Table 2. Logit coetficients (standard errors in parentheses), Retirement Confidence ‘Survey, 1995

Dependent variable
Independent variable Empl Ow -
ployer m contribu: . y Personal
pension tion atwork | Social Security| ings
-.021* -.020" 060? 036?
(.008) (022) (011) (009)
7113, -.159 425° .206
(130) (133) (183) {.131)
Some college .... +031 025 095 -.121
(.122) (.123) (.187) (.125)
income
Low income........ -.190 ~.321 441 -.095
(177) (184) (204) (177)
Middle income .. 232% 042 +129 +034
(118) (122) (169) (120)
Sex
Male .. -.268 128 -.056 470!
(173) (174) (245) (175)
Marital status.
Married....... 196 029 -.160 084
(191) (.192) (.262) (193)
Lifestyle
Very comfortable ....... 165 197 AA7# 507
(200) (207) (261) (215)
Health
Very confident 426° -.132 -.975! 042
(187) (191) (332) (188)
Social Security
Very Confident ......scssseessesnstnstisntsnssnseenstnnetsceneeigstnetinsenae -2.428 836 554
(1.041) (.471) (.494)
IRA
-.431° .068 -.591 827
(199) (194) (321) {.195)
End of month saving
Yes ..... 107 131 ~.502° -.034
(174) (176) (251) (.176)
Deposit
Yes .... 184 080 -.527 -.054
(186) (185) (321) (189)
Self advised
Yes .. -.070 -.121 ~.755 -.098
(296) {.299) (.435) (.294)
Consult advisor
No advisor 385° 180 065 -.563'
(200) (186) (333) (196)
One advisor ... 422° ~.007 -.169 241
(195) (183) (.355) (.178)
‘Two advisors .. 157 -.064 214 038
(230) (215) (393) (.206)
Employer
Yes . 558° -.562" -.030 -.915?
(232) (.230) (.394) (227)
Constant .. 271F -.984° ~3.402' 348"
(501) (497) (681) (495)
-2 Log Likelihood ........... 835.45 824.98 457.39 817.23
' Significant at p <.01

2 Significant at p <.001
* Significant at p < .05

29 Compensation and Working Conditions Fall 1997



Table 1. Independent variables in logistic regression models, Retirement Confidence Survey, 1995,

Variable

Average or percent

Age...

Education
High School or less
‘Some collage ..
Bachelors degree or highe:

Marital status.
Married ..
Not married ©

Lifestyle
Very comfortable
Otherwise’...

Health
Very confident
Otherwise’...

Social Security

Self advised
Yes
Otherwise’

Consult advisors
No advisor
One advisor
‘Two advisors
Three advisors’

Employer
Yes
Otherwise

Mean = 42.1

35.4
32.4
32.2

20.5
477
31.8

50.0
$0.0

63.0
37.0

67.0
33.0

47.0

36.0
64.0

34.0
66.0

59.0
24.0
12.0

49

40.0
60.0

Definition

Respondent's age in years

Respondent's education

Total annual household income
‘Less than $25,000
$25,000-$50,000
Over $50,000.

Future lifestyle expectations

Future health expectations
Confidence in Social Security

Use an individual Retirement Account
Save what is left at end of month
Have automatic deposit not including

401{k) or company pension plan

Retied only on self when making
financial plans for retirement

Number of professional advisors used when making
financial plans for retirement

Received assistance from employer

‘Reference category.

NOTE: Percentages may not equa! 100 due to rounding.

Compensation and Working Conditions Fall 1997

28


Table 2 presents the results of
logistic regression.?! Logistic
regression models were used to
identify factors associated with the
individual’s most important source
of retirement income. Each depen-
dent variable was coded | if the
individual selected that income
source as the most important, or 0, if
otherwise. The estimated param-
eters indicate the direction of effects
(positive or negative) of the indepen-
dent variables (age, education,
income, lifestyle expectations, use of
an Individual Retirement Account,
and so forth).

Employer pensions. Of the socioeco-
nomic factors that were included in
the regression analysis, only age and
income predicted that employer
pensions would be the most impor-
tant source of retirement income.
Older workers were more likely to
rely on employer pensions. Com-
pared to upper-income workers,
middle-income workers were more
likely to rely on employer pensions.
There were no differences by
education level, gender, or marital
status. Two future expectation
factors predicted employer pensions.
One was positive, the other was
negative: Respondents were confi-
dent about their health in retirement
but lacked confidence in the value of
future Social Security benefits.

Surprisingly, few of the financial
preparation factors were significant.
Workers who planned to rely on
employer pensions were more likely
to receive assistance from an
employer and to consult one profes-
sional financial adviser. However,
these workers were less likely to
fund an IRA.

These findings tend to reinforce
what might be expected of workers
who depend on a defined benefit
pension. Such workers would tend
to have a relatively long job tenure
and an adequate income level. They
also were probably covered by a
health care plan that allowed them to
take care of health needs during
working years and, thus, ensure a

healthy retirement. A lack of
confidence in the value of future
Social Security benefits could be
explained by having Social Security
withheld for many years, but
becoming aware of possible changes
in the system as these respondents
near retirement. Receiving assis-
tance from an employer is consistent
with dependence on an employer
pension. The security of a pension
may have provided justification for
not contributing to an IRA.

Own contribution at work. In
contrast to respondents who depend
on defined benefit pensions, regres-
sion analysis provided only limited
information about those depending
on their own contribution at work for
retirement income. The analysis
found that, other factors being equal,
younger workers and those who did
not consult with an employer were
more likely to expect that their
contributions to a plan at work
would be the most important source
of retirement income. Because none
of the other socioeconomic, future
expectation, or financial preparation
factors were statistically significant,
interpretation of these results is more
subjective. Younger workers can
expect to change jobs more often
than in the past. Also, many
workers are aware that fewer
employers offer pensions based on
jongevity and salary, and that
employers have increasingly shifted
to defined contribution retirement
plans which place the burden of
retirement preparation on the
employee.

Social Security. Socioeconomic
factors that predicted Social Security
as the most important source of
retirement income were age,
education, and income. Older
workers, those with a high school
education or less, and those with
lower incomes were more likely to
expect that Social Security would be
the most important source of
retirement income. These workers
also tended to be less confident about

their future, about their health in
retirement, and about having a
comfortable life-style in retirement.
The only financial preparation
characteristic that was a predictor
was that these workers were less
likely to save what was left at the
end of the month. This indicates
that they may be unable to save for
retirement from current earnings
because they have lower incomes
and had to use their monthly
earnings to meet basic needs.

Personal savings and investments.
Findings for personal savings and
investments provide an interesting
contrast. Other factors being equal,
age, gender, future expectations, and
having an IRA predicted personal
savings and investments. Thus,
younger workers, males, and those
expecting a “comfortable” lifestyle in
retirement indicate an aggressive
and optimistic approach to retire-
ment preparation. These workers
were less likely to receive assistance
from an employer. Those who did
not consult an advisor were less
likely to rely on personal savings
and investments compared to those
who consulted three financial
advisors, which was the reference
category for the logistic regression.

These workers were less likely to
consult with an employer which
could mean that they may have no
employer-provided pension or are
self-employed. They are more likely
to have an IRA, possibly because
contributions can be deducted from
gross income if there is no employer
pension, thus providing a tax as well
as retirement savings incentive.

Summary and conclusions

Socioeconomic factors. Age was the
only factor that was significant in all
four regression models. Older
people were more likely to rely on
the traditional sources of retirement
income of employer pensions and
Social Security. Younger people
were more likely to expect that their
own contributions at work or

Compensation and Working Conditions Fall 1997 30

IT]


BY SHARON A, DEVANEY AND
YA-PING SU

Sharon A. DeVaney is assistant professor of fam-
ily and consumer economics und Ya-Ping Su is
doctoral candidate in sociology at Purdue Uni-
versity, Telephone (765) 494-8300. This article
is an elaboration of findings previously pre-
sented by Sharon A. DeVaney as part of the Of-
fice of Compensation and Working Conditions’
‘Seminar Series, The authors’ views ure their own
and do not necessarily reflect those of the Bu-
reau of Labor Statistics or the U.S. Department
of Labor.

Factors Predicting the
Most Important Source
of Retirement Income

What are the factors that predict workers’ identification of their most
important source of retirement income? Older workers, for example,
tend to rely on employer provided pensions or Social Security. In
comparison, younger workers expect their contributions at work or their
personal savings and investments to be their most important source of

retirement income.

inancial security in retirement
F: a major concern of today’s

workers. While many workers
say they are saving for retirement,
they are less confident about having
enough money for retirement than
those in earlier years. In 1996, 19
percent were very confident and 43
percent were somewhat confident
about money for retirement, but
comparable figures for 1995 were 22
and 52 percent, respectively,
indicating a total drop in confidence
of 12 percentage points in 1 year.'

Income in retirement has tradi-

tionally been viewed as a three-
legged stool consisting of Social
Security, employer-provided pen-
sions, and private savings. Many
believe that the legs of the stool have
weakened and that a fourth leg,
earnings, is increasingly necessary to
support retirement. These concerns
abound for a number of reasons.
First, some workers fee] that future
Social Security benefits will not be
equal to current benefits.’ Second,
starting in the mid-1980s, employers
increasingly moved toward retire-

25 Compensation and Working Conditions Fall 1997

ment coverage under defined
contribution plans and away from
defined benefit pension plans.
Defined contribution plans require
workers to set aside savings from
current income. By 1993, 49 percent
of full-time workers in medium and
large private establishments (those
employing 100 or more workers)
participated in defined contribution
plans and 56 percent in defined
benefit plans compared to 41
percent and 80 percent, respectively,
in 1985.° Third, between 1992 and
1995, the proportion of families who
saved in the preceding year declined.
Over this period, the aggregate
personal savings rate as reported in
the national income and product
accounts fell from 5.9 to 4.7 per-
cent.*

This article focuses on the
analysis of factors predicting
workers’ most important source of
retirement income. Responses from
774 non-retired workers participat-
ing in the 1995 Retirement Confi-
dence Survey sponsored by the
Employee Benefit Research Institute



personal savings and investments
would be important in retirement.
Although the results suggest that
older people are more likely to plan
for retirement in a conservative
fashion, younger people may be
more willing to take risks through
investing and, therefore, plan to
depend on themselves. It is also
likely that younger people expect
to change jobs more often and
believe that they will be unable

to depend on an employer pen-
sion.

The effects of income and
education were not as strong as
expected. Compared to the upper
income group, the middle income
group was more likely to rely on
employer pension plans while the
lower income group tended to rely
on Social Security. Respondents
with only a high school education
were more likely to rely on Social
Security.

Being male was a predictor of
only one most important source of

' For more information, see Paul Yakoboski
and Allen Schiffenbauer, “The Reality of Retire-
ment Today: Lessons in Planning for Tomorrow,"
EBRI Issue Brief, Number 181, Washington, DC:
Employee Benefit Research Institute, January
1997.

2See J.F. Wasik, “Will Social Security be There
for You?” Consumers Digest, March/April 1996,
pp. 49-54,

For more information on defined contribu-
tion plans, see Ann C. Foster, “Defined Contribu-
tion Plans Becoming More Prevalent,” Compen-
sation and Working Conditions, June 1996, pp
42-44, and Ann C. Foster, “Employee Participa-
tion in Savings and Thrift Plans, 1993,” Monthly
Labor Review, March 1996, pp. 17-22.

* Additional information may be found in A.
B. Kennickell, M. Starr-McCluer, and A. E.
‘Sunden, “Family Finances in the U.S.: Recent
Evidence from the Survey of Consumer Finances,”
Federal Reserve Bulletin, Volume 83, Number
1, January 1997, pp. 1-24.

* For more information about the 1995 Re-
tirement Confidence Survey, see /995 Retirement
Confidence Survey, Washington, DC: Mathew
Greenwald & Associates and Employee Benefit
Research Institute, July 1995.

retirement income, that of personal
savings and investments. This is
consistent with current research
showing that men take a more
aggressive approach to investing
than women.” Respondents’ marital
status had no effect on any of the
dependent variables.

Future expectations. Workers who
intended to rely on Social Security
were less optimistic about their
future life-style, while those who
planned to rely on personal savings
and investments were optimistic
about their future life-style. Those
who planned to rely on employer
pensions expected good health in the
future perhaps because they had
received health care as an employee
benefit. Those planning on Social
Security were not confident about
their future health. Workers
planning to rely on employer
pensions were less likely to be
confident about future Social
Security benefits.

—ENDNOTES—

“See Income of the Aged Chartbuok,
1994, Publication 13-11727, Social Security
Administration, Office of Research and Statis-
tics, 1996.

7 See PM. Wheelerand J.R. Keamey, “Income
Protection for the Aged in the 21st Century: A
Framework to Help Inform the Debate,” Social
Security Bulletin, Volume 59, Number 2, Sum-
mer 1996, pp. 3-19.

* See “Income of the Elderly, 1995,” Facts
from EBRI, Washington DC: Employee Benefit
Research Institute, February 1977.

* For more information on pension coverage,
see Pension and Health Benefits of American
Workers: New Findings from the April 1993
Current Population Survey, Department of La-
bor, Pension and Welfare Benefits Administration,
1994.

'° See Pension and Health Benefits of Ameri-
can Workers.

" See Pension and Health Benefits of Ameri-
can Workers

* For more information, see Retirement Ben-
efits of American Workers: New Findings from
the September 1994 Current Population Survey,
Department of Labor, Pension and Welfare Ben-
efits Administration, 1995.

» For more information, see A. Ando and F.

31 Compensation and Working Conditions Fall 1997

Financial preparation. There were
definite contrasts in financial
preparation. Those who relied on
personal savings and investments
were more apt to have an IRA, while
those who relied on employer
pensions were less likely to have an
IRA. Workers who relied on
employer pensions were more likely
to receive assistance from an
employer, but those who did not
consult employers were more likely
to rely on their own contribution at
work and personal savings and
investments. The use of professional
advisors had little effect on the
probability of selecting any of the
sources of retirement income.

In conclusion, a worker’s age and
beliefs about retirement were closely
related to ideas about retirement
income. Such findings may mean
that workers now in their twenties
will plan differently than baby
boomers, many of whom are now
beginning to put money into mutual
funds and stocks.

Modigliani, “The ‘Life Cycle’ Hypothesis of Sav-
ings: Aggregate Implications and Tests,” Ameri-
can Economic Review, Volume 53, March 1963,
pp. 55-84.

TM See Kennickell, Starr-McCluer and Sunden,
“Pamily Finances in the U.S.”

'SSee Yakoboski and Schiffenbauer, “The
Reality of Retirement Today,” p. 4.

See Yakoboski and Schiffenbaver, “The
Reality of Retirement Today,” p. 7.

"7 See 1995 Retirement Confidence Survey.

TM See 1995 Retirement Confidence Survey:

See 1995 Retirement Confidence Survey.

> For more information, see B. R. Hertel,
“Minimizing Error Variance introduced by Miss-
ing Data Routines in Survey Analysis,” Sociologi-
cal Methods and Research, Volume 4, 1976, pp.
459-475,

21 For more information on logistic regression,
see G.S, Maddala, Introduction to Econometrics.
New York: MacMillan Publishing Company.
1992

2 For more information, see Nancy A
Jianakoplos and Alexandra Bernasek, “Are
‘Women More Risk Averse?” Working Papers in
Economics and Political Economy, Department
of Economics, Colorado State University, March
1996.



showed that the four most important
sources of retirement income are:
Employer-provided pension plans,
worker’s own contribution to a
pension plan, Social Security, and
personal savings and investments.*
To understand why workers selected
one retirement income source as more
important than the others, the authors
used logistic regression analysis to
determine which factors (age, income,
expectations for the future, financial
preparation, etc.) were predictors of
the most important retirement income
source. After a discussion of the
primary retirement income sources,
sample characteristics and study
findings are described.

Social Security

Social Security is a source of
retirement income for most persons.
In 1994, 91 percent of all couples
and single persons over 65 received
Social Security benefits.* Asset
income—income from savings and
investments—was received by 67
percent; retirement benefits other
than Social Security by 42 percent;
and earnings from employment by
21 percent. Although Social
Security retirement benefits are
common, they represent less than
half of all retirement income
received by the elderly, i.e., those
age 65 and older. In 1995, the
percentage of income of the elderly
from each source was:

Social Security .. 42.8
Pensions and annuities 19.0
18.2

178

22

Although middle- and lower-
income workers remain highly
dependent upon Social Security,
more affluent workers are likely to
receive a greater proportion of
retirement income from private
sources. Data from the 1994
Current Population Survey show
that, among the elderly, the poorest
20 percent received 81 percent of
Tetirement income from Social
Security; 11 percent from public

assistance; 2.7 percent from assets;
2.5 percent from pensions and
annuities; and 2.6 percent from other
sources. However, the most affluent
20 percent of the elderly received
22.7 percent of income from Social
Security; 24.4 percent from assets;
20.7 percent from pensions and
annuities; 28.5 percent from earn-
ings; and 3.7 percent from other
sources.”

Elderly women receive a greater
share of income from Social Security
and assets than men. In 1995,
Social Security accounted for 51.2
percent of their income compared to
36.6 percent for men. Women also
received 22.9 percent of income
from assets compared to 14.8 percent
for men. In contrast, 22.6 percent of
men’s retirement income was
derived from pensions and 23.6
percent from earnings compared to
14.1 and 10.0 percent, respectively,
for women."

Pension coverage

In 1993, almost two-thirds (64
percent) of all wage and salary
workers reported that their employer
sponsored a pension or a retirement
plan. Employers may legally exclude
certain categories of workers such as
part-time or temporary employees
from coverage and may impose
minimum age and eligibility
requirements. Hence, less than half
(49 percent) of all wage and salary
workers reported coverage under an
employer pension or retirement plan.
Among full-time workers, 85 percent
of government employees and 50
percent of private workers were
covered by an employer-sponsored
pension or retirement plan in 1993,
showing the greater likelihood of
coverage for government employees
compared to private sector workers.
The overall coverage rate for full-
time private sector workers has been
relatively stable since 1972, but there
have been shifts in the types of plans
and the subgroups of workers who
are covered.”

Since the mid-1980s, there has
been increasing coverage under

401(k) plans and decreasing cover-
age under both defined benefit
pension plans and non-401(k)
defined contribution plans. The
incentive for workers to participate
in 401(k) plans is the tax deferment
of employee contributions, but
employee contributions reduce
current compensation. Thus,
younger, lower paid workers are less
likely than older workers to partici-
pate in 401(k) plans. In 1993, 32
percent of private wage and salary
workers under 30 were covered
under 401(k) plans compared to 56
percent of similar workers over 30.'°

Pension coverage rates for women
increased steadily between 1972 and
1993 because plan coverage in-
creased in the service industries
where more women tend to be
employed. Overall coverage for
men declined because of a lack of
growth in the manufacturing
industry where more men are
employed. Coverage rates for male
and female full-time private wage
and salary workers in 1993 were 51
and 48 percent, respectively,
compared to 55 and 38 percent,
respectively, in 1979."

Other factors associated with
pension coverage and pension
receipt are workers’ education,
income, years of service, and size of
firm. Data from the September 1994
Current Population Survey illustrate
these relationships. One-third of
retirees without a high school
diploma received a private pension
compared to 62 percent of those with
a master’s degree or higher. Of
retirees who earned less than
$10,000 in their last year of work, 12
percent received a pension compared
to 68 percent of those who earned
between $40,000 and $50,000 in
their last year of work. Of retirees
formerly employed in firms with
fewer than 25 workers, I percent
received pensions compared to 68
percent of those who had worked in
firms with 1,000 or more workers.
Longer job tenure is also related to
increased likelihood of pension
receipt.'?

Compensation and Working Conditions Fall 1997 26


Personal savings and invest-
ments

The life-cycle hypothesis suggests
that savings will vary by age and
life-cycle stage. Because a level
stream of consumption is preferred,
younger people are likely to dissave,
that is, go into debt, as they establish
households and purchase durable
goods. As they approach mid-life
and as income increases, they tend to
save at relatively high levels com-
pared to earlier savings levels. After
retirement, the life-cycle hypothesis
suggests that dissaving will occur as
many retirees receive a reduced level
of income and also need to spend
assets to fund the desired level of
consumption.'? Some studies,
however, have shown that retired
persons continue to save because of
precautionary motives or estate
planning. For example, the 1995
Survey of Consumer Finances
showed that proportionally more
families headed by persons aged 75
and older were savers in 1995 than
in 1992.

Saving for retirement is usually
thought of as a process requiring
long-term planning. Interestingly,
retirees in the 1996 Retirement
Confidence Survey indicated a lack
of confidence in their own personal
financial planning for retirement.
Somewhat more than haif (56
percent) of retirees reported that they
had saved some money for retire-
ment. Of these, 76 percent did not
begin saving until they were 40 or
older.'5 (This definition of savings
does not include the purchase of a
home.)

Active workers in the 1996 survey
seem to be doing better. Sixty-four
percent have set aside money, apart
from Social Security or employer-
funded pensions but including
401(k) plans, for retirement on a
regular basis. Older workers were
more likely to have savings than
younger workers. Only one-third of
the workers, however, had tried to
calculate how much money they
would need to save for retirement.
Those who had not tried to calculate

an amount said that they were
unable to save a greater amount than
they were currently saving or that it
was not possible to know how much
would be needed.'*

Expectations for the future

In addition to socioeconomic
factors such as age and income,
factors that could influence beliefs
about retirement income are expecta-
tions for the future. Interview
questions from the 1995 Retirement
Confidence Survey asked about life-
style in retirement and confidence in
the future related to both health and
Social Security benefits. Life-style
was measured by the answer to:
“What do you expect your lifestyle in
retirement to be like?” Responses
were “very comfortable,” “comfort-
able,” “just make ends meet,” “will
struggle to get by,” and “don’t
know.” Health was measured by the
question: “How confident are you
that you (and your spouse) will be
healthy enough to enjoy your
retirement years?” Feelings about
Social Security were measured by the
question: “How confident are you
that the Social Security system will
continue to provide benefits of equal
value to the benefits received by
retirees today?”""”

Financial preparation for
retirement

Current workers’ financial
preparation for retirement was
measured by asking if they used an
Individual Retirement Account
(IRA), whether they saved what was
left at the end of the month, and if
they had an automatic deposit (not
including a 401(k) or company
pension plan). Interviewees were
also questioned about receiving
assistance for retirement planning
from: A stockbroker, an insurance
agent, accountant, or employer. An
index was created by adding the
number of sources that were used."

Study details
Data from the Retirement
Confidence Survey (RCS), sponsored

27 Compensation and Working Conditions Fall 1997

by the Employee Benefit Research
Institute, were collected by telephone
in July, 1995, by Mathew Greenwald
and Associates, Inc. Random digit
dialing was used to obtain a repre-
sentative sample. A total of 1,000
interview responses were obtained
from retired persons and current
workers over the age of 26.'° This
analysis was based on data from the
774 current workers participating in
the survey. Not included in the
analysis were: Respondent and
spouse who were both retired;
respondent who was a homemaker
with a retired spouse; respondent
who was a homemaker and not
married; and respondent who was
married, but was retired. Missing
data in small proportions for the
socioeconomic variables were
recoded to the mean.”

Findings and discussion

Table | presents characteristics of
the sample. The average age of the
respondents was 42 years. Educa-
tional attainment varied within a
narrow band. Those having a high
school education or less accounted
for 35 percent of respondents; those
having some college education, 32
percent; and those having a college
education, 32 percent. About 20
percent had household incomes
below $25,000; nearly 50 percent
had incomes between $25,000 and
$50,000; and almost 32 percent had
incomes over $50,000. Sixty-three
percent were married. Sixty-seven
percent of the respondents in the
RCS expected to have a “very
comfortable” life-style in retirement.
And 53 percent saved what was left
at the end of the month; 36 percent
used an automatic deposit; and 36
percent had an Individual Retire-
ment Account (IRA).

The most important sources of
retirement income were: Employer
pensions, 26.1 percent; own contri-
bution at work, 24.7 percent; Social
Security retirement benefits, 15.1
percent; personal savings and
investments, 27.5 percent; and other,
6.6 percent.

“TTT