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Kenneth Kriz Associate Professor

School of Public Administration

The Retirement Situation

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A Brief History of Retirement & Retirement Systems

Prior to the 19 th century: No concept Post Civil War: Pensions for war veterans 1882: Alfred Dolge Company private pension 1889: German Prime Minister Otto von

Bismarck develops modern national pensionsystem

Early 20 th Century: Progressive Era, adoptionof pensions by state and local governments

1930s: Advent of Social Security System Post-World War II: Development of ThreeLegged Stool of retirement financing

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The Three Legged Stool: United States

Private

Savings

Employer ProvidedPension

Social Security

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The Three Legged Stool: Other Industrialized Nations

PrivateSavings

P blic Pensi n

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Public Pension Replacement Rates

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Private Savings

Th eory

Individualssh ouldrecognize needfor privatesavings to fundretirementconsumption

EmpiricalEvidence

Private savingsrates very lowPrivate savingstends to e inrelatively low

return/low riskinvestments

Pu lic Policies

Tax-preferredaccounts:IRA, SEP-IRA, KeoghPreferredtreatment of capital gains

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Private Savings Rates

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0

5

10

15

20

25

30

35

1992 2001 2004 2007

% of Families withIRA/Keogh Account

0

5 ,00010 ,00015 ,00020 ,00025 ,00030 ,000

35 ,00040 ,000

1992 2001 2004 2007

Median Balance inIRA/Keogh Account

Source: Employee Benefits Researc h Institute (EBRI); calculated from Survey of Consumer Finances (SCF) data.

Private Retirement Savings

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Employer-Provided Pensions

Th eory

Employers will offerpension plans as an

incentive to attractproductive workersDB plans versusDC plans

Empirical Evidence

Private sectoremployers moving

to mainly DC plansFunding pro lems inpu lic DB plansInvestment

options, fundingdecisionssu optimal

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Sector Comparison - Assets

37%

63%

Private Secto

r

Defined Benefit

Defined Contri ution

68%

32%

Public Secto

r

Defined Benefit

Defined Contri ution

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F unding Problems in Public Pension Plans

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Pension Plan F unding Ratios, 2001 2009

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Plan Normal Cost, 2001 2009

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Defined Contribution Participant Behavior

The overwhelming majority of DC planparticipants fail to contribute maximum Nave asset allocation

1/n rule

80/20 rule 100-age rule Most participants never change their

allocations Most participants never read plan literature Many plan sponsors do not know expense

ratios, investment options

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Social Security

Th eory

Social insurance: RiskPooling

History

Until 1970 s: No majorissues, Pay-As-You-GoEarly 1980 s: Recognitionof demograp h icch allenges, esta lish mentof Social Security TrustFundSince 1990 s: Growingconcern over solvency of

SSTF

Policies

Privatization

Additional SST

Finvestment optionsRaising retirementage/reducing enefitsIncreasing payrolltax/ roadening payroll tax

ase

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Social Security Trust F und Projections

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Historical Accuracy of Social Security Projections

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Conclusions

Each of the three legs of the stool is wobbly Private savings: Not enough, not well managed Employer pensions: DC shift makes this more like

private savings, DB funding problems Social Security: F unding concernsF ixes vary Private savings: Hard to incentivize; Save More

Later Employer pensions: Education for employees Social Security: Technically not large; politically

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