Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits
Published: 2011-03-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Despite sizeable tax incentives, private pension participation has remained at about 50 percent of the workforce. For those in a pension plan, there is concern that these incentives accrue primarily to higher income employees and do relatively little to help lower income workers save for retirement. The financial crisis and labor-market downturn may have exacerbated these difficulties. Therefore, we examined (1) recent trends in new private pension plan formation, (2) the characteristics of defined contribution plan participants contributing at or above statutory limits, (3) how suggested options to modify an existing credit for low-income workers might affect their retirement income, and (4) the long-term effects of the recent financial crisis on retirement savings. To answer these questions, GAO reviewed reports, federal regulations, and laws, and interviewed academics, agency officials, and other relevant experts. We also analyzed Department of Labor and 2007 Survey of Consumer Finance (SCF) data, and used a microsimulation model to assess effects of modifying tax incentives for low-income workers. We incorporated technical comments from the departments of Labor and Treasury, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation as appropriate.
section_title: What GAO Found
paragraphs: Net new plan formation in recent years has been very small, with the total number of single employer private pension plans increasing about 1 percent from about 697,000 in 2003 to 705,000 in 2007. Although employers created almost 180,000 plans over this period, this formation was largely offset by plan terminations or mergers. About 92 percent of newly formed plans were defined contribution (DC) plans, with the rest being defined benefit (DB) plans. New plans were generally small, with about 96 percent having fewer than 100 participants. Regarding the small percentage of new DB plans, professional groups such as doctors, lawyers, and dentists sponsored about 43 percent of new small DB plans, and more than 55 percent of new DB plan sponsors also sponsored DC plans. The low net growth of private retirement plans is a concern in part because workers without employer-sponsored plans do not benefit as fully from tax incentives as workers that have employer-sponsored plans. Furthermore, the benefits of new DB plans disproportionately benefit workers at a few types of professional firms. Most individuals who contributed at or above the 2007 statutory limits for DC contributions tended to have earnings that were at the 90th percentile ($126,000) or above for all DC participants, according to our analysis of the 2007 SCF. Similarly, consistent with findings from our past work, high-income workers have benefited the most from increases in the limits between 2001 and 2007. Finally, we found that men were about three times as likely as women to make so-called catch-up contributions when DC participants age 50 and older were allowed to contribute an extra $5,000 to their plans. We found that several modifications to the Saver's Credit--a tax credit for low-income workers who make contributions to a DC plan--could provide a sizeable increase in retirement income for some low wage workers, although this group is small. For example, under our most generous scenario, Saver's Credit recipients who fell in the lowest earnings quartile experienced a 14 percent increase in annual retirement income from DC savings, on average. The long-term effects of the financial crisis on retirement income are uncertain and will likely vary widely. For those still employed and participating in a plan, the effects are unclear. Data are limited, and while financial markets have recovered much of their losses from 2008, it is not fully known yet how participants will adjust their contributions and asset allocations in response to market volatility in the future. In contrast, although data are again limited, the unemployed, especially the long-term unemployed, may be at risk of experiencing significant declines in retirement income as contributions cease and the probability of drawing down retirement accounts for other needs likely increases. The potential troubling consequences of the financial crisis may be obscuring long standing concerns over the ability of the employer-provided pension system in helping moderate and low-income workers, including those with access to a plan, save enough for retirement.

section_title: Letter
paragraphs: For nearly a century, qualified pension and retirement plans meeting  certain qualifications have received favorable federal tax treatment with  deferral of taxes on contributions and investment earnings until benefits  are received in retirement. Today, these pension tax incentives are the  second largest tax expenditure and the associated income tax revenue  losses are estimated to amount to approximately $105.1 billion in fiscal  year 2011 and a total of $602.2 billion from fiscal years 2012 to 2016. The  purpose of favoring private pensions through the tax code is to encourage  employers to form new plans or maintain existing plans for their  employees and to encourage workers to save for retirement. At the same  time, the favorable tax treatment includes requirements to help ensure  that the accrual of benefits would be broadly based among their workforce  and not accrue solely to higher income employees.
Yet, there has been growing concern that many millions of working  Americans remain largely outside the private pension system. The  percentage of workers participating in employer-sponsored plans has  peaked at about 50 percent of the private sector workforce for most of the  past two decades. Many employers—often those of lower income  workers—continue to choose not to offer a pension or other retirement  savings plan to their employees. For those fortunate enough to be covered  by a pension, there is a concern that much of the tax benefits flow to  higher income employees, and in many instances the financial constraints  on lower wage workers limit their ability to contribute to tax-qualified  plans and thus, to benefit from those subsidies.
Since 2001, additional tax-related incentives have been enacted that could  help encourage retirement savings and address these distributional issues,  including a tax credit—the Saver’s Credit—to encourage those with low  earnings to contribute to a retirement plan or an individual retirement  account (IRA) and a “catch-up” provision permitting those employees  more than 50 years of age to make additional tax-deferred contributions.  Also enacted were provisions increasing the limits on the annual  contribution to qualified defined contribution (DC) plans that are tax  deferrable, a step that some hoped might spur employers to form new  plans.
The distributional issues concerning the pension tax expenditure have  become more salient in light of the recent financial crisis, subsequent  recession, and continued high unemployment. These difficult economic  conditions have heightened worries as to whether workers, particularly  lower income workers, will have the resources they need to save for  retirement. Thus, given the limits of private pension coverage, the cost of  tax incentives to promote retirement saving, and the effects of the recent  recession on long term retirement security, this report addresses the  following questions:  1.  What has been the trend in new private pension plan formation in  recent years?  2.  What are the characteristics of DC participants contributing at or  above the statutory DC contribution limits and how might this have  changed as the limits have increased?  3.  How might incentives to increase retirement saving by low-income  workers through modifications of the Saver’s Credit affect retirement  income?  4.  What might be the long-term effect of the recent financial crisis on  retirement savings for U.S. workers?
To address our objectives we employed a variety of methods, including  interviewing pension and retirement experts, reviewing and analyzing  databases, and reviewing relevant studies. We used the Department of  Labor’s data from the Form 5500 as well as published data from the  Pension Benefit Guaranty Corporation (PBGC) on plan formation. We also  used data from the 2007 Survey of Consumer Finances (SCF) to examine  characteristics of DC participants. We used a microsimulation model to  assess the possible effects of modifying existing tax incentives for low- income workers. To evaluate the effects of the financial crisis on  retirement savings, we reviewed and synthesized recent studies and  interviewed retirement and financial experts. We also reviewed relevant  federal laws and regulations.
We conducted our work from February 2010 to March 2011 in accordance  with all sections of GAO’s Quality Assurance Framework that are relevant  to our objectives. The framework requires that we plan and perform the  engagement to meet our stated objectives and to discuss any limitations in  our work. We believe that the information and data obtained, and the  analysis conducted, provide a reasonable basis for any findings and  conclusions in this product.
subsections: section_title: Background
paragraphs: Pension tax preferences are structured to provide incentives for  employers to start and maintain voluntary, tax-qualified pension plans and  to ensure that participants receive an equitable share of the tax-favored  benefits. The tax treatment for DC and defined benefit (DB) plans are  similar. However, DC plan contributions are subject to specific limits and  DB plans allow deductions for contributions to fund future benefits (plus  a cushion amount), which may total several times the DC tax-deferred  contribution dollar limit. Importantly, such benefits cannot exceed the  maximum yearly benefit—which is $195,000 per participant per year— and the allowable contribution in any year also depends on a variety  of  actuarial factors, including the ages of the participants and the funded  status of the plan. (See table 1 for a summary of DC contribution limits.)
One important requirement for tax-qualified pension plans of private  employers is that contributions or benefits be apportioned in a  nondiscriminatory manner between highly compensated employees or  other workers. There are standard off-the-shelf plan designs, termed  “safe harbors,” which allow employers to easily comply with this  requirement. Alternatively, employers can develop a custom-tailored plan  design and apply general testing methods (as required by law) to a plan’s  apportionment of contributions or benefit accruals each year. These  methods for custom-tailored plan designs are complex, but they generally  require the employer to provide both coverage and contributions or  benefits for employees other than the most highly compensated at rates  that do not differ too greatly from the rates at which the employer  provides coverage and contributions or benefits for its most highly  compensated employees.
The purpose of the legal limits that constrain tax-deferred contributions to  tax-qualified retirement plans is to prevent tax preferences from being  used to subsidize excessively large pension benefits. Tax-deferred pension  contributions are also limited by the application of other statutory limits.  In addition to the legal limits, some plans set their own limits on  contributions. In DC plans with plan-specific contribution limits, tax- deferred contributions are limited to the statutory limit or the plan specific  limit, whichever is smaller. Employers set plan-specific limits, in part, to  ensure that the plans they sponsor pass statutory and regulatory  requirements, such as the requirement that contributions or benefits not  be skewed too heavily in favor of highly compensated employees.
The Employee Retirement Income Security Act of 1974 imposed dollar  and percentage-of-compensation limitations on combined employer and  employee tax-deferred contributions. Subsequently, the Revenue Act of  1978 included a provision that became Internal Revenue Code section  401(k), under which employees are not taxed on the portion of income  they elect to receive as deferred compensation. The Tax Reform Act of  1986 introduced a dollar limitation (i.e., a maximum dollar contribution)  on employees’ tax-deferred contributions to DC plans. In 2001, the  Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)  permitted greater contributions to such tax-advantaged savings plans  beginning in 2002. The scheduled increases were to be fully implemented  by 2006 and expire at the close of 2010. At the time, some asserted that  increasing these limits would enhance employer incentives to start new  plans and improve existing plan coverage, especially for employees of  small businesses.
EGTRRA also allowed a so-called catch-up provision, where persons aged  50 or older are permitted to make additional tax-deferred contributions, in  excess of other applicable statutory limits, to 401(k) and similar DC  plans. The provision is intended to encourage older workers who had not  previously been able to save sufficiently to make larger catch-up  contributions in order to reach more adequate levels of retirement savings.  (See table 1.) However, these EGTRRA provisions had also been  scheduled to expire on December 31, 2010. In 2006, the Pension Protection  Act made permanent the higher benefit limits in DB plans, higher  contribution limits for IRAs and DC plans, and catch-up contributions for  workers 50 and older that were included in EGTRRA.
Additionally, in order to encourage low- and middle-income individuals  and families to save for retirement, EGTRRA authorized a nonrefundable  tax credit (the Saver’s Credit) of up to $1,000 against federal income  tax. Eligibility for the Saver’s Credit is based on workers’ adjusted gross  income (AGI) and contributions to 401(k) and other retirement savings  plans and IRAs. The Saver’s Credit phases out as AGI increases so that  eligible tax filers with higher AGI receive a lower credit rate (see table 2).  The credit amount is equal to the amount of contributions to a qualified  retirement plan or IRA (up to $2,000 for individuals and $4,000 for  households) multiplied by the credit rate. Federal revenue losses for the  Saver’s Credit are estimated to amount to $1.4 billion in fiscal year 2011  and $6.5 billion for fiscal years 2012–2016.
Over the last three decades, DC plans have replaced DB plans as the  dominant type of private-sector employer pension plan and, by almost any  measure, have taken on a primary role in how workers save for  retirement. By 2007 (the most recent year with available data), DC plans  comprised 93.1 percent of all plans and active DC participants in the  private sector outnumbered those in DB plans 66.9 million to 19.4 million.
Meanwhile, participation in employer-sponsored plans has stayed fairly  constant in the past few years. Data from the Department of Labor’s  Current Population Survey show that in 2008 about 53 percent of private- sector wage and salary workers, aged 25–64, worked for employers that  sponsored a retirement plan and about 44 percent participated in a plan.  The Current Population Survey data show that while each of those  percentages were about 2 percentage points lower than in 2007, they are  indicative of the overall decline in plan coverage and participation since  2000. For instance, the percentage of private-sector wage and salary  workers, aged 25–64, who worked for employers that sponsored a  retirement plan in 2008 was more than 8 percentage points lower than it  had been in 2000 (about 61 percent). Likewise, the percentage of private- sector wage and salary workers, aged 25–64 participating in a plan fell  from more than 50 percent in 2000 to 44 percent in 2008.
Similar trends are evident when looking at such percentages by full- and  part-time employment status. The Current Population Survey data also  show that full-time workers are more likely than part-time workers to have  access to and participate in a pension plan. Moreover, the data indicate  there is substantial disparity in sponsorship of retirement plans between  large and small employers. Workers at establishments with fewer than 100  employees are much less likely to have access to an employer-sponsored  retirement plan than workers at larger establishments.
The U.S. economy went into recession in December 2007 and major stock  indexes fell more than 50 percent from their peaks in October of that year  until hitting their lows in March 2009. These economic conditions have not  been beneficial to retirement savings, particularly given the fact that  stocks have been a major type of investment for pension plans.
section_title: Total Number of Tax- Qualified Plans Remains Relatively Unchanged as Plan Terminations Largely Offset New, Mostly Small Plan Formation
paragraphs: Each year, from 2003 to 2007 (the most recent data available), private  employers created thousands of new retirement plans. However, the total  number of private employer-sponsored retirement plans has increased  only slightly because the gains from these newly formed plans were largely  offset by other plan terminations. Even though employers created more  than 179,000 new plans from 2003 to 2007, the Department of Labor  estimates a slight increase overall in the total number of plans from about  697,000 to only about 705,000 in the same period (see fig.1). It is important  to note that some plan formations and terminations are linked as sponsors  may terminate plans because of company mergers or acquisitions, and  then cover the participants with other newly started or existing plans.
Most of the new plans private employers created were small—about  173,000 new plans had fewer than 100 participants (about 96 percent of  plans) and only about 6,000 plans had 100 participants or more (see fig.  2). Most new DB plans were even smaller than new DC plans. The  median number of participants for new DB plans was just four, compared  to eight members for new DC plans. However, some larger DB plans rais the average size of new DB plans (about 43 participants) above that of t average size of new DC plans (about 34 participants).
section_title: DC Participants with High-Incomes and Other Assets Benefited the Most from Increases in Contribution Limits
subsections: section_title: High Earners More Likely to Make DC Contributions above Statutory Limits
paragraphs: Based on the 2007 SCF, about 5 percent of more than 40 million DC  participants contributed at or above the statutory limits for tax deferred  contributions. Most of these participants whose contributions were at or  above the limits were high-earners (see fig. 4). We estimated that about 72  percent of them had individual earnings at the 90th percentile ($126,000)  or above for all DC participants. In comparison, only 7 percent of the DC  participants contributing below the limits had individual earnings at the  90th percentile or above.
We also found that most DC participants who made contributions at or  above the 2007 statutory limits came from households with other assets in  addition to their DC accounts. Assets commonly held by the households  of such participants included checking accounts, savings accounts,  houses, IRAs, and stocks (see fig. 5). For example, 90 percent of these  participants came from households that owned a home and 60 percent  came from households holding stocks. DC participants contributing at or  above the limits were more likely to come from households holding these  assets than were DC participants contributing below the limits. For  example, 65 percent of those contributing at or above the limits lived in  households with an IRA, compared to only 29 percent of those  contributing below the limits.
In addition, according to our estimates, the value of household assets for  DC participants contributing at or above the 2007 statutory limits tended  to be higher, on average, than the value of household assets for  participants contributing below the limits (see table 3). For example, the  average value of stock for the former was about $228,000 in 2007,  compared to about $32,000 for the latter. Further, participants  contributing at or above the limits lived in households with an aggregate  savings account balance of around $59,000, on average, while those  contributing below the limits lived in households with an average  aggregate savings account balance of about $15,000.
section_title: Increases in the Limits Have Primarily Benefited High-Income Workers
paragraphs: High-income workers have been the primary beneficiaries of recent  increases in the limits on both individual employee contributions and  combined employer and employee contributions, as well as the  introduction of the catch-up contribution provision. When we compared  2007 contributions to the lower 2001-level limits, we found that about 14  percent of all DC participants would have been contributing at or above  the 2001-level limits. In comparison, about 5 percent of DC participants  made contributions that were at or above the limits in 2007. Thus, about 8  percent of all DC participants made contributions that were below the  actual 2007 limits but would have been at or above the limits if the 2001  limits had still been in place. Therefore, these participants likely  benefited from the increases in the limits because all of their 2007  contributions would have been tax-deferred while only a portion of their  contributions would have been tax deferred had the 2001 limits been in  place. Thirty-eight percent of these participants had individual earnings  at the 90th percentile ($126,000) or above and 20 percent had individual  earnings at the 95th percentile or above ($180,000). (See fig. 6.)
Regarding the catch-up contribution provision of EGTRRA, although it  was intended to help older workers, particularly women, catch up in  saving for retirement, a higher percentage of men than women made  catch-up contributions. Further, a higher percentage of men also  contributed at or above the statutory limit on these contributions.  Specifically, among the 10 percent of eligible DC participants making  catch-up contributions in 2007, 77 percent were men and 23 percent were  women. Further, men made up 74 percent of those contributing at or  above the catch-up contribution limit, while women made up only 26  percent (see fig. 7).
In addition, many participants making catch-up contributions at or above  the statutory limit already had relatively high account balances. The  median account balance for those contributing at or above the catch-up  contribution limit in 2007 was $340,000. In comparison, the median  account balance for all DC participants aged 50 and older was about  $51,000.
When we looked at total DC savings, we found that the savings of those  who made contributions at or above the limits represented a substantial  portion of all savings among DC participants, regardless of whether the  2001 or 2007 limits are applied to 2007 contributions. When we compared  2007 contributions to the 2001 limits, we found that an estimated 14  percent of participants in 2007 contributed at or above the 2001 limits and  these participants held an estimated 41 percent of all DC savings in 2007.  Under the 2007 limits, although a smaller percentage of participants (5  percent) contributed at or above the limits, these participants still held a  substantial portion of all DC savings, about 23 percent. In addition,  according to our estimates, the median account balance for those  contributing at or above either the 2001 or 2007 limits was significantly  higher than the median account balance for those contributing below the  limits (see table 4).
Some industry groups have suggested that the increases in the  contribution limits could motivate employers to sponsor new pension  plans, according to our past work. While the number of new plans  formed has risen since 2003—the year after the new higher limits began— the rate of increase has been small overall, and the total number of plans  actually declined from 2003 to 2005 (see fig. 2). Further, from 2003 to 20 the total number of pension plans has remained relatively constant at  about 700,000 plans, suggesting that there is no net increase in plans.  Other factors may have been at work, but at a minimum, the number of  pension plans and the number of workers covered by pension plans has  remained relatively steady. It is possible that the higher limits may have  had little or no effect. However, it would be hard to disentangle the  possible effects of the financial crisis and recent recession on plan  formation in recent years.
section_title: Modifications to the Saver’s Credit Could Improve Retireme nt Income for Some Low-Income Workers
subsections: section_title: Incentives to Help Low Income Workers That Could Be Implemented through the Saver’s Credit
paragraphs: Experts we spoke with cited several options that could further encourage  low-income workers to save for retirement, although each of them would  create additional cost for the federal government. We found that most of  these options could be implemented by modifying the existing Saver’s  Credit.
Provide a refundable tax credit. Expert commentary indicates that  providing a refundable Saver’s Credit would allow low-income workers to  receive the full amount of the credit for which they qualify, providing mor of an incentive for them to save for retirement. Expert commentary also  indicates that not only might this increase saving by those already taking advantage of the credit, but it might also encourage more individuals to  utilize the credit. While eligible tax filers may qualify for the credit based  on their AGI, they may gain little or no tax benefit from the credit because  their tax liabilities are low. For example, if a household earned $20,000 in  2010 and contributed $2,000 to an IRA or DC plan, the household qualifie for a $1,000 tax credit. However, the household will only receive the fulld  e  amount of the credit if its federal tax liability is $1,000 or more. Several  studies have found that low-income workers with limited tax liability may  not be able to take full advantage of the current Saver’s Credit becau nonrefundable. One study concluded that as little as 14 percent of  taxpayers eligible for the 50 percent rate could benefit from the credit  because of its nonrefundable nature. Further, a 2005 study estimated the  take-up rate for the Saver’s Credit to be only 66 percent.
Provide a credit that covers all low-income and some middle- income workers. Some experts told us that more low- and middle-i workers should be offered a tax credit for retirement savings. They  suggested that the limits on AGI under the current Saver’s Credit could be  increased to make more workers eligible and could have a larger effect on  ial  retirement saving. The Retirement Security Project and recent president ore  budget proposals have called for increasing the AGI limits so that m low- and middle-income households would qualify for the credit.
Eliminate the phase-out of the credit and apply the full credit ra for all eligible income levels. Some experts have suggested that all  recipients of the Saver’s Credit should receive the 50 percent credit rate to  better motivate low- and middle-income households to save for retirem They explained that under the current structure of the Saver’s Credit,  ent. which phases out the credit rate as AGI increases, the 10 and 20 per credit rates that some Saver’s Credit recipients receive may not be  sufficient motivation to save for retirement. For joint filers in 2010, the 50  percent credit applied to those with AGI of $33,500 or less, the 20 percent  credit applied to those with AGI between $33,501 and $36,000, and the 10  percent credit applied to those with AGI between $36,001 and $55,000.  Further, several experts said that eliminating the different crediting rat could improve the understanding and appeal of tax incentives for low- income workers, making it more likely that they would take adva the credit. Some believe that the current phase-out is difficult to  understand and can make the credit difficult to use. A 2005 analysis of the  Saver’s Credit found th at one-third of those eligible for the credit failed to  take advantage of it.
Deposit any tax credit directly into retirement savings accounts. One expert we spoke with said that depositing a tax credit for retirement saving  directly into an IRA or DC account would encourage retirement saving for  all ages and income levels because direct deposit provides a tangible  reinforcement since workers can see their accounts grow. The current  Saver’s Credit, in comparison, either reduces the amount of tax owed or is  part of the household’s tax refund. Because the money does not go directly  into a retirement account, the recipient can use the money for any purpose  and the credit might not provide the same benefits as it would if deposited  directly into a retirement account. Additionally, the expert we spoke with  said a credit directly deposited into an account could replace the employer  match and provide additional flexibility to meet future needs because saving  has increased. This could be particularly effective for young workers  because it encourages them to start saving for retirement early.
Provide a government match for employees’ retirement  contributions. A government match for retirement contributions could be another option for increasing retirement saving among low-income  workers, according to the Retirement Security Project, President’s  Economic Recovery Advisory Board, and Economic Policy Institute.
Researchers have found that presenting the Saver’s Credit as a match,  rather than a credit, improves the take-up rate. A match could replace existing Saver’s Cre dit or it could be implemented as part of a broader  reform proposal.
section_title: Saver’s Credit Modifications Could Increase Retirement Income for Some Workers
paragraphs: Several options for revising the Saver’s Credit could provide a sizable  increase in retirement savings for some low-income workers. (See Modeling Scenarios and Assumptions and appendix I for detailed descriptions of the  scenarios and assumptions.) We simulated the effects on retirement income from DC accounts using three policy scenarios (see table 5). Each of these  options would have a tradeoff in that they would increase federal costs for  otential cost of these scenarios  the Saver’s Credit. For information on the p to the federal government, see appendix I.
Policy scenario 1: refundable Saver’s Credit. On average, Saver’s Credit  recipients would receive $322 more in annual retirement income than would have without a Saver’s Credit. Saver’s Credit recipients in the  second-lowest earnings quartile would receive the greatest benefit from  the credit, with an additional $411 in annual income. We projected that 52  at age 70 would  percent of those receiving annuity income from a DC plan  have received the credit at some point over their career.
Policy scenario 2: refundable Saver’s Credit with an increase in the AGI  limits. Saver’s Credit recipients would receive an additional $491 in annual income, on average. Saver’s Credit recipients in the second-lowest earnings quartile would experience the biggest increase in income, $591 a year. We  projected that the percentage of DC annuitants who would have received  the Saver’s Credit at some point over their career increased to 72 percent.
Policy scenario 3: refundable Saver’s Credit with an increase in the AGI  limits, and automatic enrollment. Under this scenario, the average  increase in annual income for Saver’s Credit recipients would be $917.  Saver’s Credit recipients in the highest earnings quartile would receive the  biggest increase in income, experiencing an increase in annual income of  $1,181. As with scenario 2, we projected that 72 percent of DC annuitants  would have received the Saver’s Credit at some point over their career.
Since many of the options experts suggested could be implemented through modifying the Saver’s Credit, we modeled three  potential modifications to the Saver’s Credit for a cohort of workers born in 1995. These three scenarios do not reflect any one  particular proposal but incorporate some of the options experts suggested. We compared retirement income for workers by earnings  quartile under the three scenarios, assuming that workers have access to a DC plan only and that they fully annuitize their DC  accounts at retirement. Because we were unable to model the current scenario of a nonrefundable Saver’s Credit given the structure  of the microsimulation model, we used a scenario of no Saver’s Credit as our baseline. Although these assumptions reflect stylized  scenarios, they illustrate the potential effect of such changes on retirement income for workers with low lifetime earnings.
Refundable Saver’s Credit. Introduced a refundable Saver’s Credit starting in 2011 for up to $1,000 of DC contributions per  person. All tax filers eligible for the Saver’s Credit received a 50 percent credit rate. Credits were automatically deposited into  the recipient’s DC account. AGI limits remained as they were in 2010. The AGI limits were $27,750 for individuals with a filing  status of single, married filing separately, or widow(er); $41,625 for individuals with a filing status of head of household, and  $55,500 for individuals with a filing status of married filing jointly. Limits in subsequent years were indexed to inflation.
Refundable Saver’s Credit with an increase in the AGI limits. In addition to a refundable Saver’s Credit, AGI limits were  increased to include all low- and some middle-income workers. The 2011 AGI limits were $50,000 for individuals with a filing  status of single, married filing separately, or widow(er); $75,000 for individuals with a filing status of head of household; and  $100,000 for individuals with a filing status of married filing jointly. Limits in subsequent years were indexed to inflation, as  under current law.
Refundable Saver’s Credit with an increase in the AGI limits and automatic enrollment. In addition to a refundable Saver’s  Credit and an increase in the AGI limits, all employers automatically enrolled all workers eligible to participate in the employer’s  DC plan, unless the worker chose to opt-out.
We used the 1995 birth cohort for our simulation so that the reform scenarios would be effective for this cohort’s entire working life. Our  projections assume that 100 percent of tax filers for the Saver’s Credit take the credit and the credit is automatically deposited into a  recipient’s DC account. Research suggests that the aggregate utilization rate for the current nonrefundable Saver’s Credit may be closer  to two-thirds. In an alternate simulation, we assume an aggregate utilization rate of 67 percent (see app. I, table 8). Our projections also  assume an annual nonstochastic real rate of return of 6.4 percent for stocks and 2.9 percent for government bonds. We also ran an  alternate simulation in which we assumed the real rate of return for both stocks and government bonds was 2.9 percent (see app. I,  table 7). Using different rates of return reflects assumptions used by the Social Security Administration’s Office of the Chief Actuary in  some of its analyses of trust fund investment. We held stock returns for employee and employer contributions to DC plans constant.  Low-income workers are those whose steady lifetime earnings fall in the lowest lifetime earnings quartile for all workers.
Annuity equivalents are our projection of annual income produced by an individual’s DC savings.  Annuity equivalents are calculated by converting DC-derived account balances at retirement into  inflation-indexed retirement annuity payments using annuity prices that are based on projected  mortality rates for the 1995 birth cohort and annuity price loading factors that ensure that the cost of  providing these annuities equals the revenue generated by selling them at those prices.
Under our three scenarios, the average increases for all Saver’s Credit  recipients were not substantial. For example, for all of the scenarios, the  average replacement rate provided by income from annuitizing DC savings  at retirement does not increase by more than about 3 percentage points.  In addition, under our most generous scenario, on average, Saver’s Credit  recipients could only expect to see an additional $17,562 in income over  their lifetime, which is an increase of slightly more than 4 percent.
Nevertheless, for some low-income workers, the increase in income due to  any Saver’s Credit could be sizeable given their relatively low level of  income from DC savings in retirement. For example, Saver’s Credit  recipients in the lowest earnings quartile would experience, on average, an  8.7 percent increase in their annuity under the first scenario and an  increase of 14 percent under the third scenario. This amounts to an  additional $348–559 of retirement income, on average, each year. For low- income workers, this could be an important increase in income. Further,  these numbers reflect averages; some low-income workers will experience  an even greater increase in annual income.
Examples of Two Individuals Who Benefit from the Saver’s Credit  We profiled two hypothetical low-income men who work full-time at ages 21 and 25 and  take the Saver’s Credit. At retirement, they both converted their DC savings into  lifetime annuities. We compared their annuity equivalent under a scenario with no  Saver’s Credit and one with a refundable Saver’s Credit, an increase in the AGI limits,  and all employers automatically enrolling those eligible to participate in a DC plan.  Individual 1 had very low steady lifetime earnings, received more from Saver’s Credit  than individual 2, retired 7 years later, and experienced a large increase in retirement  income after the Saver’s Credit modifications were implemented. Individual 2 had  slightly higher steady lifetime earnings, received less from the Saver’s Credit than  individual 1, and only received a modest benefit increase.
Amount of Saver’s Credit Received and Retirement Income for Two Individuals  from the 1995 Cohort  Demographic characteristics at age 70  Highest level of education achieved over lifetime  Steady lifetime earnings at age 70  Annual earnings and Saver’s Credit at age 21  Annual earnings (2010 dollars)
Saver’s Credit received (2010 dollars)
Annual earnings and Saver’s Credit at age 25  Annual earnings (2010 dollars)
Saver’s Credit received (2010 dollars)
Retirement income at age 70  Total amount of Saver’s Credit received over  working years (2010 dollars)
Annuity equivalent (2010 dollars)
There are several possible explanations for why the additional annual  income provided by the Saver’s Credit would be small for many workers.  First, we projected that Saver’s Credit recipients tended to make lower  dollar contributions to their DC plans over their working years than  higher-income workers. Because contributions were lower, account  balances also tended to be lower, even with the Saver’s Credit. The lower  the account balance, the more likely the account would be cashed-out  when a worker changed jobs, decreasing DC savings. Second, we found  that, for some workers, the Saver’s Credit would make the difference  between having and not having savings at retirement. Therefore, the  annuity for these individuals would be low, pulling down the average  dollar increase in income that resulted from the Saver’s Credit. Third, our  scenarios did not account for any behavioral effects that may result from  modifying the Saver’s Credit and having all employers offer automatic  enrollment. For example, a more generous credit might motivate more  workers to save more because they would receive a larger credit. We did  not include this possibility in our projections. Further, automatically  enrolling employees would increase the number of people eligible for the  credit because more workers would be participating in DC plans and some  would be eligible to claim the Saver’s Credit. Finally, in our projections,  we assumed that annuities were inflation-adjusted. Inflation-adjusted  annuities are initially smaller than nonadjusted annuities of the same  account balance because they are more costly.
section_title: The Long-Term Effects of the Recent Financial Crisis on Retirement Income Security Remain Uncertain and Will Vary Widely Among Individuals
paragraphs: The long-term effects of the recent financial crisis on retirement income  security are uncertain, but research suggests that the effects will vary  widely for individuals based on factors such as age, type of pension plan,  and employment status. Relevant and up-to-date data on the effect of the  financial crisis on retirement saving are limited and analyses to date have  drawn varied conclusions. For those who have been able to participate in  an employer-sponsored pension plan throughout the financial crisis and  recession, their benefit or accounts at retirement may or may not be  significantly affected. However those who are out of work for any  significant length of time are much more likely to have reduced retirement  savings. The current slow recovery further adds to the uncertainty. Many  economists project only modest economic growth in the near term and  some remain concerned that unemployment will remain high for years to  come.
subsections: section_title: Impact on DC Plans
paragraphs: While both stock markets and many DC plan account balances have  regained some of their value since 2008, there is no consensus among  analysts as to the ultimate effect of the financial crisis on retirement  savings. The decline in the major stock market indexes in 2008  significantly reduced the value of many DC plan accounts. According to  the Board of Governors of the Federal Reserve System, total assets held in  DC plans fell from $3.81 trillion at the end of 2007 to $2.7 trillion at the end  of 2008. However, as of January 2011 the major stock market indexes have  regained more than 80 percent of their value from the October 2007 peak.  As for plan balances, the Employee Benefits Research Institute (EBRI)  reported that the average 401(k) account balance rose by 31.9 percent in  2009. Some plan managers we interviewed suggested that given these  recent gains, there would not be a significant effect on retirement savings  from the market decline. Others, however, assert that the prior losses  ultimately will have a negative effect on the retirement income of many.
Plan managers we spoke with conclude that the relative stability they saw  in both employee deferral rates and asset allocations has helped fuel the  regrowth in plan balances for many DC plan participants. Fidelity  Investments reports that in the first quarter of 2010 the percentage of  participants who have decreased their deferrals was 3.5 percent. While this  was higher than in the prior three quarters, it was down almost 50 percent  from its peak of 6.4 percent in the first quarter of 2009. In addition, plan  managers told us that most of their participants have maintained the same  asset allocation that they had prior to the financial crisis, including  allocations of assets in equities. These findings are consistent with past  research that indicates that households rarely rebalance retirement  savings portfolios. Nevertheless, the degree to which subsequent gains due  to continued contributions and investment returns can offset earlier losses  depends in part on the value of the account prior to the crisis and the  number of years a worker has to restore the wealth lost. Consequently,  some analyses have found that older workers with substantial investment  in equities may be more negatively impacted as they were more likely to  have had higher account balances prior to the downturn and thus to have  suffered greater absolute losses than younger workers. Further, with  fewer years left in the workforce they may be unable to recoup these  losses through additional saving and investment.
Other research, however, suggests that portfolio reallocations may have  been more frequent during the last several years than otherwise believed.  Data from a February 2009 household survey found that 21 percent of  those with retirement savings reported that they had made “active changes  to how retirement savings are invested” since a prior survey the previous  November. A follow-up survey in May 2009 found that 28.6 percent of  those with retirement savings had made a change in the investment of new  funds or the allocation of old balances since October 2008. Although  estimates differ on the number of participants who have not maintained  their prior deferral rates and asset allocations, the effects such changes  can have on retirement saving could be harmful, especially for those who  reduce or cease contributions. Plan managers report that stopping  contributions even temporarily can adversely impact account balances. In  addition to the account losses suffered when the market declined, those  who reduce or stop deferrals will forgo both the amount of the  contribution and any associated employer matching contributions, as well  as the investment income that would have been earned on those  contributions. Besides concerns about the safety of the market, job loss, a  reduction in pay or hours, or other financial shocks are all events that  could induce an individual to reduce contributions to a pension plan.
As a result of the financial crisis and economic downturn some plan  sponsors reduced or suspended employer matching contributions and a  large number of employees have been affected by these reductions. In  addition to losing the matching contributions, a participant forgoes the  investment income on those contributions. Surveys of plan sponsors  indicate that between 40–50 percent of plans that had previously  suspended employer matching contributions, particularly those at large  firms, have more recently reinstated their matches, and a report from the  Center for Retirement Research at Boston College concluded that to the  extent that the match is quickly restored, little harm may have been  done—especially compared with the alternative of laying off workers.   However, for those employees still not receiving a matching contribution  or receiving a reduced match, the long-term impact is difficult to measure  as it is unclear whether the employer suspensions are temporary or  permanent. Furthermore, everything else equal, unless the reinstituted  match is larger than it had been previously, a reduced or suspended match  means lower contributions now and lower account balances at  retirement.
The primary effects of the economic recession on individuals and  families—unemployment or reduced wages—could induce plan  participants to use retirement assets for nonretirement related purposes.  Retirement plan participants can often access accrued assets by  borrowing against plan assets, by taking hardship withdrawals from the  plan prior to retirement, or even by cashing out plan assets upon  separation from employment. The impact of this leakage on retirement  savings can be costly. We have previously reported that retirement assets  can be eroded as a result of loans or withdrawals. Data, including some  plan data, indicate that while the percentage of participants taking out  loans or hardship withdrawals from DC plans remains relatively small, it  has increased in the past couple of years since the financial crisis.
While the rates of loans and hardship withdrawals may not have increased  sharply after the financial crisis, if the economy is slow to recover and  unemployment stays high, this type of leakage may increase if participants  experiencing reduced wages or facing other personal difficulties need  access to any available financial resources. Participants may view loans or  withdrawals as a necessity to help meet critical preretirement financial  needs when faced with serious personal financial catastrophes, even if it  may mean a potential reduction in future retirement income. Furthermore,  in addition to eroding retirement savings, withdrawals from a DC plan or  other retirement account prior to age 59 ½ generally incur a tax penalty, an  additional financial burden to bear. A study published by the Urban  Institute found that withdrawals can represent a significant loss to  retirement savings. Finally, we have previously reported that DC plan  loans may affect retirement savings balances less than withdrawals, as  borrowers must pay the loan amount and interest back to the plan  account; however, not all plans permit loans.
section_title: Impact on DB Plans
paragraphs: The effects of the financial crisis and recession are different for DB plan  participants than for DC plan participants, but also pose challenges to  retirement security. DB plan assets were also hit hard by the financial  crisis. While data show that many DB plans entered the financial crisis  more than sufficiently funded, a number of plans had very low funding  ratios.
For DB plans, the risk of declining asset values falls initially on  employers, as they bear the burden of funding the plan up to legal  requirements. However, the combination of a weak economy and an  underfunded pension plan can put greater pressure on a firm’s financial  resources, possibly leading the sponsor to freeze the plan, limiting the  future benefit accruals of employees. Additionally, these financial  demands might lead firms that no longer wish to carry the burden of risk  associated with a DB plan into freezing or terminating their plans.
DB plan participants are somewhat sheltered from the impact of the  decline in assets, as promised benefits—based on years of service and  earnings—must be paid regardless of any decline in plan assets.  Nevertheless, they still bear some risk for reduced pension income in  retirement, for example, if they become unemployed or if the plan is  terminated while underfunded and benefits exceed the PBGC guarantee  limits.
section_title: Unemployment and Retirement Savings
paragraphs: Although current and relevant data concerning the full impact of the  financial crisis on retirement saving is limited, extended unemployment  almost certainly has a negative effect on an individual’s retirement income.  The extent of the damage will vary, but whether through cessation of  employee or employer contributions or even tapping into pension assets  for near term needs, being out of work for any length of time is likely to  affect a person’s ability to save and perhaps even the ability to preserve  accrued retirement savings. This is of increasing concern as  unemployment has increased dramatically in the past few years. As of  February 2011, the unemployment rate was 8.9 percent, representing  nearly 14 million people out of work, and millions more have dropped out  of the workforce—so called discouraged workers—or are working part- time involuntarily. Long-term unemployment has increased significantly as  well. As of February 2011, the share of workers unemployed for 27 weeks  or more was nearly 42 percent of the total unemployed population.
In addition to the loss of income, the unemployed will forgo additional  contributions to, and the resultant investment gains from, employer- sponsored pension plans. To the extent that unemployed persons have  retirement savings accounts, the longer they are out of work—possibly  long enough to have exhausted unemployment insurance benefits—the  greater the potential that they may tap into those assets. Though little data  are currently available to assess the account behavior of terminated  employees, Fidelity Investments has looked at the behavior of terminated  employees over the course of a 1-year period and found that 7 in 10 kept  their money in their workplace savings plan or rolled it over to another  tax-deferred retirement savings vehicle. That means, however, that almost  a third of participants cashed-out some or all of their DC plan assets.  With a significant number of workers being unemployed during the  recession for more than 1 year, it is possible that such cash-outs might  continue or even escalate. We have previously reported that cash-outs of  any amount at job separation have a greater effect on an individual’s  account balance than loans or hardship withdrawals. However, while  loans may generally affect retirement saving balances less than  withdrawals or cash-outs, if a borrower loses his or her job, the loan  amount often becomes due immediately, creating either a burden to repay  the loan at a dire financial time or, if the worker cannot pay the amount  due, an unplanned drain on retirement savings.
The biggest risk DB plan participants face with regard to retirement  income is likely from unemployment. When a worker with a DB plan is  laid off, accruals cease and the pension benefit they receive will be based  on current salary levels and current service (rather than what salary and  service would have been at the time of retirement), and future benefits will  be lower than they would have been otherwise. To the extent that  sponsors of underfunded DB plans go bankrupt and terminate their plans,  participants of many plans will receive insured benefits from the PBGC,  but some will not get their full benefit. Additionally, the PBGC itself— and by extension insured beneficiaries or taxpayers—faces greater risks  as the PBGC’s funding status has declined markedly in recent years,  raising questions about its long term ability to insure promised benefits.
section_title: Concluding Observations
paragraphs: Longstanding concerns about the current voluntary, tax subsidized  framework for fostering private pension formation have been raised. On  one hand, the existing system of tax preferences for pensions has played  at least a supporting role in fostering current levels of pension plan  coverage. Despite these tax incentives, private plan participation remains  stalled at roughly 50 percent of the private sector workforce. Recent  trends demonstrate that the slow growth in the number of retirement  plans—as new plan formation barely exceeds plan terminations—may  continue to lead to many workers continuing to work at employers that do  not offer a plan and thus remain without access to the associated tax  benefits of employer-sponsored pension plans. Furthermore, recent  initiatives, such as automatic enrollment, may increase participation;  however, even if this dramatically raises participation rates for those who  work for an employer that sponsors a plan, millions of prime age private- sector workers would remain without access to a plan.
Even for the 50 percent of the private sector workforce that does  participate in a plan there are concerns about the distribution of pension  tax benefits estimated to cost the federal government more than $100  billion per year. For DC plans, a disproportionate share of these tax  incentives accrues to higher income earners. While 72 percent of those  who make tax-deferred contributions at the maximum limit earned more  than $126,000 annually in 2007, less than 1 percent of those who earned  less than $52,000 annually were able to do so. Also, even the additional  $5,500 contribution permitted to participants 50 and older may not allow  moderate income workers to catch up anytime soon.
Some options have been proposed to narrow this disparity by enhancing  the ability of low- and middle-income workers to save more for retirement.  We have demonstrated that different Saver’s Credit modifications could  lead to improvements in retirement security for some lower income  workers. However, we also illustrate the formidable challenge of achieving  increased retirement income for this at risk group. For many American  workers and their families, the challenges to retirement security are very  real. Fostering retirement income security, especially for low- and middle- income workers, may require a serious review of current government  efforts to assist workers in achieving adequate retirement income.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of Labor, the  Department of the Treasury, the Internal Revenue Service, and the Pension  Benefit Guaranty Corporation for review and comment. Each provided  technical comments which we incorporated as appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution until 30 days after the date of this  letter. At that time, we will send copies of this report to the Secretary of  Labor, the Commissioner of Internal Revenue, the Secretary of the  Treasury, the Director of the Pension Benefit Guaranty Corporation,  appropriate congressional committees, and other interested parties. We  will also make copies available to others on request. In addition, the report  will be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made contributions to this report are listed  in appendix II.
section_title: Appendix I: Methodology
paragraphs: To analyze trends in new private pension plan formation in recent years,  we analyzed Form 5500 filings, which the Internal Revenue Service,  Department of Labor (Labor), and the Pension Benefit Guaranty  Corporation require most private tax-qualified pension plan sponsors to  file. Labor collects the Form 5500 filings and makes the filing data publicly  available on their Web site. We used the five most recent years (2003– 2007) of Form 5500 filing data available when we started our analysis. For  our analysis, we only included single employer plans and multiple- employer, noncollectively bargained plans. Additionally, we did not  include employer-sponsored retirement plans not required to file a Form  5500, such as simplified employee pension, Savings Incentive Match Plan  for Employees of Small Employers, and excess benefit plans, which are  not tax-qualified. If a plan had more than one valid filing during the year,  we picked the one that Labor identified as the “best” for the purpose of  counting plans, participants, and end of year assets.
To identify plans as new we used two information fields on the Form 5500:  one in which sponsors report if the filing is the first for a given plan and  one in which sponsors report the effective year of the plan. In general, we  included a plan as new if it reported a first year as the same as the filing  year or if it indicated that this was the first filing for the plan. However, to  account for errors in the filings, we did not include any plan as new that  had filed a Form 5500 in a previous year. We also eliminated any plan for  which the sponsor indicated it was the first filing, but the effective year  was more than 2 years prior. Note that new plans include plans created  from mergers and acquisitions that do not cover new plan participants. To  identify if a new defined benefit (DB) plan sponsor also offered a defined  contribution (DC) plan, we used the plan sponsors’ employer  identification numbers. To identify the total number of plans in any given  year, we used a Labor publication, Private Pension Plan Bulletin  Historical Tables and Graphs, which adjusts the number of plans upward  from the total number of filings based on the historical number of  nonfilers. Labor estimates the number of nonfilers based on historical  experience with the number of plans that do not file in a particular year  but filed in the year prior and the year after and the number of sponsors  that file a final return, indicating they are terminating their plan.
To assess the reliability of the Form 5500 dataset, we interviewed agency  officials knowledgeable about the data and reviewed relevant  documentation of their internal reliability checks as well as methodology  for selecting “best” filings. We also conducted electronic data testing to  assess missing data and other potential problems. We determined the data  were sufficiently reliable for the purposes of this report.
To analyze contributions to DC plans, we used the Board of Governors of  the Federal Reserve System’s Survey of Consumer Finances (SCF) to  identify characteristics of individuals participating in DC plans and their  households. This triennial survey asks extensive questions about  household income and wealth components. We used the latest available  survey from 2007. The SCF is widely used by the research community, is  continually vetted by the Board of Governors of the Federal Reserve  System and users, and is considered to be a reliable data source. The SCF  is believed by many to be the best source of publicly available information  on household finances. Because of the widespread reliance on SCF data  and the assessments of others, we determined the SCF data to be  appropriate for the purposes of this report. Further information about our  use of the SCF, including sampling errors, as well as definitions and  assumptions we made in our analysis are detailed below.
To analyze how suggested incentives to increase retirement saving by low- income workers might affect retirement income, we used the Policy  Simulation Group’s (PSG) microsimulation models to run various  simulations of workers saving in DC plans over a career, changing various  inputs to model different scenarios for modifying the Saver’s Credit. PSG’s  Pension Simulator (PENSIM) is a pension policy simulation model that has  been developed for Labor to analyze lifetime coverage and adequacy  issues related to employer-sponsored pensions in the United States. We,  along with the Department of Labor, other government agencies, and  private organizations, have used it to analyze lifetime coverage and  adequacy issues related to employer-sponsored pensions in the United  States. We projected annuity income from DC accounts at age 70 for  PENSIM-generated workers under different scenarios representing  different pension features and market assumptions. We assessed the  reliability of PENSIM and found it to be sufficiently accurate for our  purposes. See below for further discussion of PENSIM and our  assumptions and methodologies.
To analyze the long-term effect of the recent financial crisis on retirement  savings for U.S. workers, we reviewed recent studies and interviewed  retirement and financial experts. Among the studies we reviewed, several  were conducted by large plan administrators that analyzed the records of  their respective DC plan sponsors and participants. Additionally, we  reviewed studies from an industry association based on survey data of  plan administrators. While the findings of these studies provide valuable  insight into the activities of many plan sponsors and plan participants,  they are not necessarily representative of the universe of DC plans and,  with regard to workers, they do not reflect the population as a whole.
We conducted interviews with officials at the departments of the Treasury  and Labor and the Pension Benefit Guaranty Corporation, as well as  academic experts from the Employee Benefits Research Institute,  Brookings Institution, Heritage Foundation, New School for Social  Research, Urban Institute, Center for Retirement Research at Boston  College, and Syracuse University. We also interviewed plan administrators,  providers, and consultants including Fidelity Investments, Vanguard, and  Towers Watson. Finally we interviewed industry and research  organizations such as the Investment Company Institute, AARP, and  American Society of Pension Professionals and Actuaries. In addition, for  this and all of the objectives we reviewed relevant federal laws and  regulations.
subsections: section_title: 2007 Survey of Consumer Finances
paragraphs: The 2007 SCF surveyed 4,418 households about their pensions, incomes,  labor force participation, asset holdings and debts, use of financial  services, and demographic information. The SCF is conducted using a  dual-frame sample design. One part of the design is a standard, multistage  area-probability design, while the second part is a special over-sample of  relatively wealthy households. This is done in order to accurately capture  financial information about the population at large as well as  characteristics specific to the relatively wealthy. The two parts of the  sample are adjusted for sample nonresponse and combined using weights  to make estimates from the survey data representative of households  overall. In addition, the SCF excludes people included in the Forbes  Magazine list of the 400 wealthiest people in the United States.
Furthermore, the 2007 SCF dropped four observations from the public  data set that had net worth at least equal to the minimum level needed to  qualify for the Forbes list.
Although the SCF was designed as a household survey, it also provides  some detailed individual-level economic information about an  economically dominant single individual or couple in the household (what  the SCF calls a primary economic unit), where the individuals are at least  18 years old. We developed individual level estimates of this population  consisting of the economically dominant individual and their partner or  spouse in each household. We created an additional sample containing  information on 7,368 individuals by separating information about the  respondents and their spouses or partners and considering them  separately. When we refer to all workers, we are referring to a population  of adult workers that is comprised of no more than two persons from each  household and whose earnings can be expressed as an annual amount. By  definition, this will differ somewhat from the entire population of workers.  In households where there are additional adult workers, beyond the  respondent and the spouse or partner, who may also have earnings and a  retirement plan, information about these additional workers is not  captured by the SCF and is therefore not part of our analysis. Because of  this, estimates of total workers based on the SCF would likely understate  the actual population and such estimates are generally not included in this  report. We do, however, report estimates of percentages and percentiles at  the individual level.
Our analysis focused on estimating the characteristics of DC plan  participants contributing at or above three statutory limits: (1) the 402(g)  limit on individual employee contributions, (2) the 415(c) limit on  combined employer and employee contributions, and (3) the 414(v) limit  on catch-up contributions. Tax-deferred DC plan contributions may also  be limited by the application of other statutory or plan-specific limits that  we did not analyze in this report because of data limitations in the 2007  SCF. For example, there is a statutory limit on the amount of  compensation that can be taken into account in determining the qualified  pension plan contributions or benefits (26 U.S.C. § 401(a)(17)). There is  also a statutory limit on the total amount of tax-deductible contributions  that an employer may make to certain types of plans (26 U.S.C. §§ 404 and  4972). In addition, the SCF does not distinguish between tax-deferred and  non-tax-deferred pension plan contributions or between qualified and  nonqualified pension plans. Therefore, we were unable to identify DC  participants whose tax-deferred contributions were equal to the statutory  limits. DC plan contributions may also be subject to plan-specific limits.
We were not able to identify whether participants were in DC plans that  allowed them to make tax-deferred contributions, nor were we able to  identify DC plan participants whose contributions were limited by plan- specific rules.
We defined “workers” as individuals in the sample who were at least 18  years old, working at the time of the survey, and whose earnings could be  expressed as an annual dollar amount. This definition included both  public- and private-sector workers. We defined pension plan participants  as workers who were included in any type of pension plan through their  job. We defined eligible DC participants as workers who participated in a  plan in which money is accumulated in an account. We did not include  personal contributions to individual retirement accounts for any person in  our sample, including persons who may be self-employed, nor did we  consider Keogh plans in our analysis because of the scope of this report.  Our definition of DC plans includes: 401(k), thrift or savings, profit- sharing, supplemental retirement annuity (including 403(b)s), or other  account-based plans. We did not include Simplified Employee Pensions,  Simplified Incentive Match Plans for Employers, or Salary Reduction  Simplified Employee Pensions, as these plans are subject to different  statutory limits.
We classified individuals by gender, individual earnings, and household  assets. We defined earnings as the sum of wage and salary income from a  worker’s job(s) and business income (if any) from that job. For workers  who did not report their earnings as annual amounts, we used information  about hours worked per week and weeks worked per year to express  earnings as an annual amount. Our analyses excluded individuals whose  earnings could not be expressed as an annual amount. For all analyses, we  used four earnings categories: less than $52,000 per year, $52,000–125,999  per year, $126,000–179,999 per year, and $180,000 or more per year. We  chose the income cutoffs that were the median ($52,000), 90th percentile  ($126,000), and 95th percentile ($180,000) for all DC participants in 2007.
The SCF is a probability sample based on random selections, so the 2007  SCF sample is only one of a large number of samples that might have been  drawn. Since each sample could have provided different estimates, we  express our confidence in the precision of our particular sample’s results  as a 95 percent confidence interval (e.g., plus or minus 4 percentage  points). This is the interval that would contain the actual population value  for 95 percent of the samples we could have drawn. As a result, we are 95  percent confident that each of the confidence intervals in this report will  include the true values in the study population.
In this report, all estimated percentages based on all DC participants have  95 percent confidence intervals of plus or minus 1 percentage point or  less. Percentage estimates based on participants contributing below  statutory limits have 95 percent confidence intervals within plus or minus  3 percentage points of the percentage estimate itself. Percentages based  on participants at or above statutory limits have confidence intervals  within plus or minus 12 percentage points of the estimate itself. Other  numerical estimates (such as means, medians, or ratios) based on the 2007  SCF data are presented in this report along with their 95 percent  confidence intervals.
The SCF and other surveys that are based on self-reported data are subject  to several other sources of nonsampling error, including the inability to get  information about all sample cases; difficulties of definition; differences in  the interpretation of questions; respondents’ inability or unwillingness to  provide correct information; and errors made in collecting, recording,  coding, and processing data. These nonsampling errors can influence the  accuracy of information presented in the report, although the magnitude  of their effect is not known.
As part of the effort to maintain the confidentiality of survey respondents,  most dollar amounts reported in the SCF, including the dollar amount of  DC plan contributions, are rounded. The rounding scheme is designed to  preserve the population mean, on average, and rounds some estimates  down and some estimates up. For example, if the survey respondent  reported making monthly DC plan contributions of $1,292, the  contribution was rounded to either $1,200 or $1,300 based on the results of  the rounding algorithm. This rounding scheme makes it difficult to  precisely estimate whether survey respondents are at or above the  statutory limits on DC plan contributions if annual contributions are close  to the statutory limit. Therefore, our estimates of those contributing at or  above the limit are approximate. Similarly, our estimates of those  contributing below the limits are also approximate.
section_title: Methodology and Assumptions Using PENSIM Microsimulation Model
paragraphs: To project lifetime income from DC pensions and to identify the effects of  certain changes in policies, we used the PENSIM microsimulation model.  PENSIM is a dynamic microsimulation model that produces life histories  for a sample of individuals born in the same year. The life history for a  sample individual includes different life events, such as birth, schooling  events, marriage and divorce, childbirth, immigration and emigration,  disability onset and recovery, and death. In addition, a simulated life  history includes a complete employment record for each individual,  including each job’s starting date, job characteristics, pension coverage  and plan characteristics, and job ending date. The model has been  developed by PSG since 1997 with funding and input by Labor’s Office of  Policy and Research at the Employee Benefits Security Administration and  with recommendations from the National Research Council panel on  retirement income modeling.
PENSIM simulates the timing for each life event by using data from  various longitudinal data sets to estimate a waiting-time model (often  called a hazard function model) using standard survival analysis methods.  PENSIM incorporates many such estimated waiting-time models into a  single dynamic simulation model. This model can be used to simulate a  synthetic sample of complete life histories. PENSIM employs continuous- time, discrete-event simulation techniques, such that life events do not  have to occur at discrete intervals, such as annually on a person’s  birthday. PENSIM also uses simulated data generated by another PSG  simulation model, Social Security and Accounts Simulator, which  produces simulated macro-demographic and macroeconomic variables.
PENSIM imputes pension characteristics using a model estimated with  1996—1998 establishment data from the Bureau of Labor Statistics  Employee Benefits Survey (now known as the National Compensation  Survey). Pension offerings are calibrated to historical trends in pension  offerings from 1975 to 2005, including plan mix, types of plans, and  employer matching. Further, PENSIM incorporates data from the 1996— 1998 Employee Benefits Survey to impute access to and participation rates  in DC plans in which the employer makes no contribution, which the  Bureau of Labor Statistics does not report as pension plans in the National  Compensation Survey. The inclusion of these “zero-matching” plans  enhances PENSIM’s ability to accurately reflect the universe of pension  plans offered by employers. The baseline PENSIM assumption, which we  adopted in our analysis, is that 2005 pension offerings, including the  imputed zero-matching plans, are projected forward in time.
PSG has conducted validation checks of PENSIM’s simulated life histories  against both historical life history statistics and other projections.  Different life history statistics have been validated against data from the  Survey of Income and Program Participation, the Current Population  Survey, Modeling Income in the Near Term, the Panel Study of Income  Dynamics, and the Social Security Adminstration’s Trustees Report. PSG  reports that PENSIM life histories have produced similar annual  population, taxable earnings, and disability benefits for the years 2000 to  2080 as those produced by the Congressional Budget Office’s long-term  social security model and as shown in the Social Security Administration’s  2004 Trustees Report. According to PSG, PENSIM generates simulated DC  plan participation rates and account balances that are similar to those  observed in a variety of data sets. For example, measures of central  tendency in the simulated distribution of DC account balances among  employed individuals is similar to those produced by an analysis of the  Employee Benefit Research Institute-Investment Company Institute 401(k)  database and of the 2004 SCF. We performed no independent validation  checks of PENSIM’s life histories or pension characteristics.
In 2006, the Employee Benefits Security Administration submitted  PENSIM to a peer review by three economists. The economists’ overall  reviews ranged from highly favorable to highly critical. While the  economist who gave PENSIM a favorable review expressed a “high degree  of confidence” in the model, the one who criticized it focused on  PENSIM’s reduced form modeling. This means that the model is grounded  in previously observed statistical relationships among individuals’  characteristics, circumstances, and behaviors, rather than on any  underlying theory of the determinants of behaviors, such as the common  economic theory that individuals make rational choices as their  preferences dictate and thereby maximize their own welfare. The reduced  form modeling approach is used in pension microsimulation models and  the feasibility of using a nonreduced form approach to build such a model  may be questionable given the current state of economic research. The  third reviewer raised questions about specific modeling assumptions and  possible overlooked indirect effects.
section_title: Assumptions Used in Projecting DC Plan Balances at Retirement
paragraphs: PENSIM allows the user to alter one or more inputs to represent changes  in government policy, market assumptions, or personal behavioral choices  and analyze the subsequent impact on pension benefits. Starting with a 2  percent sample of a 1995 cohort, totaling 120,608 people at birth, our  baseline simulation includes some of the following key assumptions and  features:    Workers accumulate DC pension benefits from past jobs in one rollover  account, which continues to receive investment returns, along with any  benefits from a current job. At retirement, these are combined into one  account. Because we focus on DC plan balances only, we do not track  Social Security benefits or benefits from DB plans. Our reported benefits  and replacement rates therefore capture just one source of potential  income available to a retiree.
Plan participants invest all assets in their accounts in target-date funds, a  type of life-cycle fund which adjusts the mix of assets between stocks and  government bonds as the individual ages and approaches a target date in  time. Stocks return an annual nonstochastic real rate of return of 6.4  percent and government bonds return a real rate of return of 2.9 percent.  In an alternate simulation, we assume that stocks and government bonds  earn an equivalent annual nonstochastic rate of return of 2.9 percent and  find similar effects for each scenario (see table 7). Using different rates of  return reflect assumptions used by the Social Security Administration’s  Office of the Chief Actuary in some of its analyses of trust fund  investment.
Workers purchase a single, inflation-adjusted life annuity at retirement,  which occurs between the ages of 62 and 70. Anyone who becomes  permanently disabled at age 45 or older also purchases an immediate  annuity at their disability age. We eliminated from the sample cohort  members who: (1) die before they retire or before age 70, (2) immigrate  into the cohort at an age older than 25, (3) emigrate prior to age 70, or (4)  become permanently disabled prior to age 45.
Stock returns on employer and employee contributions to DC plans are  constant across scenarios.
Because we were unable to model the current scenario of a nonrefundable  Saver’s Credit given the structure of the microsimulation model, we used a  scenario of no Saver’s Credit as our baseline.
Starting with this baseline model, we vary key inputs and assumptions to  see how these variations affect pension coverage and benefits at age 70.  Policy scenarios we analyzed include:    Refundable Saver’s Credit. A refundable Saver’s Credit was introduced in  2011 for up to $1,000 of DC contributions per person. All eligible tax filers  received a 50 percent credit rate and the credit was deposited directly into  the worker’s DC account. The adjusted gross income (AGI) limits  remained as they were in 2010. The AGI limits were $27,750 for  individuals with a filing status of single, married filing separately, or  widow(er); $41,625 for individuals with a filing status of head of  household; and $55,500 for individuals with a filing status of married filing  jointly. Limits in subsequent years were indexed to inflation.
Refundable Saver’s Credit with an increase in the AGI limits. A  refundable Saver’s Credit was introduced in 2011 for up to $1,000 of DC  contributions per person. AGI increased to $50,000 for individuals with a  filing status of single, married filing separately, or widow(er); $75,000 for  individuals with a filing status of head of household; and $100,000 for  individuals with a filing status of married filing jointly. Limits in  subsequent years were indexed to inflation, as under current law. All  eligible tax filers received a 50 percent credit rate and the credit was  deposited directly into the worker’s DC account.
Refundable Saver’s Credit with an increase in the AGI limits and  automatic enrollment. A refundable Saver’s Credit was introduced in 2011  for up to $1,000 of DC contributions per person. AGI increased to $50,000  for individuals with a filing status of single, married filing separately, or  widow(er); $75,000 for individuals with a filing status of head of  household; and $100,000 for individuals with a filing status of married  filing jointly. Limits in subsequent years were indexed to inflation, as  under current law. All employers sponsoring a DC plan automatically  enrolled workers eligible to participate in the plan. All eligible tax filers  received a 50 percent credit rate and the credit was deposited directly into  the worker’s DC account.
For each of these scenarios, we assume the utilization, or take-up rate, for  the Saver’s Credit is 100 percent, presenting a best case scenario. In  alternative simulations, we assume an aggregate take-up rate of 67 percent  and find effects similar, but slightly lower, to those when the take-up rate  is 100 percent (see table 8). One study found that the actual take-up rate  may be about two-thirds because not all eligible tax filers are aware of the  credit or choose to take it. In addition, studies have noted that tax filers  are limited by the nonrefundable nature of the credit.
We projected the percent of DC annuity recipients who had received the  Saver’s Credit at some point over their working years (see table 9).  Overall, 52–72 percent of DC annuity recipients had received the Saver’s  Credit under our three scenarios. For annuity recipients in the lowest  earnings quartile, the range was 75–81 percent.
We projected the aggregate cost to the federal government of providing  the Saver’s Credit for the year 2016. By this time, the modified credits in  our scenarios would have been in place for 5 years and members of the  1995 cohort would be age 21, although our projection includes the cost for  all eligible tax filers of any age—not simply those born in 1995. We found  that the cost to the federal government of providing the credit for all  qualified contributions to DC plans ranged from $6.7 billion to $14.8 billion  under our three scenarios (see table 10). While the aggregate cost to the  government of the refundable Saver’s Credit scenario was about $6.7  billion, the cost more than doubled when the AGI limits were increased  and automatic enrollment was added.
section_title: PENSIM Cohort Summary and Cross-Sectional Statistics
paragraphs: Lifetime summary statistics of the simulated 1995 cohort’s workforce and  demographic variables give some insight into the model’s projected  income from DC plans we report (see tables 11 and 12). By restricting the  sample to those who have some earnings, do not immigrate into the cohort  after age 25, do not emigrate or die prior to age 70, and do not become  disabled before age 45, we reduce the full sample of 120,608 individuals to  a sample of 70,110 individuals.
Cross-sectional results of the sample cohort also provide some insights  into the demographic, workforce, and pension participation  characteristics of individuals in the 1995 cohort (see table 13). These  statistics describe characteristics for individuals at ages 21 and 25 in order  to provide a snapshot of pension plan participation and contributions for  most of the sample during their early working years. Given that younger  workers are more likely to be low-income, they are also more likely to be  eligible for the Saver’s Credit.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: Individuals making key contributions to this report include Michael  Collins, Assistant Director; Melinda Bowman, Analyst-in-Charge; Jennifer  Gregory; and Aron Szapiro. Joseph Applebaum, Susan Bernstein, Bethany  Boland, Edward Nannenhorn, Mimi Nguyen, Jeremy Ollayos, Mark  Ramage, Carl Ramirez, Roger Thomas, and Frank Todisco also provided  valuable assistance. Michael Hartnett, Sharon Hermes, Dana Hopings, and  Gene Kuehneman Jr. verified our report findings.
section_title: Related GAO Products
paragraphs: Social Security Reform: Raising the Retirement Ages Would Have  Implications for Older Workers and SSA Disability Rolls. GAO-11-125.  Washington, D.C.: November 18, 2010.
Retirement Income: Challenges for Ensuring Income Throughout  Retirement. GAO-10-632R. Washington, D.C.: April 28, 2010.  401(k) Plans: Several Factors Can Diminish Retirement Savings, but  Automatic Enrollment Shows Promise for Increasing Participation and  Savings. GAO-10-153T. Washington, D.C.: October 28, 2009.
Retirement Savings: Automatic Enrollment Shows Promise for Some  Workers, but Proposals to Broaden Retirement Savings for Other Workers  Could Face Challenges. GAO-10-31. Washington, D.C.: October 23, 2009.  401(k) Plans: Policy Changes Could Reduce the Long-term Effects of  Leakage on Workers’ Retirement Savings. GAO-09-715. Washington, D.C.:  August 28, 2009.
Private Pensions: Alternative Approaches Could Address Retirement  Risks Faced by Workers but Pose Trade-offs. GAO-09-642. Washington,  D.C.: July 24, 2009.
Defined Benefit Pensions: Survey Results of the Nation’s Largest Private  Defined Benefit Plan Sponsors. GAO-09-291. Washington, D.C.: March 30,  2009.
Private Pensions: Low Defined Contribution Plan Savings May Pose  Challenges to Retirement Security, Especially for Many Low-Income  Workers. GAO-08-8. Washington, D.C.: November 29, 2007.
Private Pensions: Issues of Coverage and Increasing Contribution  Limits for Defined Contribution Plans. GAO-01-846. Washington, D.C.:  September 17, 2001.
Private Pensions: “Top Heavy” Rules for Owner-Dominated Plans.  GAO/HEHS-00-141. Washington, D.C.: August 31, 2000.