match's impact on savings plan 

participation under automatic enrollment in two ways: 

• They analyzed a plan sponsor with an AE 401(k) plan that replaced its employer match with a 

non-elective contribution.·3 They found that plan participation rates decreased by 5 to 6 

percentage points at most among new hires after the plan change." 

• They pooled data for nine firms with automatic enrollment to identify the relationship between 

participation rates and the match and found that a 1 percentage pOint decrease in the maximum 

potential match was associated with a 1.8 to 3.8 percentage point decrease in plan participation 

at Six months of eligibility. 

Based on these findings, the authors estimate that for a typical employer match (viz., 50 percent match 

on the first 6 percent of pay), eliminating the match under an AE plan could reduce plan participation by 

5 to 11 percentage points. 

Dworak-Fisher (2008) uses microdata from the National Compensation Survey (NCS) to offer a new line 

of research on the impact of employer matches on 401(k) participation rates. The author splits the 

participants into three different income grou ps and concludes that: 

• For those with the lowest income, employer matches have little or no effect on participation, 

while automatic enrollment has dramatic effects, but 

• Among workers in the middle income group, employer matches have substantial effects that 

may be larger than the effects of automatic enrollment. 

It should be noted, however, that the author use NCS microdata from the respondents initiated in 2002 

and 2003, and that only a small percentage of the plans in the sample (6 percent) were governed by 

automatic enrollment provisions. 

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52 

5.2.2.3 Empirical studies an the impact of matching contributions on contribution behavior in 

voluntary enrollment 401(k} plans" 

While the logic behind an employer match increasing the incentive for an employee to contribute to a 

401(k) plan appears uncontroversial, the analysis becomes more complex with respect to the level of 

contributions the employee will make. This may happen for two reasons: 

While a larger match rate will provide a larger financial incentive for the employee to contribute 

(at least within a specified range), the employee may have a certain target in mind with respect 

to the total (employee and employer) contribution that needs to be made each year to satisfy 

their financial planning objectives. For example, if the employee has determined that he or she 

needs to save a total of 9 percent of compensation, the required employee contribution would 

be 6 percent if the employer matched 50 percent up to 6 percent of compensation but only 4.5 

percent if the employer matched 100 percent up to (at least) 4.5 percent of compensation. 

Thus, for some employees, a higher match rate may result in a lower employee contribution 

rate. 

• Empirical analysis emphasizing the match rate exclusively (as opposed to the match ~ or the 

interaction between the two) may provide unexpected results. For example, if the employee's 

primary concern is to make sure they receive the maximum match possible from the plan 

sponsor, they would be more likely to contribute at least as much as the match cap. In this case, 

an employer match of 50 percent of the first 6 percent of compensation would likely generate a 

larger employee contribution rate than one matching 100 percent of the first 3 percent of 

compensation-even though the maximum total employer match for that single worker would 

be 3 percent of compensation in either case. 

This helps explain some of the early empirical work in this area. For example, using plan data from Form 

5500 filed annually by ERISA-qualified plans with the IRS, Papke (1995) finds that substantial employee 

contribution increases occur when an employer moves from a zero to a small or moderately sized match 

rate proxy, but that at higher match rates employee contributions fall. Using a subset of the EBRI/ICI 

401(k) database with salary information, Holden and VanDerhei (2001) performed a regression analysis 

of the influence of the match rate on participants' contribution rates and found that participant beforetax contribution rates fell minimally as the employer match rate rose.46 However, that analysis also 

found that as the match cap chosen by the employer increased, participant contribution rates rose. 

Kusko, Poterba, and Wilcox (1994) utilized employee-level data from the 401(k) plan at a medium-sized 

U.S. manufacturing firm to analyze the participation and contribution decisions of workers eligible for 

this plan. Their analysis suggested that contribution decisions of eligible employees are relatively 

insensitive to the rate of employer matching on worker contributions and that most employees maintain 

the same participation status and contribution rate year after year despite substantial changes in the 

employer's match rate. Moreover, they find that institutional constraints on contributions, imposed by 

either the employer or the IRS, are an extremely important influence on contributor behavior. 

This was confirmed by Yakoboski and VanDerhei (1996) when they analyzed the 401(k) participant data 

from three large 401(k) sponsors. Moreover, they found a significant amount of clustering around the 

match cap. For example: 

• Company A had a maximum pretax contribution of 9 percent of earnings and a match rate of 30 

percent for the first 5 percent of earnings. A total of 21 percent of participants contributed 5 

percent of pay to the plan and 45 percent contributed 9 percent of pay while 1 percent 

contributed up to the 402(g) maximum for that year. The average deferral percentage for 

Company A was 6.7 percent. 

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53 

• The non-highly compensated employees in Company B were allowed to contribute a maximum 

of 15 percent pretax and had a 100 percent match for the first 3 percent of earnings. Twentyone percent of all non-highly compensated partiCipants contributed 3 percent of pay while 10 

percent contributed 15 percent and only 0.1 percent contributed at the 402(g) limit. The 

average deferral rate was 5.4 percent. 

The highly compensated employees in Company B were allowed to contribute a maximum of 10 

percent pretax and had a 100 percent match for the first 3 percent of earnings. Fifteen percent 

of all highly compensated participants contributed 3 percent of pay while 10 percent 

contributed 10 percent and 15 percent contributed at the 402(g) limit. The average deferral rate 

was 5.9 percent. 

• Company C had a maximum pretax contribution of 16 percent of earnings and a match rate of 

2/3 for the first 6 percent of earnings. A total of 30 percent of participants contributed 6 percent 

of pay to the plan and 7 percent contributed 16 percent of pay while 12 percent contributed up 

to the 402(g) maximum for that year. The average deferral percentage for Company A was 6.3 

percent. 

Even though this analysis includes the experience of only three plan sponsors, the conclusion should be 

obvious: In addition to individual-specific characteristics (e.g., age, wage and tenure), employee 

contribution behavior will undoubtedly be influenced to a large extent by plan design variables (viz., the 

match cap and plan limits for pretax contributions) as well as the 402(g) limits. 

VanDerhei and Copeland (2001) attempted to deal with these plan design influences on employee 

contribution behavior by working with a small subset of the EBRI/ICI401(k) database.47 There was 

sufficient information to track accurately 137 different "pure" matching formulas, that is, one without a 

nonelective contribution.4s Participants in the database were excluded if they were under age 20 or over 

age 64, had been with the current employer for less than one year, and/or had less than $10,000 in 

earnings. After applying each of these screens and deleting any participants with existing account 

balances who did not make employee contributions in 1998, a total of 163,346 participants were 

available for analysis. 

In previous research, the level of contributions was estimated by assuming that they were a function of 

demographic variables and some measure of a match rate of the plan. However, this approach fails to 

account for the fact that some plans have different match rates for different levels of the percentage of 

compensation contributed. For example, a plan may offer a dollar-for-dollar match for the first 2 percent 

of compensation contributed and a 50 percent match for the next 3 percent of compensation 

contributed. In addition, the strategy does not clearly distinguish between a plan that matches SO 

percent of contributions for the first 4 percent of compensation from those plans that match SO percent 

of contributions for the first 6 percent of compensation. Since the data used in this research contain 

plan-specific matching formulas, the actual match rate at each percentage level of contributions is 

known. Therefore, VanDerhei and Copeland (2001) used an estimation procedure that takes advantage 

of knowing the differing incentives that an employee eligible to contribute to a 401(k) faces at each 

percentage of compensation level of contributions. 

The parameters of a model for the first increment can be estimated from the entire sample by dividing it 

into two groups: those who make the contribution and those who do not. The parameters of a model 

for the second increment can be estimated by dividing the subsample of those who make the first 

incremental contribution into those who make the next 1 percent of compensation contribution and 

those who do not. Successive iterations are estimated until the maximum plan limit of all match 

formulas is obtained. In this model, the decision of an eligible employee is examined at each of level of 

possible contributions for the employee. Consequently, the changes in the incentives of contributing an 

21 
54 

additional percentage of compensation are captured through this strategy as well as the ability to 

control whether or not the participant is allowed to contribute (e.g., in some plans an HCE might be cut 

off from making additional contributions after 6 percent of compensation, while an NHCE may be 

allowed to contribute to lS percent of compensation). 

The application of this model is illustrated in Figure 8 of VanDerhei and Copeland (2001) with an 

example of the computation of the probability that a 22-year-old employee with one year of tenure with 

the current employer and wages of $15,000 who already contributed 4 percent of compensation will 

contribute an additional percent. This value is estimated to be as low as 81 percent if this is the last 

interval of compensation that is matched by the employer (i.e., the additional match is equal to zero). In 

contrast, the same employee is estimated to have a 90 percent probability of contributing the extra 

percent of compensation if they would forfeit the option to earn an extra 1 percent of employer match 

if they continued to contribute to MAXMATCH. In each of the three illustrated intervals, the model 

predicts that those with the lowest estimated probability of contributing the extra percent of 

compensation when the additional match is set equal to zero (young employees and those with lower 

levels of wage and tenure) will experience the most sensitivity to increases in the additional match level. 

Figure 19 provides predicted contributions for stylized participants under typical plan matching 

formulas. This shows that older participants and those with higher levels of wage and tenure are 

expected to have higher employee contributions for a given plan design. However, this also allows one 

to investigate how the change in plan design will impact the expected contribution behavior. For 

example, a change from a 50 percent match on the first 6 percent of compensation to a 75 percent 

match over the same range results in an expected increase in employee contributions for all ofthe 

stylized participants. Moreover, this figure demonstrates the ability of the model to predict 

contributions under a two-tier matching formula (e.g., a 75 percent match on the first 2 percent of 

compensation, decreasing to 50 percent for the next 3 percent of compensation) as well as the ability to 

model employees participating in a plan with no employer match. 

5.2.2.4 The impact of adopting automatic enrollment on employer contribution rates 

Soto and Butrica (2009) conclude that among a sample of large 401(k) plans, match rates are lower 

among firms with automatic enrollment than among those without automatic enrollment after 

controlling for firm characteristics. However, there were two major limitations of this analysis: 

This study was based on U.S. Department of labor Form 5500 data. that do not include speCific 

information on 401(k) match rates. Instead, the authors constructed an estimate for the match 

rate as the ratio of employer-to-employee contributions for each 401(k) plan. 

• They merged the Form 5500 data with information on automatic enrollment from the Pensions 

& Investments database of the top 1,000 pension funds, which includes a flag indicating whether 

plan administrators reported offering automatic enrollment in their defined contribution 

(401(k)-type) plans. However, this database does not report the year that the automatic 

enrollment provision was adopted, so there is no way to tell from this data source how long 

auto-enroilment had been implemented in a plan. 

The authors ran regression analysis on this database and produced a finding that: 

suggests 0 negative relotionship between automotic enrollment and match rates and is 

statistically significant at the firm-level. In particular, match rates are about 7 percentage paints 

lower among firms with automatic enrollment than among those without automatic enrollment, 

after controlling for firm characteristics. 

22 
55 

The authors correctly point out that although the regressions suggest a relationship between automatic 

enrollment and match rates, they do not necessarily imply that auto-enrollment causes lower match 

rates; however, this crucial qualification has been generally ignored in third-party accounts of the study. 

These conclusions conflict with previous EBRI research," which surveyed defined benefit plan sponsors 

administered by Mercer Human Resource Consulting to gauge their recent activity and planned 

modifications to their defined benefit (pension) and defined contribution (401(k)-type) plans. The survey 

also was able to determine what, if any, increases in employer contributions to defined contribution 

plans were made in conjunction with reductions to their defined benefit plans. 

Although the association between the adoption of automatic enrollment and employer contributions to 

401(k) plans was not the focus of the study, one-third of the defined benefit plan sponsors surveyed 

indicated that they had already increased or planned to increase their employer match to a defined 

contribution plan, and 20.9 percent indicated that that they had already increased or planned to 

increase their nonmatching employer contributions to a defined contribution plan. There was some 

overlap between the two groups, but overall, 42.5 percent of the defined benefit plan sponsors 

surveyed indicated that they had already increased or planned to increase their employer match and/or 

nonmatching employer contribution to a defined contribution plan. This was particularly evident among 

defined benefit plan sponsors that had closed a defined benefit plan to new hires, frozen their defined 

benefit plan to all members in the last two years, or planned to do so in the next two years.so 

Moreover, the 2007 EBRI study found an extremely large correlation between the adoption of automatic 

enrollment for a 401(k) plan and the freezing or closing of the defined benefit plan.51 Of those defined 

benefit plan sponsors that had closed their defined benefit plans in the last two years, 80.5 percent had 

either already adopted or were currently considering adopting automatic enrollment features for their 

401(k) plans. Of those defined benefit plan sponsors that had closed their defined benefit plans in the 

last two years, 76.1 percent had either already adopted or were currently considering adopting 

automatic enrollment features for their 401(k) plans. s2 

VanDerhei (April 2010) analyzes in detail plan-specific data of approximately 1,000 large defined 

contribution plans for salaried employees from Benefit SpecSelect'M (a trademark of Hewitt Associates 

llC) in 200S and 2009. From that information, a subsample of plan sponsors was created that had 

adopted automatic enrollment 401(k) plans by 2009, but did not have them in 2005 (the last observation 

that was not influenced by PPA). The following information was coded for each plan: 

• The default contribution rate for the AE plan in 2009. 

• The entire match rate contribution formulae for both years. 53 

• All nonelective contributions paid to the defined contribution participants by the employer. 

Whether plan sponsors were more or less generous after adopting AE was measured with three 

different metrics: 

• The average 2009 first-tier match rate was 87.78 cents for each dollar contributed, while the 

average 2005 first-tier match rate was 81.26 cents for each dollar contributed. The difference of 

6.52 cents for each dollar contributed suggests that, to the extent that this sample is 

representative of the universe of large 401(k) sponsors, those sponsors adopting AE were more 

generous to the 401(k) participants when measured by this variable after automatic enrollment 

was implemented than they were before. 

• The average effective match rateS4 for 2009 was 4.32 percent of compensation, but only 4.00 

percent of compensation in 2005. The increase of 0.32 percentage points again suggests that 

23 
56 

large 401(k) sponsors adopting AE were more generous to the 401(k) participants when 

measured by this variable after the adoption of automatic enrollment than before. 

• The average total employer contribution rate" for 2009 was 6.35 percent of compensation and 

5.46 percent of compensation in 2005. The increase of 0.89 percentage points once more 

suggests that those large 401(k} sponsors adopting AE were more generous to the 401(k) 

participants when measured by this variable than before. 

This information was then combined with the defined benefit information for the same sponsor in an 

attempt to analyze whether EBRI's 2007 findings of the association between defined benefit 

freezing/closing and enhanced 401(k) contributions were corroborated. Figure 1 of VanDerhei (April 

2010) demonstrates that the average improvements for all three metrics were much higher for sponsors 

that had frozen/closed their defined benefit plans than for the overall average. For example, the change 

in the total employer contribution rate for all frozen plans was 1.64 percent of compensation versus 

0.89 percent for the overall average. Employers that had closed their defined benefit plans to new 

employees had an even larger average improvement: 2.82 percent of compensation. The defined 

benefit plan sponsors that had frozen or closed their plans were then split into those that had done so 

prior to adopting AE and those that had changed their defined benefit plans between 2005 and 2009. If 

the hypothesis that the 401(k} improvements were a result, at least partially, of a simultaneous quid pro 

quo for the decreased accruals in the defined benefit plan, one would expect that the earlier 

modifications would be less generous than the modifications that took place approximately at the time 

of the conversion to AE. In fact, this is exactly what is found for all six comparisons in the study. For 

example, the average total employer contribution improvement for firms that had frozen their plans 

prior to 2005 was 0.69 percent of compensation, compared with 2.45 percent for those that froze 

between 2005 and 2009. Similar evidence is found for those that closed their pension plans to new 

employees: The average improvement in total employer 401(k) contribution was only 0.56 percent of 

compensation for those that closed prior to 2005, but 3.34 percent for those that closed the plan 

between 2005 and 2009. 

6 Appendix A: Brief Description of RSPMS6 

One of the basic objectives of RSPM is to simulate the percentage of the population that will be "at risk" 

of having retirement income that is inadequate to cover basic expenses and pay for uninsured health 

care costs for the remainder of their lives once they retire.s7 However, the EBRI Retirement Readiness 

Rating'" also provides information on the distribution of the likely number of years before those at risk 

"run short of money," as well as the percentage of compensation they would need in terms of additional 

savings to have a 50, 70, or 90 percent probability of retirement income adequacy. 

Appendix C describes how households (whose heads are currently ages 36-62) are tracked through 

retirement age, and how their retirement income/wealth is simulated for the following components: 

• Social Security. 

• Defined contribution balances. 

• IRA balances. 

• Defined benefit annuities and/or lump-sum distributions. 

• Net housing equity.58 

A household is considered to run short of money in this model if aggregate resources in retirement are 

not sufficient to meet aggregate minimum retirement expenditures, which are defined as a combination 

24 
57 

of deterministic expenses from the Consumer Expenditure Survey (as a function of income), and some 

health insurance and out-of-pocket health-related expenses, plus stochastic expenses from nursing 

home and home health care expenses (at least until the point they are picked up by Medicaid). This 

version of the model is constructed to simulate "basic" retirement income adequacy; however, 

alternative versions of the model allow similar analysis for replacement rates, standard-of-living 

calculations, and other ad hoc thresholds. 

The version of the model used for the analysis in this testimony assumes all workers retire at age 65 and 

immediately begin to withdraw money from their individual accounts (defined contribution and cash 

balance plans, as well as IRAs) whenever the sum of their basic expenses and uninsured medical 

expenses exceed the after-taxS9 annual income from Social Security and defined benefit plans (if any). If 

there is sufficient money to pay expenses without tapping into the tax-qualified individual accounts,GO 

the excess is assumed to be invested in a non-tax-advantaged account where the investment income is 

taxed as ordinary income. 61 The individual accounts are tracked until the point at which they are 

depleted; if the Social Security and defined benefit payments are not sufficient to pay basic expenses, 

the entity is designated as having "run short of money" at that time. 

7 Appendix B: Brief Chronology of RSPM 

The original version of RSPM was used to analyze the future economic well-being of the retired 

population at the state level. EBRI and the Milbank Memorial Fund, working with the governor of 

Oregon, set out in the late 1990s to see if this situation could be addressed for Oregon. The analysis·' 

focused primarily on simulated retirement wealth with a comparison to ad hoc thresholds for 

retirement expenditures, but the results made it clear that major decisions lie ahead if the state's 

population was to have adequate resources in retirement. 

Subsequent to the release of the Oregon study, it was decided that the approach could be applied to 

other states as well. Kansas and Massachusetts were chosen as the next states for analysis. Results of 

the Kansas study were presented to the state's Long-Term Care Services Task Force on July 11, 2002,63 

and the results of the Massachusetts study were presented on Dec. 1, 2002.64 With the assistance ofthe 

Kansas Insurance Department, EBRI was able to create Retirement Readiness Ratings based on a full 

stochastic decumulation model that took into account the household's longevity risk, post-retirement 

investment risk, and exposure to potentially catastrophic nursing-home and home-health-care risks. This 

was followed by the expansion of RSPM and the Retirement Readiness Ratings to a national model and 

the presentation of the first micro-simulation retirement-income-adequacy model built in part from 

administrative 401(k) data at the EBRI December 2003 policy forum'" The basic model was then 

modified for testimony for the Senate Special Committee on Aging in 2004 to quantify the beneficial 

impact of a mandatory contribution of 5 percent of compensation"· 

The first major modification of the model was presented at the EBRI May 2004 policy forum. In an 

analysis to determine the impact of annuitizing defined contribution and IRA balances at retirement age, 

VanDerhei and Copeland, 2004, were able to demonstrate that for a household seeking a 75 percent 

probability of retirement income adequacy, the additional savings that would otherwise need to be set 

aside each year until retirement to achieve this objective would decrease by a median amount of 30 

percent. Additional refinements were introduced in 2005 to evaluate the impact of purchasing longterm care insurance on retirement income adequacy.·7 

The model was next used in March of 2006 to evaluate the impact of defined benefit freezes on 

participants by Simulating the minimum employer-contribution rate that would be needed to finanCially 

indemnify the employees for the reduction in their expected retirement income under various rate-of25 
58 

return assumptions.68 later that year, an updated version of the model was developed to enhance the 

EBRI interactive Ballpark E$timate· worksheet by providing Monte Carlo simulations of the necessary 

replacement rates needed for specific probabilities of retirement-income adequacy under alternativerisk-management treatments.69 

RSPM was significantly enhanced for the May 2008 EBRI policy forum by allowing automatic enrollment 

of 401(k) participants with the potential for automatic escalation of contributions to be included.70 

Additional modifications were added in 2009 for a Pension Research Council presentation that involved 

a winners/losers analysis of defined benefit freezes and the enhanced employer contributions to 

defined contribution plans provided at the time the defined benefit plan was frozen. 71 

A new subroutine was added to the model to allow simulations of various styles of target-date funds for 

a comparison with participant-directed investments in 2009.72 In April 2010, the model was completely 

re-parameterlzed with 401(k) pIan-design parameters for sponsors that have adopted automaticenrollment provisions." A completely updated version of the national model was produced for the May 

2010 EBRI policy forum and used in the July 2010 Issue Brie!. 74 

The new model was used to analyze how eligibility for participation in a defined contribution plan 

impacts retirement income adequacy in September 2010.75 It was also used to compute retirement 

savings shortfalls for Baby Boomers and Generation Xers in October 2010.76 

In October 2010 testimony before the Senate Health, Education, labor and Pensions Committee on "The 

Wobbly Stool: Retirement (In)security in America," the model was used to analyze the relative 

importance of employer-provided retirement benefits and Social Security.77 

In February 2011, the model was used to analyze the impact of the 2008-2009 crisis in the financial and 

real estate markets on retirement income adequacy.78 

An April 2011 article introduced a new method of analyzing the results from the RSPM. 79 Instead of 

simply computing an overall percentage of the simulated life paths in a particular cohort that will not 

have sufficient retirement income to pay for the simulated expenses, the new method computed the 

percentage of households that would meet that requirement more than a specified percentage of times 

in the simulation. 

As explored in the June 2011/ssue Brief, the RSPM allowed retirement-income adequacy to be assessed 

at retirement ages later than 65.80 . 

In a July 2011 Notes articleS', it provided preliminary evidence of the impact of the "20/20 caps" 

proposed by the National Commission on Fiscal Responsibility and Reform on projected retirement 

accumulations. 

The August 2011 Notes articleS! evaluated the importance of defined benefit plans for households, 

assuming they retire at age 65, while demonstrating the impact of defined benefit plans in achieving 

retirement income adequacy for Baby Boomers and Gen Xers. 

Finally, the September 2011 Senate Finance testimony83 analyzed the potential impact of various types 

of tax-reform options on retirement income adequacy. This was expanded in the November 2011 EBRI 

Issue Brief"' and a new set of survey results were added to the model in the March 2012 Notes article.8s 

26 
59 

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Yakoboski, Paul. "Salary Reduction Plans and Individual Saving for Retirement." EBRlissue Brief, no. 1SS 

(Employee Benefit Research Institute, November 1994). 

Yakoboski, Paul, and Jack VanDerhei. "Contribution Rates and Plan Features: An Analysis of Large 401(k) 

Plan Data." EBRllssue Brief, no. 174 (Employee Benefit Research Institute, June 1996). 

31 
64 

9 Endnotes 

1 A brief description of the EBRI Retirement Security Projection Modele (RSPM) is provided in Appendix A followed 

bV a chronology of Its development and utilization in Appendix B. 

2 It should be noted that the baseline assumptions used in the 2010 analysis did not allow for the utilization of net 

housing equity to ensure retirement income adequacy. A future publication will include a 2012 update for this 

analysis with housing equity used "as needed." 

'This number is somewhat smaller than the $4.6 trillion reported in VanDerhei (October 2010); however, the 

baseline assumptions used in the 2010 analvsis did not allow for the utilization of net housing equity to ensure 

retirement Income adequacy. When the 2012 analysis is repeated with the same assumptions as used in 2010, the 

aggregate deficit increases to $4.8 trillion. 

4 These findings are part of the n" annual Retirement Confidence Survey (RCS), a survev that gauges the views 

and attitudes of working-age and retired Americans regarding retirement, their preparations for retirement, their 

confidence with regard to various aspects of retirement, and related issues. The surveV was conducted in January 

2012 through 20-minute telephone interviews with 1,262 individuals (1,003 workers and 259 retirees) age 25 and 

older in the United States. Random digit dialing was used to obtain a representative cross section of the U.S. 

population. To further increase representation, a cell phone supplement was added to the sample. Starting with 

the 2001 wave of the RCS, all data are weighted bV age, sex, and education to reflect the actual proportions in the 

adult population. Data for waves of the Res conducted before 2001 have been weighted to allow for consistent 

comparisons; consequently, some data in the 2012 Res may differ slightly with data published in previous waves of 

the Res. Data presented in tables in this report may not total to 100 due to rounding and/or missing categories. 

5 Helman, Copeland and VanDerhei (2012) 

6 In Dushi, lams, and lichtenstein (2011), the results from another individual response survey, the Survey of 

Income and Program Participation (SIPP), are compared with tax records, where they found that a number of 

indiViduals said they made contributions to a defined contribution plan but the tax records said they didn't and 

others made contributions according to the tax records but didn't report the contributions in the survey. When the 

percentages are netted out, the tax records show a 5 percentage point higher level of participation than what the 

survey responses show. Consequently, there are issues with the accuracy of certain individual responses in 

retirement plan participation. 

7 Figure 30 from Copeland (October 2011). 

• It should be noted that there is more than one definition of a pension freeze: 

A "hard freeze" is one in which no additional benefits will accrue to any current plan participants from either 

additional tenure or increases in compensation. 

A "saft freeze" will generally limit increases for current participants in accrued benefits for additional years of 

participation, but the definition of compensation used in the formula may be allowed to increase. 

In addition, a plan sponsor may choose to implement a partial freeze in which the plan is frozen for some but 

not all participants. 

9 This Is true only in those cases in which the defined benefit participant ends up with an annuity in retirement. 

Those who have been cashed out or chose to take a lump sum distribution would still need to deal with (postretirement) investment risk and longevity risk on their own. 

,. In recent years the longevity risk may also be dealt with via longevity insurance or longevity annuities. See Park 

(2011) for more detail. 

11 Those in the lowest income quartile will be more likely to benefit from Medicaid while those in the highest 

income quartile are more likely be able to self-Insure the risk without a catastrophic impact on their future 

retirement income. 

32 
65 

12 Utkus and Bapat (2011) analyzed defined contribution plan participants at Vanguard and found that five-year 

returns (2005-2010) for single target-date investors ranged from 3,62 percent to 4,65 percent per year for the 5th 

and 95th percentiles with a mean of 3,93 percent. Among participant-directed funds, five-year returns ranged from 

-0.02 percent to 8.09 percent per year for the 5

th and 95th percentiles with a mean of 3.76 percent. 

13 VanDerhei, Holden, Alonso and Bass (2011). 

14 It should be noted that some plan sponsors may have turned to their 401(k) plans as a means of freeing up cash 

flow that is required for their legally required minimum contributions to defined benefit plans. A review by 

Salisbury and Buser (2009) of 251401(k) plan sponsors that have suspended matching contributions for their 

approximately 4.4 million workers finds that those employing 50 percent of the workers also maintained an open 

defined benefit plan. An additional 16 percent of workers were with employers that were still obligated to fund a 

frozen defined benefit plan. Further, 8 percent of the workers were with an employer that had both an open and a 

frozen defined benefit plan that carried funding obligations. 

15 Twelve hundred 401(k) plan sponsors were randomly selected to complete the 401(k) Questionnaire via a secure 

website. 

16 More refined analysis is currently underway to link the 2006 and 2007 contributions on a plan-specific basis and 

filter out mid-year suspensions. 

11 All plans were still active as of year-end 2008. 

,. The proxy was plan aggregate employer contributions divided by employee contributions for 2007. This is 

obviously only a rough proxy and will be inaccurate to the extent nonelective contributions exist for the plan 

and/or employees contribute in excess of the maximum amount needed to obtain the full match. This analysis is 

currently being refined using year-end 2010 data. 

,. It should be noted that this analysis was done using both new contributions and investment return to offset the 

investment losses experienced during the market crisis. Based on an analysis of more than 3 million participants 

from more than 2,000 plans, Utkus and Young (2011) found that the median rise in account balances between 

December 2007 and December 2010 was 31 percent. A subsequent analysis of nearly 2 million participants during 

the same time period by Utkus and Bapat (2011) showed a positive average annual total return (0.11 percent). 

The latter were based on investment results alone - before considering the effect of contributions. 

20 While 65 seems to still be a societal norm, even Social Security has now adopted a later age for full benefits. 

21 VanDerhei and Copeland (2011). A future version of the model will include the ability to model retirement ages 

prior to Medicare eligibility. 

22 It is important to note that this models all U.s. workers. As a result, the balances will be significantly smaller 

than simulation models of those current 401(k) participants (Holden and VanDerhei, 2002) or those eligible for 

participation (Holden and VanDerhei, 2005), 

23 The simulation model analyzes how success changes with: 

• The maximum level of employee contributions allowed by the plan sponsor (6, 9, 12 and 15 percent of 

compensation). 

• The annual increase in contributions (1 vs. 2 percent of compensation), 

• Whether employees are assumed to opt out of the automatic escalation. 

• Whether employees are assumed to remember/retain their previous level of contributions when they 

change jobs vs. reverting back to the plan's initial default. 

24 VanDerhei (September 2011). 

25 Gale (2011). 

33 
66 

26 The analysis for the Senate Finance Committee hearing modeled the following scenarios: 

Employer contributions are modified in such a manner that the total match (employer plus government 

match) remains constant. 

All plan sponsors drop the plan match, and all employees receive a 30 percent match from the 

government. 

All plan sponsors drop the plan match, and all employees receive an 18 percent match from the 

government. 

In later ESRI analysis (VanDerhei, November 2011), the following scenarios were added: 

No plan sponsors drop the plan match, and all employees receive an 18 percent match from the 

government. 

No plan sponsors drop the plan match, and all employees receive a 30 percent match from the 

government. 

27 VanDerhei (September 2011). The 2011 RCS questions were fielded in January 2011 and therefore did not ask 

401(k) participants about the specific provisions used in the September 2011 Gale proposal. 

2. This survey was conducted online within the United States by Harris Interactive commissioned by the Principal 

Financial Group from May 17-June 17, 2011. It surveyed 798 employee-benefit decision makers for companies 

with three to 1,000 employees that do offer defined contribution retirement plans. These decision makers were 

selected from a Principal Financial Group client list, and their data were not weighted. 

2. A similar question was asked with the 30 percent government match provision suggested in Gale, Gruber, and 

Orszag (2006). 

30 A similar question was asked for a 30 percent government match. However, follow-up information for those 

indicating an increase or decrease in contributions is not available. 

31 The results assumed none of the 401(k) participants were automatically enrolled in these retirement plans; 

instead, they presumed that workers' rate of contribution after the first year were driven primarily by age and 

income characteristics rather than tenure with the current employer, as they might be in auto-enrollment plans 

with an automatic escalation of worker contributions. The exclusion of auto-enrollment plans in this analysis was 

necessary given the current modeling assumption of no job change. It would be very difficult to provide an 

accurate analysis of the average percentage reductions In 401(k) balance under auto-enrollment If the plans 

included an automatic escalation provision. For example, if a participant's contribution rate had already been 

escalated to 8 percent of compensation at one employer, and upon job change was automatically enrolled into 

another 401(k) plan, would they "remember" their current rate of deferral and start deferring in the new plan at 

that rate, or would their contribution rate drop to the default rate of the new plan? Undoubtedly many 401(k) 

participants in this automatic enrollment situation follow the latter approach. As additional information becomes 

available on workers' behavioral responses to auto-enrollment, EBRI will update this analysis to provide a more 

robust model. 

32 See Holden and VanDerhel (2005). 

33 See VanDerhei and Copeland (2008). 

34 The full stochastic nature of the model will be included in future analysis. 

3S It is important to note that the annuitized accumulations in this analysis are from 401(k) contributions 

exclusively and do not include projected Social Security retirement benefits. This is in contrast to other EBRI 

research (e.g., VanDerhei and Lucas, November 2010) that Includes both components. However, in the previous 

analysis, the experience of all workers (not just those who were currently 401(k) participants) was simulated and 

job change was allowed. 

34 
67 

36 These estimates compare quite favorably to those in Holden and VanDerhei (2002) when the difference between 

nominal and real replacement rates are considered. However, this is to be expected given the assumptions listed 

above (especially the lack of job turnover and therefore the suppression of cashouts prior to retirement). 

37 The baseline results in Figures 17 and 18 were simulated assuming the midpoint value for each category in the 

AliianceBernstein survey. Sensitivity analysis of this assumption is shown in Figures 3 and 4 of VanDerhei (March 

2012) for the minimum reduction in account balances, and in Figures 5 and 6 of the same publication for the 

maximum reduction in account balances. The average percentage reductions in account value in Figure 3 vary from 

3.1 to 19.7 percent (depending on income quartile) for 401(k) participants currently 26-35 under the minimum 

reduction scenario. Figure 5 shows that they vary from 8.8 to 24.4 percent (depending on income quartile) for 

401(k) participants currently 26-35 under the maximum reduction scenario 

38 Under the baseline assumptions, the average percentage reduction in employee contributions for this group in 

response to the proposal is 14.3 percent. Account balances will also be reduced due to the plan-sponsor reaction. 

3. For example, a 40-year-old participant would need to have a tenure of at least 10 years with the current 

employer to be included in this analysis. Alternative specifications of minimum tenure were used with essentially 

the same results. 

'" See pages 10-11 of Miller (2011) for an example. 

41 Given the much larger simulated account balance reductions for smaller plans shown in Figure K, it is important 

to note that the plan-size distribution used in this simulation model is based on those found in the 

EBRI/lnvestment Company Institute (ICI) 401(k) database, not the universe of 401(k) plans. Evidence of the 

magnitude of possible statistical bias in this regard can be found in VanDerhei, Holden, Alonso and Bass (2011). 

The third panel of Figure 4 (page 8) in that publication shows the distribution of plans in the EBRI/ICI 401(k) 

database in 2010 vs. 2008 Department of labor (DOL) Form 5500 for all401(k) plans and suggests an underrepresentation of small plans for the EBRI/ICI401(k) database. The plan-size variable was specified in terms of 

participants Instead of assets, but a similar distribution would be expected in the latter case. If this is indeed the 

case, the RSPM estimates for overall average benefit reductions presented here would be expected to be smaller 

than those that would be evidenced by the full 401(k) universe. 

42 Andrews (1992); Even and Macpherson (1996); Basset, Fleming and Rodrigues (1998); Even and Macpherson 

(2005); Englehardt and Kumar (2007); GAO (1997); Kusko, Poterba and Wilcox (1998); Mitchell, Utkus and Yang 

(2007); Papke (1995) and Papke and Poterba (1995); Yakaboski (1994); 

43 The original matching contribution was 25 percent on the first 4 percent of pay contributed. It was replaced with 

an employer contribution equal to 4 percent of pay plus an annual profit-sharing contribution 

44 The average employee contribution rate fell by 0.65 percent of pay. 

45 Although the impact of matching contributions on employee contribution behavior has been studied extensively 

in voluntary enrollment 401(k) plans, there has been relatively little research on automatic enrollment plans at this 

point in time. Nesmith, Utkus and Young (2007) provide evidence that new employees hired under automatic 

enrollment 401(k) plans have participation rates nearly double those for new employees hired under voluntary 

enrollment 401(k) plans (86 percent versus 45 percent). However, they show that overall plan contribution rates 

under automatic enrollment fall because many new participants who would have voluntarily chosen a higher 

contribution rate remain at the low default levels. Additional research in this field has been conducted on a 

relatively small sample of 401(k) plans in Madrian and Shea (2001); Choi, Laibson, and Madrian (2004); and Choi, 

laibson, Madrian, and Metrick (2006) 

46 This result is from a regression on a sample of all participants (whether contributing or not) for whom match rate 

and match level information was provided or derived. The regression model included age, tenure, salary, plan loan 

provision (yes/no), employer match rate, and employer match level variables to examine their effects on 

participant before-tax contribution rates. 

35 
68 

47 The EBRI/ICI 401(k) database has detailed individual participant records (including demographic information and 

contribution behavior) from more than 60,000 plans (VanDerhei, Holden, Alonso and Bass, 2011). However, 

because of strict confidentiality standards, no information on the plan sponsor's identity was included . 

.. Even for those plans without nonelective contributions, we found several participants with employer 

contributions that were not equal to the predicted amount based on the plan's matching formulas and the 

employee's before-tax or after-tax contributions, or both. This may be because of the 401(k) plan using a different 

definition of compensation than that contained in the database, and we attempted to control for this unknown 

effect by computing the difference between actual and predicted employer contributions (as a percentage of 

compensation) and excluding any participant with more than a 0:2% of compensation differential. 

49 See VanDerhei (July 2007). 

saThe percentage of defined benefit plan sponsors that indicated that they had already increased or planned to 

increase their employer match and/or nonmatching employer contribution to a defined contribution plan varied 

from 62 percent for those that had frozen the defined benefit plan in the last two years to 81 percent for those 

that planned to close the plan for new members in the next two years. 

51 As hypothesized in VanDerhei (July 2007), some employers that have discontinued accruals in the defined 

benefit plans may want to continue to have a very large percentage of their eligible employees participating each' 

year. As shown in many industry studies, the participation rates among eligible young and low-income employees 

are significantly higher in general under 401(k) plans with an automatic enrollment feature. 

S> Similar levels applied to those defined benefit plans that were to. be closed or frozen in the next two years. 

53 It is important to keep in mind that many of the plans will use a multi-tier formula (which is another reason why 

using simple averages of employer-to-employee contributions is problematic). 

54 The effective match rate is a measure of the total amount of employer's contribution via the matching formulae 

for the employee IF the employee contributes enough to receive the full match. This simultaneously controls for 

the match rate, the maximum amount matched, and the possibility of multiple-tiered formula. For example, an 

employer that matches 100 per-cent of the first 1 percent of compensation and SO percent of the next 5 percent 

would have an effective match of: 1'1+.5'5 = 3.5 (percent of compensation). 

"This is the sum of the effective match rate and the nonelective contribution rate. 

s. This material first appeared in VanDerhei and Copeland (July 2010). 

57 The nominal cost of these expenditures increases with component-specific inflation assumptions. See the 

appendix for more details. 

58 Net housing equity is introduced into the model in three different mechanisms (explained below). 

59 IRS tax tables from 2009 are used to compute the tax owed on the amounts received from defined benefit plans 

and Social Security (with the percentage of Social Security benefits subject to Federal Income Tax proxied as a 

function of the various retirement income components) as well as the individual account withdrawals. 

60 Roth IRA and 401(k) accounts are not used in this version of the model but will be incorporated into a 

forthcoming EBRI publication . 

• , Capital gains treatment is not used in this version of the model. 

62 VanDerhei and Copeland (2001). 

63 VanDerhel and Copeland (July 2002). 

64 VanDerhei and Copeland (December 2002). 

65 VanDerhei and Copeland (2003) 

.6 VanDerhei (January 2004). 

36 
69 

.7 VanDerhei (2005). 

"VanDerhei (March 2006). 

69 VanDerhei (September 2006) 

70 VanDerhei and Copeland (2008). 

71 Copeland and VanDerhei (2010). 

72 VanDerhei (2009). 

73 VanDerhei (April 2010). 

74 \.IanDerhei and Copeland (2010). 

75 VanDerhei (September 2010). 

7·VanDerhei (October2010a). 

17 VanDerhei (October 2010b). 

78 VanDerhei (February 2011). 

79VanDerhei (April 2011). 

80VanDerhei and Copeland (June 2011). 

81 VanDerhei (July 2011). 

82 VanDerhei (August 2011). 

83 VanDerhei (September 2011). 

84 VanDerhei (November 2011) 

as VanDerhei (March 2012). 

37 
70 
71 
72 
73 

75 
76 
77 
78 
79 
100% 

90% 

80% 

U> 

70% 

% 

E 

w 60% a I 

CD 

'" 50% 

CD 

l:! 

CD 

a. 

I 

I 

( I 

I 

, 

, 

40% 

1§ ... 

" E 30% 

u " 

20% 

10% 

0% 

0-5% 

Figure 11 

Cumulative Distribution Function of the Percentage 

of a Worker's Annual Pay Needed to Offset the Impact 

of a Pension Freeze in 2006, by Pension Plan Type 

(assumes 4% annual rate of return) 

---

_ - Career Average 

__ Final Average 

-0-Cash Balance-Current Interest Rates 

-

.... 

- Cash Balance-Long-Term Interest Rate

5-10% 10-15% 15-20% 15-20% 20-25% 25-30% 30

Percentage of Compensation 

Source: Autho(s tabulations from the EBRIIERF Retirement Income Projection Model. 
0.9 0.8 

, 

, 

JI. 

0.7 0.6 

l 

'0 0.5 

t 2l 0.4 

:t 

0.3 0.2 

0.1 

o 

{}-5% 

Figure 12 

Cumulative Distribution Function of the Percentage 

of a Worker's Annual Pay Needed to Offset the Impact 

of a Pension Freeze in 2006, by Pension Plan Type 

(assumes 8% annual rate of return) 

--

_ -Career Average 

__ Final Average 

--0- Cash Balance-Current Interest Rates 

-

_. Cash Baiance--Long-Term Interest Rates 

---

5-10% 1 {}-15% 15-20% 2{}-25% 25-30% 3{}-35% 

Percentage of Compensation 

Source: Authors' tabulations from the EBRIIERF Retirement Income Projection Model. 
82 
83 
84 
85 
86 
87 
88 

Testimony of James G. Rickards 

Senior Managing Director, Tangent Capital Partners LLC, New York, NY 

Before the Subcommittee on Economic Policy 

Committee on Banking, Housing & Urban Affairs 

United States Senate 

March 28, 2012 

Written Statement 

Retirement (In)security: Examining the Retirement Savings Deficit 

Introduction 

Mr. Chairman, Mr. Ranking Member and members of this Subcommittee, my 

name is James Rickards, and I want to extend my deep appreciation for the 

opportunity and the high honor to speak to you today on a subject of the utmost 

importance to the financial well being of scores of millions of Americans. The 

Subcommittee on Economic Policy has a long and distinguished history of 

examining the validity and efficacy of policies pursued by the Congress, the 

Administration and government agencies. In the wake of a stock market collapse 

in 2000, a housing market collapse in 2007 and a banking collapse in 2008, 

government policy choices to repair the damage have never been more 

important. Everyday Americans are frightened, confused and in many cases 

angry at the results of government stewardship of economic policy. A proper 

understanding of the impact of policy is critical and this Subcommittee is well 

placed to advance that understanding. 

As a brief biographical note, I am an economist, lawyer and author and currently 

work at Tangent Capital in New York City where I specialize in capital raising and 

alternative investing. My colleagues and I provide expert analysis of global 

capital markets to investors, fund sponsors and government agencies. My 

writings and research have appeared in numerous journals and I am an Op-Ed 

contributor to the Financial Times, Washington Post and New York Times and a 

frequent commentator on CNBC, CNN, Fox, NPR and Bloomberg. My recent 

book, Currency Wars: The Making of the Next Global Crisis is a national 

bestseller. 

Summary: The Problem with the Fed's Zero Rate Policy 

The Federal Reserve began to cut interest rates in 2007 in response to a 

financial crisis resulting from a collapse in housing values. The Fed Funds rate 

was lowered from 5.25% in August, 2007 to effectively zero by December 2008 

and it has remained at that level ever since. The Fed has declared an intention to 

keep short-term interest rates at this near-zero level through late 2014. If this 
89 

intention is fulfilled, the entire course of the zero rate policy will have lasted six 

years, an unprecedented and extraordinary policy move on the part of the Fed. 

The Fed's rationale for this policy has gone largely unexamined and 

unchallenged. Seasoned economists and everyday Americans have deferred to 

the Fed's expertise and have trusted the Fed to do the right thing to fix the 

economy in the aftermath of the Panic of 2008. The view is that Chairman 

Bemanke knows best and debate is unnecessary. 

It should come as no surprise that an unprecedented policy should have 

unprecedented and unexpected results. There is ample evidence that the Fed's 

policy has failed to achieve its goals and is leaving the U.S. economy worse off 

when compared to a more normalized interest rate regime. 

The principal victims of the Fed's policies are those at or near retirement who 

face a Hobson's Choice of gambling in the stock market or getting nothing at all. 

A summary of these deleterious effects on retirement income security, explained 

in more detail below, includes the following: 

• Increasing income inequality. Zero rate policy represents a wealth transfer 

from prudent retirees and savers to banks and leveraged investors. It 

penalizes everyday Americans and rewards bankers, hedge funds and 

high-net worth investors. 

• Lost purchasing power. Zero rate policy deprives retirees and those 

nearing retirement of income and depletes their net worth through 

inflation. This lost purchasing power exceeds $400 billion per year and 

cumulatively exceeds $1 trillion since 2007. 

Sending the wrong signal. Zero rate policy is designed to inject inflation 

into the U.S. economy. However, it signals the opposite - Fed fear of 

deflation. Americans understand this signal and hoard savings even at 

painfully low rates. 

• A hidden tax. The Fed's zero rate policy is designed to keep nominal 

interest rates below inflation, a condition called "negative real rates". This 

is intended to cause lending and spending as the real cost of borrowing is 

negative. For savers the opposite is true. When real returns are negative 

the value of savings erodes - a non-legislated tax on savers. 

Creating new bubbles. The Fed's policy says to savers, in effect, "if you 

want a positive return invest in stocks." This gun to the head of savers 

ignores the relative riskiness of stocks versus bank accounts. Stocks are 

volatile, subject to crashes, and not right for many retirees. To the extent 

many are forced to invest in stocks, a new stock bubble is being created 

2 
90 

which will eventually burst leaving many retirees not just short on income 

but possibly destitute. 

• Eroding trust and credibility. Economics has been infused in recent 

decades with the findings of behavioralists and social scientists. While this 

social science research is valid, the uses to which it is put are often 

manipulative and intended to affect behavior in ways deemed suitable by 

Fed policy makers. This approach ignores feedback loops. As retirees 

realize the extent of market manipulation by the Fed they lose trust in 

government more generally. 

The effects on retirees and retirement income security are both the intended and 

unintended results of the Fed's efforts to revive the economy through a replay of 

the debt-fueled borrowing and consumption binges of the past fifteen years. 

Beginning with Fed rate cuts in 1998, which fueled the tech stock boom-andbust, through the rate cuts of 2001, which fueled the housing bubble, until today 

the Fed has resorted to repetitive bouts of cheap money for extended periods. 

This monetary ease has found its way into inflated asset values that in turn 

provided collateral for debt-driven consumption. These binges drove the 

economy until the inevitable asset bubble collapses caused a contraction in 

consumption and launched another cycle. At no time were savers rewarded for 

prudence. 

Solutions are straightforward. The Fed should raise interest rates immediately 

by a modest amount of one-half of one percent and signal that other rate 

increases will be coming. The White House and Treasury should signal that they 

support the Fed's move and support a strong dollar as well. The Fed and 

Treasury could commit to facilitate the conversion of savings into private sector 

investment by closing or breaking-up too big to fail banks whose balance sheets 

are littered with distressed assets. This will facilitate the creation of clean new 

banks capable of making commercial and industrial loans to small businesses 

and entrepreneurs. 

The result, over time, would be to replace a consumption and debt driven 

economy with a savings and investment driven economy that rewards prudence 

and protects the real value of the hard earned assets of retirees and nearretirees. 

The Goal of Federal Reserve Policy - Inflation and Financial Repression 

Federal Reserve policy today is driven by fear of deflation and its 

consequences. Deflation raises the real value of debt, which increases the 

burden on debtors and eventually leads to defaults and acute stress on the 

banking system. Individuals and institutions increase cash holdings since the 

value of cash increases in deflation. This creates a liquidity trap and can cause 

economic activity of all kinds to slow sharply. 

3 
91 

The Fed insists this deflationary dynamic must be avoided at all costs in a 

healthy economy. This was the lesson of the Great Depression of the 1930's as 

understood by Chairman Bernanke and other scholars. 

If deflation is the enemy, it follows that the goal of policy is to create inflation. 

This is difficult to do because policy driven inflation is muted by the deflation that 

comes from deleveraging. Therefore, the Fed must go to progressively greater 

lengths to cause inflation. Measures include (a) cutting interest rates, ultimately 

to zero, (b) quantitative easing, i.e. printing new money through the purchase of 

securities, (c) extending the average maturity of the Fed's balance sheet by 

selling short-term securities and using proceeds to purchase longer-term 

securities and (d) importing inflation from abroad by cheapening the exchange 

value of the dollar to increase the price of imports, e.g. starting "currency wars. »1 

Beyond these inflation-inducing tools, the Fed manipulates the behavior of 

consumers and savers by setting expectations. Inflation can be identified as the 

excess of nominal growth in GOP over real growth. Nominal growth is the 

product of money supply times velocity or turnover of money. Real growth is 

constrained by workforce participation and the productivity of that workforce. To 

create inflation, the Fed must find some combination of increases in money 

supply and velocity that exceeds the growth in the workforce and its productivity. 

The Fed can increase the base money supply almost at will. The Fed's 

problems begin with velocity. If the money supply is increasing but velocity is 

declining at the same rate, nominal GOP will not change at all. This is the 

dilemma the Fed has been facing for the past four years. As illustrated in the 

following charts2 prepared by the Federal Reserve Bank of St. Louis, base 

money supply has more than tripled since 2008, however, velocity has plunged 

more than 30% in the same time period. 

4 
92 
93 

through the manipulation of expectations. Creating inflation that exactly meets 

expectations and roughly matches nominal interest rates creates no change in 

behavior because it is already priced into expectations. 

The Fed must therefore attempt two things simultaneously. It must cause 

inflation that exceeds expectations in order to induce a kind of "shock effect" that 

might frighten consumers into spending more. It must also cause inflation that 

exceeds nominal interest rates so as to create negative real rates - a strong 

inducement to borrow money. This combination of negative real rates and an 

inflationary scare may induce the kind of lending and spending that expands the 

consumption component of GOP and gets the economy growing again.3 

Another arrow in the Fed's quiver of ways to increase velocity is the so-called 

"wealth effect." The idea is that increasing levels of consumer wealth, reflected 

mainly in housing prices and stock prices, tend to produce the kind of consumer 

optimism that results in more spending and higher velocity. The Fed's efforts to 

prop up the housing market have produced modest results because of the sheer 

size of the mortgage debt that needs to be written off, the excess inventory of 

homes and the difficulty in obtaining mortgage loans given high unemployment 

and impaired credit scores. 

The Fed's efforts to prop up the stock market have been more successful. The 

popular Dow Jones Industrial Average has almost doubled in the past four 

years. However, the hoped for behavioral impact of this new bubble has been 

muted because of relatively low participation by many individuals who lost a 

substantial portion of their retirement savings in the Panic of 2008 and have 

remained wary of the market ever since. This wariness was exacerbated by the 

still unexplained "flash crash" of May 2010. 

None of this behavioral manipulation can be admitted freely because it clashes 

with the Fed's mandate to maintain price stability. More to the point, the Fed 

cannot acknowledge that its goal is inflation in excess of expectations because 

to do so would be to change those expectations which would lead to market 

driven adjustments in nominal rates and reduce the shock effect. This makes 

the Fed's goal of changed behavior and increased velocity more difficult to 

achieve. 

In summary, the Fed's goals are to maintain nominal interest rates in the range 

of zero to 2% while seeking inflation in the range of 4%. The result will be 

negative real rates that encourage borrowing and an inflation scare that 

stimulates spending. The combination of lending and spending should increase 

velocity which, when combined with the already ample money supply, should 

expand nominal GOP in such a way as to ease the real burden of government 

debt and reduce the government debt-to-GOP ratio. This policy of slow, gradual 

inflation and negative real interest rates pursued over a ten to fifteen year period 

6 
94 

is considered an effective way to erase the burden of government debt without 

hyperinflation or default. 

The academic name for this policy is "financial repression." 4 This policy of 

financial repression also involves the use of heavily regulated banks as captive 

buyers of government debt. The banks have relatively low capital requirements 

on their government securities holdings and use low cost deposits to fund those 

holdings. The resulting low risk leveraged spreads provide reasonably high 

returns on equity for the banks. 

The Impact of Fed Policy on Retirement Income Security 

The Fed's policy of financial repression, implemented in part through its current 

zero rate policy is based on flawed economic theory and represents an assault 

on savers for the benefit of bankers and other leveraged investors. 

A neo-Keynesian school that places all of its bets on the idea of "aggregate 

demand" dominates the Fed's understanding of economics. Aggregate demand 

is the sum of spending of all kinds including consumption, investment (excluding 

inventories), government spending and spending on net exports. This spending 

can be fueled by income or debt. 

When private spending is too low, government spending can be used as a 

substitute. When private incomes are too low, debt can be substituted for 

income. When private debt is too low, government debt can be substituted for 

private debt. In the neo-Keynesian view, government borrowing and spending 

step in when private borrowing and spending are inadequate to fill the potential 

aggregate demand in the economy. 

Through its focus on aggregate demand, the Fed has lost sight of the role of 

savings in the economy and the powerful linkages between savings and 

investment. There is a real multiplier effect from private investment on GOP 

compared to the illusory multiplier effect of increased government spending.s 

In the Fed's view, savings are the enemy of aggregate demand since any 

private savings represent a reduction in spending for a given level of income. 

The result is a war on savings.6 The Fed's policy is to drive savers either to 

consume more due to wealth effects or fear of inflation or to invest in riskier 

assets such as stocks in order to earn returns in excess of inflation. The goal is 

either to increase velocity directly through consumption or indirectly through 

wealth effects. Retirees and savers who protest that inflation is eroding the real 

value of their savings are told, in effect, to invest in stocks if they want positive 

real returns. 

Yet, retirement savings, represented by relatively safe instruments such as bank 

certificates of deposit, U.S. Treasury securities, high quality municipal bonds 

7 
95 

and certain money market funds are not interchangeable with stocks. Stocks are 

risky, occasionally illiquid, volatile and offer no promise of the preservation of 

capital. The mantra of "stocks for the long run" lies in ruins after the twelve-year 

stretch from December 1999 to December 2011 when leading stock indices 

showed no gains. Based on extreme global monetary ease, there is good 

reason to believe that strength in stock indices in 2012 is another bubble in the 

making that will leave investors in tears. In any case, stocks can be highly 

inappropriate for retirees who should be looking for preservation of capital and 

steady income to provide income security for the remainder of their lifetimes. 

The economic damage being done to retirement income security by the Fed's 

zero interest rate policies includes: 

Increased income inequality. As inflation increases and nominal interest rates 

are held artificially low, the real value of retiree savings and the income 

produced by those savings declines. However, this decline in wealth and income 

is not shared by all. More sophisticated investors and those who are alert to the 

tell-tale signs of inflation can weather the storm by incurring debt or investing in 

hard assets that retain value in inflation such as land, fine art, precious metals 

and certain companies that own hard assets such as railroads, mines and 

utilities. These differing responses are the result of gaps in risk appetite and 

financial literacy. 

Not all investors are created equal when it comes to an understanding of the 

dynamics at play and the opportunities for defensive investing. Indeed, many 

Americans, especially retirees, are all too trusting of the Fed's pledge to 

maintain price stability when, in fact, the Fed has reduced the purchasing power 

of the dollar by over 95% since its founding in 1913. 

The Fed's easy retort is that incomes have more than kept pace with declining 

purchasing power. Yet this is only true on average. Americans are not uniformly 

average in their experience of inflation. There are winners and losers. In recent 

decades the winners have been a minority and the losers have been a majority 

with the result that relative income inequality in the United States as measured 

by the Gini Coefficient is at an all time high and approaching the levels of 

Mexico.7 Retirees and those nearing retirement are the losers to the extent they 

seek to preserve capital and avoid risky assets. 

Lost purchasing power. The Fed's war on savings is premised on the idea that 

savings represent a reduction in spending and therefore aggregate demand. 

This seems to ignore the lost spending from the diminished return on savings. 

The following chart prepared by Haver Analytics and Gluskin Sheff shows that 

personal interest income has fallen by over $400 billion per year and over $1 

trillion in the aggregate since 2008 as a result of the Fed's zero rate policies. 

8 
96 

CHART ~ PERSONAL INTEREST INCOME 

~~lff»ftttlf/lfftllltoru.a~ 

__ ..... __ Shtlt 

While not all of this lost income would necessarily have been spent, it seems 

likely that the propensity to spend would be large due to high unemployment 

and the diminished availability since 2008 of other sources of funds such as 

home equity loans. This lost income, once converted into spending, could have 

added significantly to GOP over the past four years and must properly be 

counted as an offset to whatever benefits the Fed claims for its zero rate policy. 

This lost income effect is especially hard on retirees who may lack other sources 

of income such as wages or business revenues. 

Fed Policy Sends the Wrong Signal. As described above, the Fed is engaged in 

an effort to modify behavior by engineering negative real interest rates and an 

upside surprise in inflation. These are the primary justifications for its zero rate 

policies. However, the Fed's understanding of behavioral effects ignores second 

order effects and positive feedback loops. 

President James Bullard of the Federal Reserve Bank of St. Louis pOinted out 

this flaw in Fed policy in a seminal paper, "The Seven Faces of 'The Peril'" 

published in 2010.8 Bullard posits a theoretical dual equilibrium in inflation 

expectations. One equilibrium points toward higher inflation and higher interest 

rates. The other equilibrium points toward deflation and lower interest rates.9 

The Fed intends that its zero rate policy through 2014 should ignite inflationary 

expectations. 

In fact, everyday Americans discern the Fed's fear of deflation implicit in a zero 

rate and prepare for a deflationary outcome by increasing savings and reducing 

debt - exactly the opposite of the Fed's desired outcome. Although Bullard is a 

"dove" on monetary policy, he recommended consideration of an increase in 

interest rates precisely to tip expectations in the direction of inflation. Bullard's 

insightful analysis suggests that the Fed is its own worst enemy when it comes 

to stimulating the economy. 

9 
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Inflation is a hidden tax on retirees and near-retirees. When the rate of inflation 

exceeds the rate that can be earned on savings, a situation that prevails today, 

the result is a diminution in the real value of those savings. Inflation that 

exceeds the rate of return by 2% will cut the real value of those savings by 75% 

in an average lifetime. Inflation that exceeds the rate of return by 4% will cut the 

value of those savings in half between the time a girl is born and when she goes 

to college. Rates of inflation of 2% or 4% are not benign, they are cancerous. 

To hear Chairman Bernanke talk about how he targets 2% inflation but would 

not be surprised if actual inflation " ... might move away from ... desired levels .. .", 

as he did in response to a reporter's question at a recent press conference, is to 

witness a gun held to the head of savers in America. 1o This destruction of real 

wealth by government fiat for the benefit of banks is no different than a tax used 

to redistribute wealth from targets to beneficiaries. 

Inflation is even better than a tax from a political perspective because it requires 

no debate, no legislation and no accountability. It requires only the persistence 

of the Board of Governors of the Federal Reserve in the service of illusory 

wealth effects and negative real interest rates. Retirees and near-retirees 

understand inflation for the tax it is. 

Creating New Asset Bubbles. Real wealth, including wealth in the form of stock 

prices, comes from innovation, entrepreneurship, hard work, risk taking, savings 

and investment. It does not come from printing money. The Fed's efforts to 

inflate stock prices in pursuit of wealth effects by printing money and 

manipulating expectations to increase velocity cannot by itself create wealth but 

can temporarily inflate asset prices into periodic bubbles. 

Asset bubbles have a feel-good quality while they are being inflated and can 

temporarily mitigate the worst effects of deflation and deleveraging in the wake 

of panics and crashes. Yet, in the end, they lead to new panics and crashes and 

the destruction of bubble "wealth" and real wealth besides. The damage done by 

the Panic of 2008 has resulted in millions of Americans withdrawing from the 

stock market in order to protect wealth even if it means negative real returns. 

Recent advances in stock market prices have proceeded with relatively low 

volume and narrower participation than past advances. 

The longer this persists, the more likely retirees will succumb to the temptation 

to seek positive real returns in the stock market rather than remain in relatively 

safe investments. This shift will likely coincide with the final phase of the bubble 

to be followed by another collapse and loss of more retirement savings. There is 

nothing wrong with investing in stocks that grow based on long-term 

fundamentals. Yet, stocks are an ill-advised investment for retirees for so long 

as stock values are the plaything of Fed officials engaged in behavioral 

experiments. 

10 
98 

Erosion of Trust and Credibility. The most pernicious effect of Fed policy on 

retirees and near-retirees is a lost of trust in the Fed itself. The Fed controls 

interest rates. It influences the exchange value of the dollar. It intervenes to 

control stock prices. It does so not in pursuit of its mandate of price stability but 

in pursuit of the behavioral chimeras of velocity, wealth effects and expectations. 

This is not too difficult for everyday Americans to understand despite the 

advance applied mathematics and arcane jargon in which such interventions are 

couched. Again, the outcome is the opposite of what the Fed intends. Instead of 

increased lending and spending, the Fed is confronted with increased confusion, 

fear and anger. The result is that scores of millions of Americans try to preserve 

wealth as best they can through deleveraging and liquid savings even at the risk 

of wealth erosion due to the Fed's zero rate policies. 

Reward Savers and Those near Retirement - Don't Penalize Them 

It is a false dilemma to suppose that monetary policy is a choice between 

encouraging savings, which reduces aggregate demand, and discouraging 

savings to increase aggregate demand through consumption or wealth effects. In 

a well-functioning banking system, savings can be a source of real returns for 

savers and a source of aggregate demand through investment. 

As late as the 1980's, large money-center commercial banks operating through 

syndicates made five-to-seven year commercial and industrial loans to finance 

massive private sector investments in projects like the Alaska pipeline, fleets of 

Boeing 747 aircraft, railroad rolling stock and other critical infrastructure. These 

projects were financed in large part with the savings of everyday Americans 

including retirees. Savers received a positive return on their money and the 

banks made good spreads and fees on the lending business. The government 

was not in the business of picking winners and losers although the government 

did create a favorable investment climate with accelerated depreciation and 

investment tax credits on qualified assets. 

The 1980's were the apogee of sound policy. With Paul Volcker at the Fed and 

Ronald Reagan as president, Americans could count on sound money, less 

government intrusion in the investment process and a favorable business 

environment. America was open for bUSiness and was a destination for savings 

from around the world. 

Today the United States does not have a well functioning banking system 

because of repeated regulatory failures by the Fed and other agencies since the 

repeal of Glass-Steagall in 1999 and the repeal of derivatives regulation in 2000. 

The conveyor belt between savings and investment traditionally provided by 

banks is broken. 

11 
99 

With the repeal of Glass-Steagall in 1999 and derivatives regulation in 2000, the 

door was open to break down the traditional banking functions and allow banks 

to become highly leveraged machines for securitization and proprietary trading. 

Securitization breaks the bond between lender and borrower because the bank 

cares only about selling the loans not collecting on them at maturity. This 

destroys the incentive to allocate capital to the most productive long-term uses. 

Proprietary trading induces banks to trade against their own customers to the 

detriment of long-term banker-client relations. These conflicts and short-term 

perspectives came to a disastrous conclusion in the Panic of 2008. Productive 

private sector investment and capital formation have been the victims. 

It is not too late to turn back from the Fed's ruinous policies. The path to 

improved income security for retirees and near retirees consists of: 

• Raising interest rates in stages to provide positive real returns to savers. 

• Banning over-the-counter derivatives that serve no role in capital formation 

but greatly increase systemic risk. 

• Breaking up too big to fail banks that pose systemic risk. 

• Offering real price stability. Two percent inflation is not benign, it is 

cancerous. 

• Create a favorable investment and growth climate by ending regime 

uncertainty in areas such as taxes, healthcare, regulation and other 

government impositions. 

The United States, indeed the world, is mired in a swamp of seemingly 

unpayable debt. In these circumstances, there are only three ways out - default, 

inflation and growth. The first is unthinkable. The second is the current path of 

the Fed although it can only be pursued in stealth. The third is the traditional path 

of the American people. Growth does not begin with consumption, it begins with 

investment. Only when private productive investment is encouraged and pursued 

does consumption follow as the fruit of that investment. 

America's retirees and near retirees are ready, willing and able to provide the 

prudent savings needed to fuel investment and growth. All they ask in return is 

stable money, positive returns and a friendly investment climate. The Fed's policy 

of money printing and negative returns is anathema to investment and growth. 

Until the Fed's war on savers is ended and reversed income security for retirees 

will be an illusion. 

12 
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Endnotes 

1 The view that monetary ease can be effected and inflation created even when interest rates are 

at zero by cheapening the currency was advanced in, Svensson, Lars E. 0., "Escaping a 

Liquidity Trap and Deflation: The Foolproof Way and Others," Working Paper No. 10195, 

National Bureau of Economic Research, December, 2003. 

2 These charts are prepared by and available from the Federal Reserve Economic Data (FRED) 

series issued by the Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/ 

3 Chairman Bemanke revealed his willingness to tolerate inflation in excess of the 2% targeted 

rate in his press conference following the Federal Open Market Committee meeting on January 

25, 2012. See, Transcript of Chairman Bemanke's Press Conference, January 25, 2012, 

question and answer with Greg Ip of the Economist, pp 12-13, 

http://www. federalreserve.gov/mediacenterlfiles/FOMCpresconf20120125.pdf 

4 See, Reinhart, Carmen M. and Sbrancia, Belen, "The Liquidation of Government Debt", 

Working Paper 16893, National Bureau of Economic Research, March, 2011, 

http://www.nber.org/papers/w16893. . 

5 For evidence that the government spending multiplier is less than 1 and therefore destroys 

rather than creates wealth om •. e all secondary effects are accounted for, see, Fredman, 

Charles; Kumhof, Michael; Laxton, Douglas; Muir, Dirk; Mursula, Susanna, "Global Effects of 

Fiscal Stimulus During the Crisis," International Monetary Fund, February 25, 2010; Barro, 

Robert J. and Redlick, Charles J., "Macroeconomic Effects From Government Purchases and 

Taxes," George Mason University, Working Paper No. 10-22, July 2010; and Woodford, 

Michael, "Simple Analytics of the Government Expenditure Multiplier," Paper presented at the 

meetings of the Allied Social Science Associations, January 3, 2010. 

6 The Fed is not unaware of the impact of its poliCies on the portfolio performance of those 

institutional investors such as insurance companies and pension funds who have large 

portfOliOS of fixed income assets intended to match retirement and other liabilities to their policy 

holders and beneficiaries. See, Transcript of Chairman Bernanke's Press Conference, January 

25, 2012, question and answer with Scott Spoerry of CNN, pp 26-28, 

http://www.federalreserve.gov/mediacenterlfiles/FOMCpresconf20120125.pdf.However.this 

view is tinged with some derision of those who seek safe forms of savings. In a conversation 

between a senior official of a large investment bank and a member of the Federal Open Market 

Committee, the FOMC member justified the economic damage to pension funds and insurance 

companies caused by the Fed's zero rate policy by saying, " .. they're not systemic ... ". In other 

words, the Fed views its mandate as propping up systemically important too big to fail banks 

even at the expense of the institutional retirement savings industry. 

7 CIA World Factbook, U.S. Government Printing Office, 2010. 

8 Bullard, James, "Seven Faces of 'the Peril,' "Federal Reserve Bank of St. Louis Review, 

September/October 2010 http://research.stlouisfed.org/publicatlons/review!10/09!Bullard.pdf 

9 Bullard's dual equilibrium model bears some resemblance to the dual equilibrium between 

monetary expansion and contraction posited by Ben Bernanke in his landmark paper, "The 

Macroeconomics of the Great Depression: A Comparative Approach," Jourfial of Money, Credit 

and Banking (1995). 

10 See note 3, op. cit. 

13 
101 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STATEMENT FOR THE RECORD 

THE FINANCIAL SERVICES ROUNDTABLE 

On 

The Senate Banking Committee, Subcommittee on Economic Policy hearing entitled: 

"Retirement (In)security: 

Examining the Retirement Savings Deficit Economic Policy." 

March 28, 2012 

The Financial Services Roundtable (the "Roundtable") respectfully offers this statement for the 

record to the U.S. Senate Banking Committee, Subcommittee on Economic Policy hearing 

entitled: "Retirement (In)security: Examining the Retirement Savings Deficit Economic Policy." 

The Roundtable represents 100 of the largest integrated financial services companies providing 

banking, insurance, and investment products and services to the American consumer. Member 

companies participate through the Chief Executive Officer and other senior executives 

nominated by the CEO. Roundtable member companies provide fuel for America's economic 

engine, accounting directly for $92.7 trillion in managed assets, $1.2 trillion in revenue, and 2.3 

million jobs. 
102 

THE ROUNDTABLE SUPPORTS RETIREMENT SECURITY: 

The Roundtable shares Congress' and the Obama Administration's goal of increasing 

opportunities for Americans to save and plan for tbeir retirement. More specifically, we support 

increased incentives and opportunities for Americans to save and invest. The increased life span 

oftbe average American and tbe growing number of baby boomers nearing retirement age 

makes prudent retirement planning a critical issue. It is our belief tbat providing these 

opportunities is important because savings increase domestic investment, encourage economic 

growth, and result in higher wages, financial freedom, and a better standard of living. 

Our nation's current retirement system has enhanced tbe retirement security of tens of millions 

of American workers by increasing retirement savings and the quality of life during tbeir 

retirement years. In fact, Americans have increased tbeir participation in 401(k) plans by 250 

percent (250%) over tbe last twenty-five years. I The financial services industry has played a 

key role in helping to increase tbe number of Americans who plan and save for their retirement. 

The financial services industry currently manages over $17 trillion of retirement savings, which 

represents 36 percent (36%) of all U.S. household assets. 2 The U.S. retirement market is 

projected to grow to nearly $22 trillion by 2016. 3 That represents a 30 percent (30%) increase 

in retirement savings over a four-year period. According to a recent Gallup poll, nearly twothirds of non-retirees (64%) now look to IRAs and 401 (k)s as major funding sources when tbey 

retire. 4 

The one vital component of retirement savings that American workers can control is when they 

start saving. American workers give tbemselves the best chance at a secure retirement by 

saving early. Even small monthly amounts of money into a 401(k) or IRA early in life can make 

a real difference in an individual's ability to retire comfortably .. This is not to say tbat saving 

early can guarantee a perfect retirement. But when individuals embrace saving for retirement as 

early as possible and make it a priority throughout their earning years, they put tbe power of 

compound interest to work in tbeir favor. For example, saving just $50 more away a month 

could mean tbousands of dollars of additional retirement savings. The Roundtable knows more 

work has to be done to increase the number of people who plan and save for tbeir retirement. To 

be sure, tbere are still roadblocks to helping people save, but private sector action paired witb 

targeted congressional policies will continue to encourage people to plan, save, and grow their 

retirement savings. 

CONCLUSION: 

In closing, strengtbening tbe retirement security of all Americans is a priority for tbe 

Roundtable. The Roundtable believes tbat most Americans should approach retirement witb a 

comprehensive strategy that incorporates a number of retirement vehicles. We support public 

Oliver Wyman, Inc., OLIVER WYMAN REPORT: ASSESSMENT OF THE IMPACI' OF TIlE DEPARTMENI' OF 

LABOR'S PROPOSED "FIDUCIARY" DEFINITION RULE ON IRA CONSUMERS (Apr. 12,2011) 

http://www.ebri.orglresearchl?fa=genretire 

http://www.bankinvestmentconsultant.cominews!cerulli-predicts-retinnent-market-will-exceed-22-trillionby-2016-2677132-I.httnl 

http://www.gallup.comipoIll150215Ilnvestors-Feel-Affected-Social-Security-Medicare-Changes.aspx 

2 
103 

policies that encourage greater employer and employee participation in retirement planning and 

savings. In the current economic climate, it is essential that Congress, the Obama 

Administration, and private industry continue to actively collaborate in order to increase the 

number of people saving for retirement and the amount of money they save. The Roundtable 

stands ready to work with policymakers and other stakeholders to preserve, promote and 

expand the current workplace-based retirement system to help strengthen retirement security for 

all Americans. 

3 
104 

STATEMENT FOR THE RECORD 

SUBMITTED TO THE 

SENATE BANKING, HOUSING AND URBAN AFFAIRS' 

SUBCOMMITTEE ON ECONOMIC POLICY 

on 

Retirement (In)Security: Examining the Retirement 

Savings Deficit 

March 28, 2012 

AARP 

601 E Street, N.W. 

WASHINGTON, D. C. 20049 

For further information, contact: 

Cristina Martin Firvida 

(202) 434-6194 

Government Affairs 
105 

Introduction 

On behalf of our members and all Americans age 50 and over, AARP would like to 

thank Chairman Tester and Ranking Member Vitter for convening today's hearing to 

highlight the important issues surrounding the significant gap between what financial 

assets Americans will need to acquire to maintain their standard of living in retirement and 

what they are on a path to acquire. AARP appreciates the opportunity to submit written 

comments on some of the significant issues surrounding the current and future state of 

retirement security of American workers and their families. 

A major priority for AARP has long been to assist all Americans in accumulating and 

effectively managing the resources they need to supplement Social Security and maintain 

an adequate standard of living throughout their retirement years. Unfortunately, both 

economic and social trends over recent decades, and notably developments affecting 

employer-provided pensions, have made the necessity of achieving and maintaining an 

adequate income in retirement more challenging than ever before. According to a recent 

calculation by the Center for Retirement Research at Boston College, the "retirement 

income deficit" for American households ages 32 to 64 is estimated to be roughly $6.6 

trillion. In fact, 60 percent of workers in 2012 reported that the total value of their entire 

household's savings and investments (not just for retirement), was less than $25,000.1 

These trends require the thoughtful and timely attention of Congress, the President and 

Executive Branch agencies. They also serve to underscore the critical importance Social 

Security plays, and will play, in the retirement security of both current and future 

generations of Americans. 

1 R. Helman, M Greenwald, et aI., The 2012 Retirement Confidence Survey: Job Insecurity, Debt Weigh on 

Retirement Confidence, Sevings 16 (EBRI, Mar. 2012), evel1able at 

http://www,ebrLorg/pdf/briefspdf/EBRI_IB_03-2012_No369_RCS2,pdf 

2 
106 

Social Security was designed to provide only a foundation of an individual's 

retirement security and was never intended to be the sole source of income for people who 

have retired. However, due to shortcomings in other traditional components of the 

retirement security framework that help individuals achieve and maintain an adequate level 

of income for their golden years - employer-based pension plans, personal savings, and 

affordable health care - many Americans rely, and will continue to rely, on Social Security 

as their primary, if not sole, source of family income for their retirement. 

Employer-Based Pension Coverage 

It is widely accepted that workplace retirement plans are an efficient and effective 

means for individuals to save and earn benefits for their own retirement. As a result, 

AARP strongly believes that all workers need access to a workplace retirement plan that 

supplements Social Security's strong foundation. Since the enactment of the Employee 

Retirement Income Security Act (ERISA), the focus has been on three central issues: 

coverage and participation; security; and adequacy. 

Unfortunately, employer-provided retirement plan coverage in the U.S. privatesector labor force has generally hovered around a modest 50 percent for decades,2 with 

larger employers more likely than smaller ones to offer retirement plans. 3 Overall, roughly 

78 million American workers (both public and private) do not have access to a workplace 

retirement plan, such as a pension or 401 (k) plan. As a result, few of these individuals 

save for retirement on their own, and many are currently retired, or will retire, with less 

than enough money to meet their basic needs. 

2 S. Mackenzie & K.B. Wu, The Coverage of Employer Provided Pensions: Partial and Uncertain at 7 (AARP 

2008). 

3 Id. at 15. 

3 
107 

In response to this significant problem, AARP has been a strong supporter of 

proposals such as the Auto IRA, which would help bridge this coverage gap and provide 

access to a workplace retirement vehicle to tens of millions of American workers.4 

Specifically, this proposal, introduced as S. 1557 in the current Congress, would allow 

workers without access to an employer plan to voluntarily fund their own individual 

retirement accounts (IRA) through payroll deductions. Harnessing the power of regular, 

automatic payroll deductions at work would encourage and simplify saving and significantly 

improve the retirement security of millions of Americans. Moreover, these accounts would 

be portable, so workers could take them to another job. 

In addition, these automatic accounts involve little or no cost for most employers. 

Because Auto IRA would establish simple individual retirement accounts rather than 

employer-sponsored retirement plans, employer responsibilities under this proposal are 

much more limited. For instance, Auto IRA employers would neither select, hold, nor 

manage investments, nor would they be required to provide contributions to employee 

accounts. Finally, Auto IRA provides tax credits for employers to help offset any limited 

costs of setting up these accounts. 

In addition to coverage issues, the actual partiCipation rate of workers in privatesector pension plans varies with age, income, education, ethnicity, size of employer and 

type of employment. Older, better-educated, full-time, better-paid workers are more likely 

to be plan members than younger, less educated, part-time, lower-paid workers.s 

4 G. Koenig, The Case for Automatic Enrollment in Individual Retirament Accounts (AARP Public Policy 

Institute, February 2012) 

5 S. Mackenzie & K.B. Wu, The Coverage of Employer Provided Pensions: Partial and Uncertain 2, 7-12 

(AARP 2008). 

4 
108 

In an effort to increase participation rates in 401 (k) plans, AARP supported the autoenrollment provisions in the bipartisan Pension Protection Act. A May 2011 Aon Hewitt 

study found that "(t)hree in five employers automatically enrolled employees into their 

defined contribution plans in 2010, up from 24 percent in 2006. For employees who were 

subject to automatic enrollment, Aon Hewitt's analysis found that 85.3 percent participated 

in their DC plan, 18 percentage points higher than those that were not subject to automatic 

enrollment.,6 

The Move from Defined Benefit to Defined Contribution 

For those workers who are fortunate to work for employers who offer access to a 

workplace retirement vehicle, many of their employers have moved away from providing 

defined benefit (DB) plans and increasingly offer only defined contribution (DC) plans, such 

as 401 (k) plans. While DC plans can be valuable to many, they transfer investment, 

longevity, inflation, and interest rate risks entirely to the individual, and could make it more 

likely that an individual would outlive his or her retirement nest egg. Today, only about 17 

percent of workers have DB pension coverage on their current job, compared to 41 

percent who have DC plan coverage. 

The shift away from DB plans to DC plans places significant responsibility on 

individuals to make appropriate decisions concerning their contributions, their investments 

and how they will manage their money once they retire so that they will have adequate 

income to fund their retirement years. Unfortunately, the technical demands of investment 

management and the associated risks are more than many individuals are able or willing to 

handle. While DC-type plans can be an effective savings vehicle for retirement -

6 Aon Hewitt News Release, May 24. 2011 (http://aon.mediaroom.com/index.php?s=43&item=2285) 

5 
109 

especially if individuals take all the right actions and markets achieve historical rates of 

return - in practice these conditions will not all be met. Many people fail to make optimal 

choices at every step along the way, as evidenced by generally less than adequate DC 

account balances. According to a 2011 Fidelity report, the average 401 (k) account 

balance was only $71 ,500 at the end of 2010.1 Moreover, even if DC plan members make 

all the right decisions, if they happen to retire in a down market, much like the recent 

economic downturn, their account balances may still not be adequate for retirement. 

There is also substantial confusion among 401 (k) plan partiCipants as to the fees 

they pay. The fee information partiCipants currently receive about their plan and 

investment options is often scattered among several sources, difficult to access, or 

nonexistent. Even if fee information is accessible, plan investment and fee information is 

not always presented in a way that is meaningful to participants. Fees are important 

because of their impact on the level of assets available for retirement. 

The Government Accountability Office estimated that $20,000 left in a 401 (k) 

account that had a 1 percentage point higher fee for 20 years would result in an over 17 

percent reduction - over $10,000 - in the account balance. We estimate that over a 30-

year period, the account balance would be about 25 percent less. Even a difference of 

only half a percentage point, or 50 basis points, would reduce the value of the account by 

13 percent over 30 years. In short, employers - as well as employees - need to be aware 

that fees and expenses can have a huge impact on retirement income security levels. 

401 (k) plan participants therefore have a need and a right to receive timely, accurate, and 

7 Fidelity News Release, February 23, 2011 (http://www.fideltty.com/inside-fidelity/employer-services/q4-

2011-401k-update) 

6 
110 

informative fee disclosures from their 401 (k) plans to help them better prepare for a 

financially secure retirement. 

Because fees reduce the level of assets available for retirement, we have supported 

both Congressional and regulatory efforts to increase disclosure requirements so that 

fiduciaries and participants can receive the information they need to make informed 

choices about these investments. AARP supports increased disclosure of fees charged by 

service providers to fiduciaries.a Provider fees should be disclosed both to participants 

and employers, and clearly explained to participants on their annual statements. 

Moreover, participants should have the right to receive more detailed fee information on 

request. 

In contrast to DC plans, DB plans generally provide a predictable monthly 

retirement benefit to employees, lower fees, and professional management of retirement 

assets. It has been demonstrated that DB plans are also more efficient as well- that is, 

they cost less to achieve a particular level of retirement income than defined contribution 

plans. 

The Shift from Annuitized to Lump-Sum Distributions 

The share of traditional plans offering a lump-sum distribution option has increased 

in part because plan sponsors are able to shed longevity risk and pension costs by 

increasing the take-up of lump-sum distributions by plan members. As for DC plans, 

8 S. Mackenzie, Determining whether 401(K) plan fees are reasonable: Are disclosure rules adequate? 

(AARP Sept. 2008), available at htlp:/Iwww.aarp.orglresearchlppi/econ-seclpensionsiarticlesli8_fees.hIm!. 

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although more of their participants may be interested in the annuity option than had been 

previously thought, the lump sum option is still the overwhelming choice.9 

Traditional DB plans have historically provided lifetime streams of income, while 

only a small fraction of DC plans offer an annuity or other lifetime income option. 

Moreover, many DB plan sponsors today offer lump-sum benefits and many retirees are 

opting for them. Younger workers are more likely than older workers to have only a DC 

plan, and the number of workers retiring and receiving their retirement account balances 

as a lump-sum is growing. It is not clear how, or how well, beneficiaries will manage those 

assets throughout decades of retirement. 

AARP is concerned that - unlike the case with Social Security benefits - many 

Americans will outlive the retirement assets they have accumulated due to the combined 

effects of longer life expectancies and the overly optimistic assumptions many individuals 

make when spending down these assets. Effectively managing this decumulation phase 

of retirement can be especially complicated, but it is essential for the long term economic 

security of millions of American workers who can no longer count on the guaranteed 

lifetime income stream once overwhelmingly provided by workplace DB pension plans. 

In response, AARP is pleased to support S. 267, the bipartisan Lifetime Income 

Disclosure Act - legislation that would provide individuals with a better understanding of 

the lifetime value of their 401 (k) plan assets by including in a yearly benefit statement a 

conversion of their total accrued benefits into a monthly dollar amount as if they had opted 

9 An AARP survey of the distribution choices made by workers and retirees with pension plans found that 

there was definite interest in the annuity option. Specifically, it found that about 31 percent of workers and 25 

percent of retirees with DC plans that offered one or more options other than lump sum withdrawal were 

planning to select or had already selected the annuity option. See Kathi Brown et al. 2010. Annuities and 

Other Lifetime Income Products: Their Current and Future Role in Retirement Security. MRP Public Policy 

Institute, Factsheet 189 (May), 

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to receive a lifetime annuity. This conversion would help provide a more meaningful long 

term perspective to 401(k) plan participants than is generally presented under current 

practices by giving them a more accurate picture of the lifetime value of their plan and 

helping them make better decisions about how much they may need to save and how best 

to manage their retirement assets. 

Fiduciary Standards 

The impact of conflicted or inappropriate advice on individuals' private retirement 

savings can be devastating. Accordingly, the importance of strong fiduciary standards 

cannot be understated and such measures are essential to protect the security of 

individuals' hard earned retirement assets both now and in the future. 

Because the growth in 401 (k) plans places significant responsibility on individuals to 

make appropriate investment choices so that they have adequate income to fund their 

retirement, AARP supports the goal of increasing access to investment advice for 

individual account plan participants so that participants may be better empowered to 

achieve their retirement savings objectives. To that end, we have consistently asserted 

that such advice must be subject to the Employee Retirement Income Security Act's 

(ERISA) fiduciary rules, based on sound investment principles and protected from conflicts 

of interest. The recent financial turmoil and scandals on Wall Street once again 

underscore the imperative that such advice be independent and non-conflicted. 

AARP supports regulations to ensure that participants are provided with objective, 

non-conflicted investment advice. Consistent with a recent AARP poll, Americans believe 

that advice should be suitable for their needs, objectives and risk tolerance. AARP 

supports the Department of Labor's review of the definition of fiduciary regulation given 

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that the current manner in which employee benefits are provided is significantly different 

from the situation in 1975, as is evident with the shift from defined benefit plans to defined 

contribution plans. Not only has the financial industry's emphasis shifted to accommodate 

the demand for individual investment advice in 401 (k) plans, but the variety and complexity 

of investments has radically changed. Consequently, AARP believes that a reviSion of this 

regulation to reflect the practices in the current market place would better protect the 

interests of plans and their participants and beneficiaries. 

Healthcare 

Another key factor to consider when evaluating the retirement security of Americans 

and their families is the impact of high, and increasing, healthcare costs. Skyrocketing 

costs plague our entire health care system, burden individuals and employers, and 

threaten the sustainability of Medicare and Medicaid, vital programs that tens of millions of 

Americans rely upon. Seniors spend a disproportionate share of their income - nearly 20 

percent - on health care costs, which continue to increase at rates well above the rate of 

overall inflation. We must transform the delivery of health care and bring down costs 

throughout the system to keep Medicare and Medicaid affordable now and strong for future 

generations. 

These healthcare cost trends are not sustainable and Congress must work 

thoughtfully to find ways to hold down these costs, and not simply shift them to individuals 

and other payors. However, it is important to realize that Medicare is just one part of our 

nation's health care system, which includes a vast array of other payers, including public, 

individual, and employer-based health insurance. For families and workers, soaring costs 

compound job losses and other financial problems. Since 2001, family premiums 

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outpaced both earnings and overall infiation.1o The average annual premium for family 

coverage increased to $15,073 in 2011, more than double the figure in 2000.11 And the 

more employees must pay, the less likely they are to enroll in employer plans. 12 People 

with private non-group insurance are even worse off; three-quarters of those age 50 to 64 

buying coverage on the individual market spent at least 10 percent of their after-tax income 

on health care. Their average out-of-pocket costs for premiums and health care are two 

and half times more than the costs of those with employer coverage. 13 

As you examine how to address the growing cost of health care programs, we urge 

you to reject arbitrary limits and cost shifting and focus instead on ways to make the 

delivery of health care to all Americans more efficient and cost-effective. Arbitrary cuts 

simply shift costs on to other payers of health care services, particularly beneficiaries and 

their families, and undermine current and future beneficiaries' access to quality care. 

Social Security 

AARP strongly believes that the trends and factors discussed above, as well as the 

recent economic crisis, highlight the importance of Social Security's guaranteed benefit as 

the foundation of retirement income for all Americans. In the face of declining traditional 

pensions or the outright lack of pension coverage, low personal savings rates, diminished 

home values, longer life expectancies and higher healthcare costs, the guaranteed benefit 

of Social Security will be increasingly important to future generations of Americans. 

10 HRET/Kaiser Family Foundation. 2011 Employer Health Benefits Survey 

"Ibid. 

12 Kaiser Family Foundation. February 2007. Snapshots: Health Care Costs. Insurance Premium CostSharing and Coverage Take-up. 

13 Smolka G, Multack M.,Figueiredo C. February 2012. Health Insurance Coverage for 50- to 64-Year-Olds. 

AARP Public Policy Institute Insight on the Issues. Available at: http://www.aarp.org/health/medicareinsurancelinfo-02-2012/Heallh-lnsurance-Coverage-for-50-64-year-olds-insighl-AARP-ppi-heallh.hlml 

11 
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Social Security is currently the principal source of income for nearty two-thirds of 

older American households receiving benefits, and roughly one third of those households 

depend on Social Security benefits for nearly all (90 percent or more) of their income. 

Despite its critical importance, Social Security's earned benefits are modest. averaging 

only about $1.200 per month for all retired workers in December 2011. Nonetheless. 

Social Security keeps countless millions of older Americans out of poverty and allows tens 

of millions of Americans to live their retirement years independently. without fear of 

outliving their retirement income. Social Security also provides critical income protection 

for workers and the families of those who become disabled or deceased. 

Social Security benefits are financed through payroll contributions from employees 

and their employers, each and every year, throughout an individual's working life. 

According to the Social Security Trustees, the program has sufficient assets to pay 100 

percent of promised benefits for nearly a quarter century, and even with no changes, can 

continue to pay approximately 75 percent of promised benefits thereafter. While Social 

Security faces financial challenges in the future, it is not in a crisis now. Because Social 

Security is not in crisis, and because the retirement deficit facing Americans today is so 

great, AARP strongly believes that a debate to address the financial challenges that Social 

Security faces should focus on preserving and strengthening the retirement security of 

Americans and their families for generations to come. 

Older Workers 

AARP also believes that Congress should assist those who want or need to work 

longer. Eliminating barriers to gainful employment and promoting job opportunities for 

older workers, including combating age stereotypes, is particularly important. Age 

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discrimination remains a significant barrier to older workers who are unemployed and 

seeking work, or older workers who wish to remain in the workforce. According to a recent 

AARP survey, more than half of workers 50 and older who had recently experienced 

unemployment cited age discrimination as a significant barrier in finding a new job. 

Although age discrimination is a serious and growing problem, a 2009 decision by the U.S. 

Supreme Court departed from decades of precedent and significantly narrowed the scope 

of legal protections for workers who've experienced age discrimination. This is why AARP 

is urging Congress to enact the bipartisan Protecting Older Workers Against Discrimination 

Act, S. 2189, which would restore and reaffirm the law so that older workers are on the 

same legal footing as other workers in challenging discrimination. 

Retirement Security Tools 

Finally, AARP appreciates that today's hearing may seek to explore the tools that 

are currently available for individuals to use to make better decisions about planning for 

their own retirement. As you may know, AARP has been actively engaged in an effort to 

provide such retirement security tools to individuals for free online. For instance, AARP 

has developed, or has partnered with other organizations to launch: 

• AARP Social Security Benefits Calculator - The AARP Social Security Benefits 

Calculator is part of AARP's "Ready for Retirement?" effort 

(www.aarp.org/readvtorretirement), a ten-step approach to envisioning and planning 

for a secure retirement, which includes creating a budget and preparing for the 

unexpected. For many, one of the most important retirement-related decisions is 

when to claim Social Security benefits. The calculator allows users to customize 

their estimates by calculating spousal benefits and taking into account the impact of 

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continuing to work while collecting benefits. Users have the opportunity to print a 

personalized summary report. You can find the calculator at 

www.aarp.org/socialsecuritybenefits. The calculator is available in Spanish at 

www.aarp.org/calculadoradesegurosocial. 

• AARP Retirement Calculator - AARP's Retirement Calculator takes each aspect of 

financial planning for retirement into consideration, from Social Security benefits to 

pension, retirement accounts, inheritances and budgeting for lifestyle changes. 

Through this simple, step-by-step tool, users can begin to envision their financial 

plan during retirement. You can find the Retirement Calculator at 

www.aarp.org/retirementcalculator. The calculator is available in Spanish at 

www.aarp.org/calculadorajubilacion. 

• 401 (k) Fee Calculator - The AARP 401 (k) Fee calculator helps consumers discover 

the hidden fees that might come with their 401 (k) account. The calculator provides 

individuals with a personalized report detailing how much they might pay in fees, as 

well as how that could affect their retirement savings. You can find the 401 (k) Fee 

Calculator at www.aarp.org/401kfees. 

Conclusion 

Over the past 25 years, there has been a slow and steady erosion of the adequacy 

and security of employer provided pensions, an important component of our retirement 

security framework. As a nation, we need to refocus our efforts on the critical need for all 

American workers and their families to accumulate and effectively manage the resources 

they require to achieve an adequate standard of living throughout their retirement years. 

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Once again, AARP would like to thank Chairman Tester and Ranking Member Vitter 

for holding today's important hearing. We look forward to working with you and the other 

Members of this Committee to help ensure that as many Americans as possible are able to 

achieve a secure and adequate retirement. 

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120 

MARC r' 2012 I Resisting the policy threat to retirement savings 

The United States is hardly immune to this trend, In 

our case, the number of citizens over age 65 will nearly 

double from Just over 40 million today to over 72 million 

by 2030 as the huge Baby Boom generation edges into 

retirement.* 

The percentage of working-age Americans will decline 

over the same period - from 63% to 57% - even though 

the absolute number of working-age Americans will rise 

from 195 million to 213 million people: This increase in 

America's future workforce carnes some real benefits, 

especially relative to countries like Japan, Germany, and 

China, whose working-age populations will declrne, evon 

drastically in some cases, over the course of this century, 

But in the near term, there is no escaping the pressure 

that an aging population will put on our key entitlement 

programs - Social Security and Medicare, 

In fact, absent real reform, these critical support 

programs for the elderly are on track to absorb as much 

of U, S, GDP by mid century as the entire federal government has typically taken in by way of tax revenue since 

1970 (Figure 1), 

~ U.S. Bureau of the Census, 2008 and 2011 

,As Douglas Elmendorf of the Congressional Budget 

Office said In testimony to the Select Committee on 

Deficit Reduction ,n 2011, the nSlng pressure on our 

old-age support systems will force us to choose among 

three unattractive options' 

.. Raising the share of revenues going to the federal 

government well above the long-term average of 18% 

• Cutting back substantially on Social Security and Medicare 

" Slashing federal spending on everything from the Marine 

Corps to National Public Radio 

Needless to say, the political environment fostered by 

the pending fiscal challenge Will be difficult Both srdes 

of the aisle WII! almost surely have to offer up painful 

concessions In order to get on top of these long-term 

defiCit drivers, The challenge will be unaVOidable, If we 

don't actively curb defrclts, we will be subject to highly 

negative global market forces. To see this in action, we 

need to look no further than Europe, where the threat 

of catastrophic fiscal meltdowns are forCing pol1tlclans' 

hands every day 

t Inciudes major mandatory health~care programs' ~1ediCar0. Medicaid, eXchange SubSidies, and the Ciliidre'l's "l\'?alrilinsura:lce PrografTi (CHIP) 
121 
122 
123 
124 

Source' Douglas Elmendorf. eBO DIrector, Test:mony to the Select ComrrHtee on DefiCit Reduction, September 13, 2011 

That puts the tax deferrals that help make workplace 

savings and IRAs feasible in the crosshairs of budget 

hawks. There is precedent for harmful "cost saving" that 

should serve as a cautionary tale today. The last major 

tax overhaul in 1986, for example, cut deeply into incentives for retirement savings and stymied the growth of 

the IRA market for years. 

We have alroady seen how many millions of Americans 

are well short of saving enough to ensure a secure retirement - and how replacement rates from "guaranteed" 

sources like Social Security and DB pensions are on 

track to deCline .. Against this backdrop, policy should be 

moving in every way possible to raise savings levels and 

extend access to on-the-Job savings to as many workers 

as possible, In today's environment, policy moves that 

attempt to cut publiC deficits by undercutting private 

savings are simply misguided, inappropriate, and 

potentially quite harmful to Americans and the nation 

as a whole. Personal solvency and national solvency, 

we believe, are mutuaily reinforcing and should never be 

put at cross purposes. 

One of the most common arguments for cutting or 

curbing savings tax deferrals rests on claims of "distributional justice." In other words, these deferrals supposedly 

benefit the wealthy far more than average workers. 

ThiS assumption IS flat wrong. 

In fael, the malority of these tax advantages (62%) go to 

workers who earn less than $100,000 per year, while the 

remaining 38% g08S to those who earn more (Figure 7)< 

But let's compare these tax deferrals - which, we should 

recall, are postponements and not the forgiveness of 

taxes - to the income taxes the recipients actually pay. 

Middle· and lOW-Income workers pay 26% of federal 

income taxes. In other words, they receive twice as large 

a share of savings tax breaks as the share of income 

taxes they actually pay. Workers who earn more than 

$100.000 pay 75% of all federal income taxes. So. more 

affluent earners get almost exactly half the share of 

savings tax breaks as they pay in taxes 

On itS face, thiS baSIC differentiation in the tax-deferral 

and tax-payment structure is progressive. which is not 

unsurprismg given that we currently have a progressive 

income tax. And when we consider that every serious 

Social Security reform proposal protects low-income 

workers, a5 we believe is only right, the brunt of tax 

Increases and benefit reductions from any reform 

would likely fall on upper-middle-lncofDe and wealthy 

SOCIal Secunty reCipients. But how would It be fair - or 

politically feasible, for that matter - to Simultaneously 

undercut the pnvate savings efforts of these more 

affluent earners - and taxpayers? 

There IS another reason for caution with respect to any 

defiCit or tax code changes that undercut workplace 
125 

savings or the Incentives many businesses have to offer 

them, Access to workplace savings is vital to low- and 

moderate-income workers, Workplace savings are qUite 

simply the only regular savings option these workers 

have, Over 71% of workers earning between $30,000 

and $50,000 do save for retirement - but only if they 

have access to payroll-deduction savings plans at work, 

Among moderate-income workers who lack access 

to savings at work, fewer than 5% set money aside to 

prepare for retirement Thus, capping or eliminating 

incentives for workplace and other retirement savings 

exactly the wrong direction to go, 

The reason for this!s that many small business owners 

and companies are motivated to offer plans to their 

empioyees by the $50,000-per-year maximum that 

these owners can set aside ior themselves under current 

law, If that cap is reduced to $20,000 per year - as 

the Simpson-Bowles DefiC!t Commission has recom" 

mended - many business owners could easily become 

more selective about whom they would offer workplace 

savings programs, Rather than setting UP savings 

plans for their entire workforce, bUSiness owners could 

Just cover themselves and a fraction of their employees, 

Capping or cutting incentives for tax-deferred savings 

could thus have a devastating, unintended impact by 

sending millions of low, and moderate-income workers 

toward retirement with essentially no savings at aiL 

Figure 7: Who benefits? Who pays? 

I putnam.com 

What makes thlS seem even worse, from our perspective, 

IS that we believe the revenue "gains" to the Treasury 

from such a policy shift are overstated by 50% or more, 

In our View, these gains are overstated by a genuinely 

bizarre budget methodology that looks out only 10 years 

and undercounts the flow-back to Treasury as retirement 

savings are drawn down- and taxed - as ordinary 

incoille. Budget hilwks also seem oblivious to the 

damage they might Inflict on low- and moderate,income 

workers' chances for retirement security by dramatically 

undercc:tting the wlll!ngness of bUSiness owners to offer 

plans In the first place, Instead of making what we 

believe would be a huge mistake of cutting back on 

savings deferrals, we believe pollcymakers should be 

dOing everything they can to expand - and even 

mandate - workplace savings coverage to the millions 

Of people who lack It 

That is why we support the concept of the automatic 

payroll-deduction IRA, which was recently re-introduced 

by Congressman Richard Neal of Massachusetts, That is 

also why we support a Sense of Congress resolution In 

defense of savings incentives, which was recently introduced with more than 100 co-sponsors from both major 

partIes. We believe incentives for retirement savings ore 

fundamentally good policy. 

"Tax expenditures" versus share of federal income taxes paid, by income !evel 
126 

The 
127 

§ACLI 

Financial Security. For life. 

The American Council of Life Insurers 

Written Statement for the Record 

for 

"Retirement (In)securlty: Examining the Retirement Savings Deficit." 

Committee on Banking, Housing, and Urban Affairs 

Subcommittee on Economic Policy 

United States Senate 

March 28, 2012 
128 

American Council of Life Insurers (ACLI) Statement for the Record 

"Retirement (In)securlty: Examining the Retirement Savings Deficit.· 

Committee on Banking, Housing, and Urban Affairs 

Subcommittee on Economic Policy 

United States Senate 

March 28, 2012 

The American Council of Life Insurers (ACLI) commends this Committee for holding this 

hearing on the growing retirement security crisis. We applaud Chairman Tester (D-MT) and 

Ranking Member Vitter (R-LA) for holding this particular hearing focusing on the need for 

more Americans to save for their retirement in a challenging economy. 

THE AMERICAN COUNCIL OF LIFE INSURERS 

The American Council of Life Insurers is a national trade organization with over 300 

members that represent more than 90% of the assets and premiums of the U.S. life 

insurance and annuity industry. ACLI member companies offer insurance contracts and 

investment products and services to qualified retirement plans, including defined benefit 

pension, 401(k), 403(b) and 457 arrangements and to individuals through individual 

retirement arrangements (IRAs) and on a non-qualified basis. ACLI member companies also 

are employer sponsors of retirement plans for their employees. As service and product 

providers, as well as employers, we believe that saving for retirement, managing assets 

throughout retirement, and utilizing financial protection products are critical to shoring up the 

retirement savings deficit facing individuals and alleviating the financial burden on public 

safety net programs. 

Seventy-five million - or two out of three - American families count on life insurers' products 

for protection, long-term savings, and a guarantee of lifetime income when it's time to retire. 

Given today's economic uncertainties, the financial and retirement security these products 

provide has never been more important. To provide context about the extent to which the life 

insurance industry protects American families, in 2010 alone, American families received 

$58 billion in life insurance death benefits, $70 billion in annuity payments, $16 billion in 

disability income insurance benefits, and $7 billion in long-term care insurance benefits. 

RETIREMENT SAVINGS OPPORTUNmES HAVE BEEN SUCCESSFUL 

The ACLI strongly supports the current defined benefit (DB) and defined contribution (DC) 

retirement system and believes expanding this system should be a national goal. People are 

living longer than ever. According to the Center for Disease Control, a 65 year-old can expect 

to live to age 83.6. Yet many Americans are unprepared for retirement. In its 2010 

Retirement Readiness Rating, the Employee Benefit Research Institute (EBRI) found that 

47.2 percent of workers born between 1948 and 1954 are "at risk" of not having enough 

retirement income to pay for basic expenses. Moreover, according to the 2007 Federal 

Reserve Survey of Consumer Finances, the most recent available survey, 50 percent of 

Americans 50 to 64 years old have 16 months or less of savings, even though many will live 

more than 20 years in retirement. 

The ACLI believes that by supporting and expanding the current voluntary employer-based 

retirement system, individuals will have a simple, efficient way to save for their retirement. 

Workers' money goes directly to their retirement savings account through payroll deduction 

and this money is often matched by the employer. Recent changes in law put in place by the 
129 

2006 Pension Protection Act (PPA) - such as auto-enrollment and auto-escalation - are 

improving the rates at which people save for their retirement at the workplace. Lowerincome workers also benefit from targeted tax breaks that provide an additional incentive to 

save through the use of the Saver's Credit. Under the current system, individuals also 

benefit from the employer's role as a fiduciary who oversees investment management, 

monitors plan fees and services, and selects quality investment alternatives. This structure 

allows individuals to have access to well thought out, low-cost investment options. 

Fortunately, even if an employer does not sponsor a retirement plan, both the business 

owner and his employees can save for their retirement in an individual annuity. Annuities can 

be used to fund an individual retirement account and to accumulate additional retirement 

savings. Moreover, an individual annuity provides guaranteed lifetime income in retirement. 

Unfortunately, proposals that would dramatically change the current tax incentives for 

retirement savings have been put forward and analyzed by members of Congress. These 

proposals tend not to focus on how policymakers can achieve better retirement savings 

outcomes, but rather focus on collecting additional revenues. Independent analysis has 

generally found that these proposals would be detrimental to retirement savings and would 

disproportionately - and negatively - impact younger and lower income workers. 

In his testimony before the Senate Finance Committee in 2011, Dr. Jack VanDerhei 

discussed EBRI's analysis of one such proposal put forward by Dr. Bill Gale that would 

transition the current deduction-based retirement system into a system incentivized by 

refundable tax credits for retirement savings. EBRI's analysis of this proposal found that the 

lowest income workers would be most likely to react to such a change by reducing their 

retirement savings (56.7% of respondents to their survey would reduce savings). 

Additionally, EBRI found that a proposal ofthis sort would significantly reduce Americans' 

total retirement savings. This is especially true for younger Americans who, under EBRl's 

mostgenerous assumptions, could see a reduction in their 401(k) account balances of at 

least 11% - however this reduction could be as high as 30 or 40% under more realistic 

assumptions. 

Further, proposals put forward bY other groups would have policymakers limit the amount 

Americans can save annually. In addition to sending a negative message about the 

importance of saving for retirement, these proposals were also found to disproportionately 

hurt younger workers trying to saving for retirement. We urge this Committee to preserve the 

current system of retirement savings incentives and examine ways to build on its successes. 

Separately, some states are considering legislation to create government-sponsored 

retirement plans for private seetor workers. These proposals raise many questions and 

concerns, including application of ERISA to state-run plans, increased taxpayer liabilities, and 

direct state competition with the private sector. Instead, states should focus their efforts on 

state-wide education programs that raise awareness of retirement security issues, promote 

retirement savings, and encourage the adoption of new plans. 

PROPOSALS TO EXPAND RETIREMENT SAVINGS OPPORTUNITIES 

ACLI urges this Committee to look at other proposals that would expand retirement savings 

opportunities. The ACLI supports reforms to and expansion of the private multiple employer 

plan (MEP) system to further encourage and facilitate participation by employers that are not 

prepared to sponsor a stand-alone retirement plan. MEPs can be an important tool to reduce 

costs and administrative burdens. Under a MEP, businesses join together to achieve 

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130 

economies of scale and advantages with respect to plan administration, and advisory 

services. MEPs may be a good option for employers that are not confident they can or should 

sponsor their own retirement plan. Participation in a MEP may facilitate a smooth transition 

to a stand-alone employer-sponsored retirement plan. 

Additionally, the Administration has put forward the Automatic IRA (AutoIRA) proposal in its 

budget proposals. The proposal would require any employer in business for at least two 

years and having ten or more employees to automatically enroll eligible employees into a 

Roth IRA. If the employer offers a qualified plan, SEP or SIMPLE retirement plan for its 

employees, it is not required to participate. However, if the employer's qualified plan 

otherwise excludes a portion of its workforce (i.e., a subsidiary, or division of the company) 

from participation in its qualified plan, the employer must provide an AutolRA for those 

excluded employees. 

DEFINITION OF FIDUCIARY 

Access to affordable investment advice is key to helping close the retirement savings deficit. 

ACLI thanks Chairman Tester and many other members of this Committee for sharing their 

concerns over the Department of Labor's ("Department") initial proposed rule on the 

definition of fiduciary for purposes of giving investment advice. In response to the concerns 

expressed by you and others, in September, the Department announced that it would repropose the rule. ACLI appreciates the Department's concern that under some 

circumstances the current rule impinges the Department's ability to bring enforcement 

actions in situations that are clearly abusive. We share the Department's interest in seeing 

that plans and participants who seek out and are promised advice, receive advice that 

adheres to the standards imposed by ERISA. At the same time, we were concerned that the 

initial proposed rule's pursuit of this objective would have disrupted investment sales and 

distribution practices that are customary in the marketplace, well understood, and commonly 

relied upon by financial service providers, plans and participants alike. We were also 

concerned that these changes would result in plans, plan participants, and IRA owners 

having I~s access to investment information. 

Relevant to this Committee's jurisdiction is the fact that the SEC will soon issue a Request for 

Information in pursuit of its rulemaking. This is in response to Section 913 of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act that a uniform fiduciary standard be 

implemented for all broker-dealers, their registered representatives and investment advisors. 

This initiative directly impacts many of the same individuals that would be affected by the 

fiduciary rule being promulgated by the Department. ACLI has requested that these two 

agencies coordinate and issue their proposed regulations simultaneously. We hope that any 

re-proposed rule will advance the Department's and the SEC's enforcement objective while 

avoiding unnecessary disruption and negative impacts to plans, participants and individuals. 

IMPORTANCE OF LIFETIME INCOME 

As the first wave of the baby boom generation reaches retirement age, it is important to 

educate American workers about the need to consider the need to have guaranteed lifetime 

income in retirement. Many current retirees are fortunate in that they are receiving lifetime 

monthly income from both Social Security and an employer-provided defined benefit (DB) 

pension. That situation is rapidly changing. Today, more workers have retirement savings in 

DC plans, which largely do not offer the option to elect a stream of guaranteed lifetime 

income. This change leads to questions of how individuals will manage their savings to last 

throughout their lifetimes. Workers need to understand the value of their retirement savings 

as a source of guaranteed lifetime income. With this information, workers would be in a 

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131 

better position to consider augmenting their SoCial Security benefit with additional amounts 

of guaranteed lifetime income. This income may be used to meet anticipated monthly 

expenses and it shifts the risk of outliving one's savings to a life insurer. 

ACLI thanks senator Herb Kohl, a member of this Committee and Chairman of the Senate 

Aging Committee, for his continued support of the bipartisan "Lifetime Income Disclosure 

Act." This is the first step in helping individuals think of defined contribution plan savings as 

not only a lump sum balance, but also as a source of guaranteed lifetime income. With this 

additional income information on a benefit statement, coupled with the Social Security 

income statement, workers can see how much monthly income they could potentially receive 

in retirement. Workers can better decide whether to increase their savings, adjust their 

401(k) investments or reconsider their retirement date, if necessary, to assure the quality of 

life they expect in retirement 

Over the long-term, the nation will benefit because people who address their long-term 

financial security needs today are less likely to need public assistance tomorrow. . 

Government policies that encourage prudent behavior, such as long·term savings, should not 

only be maintained, they should be enhanced. Therefore, ACLI continues to urge 

policymakers to support and build on the current employer-based retirement system and 

reject any proposals that would limit Americans' opportunity to save and prepare for their 

retirement. We would also urge policymakers to examine ways in which Congress might 

better educate individuals about their lifetime income needs. ACLIlooks forward to working 

with the Committee in taking these important steps today to help address tomorrow's 

retirement income security crisis. 

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