The Changing Character and Dramatic Growth of Retirement Saving in the United States

A new NBER study by James Poterba, Steven Venti and David Wise, "The Transition to Personal Accounts and Increasing Retire-ment Wealth: Macro and Micro Evidence" (NBER Working Paper 8610) analyzes contributions made over 25 years to traditional pension plans and to retirement saving programs, such as IRAs and 401(k) plans. The study finds a major transition over this period from traditional pensions toward individually-controlled retirement accounts, and a dramatic increase in retirement saving overall. Between 1975 and 1999, the total value of assets set-aside to support retirement in-creased from $400 billion to over $12 trillion, as illustrated in Figure 1. To put this in perspective, $12 trillion is equal to about $350,000 for every American over age 65 today. It is equal to $45,000 for every person -- from infant to centenarian -- in the United States. And it is in addition to Social Security.

The study by Poterba, Venti and Wise points to a fundamental and ongoing transition in the economics of retirement. For past generations of retirees, the large majority of income support has come from Social Security and, for some, a traditional employer-provided pension benefit. Retirees typically owned homes, but few had enough financial assets to support even six months of their retirement. This is changing. The past two decades have seen the emergence of an entirely new component of retiree finances. The most widely known retirement saving programs are Individual Retirement Accounts (IRAs) and employer-sponsored 401(k) plans. Other re-tirement saving programs include 403(b) plans for employees in non-profit and educational organizations, 457 plans for state and local employees, the Thrift Savings Plan for federal employees, and Keogh plans for self-employed workers.

While many types of retirement programs have had an important impact in increasing retirement saving, the employer-sponsored 401(k) plan has been the single most important source of growth. The number of active participants in-creased from essentially no participants in 1981 to nearly 40 million active participants in 1997. This is a sizable fraction of the entire U.S. labor force. Active participants in 401(k) plans make an average annual contribution to their plan of over $3000. Total annual contributions to 401(k) and other similar plans reached $176 Billion in 1999.

The study also explores whether the new retirement saving plans have in any way displaced traditional pension plans. The investigators find little if any displacement -- probably less than 11 percent of the total plan contributions of 401(k) participants. The amount of new saving taking place in IRAs, 401(k) plans, and similar retirement ac-counts simply dwarfs any decline in traditional pension coverage. And for most workers who have had a traditional pension, their 401(k) plan is in addition to the pension.

While the focus of the study is to document the overall growth of retirement saving in the United States, the study also illustrates the potential impact of saving trends on individual workers who contribute to 401(k) plans, or similar plans, throughout their working careers. For example, a middle-income worker approaching retirement today might have earned a salary that grew from around $9,000 at age 25 to $22,000 at age 40 to $37,000 at age 55, and so on. If this person had contributed 9 percent of their earnings to a 401(k) plan beginning at age 25, they would have accumulated about $575,000 in retirement saving by age 65. This hypothetical example, the investigators suggest, will become the reality for an increasing number of retiring workers in the United States. Over time, more and more workers will reach retirement having made contributions to 401(k) plans throughout their working careers.

The research was funded by the National Institue on Aging and the National Science Foundation. It was summarized by Richard Woodbury.

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