Retirement income in the United States includes Social Security benefits, asset income, pension benefits, and earnings. Over the last 40 years, receipt of Social Security has become almost universal while receipt of asset income has increased modestly, receipt of private pensions has tripled, and receipt of government pensions has increased by 50 percent. However, a smaller proportion of aged households received earnings in 2000 than in 1962. (See fig. 1.) All of these components of retirement income have been affected by the major regulatory, labor market, and demographic changes that have taken place in the last 40 years. Legislative changes have expanded the pension and personal saving options available to workers. The Employee Retirement Income Security Act (ERISA) of 1974 provided certain minimum standards and broad new protections of employee benefits plans, including provisions for individual retirement accounts (IRA). Subsequent legislation revised some provisions of ERISA, further expanding the possibilities for workers to have access to pension income in retirement and established new types of employer- sponsored pension plans, such as 401(k) plans. Legislative changes have also focused on the financing problems of Social Security. In the late 1970s and early 1980s, legislative action regarding Social Security attempted to solve this financing problem by raising taxes, curtailing future benefits, raising the retirement age, and trying to increase work incentives. However, the financing of future Social Security benefits is still an issue, and further action will need to be taken to either increase the program’s revenues, decrease its expenditures, or both. The labor market conditions facing young workers today differ significantly from those facing earlier generations of workers. Changes in earnings, women’s labor force participation, and pension coverage over the last 40 years have altered the context within which workers save for retirement. Real earnings increased throughout the 1960s, slowed considerably in the 1970s, remained relatively stagnant during the 1980s and much of the 1990s, and may have started to rise in the late 1990s. For some groups of workers, such as production or nonsupervisory workers, average weekly earnings adjusted for inflation declined over most of the time period following the early 1970s. (See fig. 2.) For young workers facing stagnant or declining real earnings, saving for retirement might have become more difficult than it was for those who entered the labor market when real earnings were growing. In addition, over the last 40 years, more women have entered the labor force. They entered regardless of their marital status—the labor force participation rates of married women, for example, increased from 32 percent in 1960 to 61 percent in 1999. (See fig. 3.) This means a larger share of women in younger cohorts is working and likely to qualify for Social Security and pensions based on their own earnings. This also means an increase in the share of married couple households that have two earners, which could increase the potential for household retirement saving. The composition of pension coverage also changed during this period. The estimated share of private wage and salary workers participating in a DB plan as their primary pension plan declined from 39 percent in 1975 to 21 percent in 1997, while the share participating in a DC plan as their primary pension plan increased from 6 percent to 25 percent. (See fig. 4.) The decline in DB pension plan coverage and the increase in DC pension plan coverage over the past 3 decades means that more of the responsibility for retirement saving has shifted to individual workers from employers. Demographic changes over the last 40 years have also altered the circumstances of workers as they save for retirement. Educational attainment, for example, has increased over time. In 1960, only about 8 percent of the population 25 years of age and older had a college degree. By 1999, 25 percent of the population 25 years or older were college graduates. (See fig. 5.) The increase in educational attainment over time could facilitate increased saving among those younger workers who attain higher education. The composition of households has also changed over this period with the share of households headed by a married couple decreasing. In 1960, 74 percent of all households were comprised of married couple families. By 1999 this had fallen to 53 percent. At the same time, the percentage of one-person households increased from 13 percent to 26 percent of all households. (See fig. 6.) Median incomes are typically lower for families headed by a single female or for single person households. In addition, life expectancy has increased across the generations. The greater life expectancy of the younger generations could mean that the retirement income of the Baby Boom and Generation X would need to support a larger number of years. The retirement security of today’s workers will also be affected by changes in the cost and provision of health care. Over the last 40 years, the provision of health benefits has become more expensive for employers as generous benefits have combined with higher utilization rates, a growing elderly population, and a rapidly increasing cost of service. In response to these increased costs, many employers have begun to limit the health benefits provided, either by terminating their plans, restricting benefits, or reducing their share of the premium. As a result, future retirees are likely to pay more of the costs of their health care. Consequently, today’s workers might have to work longer, save more, or both, to ensure sufficient access to health benefits. In addition to paying more for privately sponsored health benefits, today’s current workers might also pay more in retirement for Medicare. Medicare costs are continuing to rise with the result that either benefits will have to be reduced or monthly premiums will have to be increased. Given all these demographic changes, as well as regulatory and economic changes, analysis of retirement income is increasingly dependent on good estimates, which in turn require adequate data. In a recent report on needed improvements in retirement income data, we identified data improvements that experts say are a priority for the study of retirement income. In particular, experts cited data from employers on employee benefits, as well as linkages between individual and household surveys and administrative data, as being helpful for estimating future retirement income. Baby Boom and Generation X households headed by individuals aged 25 to 34 have greater accumulated assets, adjusted for inflation, than current retirees had when they were the same age but they also have more debt. The large increase in assets between current retirees—the Pre-Baby Boom generation—and the Baby Boom is due mainly to increases in home equity and increases in the rate of home ownership. The modest increase in assets between the Baby Boom and Generation X can be accounted for in large part by the increase in the ownership and value of DC retirement accounts, because SCF data do not reflect the value of benefits from DB pension plans. While the percentage of households with debt has changed very little across the generations, the real total debt levels have more than doubled between current retirees and Generation X workers. Yet, for most young Baby Boom and Generation X households, assets exceed debts and the net worth of these households with positive net worth is 60 percent greater than that of current retirees at similar ages. However, particularly for Generation X, greater life expectancy may require more assets to cover more years in retirement and greater assets may also be required to support higher standards of living. Within each generation, the distribution of net worth across households is affected by economic and demographic characteristics. Specifically, those who do not own their own home, are less educated, or are single, have less in net worth. For households headed by a 25- to 34-year old, both the median value of total assets (in 1998 dollars) and the percentage of households with assets increased across the generations. (See fig. 7.) The median value of total assets for the Baby Boom and Generation X is more than 50 percent greater than that for the Pre-Baby Boom generation. While our analysis indicates that asset levels increase across the generations, it does not take into account the expectation of rising standards of living. Generation X, for example, could have greater assets than those of previous generations and still feel that these assets are insufficient for the lifestyle they want or expect. For households headed by a 25- to 34-year old, the increase in assets across the generations can be attributed mainly to housing and DC retirement accounts. (See fig. 7.) As we have noted, our measure of assets does not include the value of benefits from DB pension plans and, to the extent that a larger percentage of the Pre-Baby Boom and the Baby Boom than Generation X is covered by DB plans, will underestimate the true value of assets for the Pre-Baby Boom and the Baby Boom relative to Generation X. The large increase in total asset accumulation between the Pre-Baby Boom and the Baby Boom is largely due to increases in home equity and increases in the rate of home ownership. The median value of housing assets increased from $72,890 for the Pre-Baby Boom to $78,583 for the Baby Boom, while the percentage of households owning their own home increased from 39 to 45 percent. The modest increase in total asset accumulation between the Baby Boom and Generation X can be accounted for in large part by the increase in the ownership and value of retirement accounts. The median value of DC retirement accounts increased from $2,947 for the Baby Boom to $8,003 for Generation X, while the percentage of households with retirement accounts increased from 20 percent to 46 percent. The increased percentage of households with retirement accounts reflects changes in the types of pension plans offered by employers. Between 1983 and 1997, the percentage of workers covered by primary DC pension plans, under which the worker has a retirement account, increased from 11 percent to 25 percent while the percentage of workers covered by DB pension plans declined from 35 percent to 21 percent. Financial and nonfinancial assets contribute only modestly to the increase in total assets across the generations. (See fig. 8.) Financial assets include savings accounts, mutual funds, and stocks and bonds while nonfinancial assets include vehicles, business interests, and nonresidential real estate. The median value of financial assets varies between less than $2,000 for the Pre-Baby Boom generation and $4,000 for the Baby Boom. A greater percentage of households in the younger cohorts have financial assets than was the case for current retirees. The median value of nonfinancial assets is greater than that for financial assets in each of the generations and has increased across the cohorts. While the ownership of nonfinancial assets increased for the Baby Boom, relative to current retirees, it decreased for Generation X relative to both the Baby Boom and current retirees. The degree to which the younger cohorts will be able to add to the assets that we observe when they are ages 25 to 34 will be affected by a number of demographic and economic factors. Individuals have control over some of these factors. For example, they can determine how much education they receive, how long they work, whether both spouses in a couple work, how much they save while they are working, and whether they stay married or get divorced. On the other hand, individuals have no direct control over the rate of growth of real wages, the performance of the overall economy, the rate of return on financial assets, changes in housing prices, shifts in pension coverage and generosity of benefits, the state of the health care system, changes in life expectancy, and the resolution to the funding shortfall for Social Security and Medicare. One of the resolutions to the funding shortfall for both Social Security and Medicare is to increase the payroll tax that employees and employers pay. An increase in the payroll tax, of course, reduces the amount of an individual’s disposable income available to both consume and save. On the other hand, if individuals expected Social Security benefits to be reduced, they might increase their personal saving in order to offset this reduction in benefits. Likewise, increases in life expectancy may also require increased saving in order to provide for a greater number of years in retirement or might induce people to work longer. For households headed by a 25- to 34-year old, overall debt levels increase across the generations. (See fig. 9.) The median level of debt for the Baby Boom is 38 percent greater than that for the Pre-Baby Boom generation while Generation X’s median level of debt is 146 percent greater than that of the Pre-Baby Boom generation and 78 percent greater than that of the Baby Boom. The percentage of households with debt changed very little, however, remaining at roughly 83-84 percent across the generations. Thus, those households that go into debt are going into debt more deeply with each new generation. The increase in debt levels between the Baby Boom and Generation X was due largely to increases in housing debt. The median value of housing debt increased between the Baby Boom and Generation X by 61 percent. The percentage of households with housing debt changed very little between these two generations, however, remaining at roughly 40 percent. The amount of debt carried by a household will affect the value of its net worth. For households headed by a 25- to 34-year old, the percentage of households with positive net worth and the median value of positive net worth increased between the Pre-Baby Boom and Generation X; however, the median value of negative net worth is also much higher for Generation X. (See fig. 10.) The median value of net worth for households with positive net worth increased by 60 percent between the Pre-Baby Boom and the two younger generations. The percentage of households with negative net worth is smaller for the two younger generations than for current retirees when they were young. However, the median value of net worth for households with negative net worth is about four times larger for Generation X than for the Baby Boom or the Pre-Baby Boom. The younger generations in general have experienced an increase in net worth relative to current retirees at the same age, with the Baby Boom having a median net worth three times that of the older generation and Generation X having a median net worth two and a half times that of current retirees. However, there are some groups within these cohorts that have not benefited as much as others. (See table 1.) For example, the median net worth for Baby Boom and Generation X homeowners is between $17,000 and $35,000 greater than that for Pre-Baby Boom homeowners; for nonhomeowners, net worth between the older and younger cohorts differs by only $2,300 to $3,700. Median net worth has increased across the cohorts for all education levels, but much less so for those without a high school degree. Both single headed households and households headed by a married couple have seen increases in net worth; however, the increases have been much smaller for single headed households. These trends have increased the disparity in net worth within the younger generations compared to the Pre-Baby Boom. Another measure of the well-being of different generations is the ratio of net worth, or wealth, to income. Median ratios of wealth to income for households headed by a 25- to 34-year old are presented in table 2. The Baby Boom and Generation X have higher wealth-to-income ratios than current retirees had at similar ages. This suggests that households in the younger generations have been able to accumulate more wealth than was the case for current retirees. The ratios also reflect the differences across demographic groups within generations. Within each generation, ratios of wealth to income are higher for the well-educated, the married, and homeowners. In our simulations, Generation X and the Baby Boom have similar levels of retirement income in real terms (adjusted for inflation). Social Security benefit levels for Generation X and the Baby Boom will depend on how the Social Security funding shortfall is resolved. The shift to greater DC pension coverage does not have much effect on the pension income of Generation X relative to the Baby Boom. However, replacement rates for Generation X are estimated to be lower than for the Baby Boom under each scenario we considered, suggesting retirement income for Generation X may not keep up with the rising standard of living, absent increases in other sources of retirement income, or increases in rates of return. Our simulations suggest that Generation X will have real retirement income that is similar or somewhat higher than the Baby Boom, depending on how the Social Security funding shortfall is resolved. If the shortfall is resolved by increasing the program’s revenues to maintain scheduled benefits, then Generation X is estimated to have somewhat higher real retirement income at age 62 than the Baby Boom generation. (See table 3.) Because our simulations assume that real earnings increase over time, Generation X would have higher Social Security benefits than the Baby Boom. However, if the shortfall is resolved through gradual benefit reductions over time, then Generation X is estimated to have real retirement income levels at age 62 that are more similar to those of the Baby Boom. (See table 4.) Because the benefit reductions increase over time, they would have more impact on Generation X than on the Baby Boom, leading to slightly lower Social Security benefits for Generation X relative to the Baby Boom. Changes to the Social Security system could also affect other forms of retirement income, especially those not considered here. If program revenues were increased by raising Social Security payroll taxes, then individuals would have less disposable income to save for retirement. This could take the form of decreases in personal saving or lower contributions to DC pension plans. Instead, if general revenues were used, the funding of other programs could be affected, which could lower some individuals’ income from other income support programs, such as Supplemental Security Income (SSI). The timing and implementation of the changes to the Social Security system are also relevant since action taken later rather than sooner would necessitate larger tax increases or benefit reductions and the impact on Generation X could be even greater. Generation X and the Baby Boom are estimated to have similar levels of pension income when our simulations assume that the rate of DB and DC pension coverage is constant over time. (See table 4.) DC account balances are annuitized at retirement to facilitate comparisons. While Generation X’s simulated higher earnings might have suggested higher pension income as well, they may have been too young to completely benefit from the strong stock market of the 1990s. The assumption that the rate of pension coverage is constant over time has not been the experience of private pensions in the United States over the last 25 years. DB coverage has declined, and DC coverage has increased. Generation X and the Baby Boom are estimated to have similar levels of pension income even when our simulations assume Generation X only has access to DC pension plans. (See table 5.) While assuming that all pension coverage will shift to DC plans represents the extreme case, it does provide a bound to our estimates. These simulations provide some insight into the impact that the continuing shift from DB to DC pension coverage might have on retirement income for Generation X, since the final outcome of this shift is uncertain. In our simulations, Generation X has a lower earnings replacement rate than the Baby Boom (see table 6) even though the Baby Boom and Generation X are estimated to have similar levels of retirement income. Our assumption of increasing earnings over time leads to Generation X having a lower replacement rate. The largest difference between the cohorts, in terms of replacement rates, occurs under the Social Security benefit reduction scenario since benefit levels are falling more for Generation X while earnings are unchanged. While the shift in pension coverage raises the level of retirement income for Generation X, it does not change the replacement rate. The earnings replacement rate is an indicator of how well individuals are doing at maintaining their pre-retirement standard of living. While our estimated replacement rates do not cover all individuals in each generation or include all forms of retirement income, they still might indicate a decline in the standard of living during retirement for Generation X. However, this does not take into account that retirement income may increase because of behavioral changes or other external factors. Since Generation X is still relatively young, it is possible that some members of this cohort may change their behavior and save more or work longer. Also, variations in rates of return could be greater than expected, causing some individuals in our simulations to experience higher asset returns. Any of these factors could raise retirement income and, possibly, Generation X’s replacement rate. If this were to occur, the difference in replacement rates between the Baby Boom and Generation X could be smaller than we estimate. Our simulations suggest that retirement income will vary significantly within both Generation X and the Baby Boom. Retirement income will also vary by demographic group, with income being lower for the less educated and single women. Simulated retirement income will vary widely across households within both Generation X and the Baby Boom. For example, if married households in Generation X were arranged from lowest to highest in terms of their retirement incomes at age 62, the top 20 percent would receive over 40 percent of all retirement income while the bottom 20 percent would receive less than 7 percent. (See fig. 11.) The disparity between the top 20 percent and bottom 20 percent is even larger for single persons. Because retirement income is closely linked to earnings, which are known to vary significantly, this degree of variation in estimated retirement income is not surprising. When examining the sources of retirement income, simulated pension benefits are less evenly distributed than simulated Social Security benefits. Married couples in the top 20 percent in terms of pension benefits receive over 58 percent of all pension benefits while those in the bottom 20 percent receive no benefits at all, as shown for Generation X in figure 12. In comparison, married couples in the top 20 percent in terms of Social Security benefits receive about 31 percent of all Social Security benefits, while those in the bottom 20 percent receive about 10 percent. Pension benefits are less evenly distributed for at least two reasons. First, by design, the Social Security benefit formula is more generous toward low-income and disabled workers, in contrast to pensions, which tend to play a larger role in the retirement income of higher earning workers. Second, some workers have no pension coverage while nearly all workers are covered by Social Security. In our simulations, 20 percent of married households and 33 percent of single individuals in Generation X receive no pension benefits. The median retirement income for married households where at least one member has a pension is almost twice as large as the median for married households where neither member has a pension. (See fig. 13.) The percentage difference between those with pensions and without pensions is even larger for single persons. Simulated retirement income varies by educational attainment, marital status, and gender. Simulated retirement income is lower for those with less education, as shown for Generation X in figure 14. The median retirement income for married high school dropouts is about 43 percent less than the median for married college graduates. The percentage difference between single high school dropouts and single college graduates is even larger. The less educated have lower Social Security and pension benefits due to lower lifetime earnings and lower rates of pension coverage. In our simulations for Generation X, 66 percent of married couples without high school degrees receive pension benefits as opposed to 87 percent of married college graduates. Simulated retirement income also varies by marital status with divorced and never married individuals having lower retirement incomes than widows and married couples. (See table 7.) Median retirement incomes for never married persons and divorced persons are about 23 percent less and 32 percent less, respectively, compared to that of widows. Median household retirement incomes for never married persons and divorced persons are about 58 percent less and 63 percent less, respectively, compared to that of married couples. Retirement incomes are less for never married persons and divorced persons, even if one compares retirement income per household member. How widows and married couples compare in terms of retirement income depends on the measure of income used. Widows have lower median retirement income than married couples using household income as the measure, but greater median retirement income using income per household member as the measure. (See table 7.) Whether or not married couples have a higher standard of living than widows depends on how much they save by sharing their expenses. Simulated retirement income is lower for single women than for single men, as shown for Generation X in figure 15. The median retirement income for single women is about 31 percent less than the median for single men. Again this is due to lower lifetime earnings and a lower rate of pension coverage. Sixty-three percent of single women in Generation X receive pension benefits as opposed to 74 percent of single men. Variation in simulated retirement income suggests some members of both generations may be at greater risk of retiring with insufficient resources. Assessing the sufficiency of simulated retirement income is difficult because we do not simulate assets, earnings in retirement, and SSI and other public assistance programs. However, retirees who earned low earnings over their working years may not have substantial assets or earnings in retirement, and SSI provides only a very modest level of support and is restricted to the poorest of retirees. Our analysis of wealth at ages 25 to 34 and our simulations of Social Security and pension benefits at age 62 suggest that both the Baby Boom and Generation X are likely to have similar levels of retirement income in real terms, but that level may not support Generation X’s future living standards. Our analysis also indicates that across the generations, similar subgroups of the population are most vulnerable in retirement. The levels of retirement income that Baby Boom and Generation X workers will actually receive depend in part upon their own behavior, such as how long they work or how much they save, and in part upon factors they cannot control, such as the performance of the overall economy, the rate of return on financial investments, and changes in Social Security and health care financing. Individuals’ behavior, and future economic events, may vary significantly from the assumptions underlying our models, especially for those workers who still have many years to work before retirement. In addition, estimates of future retirement income depend on adequate data on individuals’ earnings, wealth, and pensions, not all of which are easily captured in existing data sets. Further, rising expectations about consumption, leisure and health care in retirement (and the costs of meeting these expectations) could require higher replacement rates for Generation X than for the Baby Boom in order to maintain the standards of living they achieved while working. Government policy can potentially have an important effect on individuals’ retirement income. Policies that encourage individuals to acquire more education and training, to work longer and to save more can help ensure higher retirement incomes in the future. Also, any reform that policymakers undertake with regard to the Social Security program or health care financing will have repercussions for the retirement income of Generation X and the younger half of the Baby Boom. Our work suggests the importance of all these policy actions reflecting a coordinated approach to future retirement income, and that they be made soon enough so the affected individuals will have adequate time to adjust their work and saving behavior accordingly. Finally, the continued vulnerability of certain segments of the population to inadequate resources at retirement suggests that successful retirement income policies would take potential impacts on these groups into consideration. We provided a draft of this report to SSA, Labor, and Treasury. All three provided technical comments, which we have incorporated as appropriate. We are sending copies of this report to the Social Security Administration, the Department of Labor, and the Department of the Treasury. We will also make copies available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions concerning this report, please contact Barbara Bovbjerg at (202) 512-7215. See appendix III for other contacts and staff acknowledgments. Barbara D. Bovbjerg Director, Education, Workforce and Income Security Issues. To gain an understanding of what today’s workers might expect to receive in terms of retirement income, we compared the wealth of current workers with that of current retirees, at similar points in their lives, and estimated the pension and Social Security benefits that the Baby Boom and Generation X might receive. To analyze personal wealth we used the Survey of Consumer Finances, a survey of U.S. households sponsored by the Board of Governors of the Federal Reserve System. To analyze how workers from the Baby Boom and Generation X compare in terms of the retirement income they can expect to receive and the likely distribution across workers within the Baby Boom and Generation X, we simulated expected retirement income at age 62. To analyze personal wealth, we used the Survey of Consumer Finances (SCF), a triennial survey of U.S. households sponsored by the Board of Governors of the Federal Reserve System with the cooperation of the U.S. Department of the Treasury. The SCF provides detailed information on U.S. households’ balance sheets and their use of financial services, as well as on their pensions, labor force participation, and demographic characteristics as of the time of the interview. The SCF also collects information on households’ total cash income, before taxes, for the calendar year preceding the survey. Because the survey is expected to provide reliable information both on assets that are fairly common—such as houses—as well as on assets that are owned by relatively few—such as closely held businesses—the SCF uses a sample design that includes a standard, geographically based random sample and a special over sample of relatively wealthy families. Weights are used to combine information from the two samples to make estimates for the full population. The 1962 SCF was conducted by the Census Bureau and surveyed 3,551 households. The 1983 SCF was conducted by the Survey Research Center of the University of Michigan and surveyed 3,824 households. The 1998 SCF was conducted by the National Opinion Research Center at the University of Chicago and surveyed 4,309 households. Using the SCF, we analyzed how marital status, education, and homeownership are related to the wealth of households headed by a 25- to 34-year old. Using the 1962, 1983, and 1998 SCFs, we examined the ownership and level of household savings for current retirees (born between 1925 and 1945), the Baby Boom (born between 1946 and 1964), and Generation X (born between 1965 and 1976) when each generation was 25 to 34 years old. We selected this age group because this is the only age group for which we have data on personal wealth in each of the three generations. Our measure of personal wealth includes tax favored retirement saving, such as individual retirement accounts (IRA) and 401(k)s and other thrift type plans, as well as savings that are not specifically dedicated to retirement but may enhance retirement income, such as liquid financial assets (checking accounts, savings accounts, money market deposit accounts, and money market mutual funds), other financial assets (certificates of deposit, mutual funds, stocks, and bonds), housing assets, and nonhousing assets (nonresidential real estate, business interests, and vehicles). We also looked at housing liabilities and nonhousing liabilities (credit cards, installment loans, and other debts). For each component of personal wealth, we calculated the percentage of households owning that type of wealth as well as the median value. We looked separately at assets and debt and then combined them to calculate individual net worth. For studies in which the focus is on saving or net worth, the SCF is preferable to other household income surveys, such as the Panel Study of Income Dynamics (PSID) or the Survey of Income and Program Participation (SIPP). The SCF has more detailed information about wealth holding, better distributional characteristics, less item nonresponse, and fewer imputed variables than the PSID or the SIPP. However, the SCF, like all surveys, is subject to sampling errors, reporting errors, and nonresponse errors. Sampling errors result from the fact that survey estimates are based on a sample of the population rather than on a complete census of the population. Reporting errors arise because respondents may not understand what is wanted, may not know the information requested, or may be reluctant to reveal their actual income or wealth. Nonresponse errors arise when the family selected for participation is not available to be interviewed, either because they refuse to participate or cannot be contacted. Further, the sample sizes for the SCF are relatively small compared with surveys such as the Current Population Survey. For our analysis, we are concerned with the fact that small samples are vulnerable to bias from observations not representative of the population as a whole. For all of these reasons, our numbers should be interpreted with some caution. To analyze how workers from the Baby Boom and Generation X compare in terms of the retirement income they can expect to receive and the likely distribution across workers within the Baby Boom and Generation X, we simulated expected retirement income at age 62. Our measure of retirement income consists of pension income, Social Security benefits, and spouse’s earnings. It does not include personal savings, earnings in retirement, health benefits, or income from other income support programs (e.g., Supplemental Security Income). For our simulations, we used the Social Security and Accounts Simulator (SSASIM), Genuine Microsimulation of Social Security and Accounts (GEMINI), and Pension Simulator (PENSIM) simulation models. GEMINI estimated Social Security benefits and PENSIM estimated pension income from defined benefit and defined contribution plans for the 1955 birth cohort (Baby Boom) and the 1970 birth cohort (Generation X) and their spouses. Retirement income and its components were discounted to 2001 dollars, allowing us to make comparisons across cohorts in terms of the level of retirement income. However, these comparisons do not give an indication of standards of living in retirement. To make this comparison, we looked at the earnings replacement rate, calculated as retirement income at age 62 divided by earnings at age 61 for retired workers who worked at age 61 and whose spouse, if married, was the same age. To examine the distribution of retirement income within both generations, we calculated the degree of variation by arranging households by retirement income and finding the proportion of that income received by each quintile. To compare groups by demographics, we calculated median retirement income by educational attainment, gender, and marital status. Due to the difference in household size, we performed most of the above calculations separately for married couples and singles—those widowed, divorced, or never married—at age 62. When examining retirement income by marital status we calculated both household income and income per household member. SSASIM is a Social Security policy simulation model developed by the Policy Simulation Group (PSG). The initial version of the model was developed under a series of contracts from the Social Security Administration as part of the 1994-96 Advisory Council on Social Security. SSASIM consists of two models, a macro model of aggregate program finances, and an embedded micro model of selected cohort individuals. In addition to current law policy, the model can simulate a variety of policy reforms, from incremental changes to broader structural reforms that would introduce individual accounts into the broader Social Security system. GEMINI is a policy microsimulation model also developed by the PSG. GEMINI is useful for analyzing the lifetime implications of Social Security policies for a large sample of people born in the same year and can simulate different reform features for their effects on the level and distribution of benefits. GEMINI uses as input birth cohort samples generated by PENSIM so as to represent the demographic and economic characteristics of historical birth cohorts. Also, GEMINI incorporates the same kind of Old Age, Survivor and Disability Insurance (OASDI) program logic as used in the micro model of SSASIM, with almost all assumption and policy parameters read from a SSASIM input database. GEMINI produces output files that contain detailed information about the life events and annual OASDI program experience of each individual in the cohort sample. For our report, the PSG produced the GEMINI output files using the same 1955 and 1970 birth cohorts used in PENSIM for both a scheduled and funded Social Security scenario (see following paragraphs for more details.) The PENSIM and GEMINI output files were then merged, yielding an output file containing yearly Social Security benefits, pension income, and spouse’s earnings from age 62 until death for each member of the cohort. PENSIM is a pension policy simulation model that is being developed by the PSG to analyze lifetime coverage and adequacy issues related to employer-sponsored pension plans. The development of PENSIM has been funded since 1997 by the Office of Policy and Research at the Employee Benefits Security Administration of the U.S. Department of Labor. PENSIM produces a random sample of simulated life histories for 100,000 people in a birth cohort and for their spouses who may have been born in a different year. The members of the birth cohort experience demographic and economic events, the incidence and timing of which vary by age, gender, education, disability, and employment status. The types of life events that are modeled in PENSIM include: demographic events (birth, death); schooling events (leaving school at a certain age, receiving a certain educational credential); family events (marriage, divorce, childbirth); initial job placement; job mobility events (earnings increases while on a job, duration of a job, movement to a new job, or out of the labor force); pension events (becoming eligible for plan participation, choosing to participate, becoming vested, etc.); and retirement events. For our report, we specified a DB and DC pension plan, which the PSG entered into PENSIM to be used with the 1955 and 1970 birth cohorts to simulate pension benefits for the Baby Boom and Generation X. These simulations were conducted under both a sunset and no sunset pension scenario as well a scenario where Generation X only had access to DC pensions (see following discussion for more details). Our simulations assume a single type of DB pension plan for all workers covered by such a plan. This plan’s structure is similar to the most common type of DB pension plan in the private sector. In terms of structure, this plan has an eligibility requirement (consisting of a minimum age of 21 and 1 year of service) and 5 years cliff vesting. The plan’s normal retirement age is 62 for workers with any years of service, and it has an early retirement option, with early retirement benefits beginning at age 55 for workers with 10 years of service. If a worker chooses to retire early there is a linear early retirement reduction of 5 percent per year (e.g., if a worker retires at age 55, he would receive 65 percent of the normal retirement benefit). The plan pays a monthly benefit at retirement, rather than a lump sum. In terms of the calculation of benefits, the traditional DB plan calculates benefits using a final average pay formula, such as: X% * average Y years earnings at the end of career or when highest * years of service. Surveys of DB plans in the United States indicate that, typically, the percentage credit (X%) is in the range of 1-1.75 percent. For this report we chose 1.25 percent. The most common definition of final average pay is the high consecutive 5 years of earnings. Therefore, the formula that we use to calculate DB benefits is: 1.25% * average of high consecutive 5 years pay * years of service. In our simulations of DC plans, all individuals covered by a DC pension plan are covered by the same plan. This plan’s structure is similar to the most common type of DC pension plan in the private sector. In terms of structure, this plan has an eligibility requirement (consisting of a minimum age of 21 and 1 year of service) and 5 year graded vesting. At retirement, individuals annuitize their account balances, with married individuals purchasing a joint and one-half survivor annuity and single individuals purchasing a single life annuity. Employees can contribute up to 12 percent of their earnings and the employer match 50 percent of the employees’ contributions up to 5 percent. Employees can invest their contributions in their choice of equities and fixed income assets, where the fixed income assets will consist of Treasury bonds and corporate bonds. Employees who leave before retirement can choose to have their account balances rolled over into another retirement account. In our simulations, rollover decisions are based on the data in table 11. Assumptions also need to be made regarding participation and contribution rates, and asset allocation. Tables 8-11 provide information on the assumptions used for each of these factors. Table 8 provides data on participation rates by age and salary. Data on contribution rates by age and salary are shown in table 9. Table 10 provides data on average asset allocation rates by age and investment options. Data on the distribution of assets at termination by asset levels is shown in table 11. Our simulations considered several scenarios for pension benefits. One assumed that the sunset provision in the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 holds and the other that the provisions in EGTRRA, which raise the limits on both DB and DC plans, do not sunset. We also considered the scenario where the shift in coverage reached its extreme and Generation X only had access to DC plans. Our simulations of expected Social Security benefits consider two different scenarios for resolving the funding shortfall. One scenario assumes scheduled benefits are paid while payroll taxes are increased to levels that support those benefits. Our scheduled benefits scenario increases the payroll tax once and immediately by the amount of the OASDI actuarial deficit as a percent of payroll so that benefits under the current system can continue to be paid throughout the simulation period. The other scenario, the funded benefits scenario, assumes that benefits are reduced to levels supportable by current payroll tax rates. The benefit reductions used in this scenario reduce the primary insurance amount (PIA) formula factors by equal percentage point reductions (by 0.319 each year for 30 years) for those newly eligible in 2005, subjecting earnings across all segments of the PIA formula to the same reduction. Simulating retirement income almost 30 years into the future requires many assumptions and simplifications and, consequently, our simulations have a number of limitations. A primary limitation of our analysis is that our simulations do not include important components of retirement income such as personal savings, earnings in retirement, health benefits, and other public assistance programs such as SSI. Including personal savings might reduce retirement income for Generation X relative to retirement income for the Baby Boom if the post-1980 decline in personal savings rates continues. Including earnings in retirement might increase Generation X’s retirement income relative to the Boomers income if wages increase over time or if people in the future are more likely to work in retirement. From a distributional perspective, including personal savings would probably increase the upper quintile’s share of retirement income while including public assistance programs such as SSI would benefit the bottom of the distribution. Another component of well-being in retirement that we do not estimate are private and public health benefits. Including health benefits might reduce Generation X’s standard of living in retirement relative to the Baby Boom due to falling health benefits and rising health care costs over time An important assumption driving our results is that real wages grow over time. We assume real wages grow at 1.0 percent per year, following the 2001 Social Security Trustees Report’s intermediate assumption. If, instead, wages stagnate as in the 1980s and 1990s, then retirement income for Generation X relative to retirement income for the Baby Boom might be lower than our estimates. Another critical assumption is the relative rate of DB and DC pension coverage. Over the last 25 years pension coverage has been shifting from DB to DC pensions. However, due to the uncertainty in predicting future relative coverage rates, our simulations either assume a constant rate of DB and DC coverage over time or only DC coverage for Generation X. The likely outcome is somewhere in between. An important omission under the scheduled Social Security benefit scenario is the impact of higher taxes or general revenue transfers on other sources of retirement income. Increased taxes or general revenue transfers will most likely be necessary to pay Social Security benefits as scheduled under current law. Tax increases might reduce saving for retirement and general revenue transfers might reduce funding for other government retirement programs such as SSI, Medicare, or Medicaid. The impact of tax increases may be larger for Generation X than for the Baby Boom because they will pay higher taxes for more years. Another limitation is the sensitivity of estimated DC benefits to our assumptions about future rates of return. We assume individuals’ rates of returns vary randomly around average rates projected by the Office of the Chief Actuary at SSA. If average rates of return in the future are significantly different, then actual DC benefits could differ substantially from our simulations. While the model allows returns to vary stochastically by individuals, it cannot capture fluctuations in overall market rates of return. An ill timed stock market downturn could result in either generation’s DC benefits being significantly lower than simulated. Retirement income for Generation X could be more sensitive to future rates of return than retirement income for the Baby Boom, if the trend toward DC pensions continues. Another limiting assumption is that our simulations only include one kind of DB and DC plan, which clearly does not capture the full complexity of pension plans. We attempted to choose the characteristics of each to be typical of today’s pension plans. If they are not truly representative or if the characteristics of DB and DC plans change over time, then our results could be biased. In particular, the finding that the shift to DC plans only has a very modest effect on pension benefits may depend on our choice of plans. While educational attainment has been increasing over time, this is not captured by the simulations. Both generations are assumed to achieve the same level of education as 35- to 44-year olds in the 1997 Current Population Survey. Higher levels of education for Generation X could increase their retirement income relative to the Baby Boom. From a distributional perspective, the simulations are limited, in that they do not capture differences across the generations in the variation of earnings. By some measures, earnings disparity has been increasing over the last 20 years, which could potentially lead to more variation in retirement income for Generation X. The simulations assume the same cohort life expectancies as the 2001 Social Security Trustees Report’s intermediate cost projection. Marital status at age 62 is calibrated to unpublished projections from the SSA’s Office of the Chief Actuary. Assumed life expectancies may be too low, as some have argued that the Trustees underestimate future improvements in mortality rates. Increased life expectancies would reduce DC benefits in our simulations because retirees would have to pay higher prices when annuitizing their retirement accounts. Our simulations of retirement income do not take taxation into account. Incorporating taxes would not only lower disposable income, but would also reduce variation in income because federal tax rates are progressive and because only relatively higher income households are required to pay tax on their Social Security benefits. Finally, we are only able to simulate retirement income for two illustrative birth cohorts as opposed to entire generations. The 1955 and 1970 birth cohorts may not fully capture the experiences of the Baby Boom and Generation X, respectively. For our analysis of estimated retirement income, we used two different scenarios for the changes to the pension limits under EGTRRA. One assumed that the sunset provision in EGTRRA holds and the other that the provisions, which raise the limits on both DB and DC plans, do not sunset. The following tables show estimated retirement income under the no- sunset pension scenario. Extending pension contribution limits beyond 2010 increases real retirement income and replacement rates for Generation X relative to real retirement income and replacement rates for the Baby Boom. Table 12 shows the estimated median monthly household retirement income at age 62 under a scheduled (tax increase) Social Security scenario and a constant rate of DB and DC pension coverage. Estimated median monthly household retirement income at age 62 under a funded (benefit reduction) Social Security scenario and a constant rate of DB and DC pension coverage is shown in table 13. Table 14 shows the simulated median monthly household retirement income at age 62 under a funded (benefit reduction) Social Security scenario and Generation X having only DC pension coverage. Replacement rates for the Baby Boom and Generation X under the different Social Security and pension coverage scenarios are shown in table 15. The distribution of simulated retirement income is very similar across the generations and across scenarios. For both generations and in all scenarios, retirement income is estimated to vary widely, pension benefits are less evenly distributed than Social Security benefits, and the less educated, single women, and those without pensions have lower retirement incomes. Figures 16-20 and table 16 show the estimated distribution of retirement income for the Baby Boom assuming funded Social Security benefits, no extension of raised pension contribution limits beyond 2010, and a constant rate of DB and DC pension coverage over time. These are the same assumptions used for Generation X in figures 11-15 and table 7. We do not emphasize a comparison of the distributions across generations because our models do not capture differences across generations in the variation of earnings. By some measure earnings disparity has been increasing over the last 20 years, which may result in retirement income varying more in Generation X than in the Baby Boom. Figures 21-25 and table 17 show the estimated distribution of retirement income for Generation X assuming funded Social Security benefits, no extension of raised pension contribution limits beyond 2010, and all pensions are DC pensions. Figures 26-30 and table 18 show the estimated distribution of retirement income for Generation X assuming funded Social Security benefits, extension of raised pension contribution limits beyond 2010, and a constant rate of DB and DC pension coverage over time. Figures 31-35 and table 19 show the estimated distribution of retirement income for Generation X assuming scheduled Social Security benefits, no extension of raised pension contribution limits beyond 2010, and a constant rate of DB and DC pension coverage over time. In addition to those named above, the following individuals made significant contributions to this report: Michael J. Collins, Gordon Mermin, Janice Peterson, Brendan Cushing-Daniels, Barbara Alsip and Patrick DiBattista, Education, Workforce, and Income Security Issues; Grant Mallie, Applied Research and Methods; and Marylynn Sergent, Strategic Issues. Social Security Reform: Analysis of Reform Models Developed by the President’s Commission to Strengthen Social Security. GAO-03-310. Washington, D.C.: January 15, 2003. Social Security: Analysis of Issues and Selected Reform Proposals. GAO-03-376T. Washington, D.C.: January 15, 2003. Private Pensions: Participants Need Information on the Risks of Investing in Employer Securities and the Benefits of Diversification. GAO-02-943. Washington, D.C.: September 6, 2002. Private Pensions: Improving worker Coverage and Benefits. GAO-02-225. Washington, D.C.: April 9, 2002. Private Pensions: Key Issues to Consider Following the Enron Collapse. GAO-02-480T. Washington, D.C.: February 27, 2002. Social Security: Program’s Role in Helping Ensure Income Adequacy. GAO-02-62. Washington, D.C.: November 30, 2001. Private Pensions: Issues of Coverage and Increasing Contribution Limits for Defined Contribution Plans. GAO-01-846. Washington, D.C.: September 17, 2001. Retirement Savings: Opportunities to Improve DOL’s SAVER Act Campaign. GAO-01-634. Washington, D.C.: June 26, 2001. National Saving: Answers to Key Questions. GAO-01-591SP. Washington D.C.: June 1, 2001. Cash Balance Plans: Implications for Retirement Income. GAO/HEHS-00-207. Washington, D.C.: September 29, 2000. Private Pensions: Implications of Conversions to Cash Balance Plans. GAO/HEHS-00-185. Washington, D.C.: September 29, 2000. Social Security Reform: Implications for Private Pensions. GAO/HEHS-00-187. Washington, D.C.: September 14, 2000. Pension Plans: Characteristics of Persons in the Labor Force Without Pension Coverage. GAO/HEHS-00-131. Washington, D.C.: August 22, 2000. Social Security: Evaluating Reform Proposals. GAO/AIMD/HEHS-00-29. Washington, D.C.: November 4, 1999. Integrating Pensions and Social Security: Trends Since 1986 Tax Law Changes. GAO/HEHS-98-191R. Washington, D.C.: July 6, 1998. Social Security: Different Approaches for Addressing Program Solvency. GAO/HEHS-98-33. Washington, D.C.: July 22, 1998. 401(k) Pension Plans: Loan Provisions Enhance Participation But May Affect Income Security for Some. GAO/HEHS-98-5. Washington, D.C.: October 1, 1997. Retirement Income: Implications of Demographic Trends for Social Security and Pension Reform. GAO/HEHS-97-81. Washington, D.C.: July 11, 1997.

Summary: Today's workers will rely to a large extent on Social Security, private pensions, and personal wealth for their retirement income. But some analysts question whether these sources will provide sufficient retirement income to maintain workers' standards of living once they leave the labor force. Indeed, the Social Security trust funds are projected to become exhausted in 2042, at which time, unless action is taken, Social Security will not be able to pay scheduled benefits in full. To gain an understanding of what today's workers might expect to receive in terms of retirement income, GAO was asked to examine (1) how the personal wealth of Baby Boom (born between 1946 and 1964) and Generation X (born between 1965 and 1976) workers compare with what current retirees had at similar ages, (2) how workers from the Baby Boom and Generation X compare in terms of the pension and Social Security benefits they can expect to receive, and (3) the likely distribution of pension and Social Security benefits across workers within the Baby Boom and Generation X. Baby Boom and Generation X households headed by an individual aged 25 to 34 have greater accumulated assets, adjusted for inflation, than current retirees had when they were the same age, but also more debt. Most of the large increase in assets between current retirees and the Baby Boom is due to increased ownership and equity in housing. Contributions to defined contribution pension plans play a role in explaining the modest increase in assets between the Baby Boom and Generation X, in part, because GAO's data do not allow it to consider the value of benefits from defined benefit pension plans. Workers from Generation X are estimated to have similar levels of retirement income in real terms (adjusted for inflation) at age 62 as their counterparts in the Baby Boom, but Generation X may be able to replace a smaller percentage of their pre-retirement income. Whether Social Security benefits for Generation X are higher or lower than those for the Baby Boom will depend on how the Social Security funding shortfall is resolved. With regard to pensions, Generation X and the Baby Boom are estimated to have similar levels of pension income even with a continued shift from defined benefit to defined contribution pension coverage. Retirement income will vary within both Generation X and the Baby Boom households, and certain groups will be more likely to have lower retirement incomes. As one might expect, given significant variation in workers' earnings, if households were arrayed from lowest to highest in terms of estimated total retirement income, those in the top 20 percent would receive a substantially larger proportion of income compared with those in the bottom 20 percent. Retirement income is lower for the less educated and single women.