oversight

Retirement Income: Intergenerational Comparisons of Wealth and Future Income

Published by the Government Accountability Office on 2003-04-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

             United States General Accounting Office

GAO          Report to the Ranking Minority
             Member, Subcommittee on Employer-
             Employee Relations, Committee on
             Education and the Workforce, House of
             Representatives
April 2003
             RETIREMENT
             INCOME
             Intergenerational
             Comparisons of
             Wealth and Future
             Income




GAO-03-429
                                               April 2003


                                               RETIREMENT INCOME

                                               Intergenerational Comparisons of Wealth
Highlights of GAO-03-429, a report to
Ranking Minority Member, Subcommittee          and Future Income
on Employer-Employee Relations,
Committee on Education and the
Workforce, House of Representatives




Today’s workers will rely to a large           Baby Boom and Generation X households headed by an individual aged 25 to
extent on Social Security, private             34 have greater accumulated assets, adjusted for inflation, than current
pensions, and personal wealth for              retirees had when they were the same age, but also more debt. Most of the
their retirement income. But some              large increase in assets between current retirees and the Baby Boom is due
analysts question whether these                to increased ownership and equity in housing. Contributions to defined
sources will provide sufficient
retirement income to maintain
                                               contribution pension plans play a role in explaining the modest increase in
workers’ standards of living once              assets between the Baby Boom and Generation X, in part, because GAO’s
they leave the labor force. Indeed,            data do not allow it to consider the value of benefits from defined benefit
the Social Security trust funds are            pension plans.
projected to become exhausted in
2042, at which time, unless action             Workers from Generation X are estimated to have similar levels of
is taken, Social Security will not be          retirement income in real terms (adjusted for inflation) at age 62 as their
able to pay scheduled benefits in              counterparts in the Baby Boom, but Generation X may be able to replace a
full.                                          smaller percentage of their preretirement income. Whether Social Security
                                               benefits for Generation X are higher or lower than those for the Baby Boom
To gain an understanding of what               will depend on how the Social Security funding shortfall is resolved. With
today’s workers might expect to
receive in terms of retirement
                                               regard to pensions, Generation X and the Baby Boom are estimated to have
income, GAO was asked to                       similar levels of pension income even with a continued shift from defined
examine (1) how the personal                   benefit to defined contribution pension coverage.
wealth of Baby Boom (born
between 1946 and 1964) and                     Retirement income will vary within both Generation X and the Baby Boom
Generation X (born between 1965                households, and certain groups will be more likely to have lower retirement
and 1976) workers compare with                 incomes. As one might expect, given significant variation in workers’
what current retirees had at similar           earnings, if households were arrayed from lowest to highest in terms of
ages, (2) how workers from the                 estimated total retirement income, those in the top 20 percent would receive
Baby Boom and Generation X                     a substantially larger proportion of income compared with those in the
compare in terms of the pension                bottom 20 percent. Retirement income is lower for the less educated and
and Social Security benefits they
can expect to receive, and (3) the
                                               single women.
likely distribution of pension and             Percentage of the Aged Receiving Income, by Source
                                               Source
Social Security benefits across
workers within the Baby Boom and                                                                                                                            90
                                                        Social Security
Generation X.                                                                                                                                     69

                                                                                                                                             59
                                                         Asset Income
                                                                                                                                      54


                                                                                                            29
                                                     Private Pensions
                                                                                        9

                                                                                             14
                                               Government Pensions
                                                                                        9


                                                                                                       22
                                                               Earnings
                                                                                                                   36

                                                                             0                    20                 40                    60          80        100
www.gao.gov/cgi-bin/getrpt?GAO-03-429.                                       Percentage of aged


To view the full report, including the scope                                            2000
and methodology, click on the link above.                                               1962
For more information, contact Barbara D.
                                               Source: Fast Facts and Figures About Social Security, Social Security Administration, 2002.
Bovbjerg at (202) 512-7215.
Contents


Letter                                                                                          1
                       Results in Brief                                                         3
                       Background                                                               5
                       Baby Boom and Generation X Workers Have More Assets and More
                         Debt Than Current Retirees Had at Similar Ages                        13
                       Generation X and the Baby Boom Are Estimated to Have Similar
                         Levels of Real Retirement Income, but Generation X Could Have
                         Lower Replacement Rates                                               22
                       The Distribution of Retirement Income Will Vary within
                         Generations, and Certain Groups Will Be More Likely to Have
                         Lower Retirement Incomes                                              27
                       Concluding Observations                                                 35
                       Agency Comments                                                         36

Appendix I             Scope and Methodology                                                   38
                       Analysis of Personal Wealth                                             38
                       Analysis of Simulated Retirement Income                                 40

Appendix II            Alternative Scenarios                                                   52
                       Retirement Income Under the No-Sunset Pension Scenario                  52
                       Distributional Figures and Tables for the Baby Boom and for
                         Generation X under Alternative Scenarios                              54

Appendix III           GAO Contacts and Staff Acknowledgments                                  75
                       GAO Contacts                                                            75
                       Staff Acknowledgments                                                   75

Related GAO Products                                                                           76



Tables
                       Table 1: The Median Value of Net Worth for Households Headed by
                                a 25- to 34-Year Old—Differences by Homeownership,
                                Marital Status, and Education                                  21
                       Table 2: Median Value of Wealth-to-Income Ratios for Households
                                Headed by a 25- to 34-Year Old—Differences by
                                Homeownership, Marital Status, and Education                   22




                       Page i                                        GAO-03-429 Retirement Income
Table 3: Median Monthly Household Retirement Income and Its
         Major Components, at Age 62, if Social Security Shortfall
         Addressed by Increasing Revenues                                24
Table 4: Median Monthly Household Retirement Income and Its
         Major Components, at Age 62, if Social Security Shortfall
         Addressed by Reducing Benefits                                  24
Table 5: Median Monthly Household Retirement Income and Its
         Major Components, at Age 62, if Social Security Shortfall
         Addressed by Reducing Benefits and Generation X Having
         Only DC Pension Plans                                           26
Table 6: Median Household Replacement Rates for Baby Boom and
         Generation X                                                    27
Table 7: Median Monthly Household Retirement Income at Age 62
         by Marital Status for Generation X, in 2001 Dollars             34
Table 8: Participation Rates by Age and Salary, 2001                     45
Table 9: Contribution Rates by Age and Salary, 1999                      45
Table 10: Average Asset Allocation Rates by Age and Investment
         Options, 2000                                                   46
Table 11: Assets at Termination, 2000                                    46
Table 12: Median Monthly Household Retirement Income and its
         Major Components, at Age 62, if Social Security Shortfall
         Addressed by Increasing Revenues                                52
Table 13: Median Monthly Household Retirement Income and its
         Major Components, at Age 62, if Social Security Shortfall
         addressed by Reducing Benefits                                  53
Table 14: Median Monthly Household Retirement Income and its
         Major Components, at Age 62, if Social Security Shortfall
         Addressed by Reducing Benefits and Generation X Having
         Only DC Pension Plans                                           53
Table 15: Median Household Replacement Rates for Baby Boom
         and Generation X                                                54
Table 16: Median Monthly Household Retirement Income at Age 62
         by Marital Status for the Baby Boom, in 2001 Dollars            59
Table 17: Median Monthly Household Retirement Income at Age 62
         by Marital Status for Generation X When All Pensions are
         DC Pensions, in 2001 Dollars                                    64
Table 18: Median Monthly Household Retirement Income at Age 62
         by Marital Status for Generation X with Extension of
         Raised Pension Contribution Limits, in 2001 Dollars             69
Table 19: Median Monthly Household Retirement Income at Age 62
         by Marital Status for Generation X with Scheduled Social
         Security Benefits, in 2001 Dollars                              74



Page ii                                        GAO-03-429 Retirement Income
Figures
          Figure 1: Percentage of the Aged Receiving Income, by Source             6
          Figure 2: Average Weekly Earnings for Production or
                   Nonsupervisory Workers, Adjusted for Inflation                  8
          Figure 3: Labor Force Participation Rates of Married Women               9
          Figure 4: Estimated Private Wage and Salary Worker Participation
                   Rates Under DB and DC Pension Plans                            10
          Figure 5: Levels of Education Completed by Individuals Age 25 and
                   Over                                                           11
          Figure 6: Percentage of Households by Household Composition             12
          Figure 7: Median Value of Total Assets, Retirement Accounts, and
                   Housing Assets, and the Percentage of Households with
                   these Assets for Households Headed by a 25- to 34-Year-
                   Old                                                            15
          Figure 8: Median Value of Total Assets, Financial Assets, and
                   Nonfinancial Assets, and the Percentage of Households
                   with These Assets for Households Headed by a 25- to 34-
                   Year Old                                                       17
          Figure 9: Median Value of Debt and the Percentage of Households
                   with Debt for Households Headed by a 25- to 34-Year Old
                   (Total Debt, Housing Debt, Financial Debt, and Other
                   Debt)                                                          19
          Figure 10: Median Value of Positive and Negative Net Worth and
                   the Percentage of Households with Net Worth for
                   Households Headed by a 25- to 34-Year Old                      20
          Figure 11: Proportion of Household Retirement Income for Each
                   Quintile of the Retirement Income Distribution at Age 62
                   for Generation X                                               29
          Figure 12: Proportion of Household Pension Benefits and
                   Household Social Security Benefits for Each Quintile of
                   the Pension Benefit and Social Security Benefit
                   Distributions at Age 62 for Generation X                       30
          Figure 13: Median Monthly Household Retirement Income at Age
                   62 for Generation X by Pension Status                          31
          Figure 14: Median Monthly Household Retirement Income at Age
                   62 by Educational Attainment for Generation X                  33
          Figure 15: Median Monthly Retirement Income at Age 62 by Gender
                   for Single Person Households for Generation X                  35




          Page iii                                      GAO-03-429 Retirement Income
Figure 16: Proportion of Household Retirement Income for Each
         Quintile of the Retirement Income Distribution at Age 62
         for the Baby Boom                                              55
Figure 17: Proportion of Household Pension Benefits and
         Household Social Security Benefits for Each Quintile of
         the Pension Benefit and Social Security Benefit
         Distributions at Age 62 for the Baby Boom                      56
Figure 18: Median Monthly Household Retirement Income at Age
         62 by Pension Status for the Baby Boom                         57
Figure 19: Median Monthly Household Retirement Income at Age
         62 by Educational Attainment for the Baby Boom                 58
Figure 20: Median Monthly Retirement Income at Age 62 by Gender
         for Single Person Households for the Baby Boom                 59
Figure 21: Proportion of Household Retirement Income for Each
         Quintile of the Retirement Income Distribution at Age 62
         for Generation X When All Pensions Are DC Pensions             60
Figure 22: Proportion of Household Pension Benefits and
         Household Social Security Benefits for Each Quintile of
         the Pension Benefit and Social Security Benefit
         Distributions at Age 62 for Generation X When all
         Pensions are DC Pensions                                       61
Figure 23: Median Monthly Household Retirement Income at Age
         62 by Pension Status for Generation X When All Pensions
         Are DC Pensions                                                62
Figure 24: Median Monthly Household Retirement Income at Age
         62 by Educational Attainment for Generation X When All
         Pensions Are DC Pensions                                       63
Figure 25: Median Monthly Retirement Income at Age 62 by Gender
         for Single Person Households for Generation X When All
         Pensions are DC Pensions                                       64
Figure 26: Proportion of Household Retirement Income for Each
         Quintile of the Retirement Income Distribution at Age 62
         for Generation X with Extension of Raised Pension
         Contribution Limits                                            65
Figure 27: Proportion of Household Pension Benefits and
         Household Social Security Benefits for Each Quintile of
         the Pension Benefit and Social Security Benefit
         Distributions at Age 62 for Generation X with Extension
         of Raised Pension Contribution Limits                          66
Figure 28: Median Monthly Household Retirement Income at Age
         62 by Pension Status for Generation X with Extension of
         Raised Pension Contribution Limits                             67



Page iv                                       GAO-03-429 Retirement Income
Figure 29: Median Monthly Household Retirement Income at Age
         62 by Educational Attainment for Generation X with
         Extension of Raised Pension Contribution Limits                68
Figure 30: Median Monthly Retirement Income at Age 62 by Gender
         for Single Person Households for Generation X with
         Extension of Raised Pension Contribution Limits                69
Figure 31: Proportion of Household Retirement Income for Each
         Quintile of the Retirement Income Distribution at Age 62
         for Generation X with Scheduled Social Security Benefits       70
Figure 32: Proportion of Household Pension Benefits and
         Household Social Security Benefits for Each Quintile of
         the Pension Benefit and Social Security Benefit
         Distributions at Age 62 for Generation X with Scheduled
         Social Security Benefits                                       71
Figure 33: Median Monthly Household Retirement Income at Age
         62 by Pension Status for Generation X with Scheduled
         Social Security Benefits                                       72
Figure 34: Median Monthly Household Retirement Income at Age
         62 by Educational Attainment for Generation X with
         Scheduled Social Security Benefits                             73
Figure 35: Median Monthly Retirement Income at Age 62 by Gender
         for Generation X for Single Person Households with
         Scheduled Social Security Benefits                             74




Page v                                        GAO-03-429 Retirement Income
Abbreviations

DB                defined benefit
DC                defined contribution
EGTRRA            Economic Growth and Tax Relief Reconciliation Act of
                  2001
ERISA             Employee Retirement Income Security Act of 1974
GEMINI            Genuine Microsimulation of Social Security and Accounts
IRA               individual retirement account
OASDI             Old Age, Survivor and Disability Insurance
PENSIM            Pension Simulator
PIA               primary insurance amount
PSG               Policy Simulation Group
PSID              Panel Study of Income Dynamics
SCF               Survey of Consumer Finances
SIPP              Survey of Income and Program Participation
SSASIM            Social Security and Accounts Simulator
SSI               Supplemental Security Income



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Page vi                                                   GAO-03-429 Retirement Income
United States General Accounting Office
Washington, DC 20548




                                   April 25, 2003

                                   The Honorable Robert Andrews
                                   Ranking Minority Member
                                   Subcommittee on Employer-Employee Relations
                                   Committee on Education and the Workforce
                                   House of Representatives

                                   Dear Mr. Andrews:

                                   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.1 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.2 Pension coverage has
                                   remained at about 50 percent of the workforce for decades while the
                                   composition of that coverage has shifted from defined benefit (DB) plans
                                   to defined contribution (DC) plans.3 As a result of this shift, an increasing
                                   share of the responsibility for providing for one’s retirement income has
                                   shifted from the employer to the employee. Finally, workers today are
                                   saving a smaller proportion of their incomes than earlier generations did.
                                   Yet, if current workers are to maintain their standards of living and meet
                                   increasing health care costs in retirement, they need to save more.




                                   1
                                    An early assessment of the sufficiency of retirement income for the Baby Boom was
                                   presented in a 1993 Congressional Budget Office study, Baby Boomers in Retirement: An
                                   Early Perspective.
                                   2
                                    The projection of trust fund exhaustion in 2042 is based on the intermediate assumptions
                                   of the Social Security Administration’s Office of the Chief Actuary as presented in the 2003
                                   Trustees Report. According to the same assumptions, annual costs will exceed tax income
                                   for the Social Security trust funds starting in 2018.
                                   3
                                    In DB plans, the amount of the benefit received at retirement is defined in advance by the
                                   plan’s benefit formula, which considers such factors as salary and service. In a DC plan, it
                                   is the amount of the contribution made by the employer, employee, or both, to the worker’s
                                   individual account that is defined. Benefits in this type of plan are based largely on the
                                   amount contributed but are also affected by how this amount is invested.



                                   Page 1                                                     GAO-03-429 Retirement Income
These trends suggest that today’s younger workers might reach retirement
unable to maintain the standards of living they had achieved while
working. Additionally, there may be a greater strain on retirement assets if
younger workers spend more years in retirement due to greater life
expectancy. To gain an understanding of what today’s workers might
expect to receive in terms of retirement income, you asked us to examine
(1) how the wealth of Baby Boom and Generation X workers compares
with what current retirees (pre-Baby Boom generation) had as young
adults, (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 benefits and Social
Security benefits for all workers within the Baby Boom and Generation X.
The Baby Boom generation includes those born between 1946 and 1964,
Generation X includes those born between 1965 and 1976, and we define
the Pre-Baby Boom generation as those born between 1925 and 1945.

To compare wealth across all three generations, we used the Federal
Reserve Board’s Survey of Consumer Finances (SCF), a nationally
representative database containing detailed information on assets and
debt, and compared the ownership and median levels of different types of
assets and debt for 25- to 34-year olds in each generation. We selected this
age group because it is important to compare each of the generations at
the same life-cycle stage and this is the only age group for which we have
data on wealth for all three generations.4 This comparison enabled us to
assess the extent to which the Baby Boom and Generation X have been
able to accumulate wealth, some or all of which can be used to finance
consumption in retirement. However, our wealth measure does not
include the future values of Social Security or pensions.5 Therefore, to
complement our analysis of the younger generations’ wealth, we simulated
future retirement income for the Baby Boom and Generation X. To
illustrate the levels and distribution of retirement income that current
workers can expect to receive at age 62, we used the Policy Simulation




4
 Under the standard life-cycle theory of personal saving, people save and accumulate
wealth to smooth their standard of living over their lifetime. Young adults entering the
workforce tend to save less than older workers in their peak earning years. The elderly
draw on their wealth in retirement.
5
 For individuals covered by pension plans, the SCF includes amounts accumulated under
DC plans but does not capture the expected value of future benefits under DB plans. The
SCF also does not capture the expected value of future Social Security benefits.




Page 2                                                     GAO-03-429 Retirement Income
                   Group’s (PSG) models6 to simulate some components of retirement
                   income—Social Security benefits, pension income, and the earnings of
                   spouses not yet retired. Under contract to us, the PSG used Pension
                   Simulator (PENSIM) to estimate pension benefits and Genuine
                   Microsimulation of Social Security and Accounts (GEMINI) to estimate
                   Social Security benefits for two illustrative birth cohorts—Baby Boomers
                   born in 1955 and Generation Xers born in 1970. These simulations are
                   based on the Social Security Trustees’ 2001 intermediate economic and
                   actuarial assumptions. While our simulations provide estimates of future
                   retirement income, there is a considerable amount of uncertainty involved
                   with these estimates. Since these estimates could change significantly,
                   depending on assumptions used and behavioral responses, they should not
                   be considered predictions.

                   In order to bound our estimates of retirement income, we considered
                   different scenarios for Social Security and pensions. We used two
                   scenarios for estimating Social Security benefits: (1) scheduled benefits
                   are paid and (2) funded benefits are paid.7 We also considered two
                   scenarios for pension benefits, one assuming that both the Baby Boom and
                   Generation X had the same DB and DC pension plan coverage and the
                   other that Generation X workers with pensions had only DC pensions. We
                   compared the two younger generations under these various scenarios
                   because the retirement income of these younger generations will be
                   affected by policy decisions on Social Security and pensions. Changes in
                   Social Security and pension benefits, in turn, will affect the amount that
                   the Baby Boom and Generation X need to save.

                   We conducted our work between April 2002 and April 2003 in accordance
                   with generally accepted government auditing standards. A more detailed
                   discussion of our scope and methodology appears in appendix I.


                   Baby Boom and Generation X households headed by individuals aged 25 to
Results in Brief   34 have greater accumulated assets, adjusted for inflation, than current


                   6
                    The models—Social Security and Accounts Simulator, Genuine Microsimulation of Social
                   Security and Accounts, and Pension Simulator—are described in appendix I.
                   7
                    While there are many ways of achieving the same result, we chose to focus on the polar
                   cases or bounds for change within the current system. For additional information on the
                   benchmarks, see U.S. General Accounting Office, Social Security: Program’s Role in
                   Helping Ensure Income Adequacy, GAO-02-62 (Washington, D.C.: Nov. 30, 2001) and
                   appendix I.




                   Page 3                                                   GAO-03-429 Retirement Income
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 DC
pension plans play a role in explaining the modest increase in assets
between the Baby Boom and Generation X, in part because SCF data do
not reflect the value of future benefits from DB pension plans. Of the three
groups, members of Generation X carry the most debt. Yet, for Baby Boom
and Generation X households with positive net worth (assets exceed debt)
at age 25 to 34, net worth is 60 percent greater than that of current retirees
when they were the same age. 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. Additionally, within each generation, some people will
not do as well as others. Specifically, those who do not own their home,
are less educated, or are single, have less net worth.

Our simulations suggest that Generation X workers will have similar levels
of retirement income in real terms (adjusted for inflation) at age 62 as
their counterparts in the Baby Boom generation, but Generation X may be
able to replace a smaller percentage of their preretirement income.
Whether Social Security benefits for Generation X are higher or lower than
those for the Baby Boom generation will depend on how the Social
Security funding shortfall is resolved. If scheduled benefits were
maintained by increasing program revenues, then Generation X could
receive higher Social Security benefits in constant dollars than the Baby
Boom generation, but at the possible cost of higher taxes and a reduced
capacity to save during their working lives. If benefits were reduced to
levels payable by current payroll tax rates, then Generation X could
receive somewhat lower Social Security benefits than the Baby Boom
generation. With regard to pensions, Generation X and the Baby Boomers
are estimated to have similar levels of retirement income. A continued
shift from DB to DC pension coverage does not appear to have much
effect on the relative pension income of Generation X and the Baby Boom.
With respect to replacement rates, however, Generation X is estimated to
be able to replace a smaller percentage of preretirement income than the
Baby Boom. The lower replacement rates for Generation X might translate
into a decline in their standard of living at retirement, absent increases in
retirement income related to behavioral changes (e.g., increases in
savings, working longer), or external factors (e.g., increases in rates of
return on assets).

Retirement income will vary within both Generation X and the Baby Boom
generation and certain groups will be more likely to have lower retirement


Page 4                                            GAO-03-429 Retirement Income
             incomes. As one might expect, given significant variation in workers’
             earnings, if households were arrayed from lowest to highest in terms of
             estimated 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
             for single women.


             Retirement income in the United States includes Social Security benefits,
Background   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.




             Page 5                                         GAO-03-429 Retirement Income
Figure 1: Percentage of the Aged Receiving Income, by Source

Source

                                                                                                             90
         Social Security
                                                                                                   69

                                                                                              59
          Asset Income
                                                                                       54


                                                             29
      Private Pensions
                                         9

                                              14
Government Pensions
                                         9


                                                        22
                Earnings
                                                                    36

                              0                    20                 40                    60          80        100
                              Percentage of aged

                                         2000

                                         1962

Source: Fast Facts and Figures About Social Security, Social Security Administration, 2002.


Note: The aged include couples and nonmarried persons age 65 or older.


Legislative changes have expanded the pension and personal saving
options available to workers.8 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


8
 We have issued several reports on pension coverage and participation: U.S. General
Accounting Office, Private Pensions: Improving Worker Coverage and Benefits,
GAO-02-225 (Washington, D.C.: Apr. 9, 2002); Private Pensions: Issues of Coverage and
Increasing Contribution Limits for Defined Contribution Plans, GAO-01-846
(Washington, D.C.: Sept. 17, 2001); Pension Plans: Characteristics of Persons in the Labor
Force Without Pension Coverage, GAO/HEHS-00-131 (Washington, D.C.: Aug. 22, 2000).




Page 6                                                                                GAO-03-429 Retirement Income
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.




Page 7                                            GAO-03-429 Retirement Income
Figure 2: Average Weekly Earnings for Production or Nonsupervisory Workers, Adjusted for Inflation
Average weekly earnings in 1998 dollars
550


500


450


400


350


300


250


200
   1960      1962      1964      1966      1968      1970   1972   1974   1976   1978   1980   1982   1984   1986   1988   1990   1992   1994   1996   1998
Source: Department of Labor, Bureau of Labor Statistics.



                                                               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.




                                                               Page 8                                                       GAO-03-429 Retirement Income
Figure 3: Labor Force Participation Rates of Married Women
Percentage
70


60


50


40


30


20


10


 0
       1960        1980         1999
Source: Bureau of the Census.



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.




Page 9                                             GAO-03-429 Retirement Income
Figure 4: Estimated Private Wage and Salary Worker Participation Rates Under DB
and DC Pension Plans
Percentage of workers participating
50



40



30



20



10



 0
 1975        1977      1979       1981       1983       1985       1987      1989       1991       1993       1995       1997

                DB

                DC-Supplemental

                DC-Primary
Source: Department of Labor, Employee Benefits Security Administration (formerly the Pension and Welfare Benefits Administration).



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




Page 10                                                                             GAO-03-429 Retirement Income
generations.9 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.

Figure 5: Levels of Education Completed by Individuals Age 25 and Over

Percentage of population
70


60


50


40


30


20


10


 0
                1960                    1980             1999                    Y

               Less than H.S.

               H.S. or some college

               College degree or more

Source: Bureau of the Census.




9
 The life expectancy for a person born in 1940 (Pre-Baby Boom) is 61.4 years for a male and
65.7 years for a female. However, a person born in 1955 (Baby Boom) has a life expectancy
of 66.7 years if male and 72.8 years if female. And someone born in 1970, and therefore a
member of Generation X, has a life expectancy of 67.2 years if male and 74.9 years if
female.




Page 11                                                   GAO-03-429 Retirement Income
Figure 6: Percentage of Households by Household Composition
Percentage of households
80


70


60


50


40


30


20


10


 0
                1960                  1980      1999                 X

               Married couple

               Female householder

               One-person household

Source: Bureau of the Census.



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



Page 12                                          GAO-03-429 Retirement Income
                       needed improvements in retirement income data, we identified data
                       improvements that experts say are a priority for the study of retirement
                       income.10 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
Baby Boom and          34 have greater accumulated assets, adjusted for inflation, than current
Generation X Workers   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
Have More Assets and   generation—and the Baby Boom is due mainly to increases in home equity
More Debt Than         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
Current Retirees Had   large part by the increase in the ownership and value of DC retirement
at Similar Ages        accounts, because SCF data do not reflect the value of benefits from DB
                       pension plans.11 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.




                       10
                        U.S. General Accounting Office, Retirement Income Data: Improvements Could Better
                       Support Analysis of Future Retirees’ Prospects, GAO-03-337 (Washington, D.C.: Mar. 21,
                       2003).
                       11
                         Coverage by DB pension plans is greater for current retirees than for the Baby Boom or
                       Generation X. Therefore, our measure of wealth underestimates their wealth relative to the
                       wealth of the younger generations. To the extent that a larger percentage of the Baby Boom
                       than Generation X is covered by DB plans, our measure of wealth also underestimates
                       wealth for the Baby Boom relative to Generation X.




                       Page 13                                                  GAO-03-429 Retirement Income
Increases in Home Equity   For households headed by a 25- to 34-year old, both the median value of
and Ownership are          total assets (in 1998 dollars) and the percentage of households with assets
Responsible for Most of    increased across the generations.12 (See fig. 7.) The median value of total
                           assets for the Baby Boom and Generation X is more than 50 percent
the Increase in Assets     greater than that for the Pre-Baby Boom generation.13 While our analysis
Across the Generations     indicates that asset levels increase across the generations, it does not take
                           into account the expectation of rising standards of living.14 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



                           12
                            We define total assets to include assets that are specifically dedicated to retirement, such
                           as IRAs, 401(k)s, 403(b)s, and other thrift-type plans, as well as assets that are not
                           specifically dedicated to retirement but may ultimately provide retirement income, such as
                           housing, financial assets (including savings accounts, mutual funds, stocks, and bonds),
                           and nonfinancial assets (including vehicles, business interests, and nonresidential real
                           estate).
                           13
                            Median values of assets are calculated only for those households that have assets.
                           14
                             Comparisons across the 3 years selected, 1962, 1983, and 1998, need to be qualified
                           because these years do not represent similar points in the business cycle. 1962 and 1998
                           were at the early and late stages, respectively, of an economic expansion, while 1983 was at
                           the very end of a recession. To the extent that the position in the business cycle affects the
                           real value of assets and debts, the comparison across generations may be misleading.




                           Page 14                                                     GAO-03-429 Retirement Income
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.

Figure 7: Median Value of Total Assets, Retirement Accounts, and Housing Assets,
and the Percentage of Households with these Assets for Households Headed by a
25- to 34-Year-Old

                             Median value in 1998 dollars (in thousands)
                                 90

                                 80

                                 70

                                 60

                                 50

                                 40

                                 30

                                 20

                                 10

                                  0
                                            1962                             1983               1998
                                       Pre-Baby Boom                      Baby Boom          Generation X

Percentage of
households                            92.3    3.1     39.2         94.5     20.2   45.1   95.1   45.7   45.7


                                             Total assets

                                             Retirement accounts

                                             Housing assets

Source: Federal Reserve Board.

Note: GAO analysis based on data from the Survey of Consumer Finances. The median for housing
assets is larger than the median for total assets because these medians come from two different
distributions. Total assets include bank accounts and automobiles as well as housing, so the
distribution of the value of total assets ranges from assets with relatively low values, such as bank
accounts and other financial assets, to assets with relatively high values, such as houses. The
distribution for housing assets includes only those households owning a home, whereas the
distribution for total assets includes all households with any type of asset, including those who do not
own homes.




Page 15                                                                       GAO-03-429 Retirement Income
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.




Page 16                                           GAO-03-429 Retirement Income
Figure 8: Median Value of Total Assets, Financial Assets, and Nonfinancial Assets,
and the Percentage of Households with These Assets for Households Headed by a
25- to 34-Year Old
                             Median value in 1998 dollars (in thousands)
                                 50



                                 40



                                 30



                                 20



                                 10



                                  0
                                            1962                             1983               1998
                                       Pre-Baby Boom                      Baby Boom          Generation X

Percentage of
households                            92.3   77.5     87.8         94.5     87.8   89.1   95.1   88.2   82.5


                                             Total assets

                                             Financial assets

                                             Nonfinancial assets

Source: Federal Reserve Board.

Note: GAO analysis based on data from the Survey of Consumer Finances.


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


Page 17                                                                        GAO-03-429 Retirement Income
                           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.


The Younger Generations,   For households headed by a 25- to 34-year old, overall debt levels increase
Especially Generation X,   across the generations. (See fig. 9.) The median level of debt for the Baby
Have Higher Levels of      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
Debt Than Current          of the Pre-Baby Boom generation and 78 percent greater than that of the
Retirees Did at Similar    Baby Boom. The percentage of households with debt changed very little,
Ages                       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.15 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.




                           15
                            Median values of debt are calculated only for those households that have debt.




                           Page 18                                                  GAO-03-429 Retirement Income
Figure 9: Median Value of Debt and the Percentage of Households with Debt for
Households Headed by a 25- to 34-Year Old (Total Debt, Housing Debt, Financial
Debt, and Other Debt)

                             Median value in 1998 dollars (in thousands)
                                 80


                                 70


                                 60


                                 50


                                 40


                                 30


                                 20


                                 10


                                  0
                                              1962                      1983                 1998
                                         Pre-Baby Boom               Baby Boom            Generation X

Percentage of
households                            84.5 36.9   3.2     80.8   82.5 40.5 14.8 72.3   83.6 39.5 10.7 76.9


                                             Total debt

                                             Housing debt

                                             Other debt

                                             Nonhousing debt

Source: Federal Reserve Board.

Note: GAO analysis based on data from the Survey of Consumer Finances. The median for housing
debt is larger than the median for total debt because these medians come from two different
distributions. Total debt includes credit card and installment debt as well as housing debt. Because
the distribution of the value of total debt includes relatively low levels of nonhousing debt as well as
the higher levels of housing debt, the median will be lower than the median for housing debt.
Nonhousing debt includes debt for other residential property, such as vacation homes, debt for
nonresidential real estate, business debt, credit card debt, and installment loans. Other debt includes
loans against pensions, loans against life insurance, and margin loans.


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



Page 19                                                                    GAO-03-429 Retirement Income
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.

Figure 10: Median Value of Positive and Negative Net Worth and the Percentage of
Households with Net Worth for Households Headed by a 25- to 34-Year Old

                             Median value in 1998 dollars (in thousands)
                                 30


                                 25


                                 20


                                 15


                                 10


                                  5


                                  0


                                 -5


                             -10
                                           1962              1983                1998            X
                                      Pre-Baby Boom       Baby Boom           Generation X

Percentage of
households                             72.9    26.6       87.8    12.2        78.2   21.7


                                              Positive

                                              Negative

Source: Federal Reserve Board.

Note: GAO analysis based on data from the Survey of Consumer Finances. Net worth is defined as
assets minus debt. If assets are greater than debt, the household has positive net worth. If debt is
greater than assets, the household has negative net worth. Therefore, the positive and negative net
worth columns will not sum to total net worth since they are based on different distributions.




Page 20                                                                    GAO-03-429 Retirement Income
Within Each Generation,     The younger generations in general have experienced an increase in net
the Value of Net Worth Is   worth relative to current retirees at the same age, with the Baby Boom
Lower for Those Who Do      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
Not Own Their Own Home,     current retirees. However, there are some groups within these cohorts that
Are Less Educated, or Are   have not benefited as much as others. (See table 1.) For example, the
Single                      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.

                            Table 1: The Median Value of Net Worth for Households Headed by a 25- to 34-Year
                            Old—Differences by Homeownership, Marital Status, and Education

                             In 1998 dollars
                                                                                                       Median
                                                                        Pre-Baby Boom                    Baby Boom        Generation X
                                                                                 (1962)                       (1983)            (1998)
                             Homeowners                                        $25,594                       $60,521          $43,100
                             Nonhomeowners                                          982                        4,699             3,300
                             Less than high school                                  815                        4,658             2,500
                             High school graduate                               10,044                        17,195           17,920
                             College graduate                                   23,953                        36,569           30,020
                             Married                                              9,165                       31,677           34,501
                             Not married                                              0                        7,160             5,750
                             All households                                     $6,072                       $19,504          $15,500
                            Source: GAO analysis based on data from the Survey of Consumer Finances.



                            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




                            Page 21                                                                      GAO-03-429 Retirement Income
                         wealth to income are higher for the well-educated, the married, and
                         homeowners.

                         Table 2: Median Value of Wealth-to-Income Ratios for Households Headed by a
                         25- to 34-Year Old—Differences by Homeownership, Marital Status, and Education

                                                                                 Median
                                                          Pre-Baby Boom           Baby Boom         Generation X
                                                                   (1962)              (1983)             (1998)
                          Homeowner                                 0.641               1.343              1.044
                          Nonhomeowners                             0.052               0.167              0.151
                          Less than high school                     0.029               0.216              0.159
                          High school graduate                      0.278               0.525              0.586
                          College graduate                          0.510               0.799              0.743
                          Married                                   0.261               0.755              0.742
                          Not married                               0.000               0.299              0.268
                          All households                            0.214               0.562              0.523
                         Source: Federal Reserve Board.

                         Note: GAO analysis based on data from the Survey of Consumer Finances.



                         In our simulations, Generation X and the Baby Boom16 have similar levels
Generation X and the     of retirement income in real terms (adjusted for inflation). Social Security
Baby Boom Are            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
Estimated to Have        pension coverage does not have much effect on the pension income of
Similar Levels of Real   Generation X relative to the Baby Boom. However, replacement rates for
                         Generation X are estimated to be lower than for the Baby Boom under
Retirement Income,       each scenario we considered, suggesting retirement income for
but Generation X         Generation X may not keep up with the rising standard of living, absent
Could Have Lower         increases in other sources of retirement income, or increases in rates of
                         return.
Replacement Rates




                         16
                          For our analyses, we considered two illustrative birth cohorts—Baby Boomers born in
                         1955 and Generation Xers born in 1970.




                         Page 22                                                     GAO-03-429 Retirement Income
Cross-generational           Our simulations suggest that Generation X will have real retirement
Comparisons of               income17 that is similar or somewhat higher than the Baby Boom,
Retirement Income Levels     depending on how the Social Security funding shortfall is resolved.18 If the
                             shortfall is resolved by increasing the program’s revenues19 to maintain
Will Be Affected by the      scheduled benefits, then Generation X is estimated to have somewhat
Resolution to the Social     higher real retirement income at age 62 than the Baby Boom generation.
Security Funding Shortfall   (See table 3.) Because our simulations assume that real earnings increase
                             over time,20 Generation X would have higher Social Security benefits than
                             the Baby Boom. However, if the shortfall is resolved through gradual
                             benefit reductions over time,21 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.




                             17
                              Due to the current state of the simulation models used, the measure of retirement income
                             used here includes Social Security benefits, private pension income, and spouse’s earnings.
                             Private pensions include both DB and DC plans. See appendix I for a description of the DB
                             and DC plans modeled.
                             18
                              While there are many ways of achieving the same result, we chose to focus on the polar
                             cases or bounds for change within the current system. For additional information on the
                             benchmarks, see U.S. General Accounting Office, Social Security: Program’s Role in
                             Helping Ensure Income Adequacy, GAO-02-62 (Washington, D.C.: Nov. 30, 2001) and
                             appendix I.
                             19
                               There would be no change in benefits, but additional revenue would enter the system
                             through increased taxes, general revenue transfers, or some similar means.
                             20
                               Our simulations are based on the intermediate assumptions in the 2001 Social Security
                             Trustees Report.
                             21
                              There would be no change in the amount of revenue entering the system, instead, initial
                             Social Security benefits would be reduced each year in order to make the system solvent
                             over the 75-year projection period.




                             Page 23                                                   GAO-03-429 Retirement Income
Table 3: Median Monthly Household Retirement Income and Its Major Components,
at Age 62, if Social Security Shortfall Addressed by Increasing Revenues

                                                        Baby Boom                    Generation X
Retirement income                                           $3,147                        $3,365
  Pension income (DB and DC)                                  $962                           $942
  Social Security benefits                                  $1,366                         $1,549
Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account balances annuitized at
retirement. Not all components of retirement income are shown. Pension income is measured across
all individuals in the cohort. Median pension income for those covered by a pension is $1,495 for the
Baby Boom and $1,440 for Generation X. In our simulations, the rates of return for DC pension
contributions vary over time and by individual. Median spousal earnings for those spouses working
are $3,295 for the Baby Boom and $3,375 for Generation X.


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.

Table 4: Median Monthly Household Retirement Income and Its Major Components,
at Age 62, if Social Security Shortfall Addressed by Reducing Benefits

                                                        Baby Boom                    Generation X
Retirement income                                           $3,011                        $2,991
  Pension income (DB and DC)                                  $962                           $942
  Social Security benefits                                  $1,234                         $1,199
Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account balances annuitized at
retirement. Not all components of retirement income are shown. Pension income is measured across
all individuals in the cohort. Median pension income for those covered by a pension is $1,495 for the
Baby Boom and $1,440 for Generation X. In our simulations, the rates of return for DC pension
contributions vary over time and by individual. Median spousal earnings for those spouses working
are $3,295 for the Baby Boom and $3,375 for Generation X.




Page 24                                                          GAO-03-429 Retirement Income
Generation X and the Baby   Generation X and the Baby Boom are estimated to have similar levels of
Boom May Have Similar       pension income when our simulations assume that the rate of DB and DC
Levels of Pension Income    pension coverage is constant over time.22 (See table 4.) DC account
                            balances are annuitized at retirement to facilitate comparisons. While
Even When Pension           Generation X’s simulated higher earnings might have suggested higher
Coverage Shifts from DB     pension income as well, they may have been too young to completely
to DC Plans                 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.23 (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.




                            22
                              The Economic Growth and Tax Relief Reconciliation Act of 2001 increased the limits on
                            contributions to DC pension plans and the maximum DB pension. The act also contained a
                            sunset provision, which will return these limits to their pre-act levels in 2010. Legislation
                            has been proposed that would eliminate the sunset provision in the act. Since no action has
                            been taken on this legislation, we present our findings under the sunset scenario. Our
                            simulations of a no-sunset scenario appear in appendix II.
                            23
                             This result may depend on the rates of return. In our analyses, the mean nominal rates of
                            return, which all returns varied around, were 6.3 percent for Treasuries, 6.8 percent for
                            corporate bonds, and 10 percent for equities. See the limitations of analysis in appendix I.




                            Page 25                                                    GAO-03-429 Retirement Income
                            Table 5: Median Monthly Household Retirement Income and Its Major Components,
                            at Age 62, if Social Security Shortfall Addressed by Reducing Benefits and
                            Generation X Having Only DC Pension Plans

                                                                                     Baby Boom                   Generation X
                            Retirement income                                            $3,011                       $3,096
                              Pension income (DB and DC)                                   $962                          $984
                              Social Security benefits                                   $1,234                        $1,199
                            Source: GEMINI/PENSIM.

                            Note: Median values at age 62 discounted to 2001 dollars and DC account balances annuitized at
                            retirement. Not all components of retirement income are shown. Pension income is measured across
                            all individuals in the cohort. Median pension income for those covered by a pension is $1,495 for the
                            Baby Boom and $1,700 for Generation X. In our simulations, the rates of return for DC pension
                            contributions vary over time and by individual. Median spousal earnings for those spouses working
                            are $3,295 for the Baby Boom and $3,375 for Generation X.


Replacement Rates Lower     In our simulations, Generation X has a lower earnings replacement rate24
for Generation X Relative   than the Baby Boom (see table 6) even though the Baby Boom and
to the Baby Boom            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.25

                            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


                            24
                              Our earnings replacement rate is calculated as retirement income at age 62 divided by
                            earnings at age 61. Given the complexity of trying to calculate replacement rates at the
                            household level when spouses are not the same age and beneficiaries become entitled at
                            different ages, we calculated replacement rates at age 62 only for retired workers who had
                            worked at age 61 and whose spouses, if married, were the same age.
                            25
                             Our shift to all DC coverage assumed that some individuals who were previously covered
                            by a DB plan would choose not to contribute to a DC plan. This decrease in pension
                            coverage may offset the increase in pension income, leaving the median replacement rate
                            unchanged.




                            Page 26                                                          GAO-03-429 Retirement Income
                      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.26 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.

                      Table 6: Median Household Replacement Rates for Baby Boom and Generation X

                                                                                       Baby Boom Generation X
                       Social Security Tax Increase Scenario, Constant DB/DC                 74.6%     68.1%
                       Social Security Benefit Reduction Scenario, Constant                  70.7%     60.4%
                       DB/DC
                       Social Security Benefit Reduction Scenario, Generation                  70.7%             60.2%
                       X only has DC
                      Source: GEMINI/PENSIM.

                      Note: The replacement rate is calculated as retirement income at age 62 divided by earnings at age
                      61 for retired workers who worked at age 61 and whose spouses, if married, were the same age.
                      Some but not all of the difference in replacement rates between generations may be explained by the
                      difference in the normal retirement age.



                      Our simulations suggest that retirement income will vary significantly
The Distribution of   within both Generation X and the Baby Boom. Retirement income will also
Retirement Income     vary by demographic group, with income being lower for the less educated
                      and single women.
Will Vary within
Generations, and
Certain Groups Will
Be More Likely to
Have Lower
Retirement Incomes


                      26
                       In order to facilitate comparison, we examined retirement income at age 62. However,
                      differences in life expectancy and health status, particularly for Generation X, may lead to
                      more years in retirement and a need for more assets. If people work longer because they
                      are healthier and anticipate living longer, examining retirement income at 62 may not
                      capture these behavioral changes.




                      Page 27                                                        GAO-03-429 Retirement Income
The Distribution of         Simulated retirement income will vary widely across households within
Retirement Income Will      both Generation X and the Baby Boom.27 For example, if married
Vary within Both            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
Generation X and the Baby   over 40 percent of all retirement income while the bottom 20 percent
Boom                        would receive less than 7 percent. (See fig. 11.)28 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,29 this degree of variation in estimated retirement
                            income is not surprising.




                            27
                              Because projected distributions for the two generations are very similar we only present
                            figures and tables for Generation X in this section and present the same information for the
                            Baby Boomers in appendix II. The projections discussed here assume funded Social
                            Security benefits, no extension of raised pension contribution limits, and the coverage
                            rates for DB and DC pensions remain constant over time. The distributions under
                            alternative scenarios, including employers only offering DC plans to Generation X, are also
                            very similar (see app. II).
                            28
                              Simulated retirement income is pre-tax and excludes important components of retirement
                            income both of which affect the degree of variation. Examining after tax income would
                            most likely reduce variation because of the progressive nature of the income tax. Simulated
                            income exlcudes personal savings and SSI and other forms of public assistance. Including
                            personal savings would most likely increase variation as there is great variation in the
                            distribution of wealth. Including SSI would raise the bottom of the distribution (see Arthur
                            B. Kennickell, An Examination of Changes in the Distribution of Wealth from 1989 to
                            1998: Evidence from the Survey of Consumer Finances, Federal Reserve Board (June
                            2000)).
                            29
                             See U.S. Census Bureau, Current Population Reports: P60-204, The Changing Shape of the
                            Nation’s Income Distribution 1947-1998, (Washington, D.C.: 2000).




                            Page 28                                                    GAO-03-429 Retirement Income
Figure 11: Proportion of Household Retirement Income for Each Quintile of the
Retirement Income Distribution at Age 62 for Generation X

Percentage of income
70


60


50


40


30


20


10


 0
       Bottom 20%        Second quintile   Third quintile   Fourth quintile     Top 20%
     Retirement income quintiles

              Married at age 62

              Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and constant rates of coverage over time for DB
and DC pensions.


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.




Page 29                                                           GAO-03-429 Retirement Income
Figure 12: Proportion of Household Pension Benefits and Household Social Security Benefits for Each Quintile of the Pension
Benefit and Social Security Benefit Distributions at Age 62 for Generation X

Percentage of benefits                                                          Percentage of benefits
70                                                                              70


60                                                                              60


50                                                                              50


40                                                                              40


30                                                                              30


20                                                                              20


10                                                                              10


 0                                                                               0
     Bottom 20%          Second      Third     Fourth        Top 20%                 Bottom 20%        Second             Third     Fourth     Top 20%
                         quintile   quintile   quintile                                                quintile          quintile   quintile
     Pension benefit quintiles                                                       Social Security benefit quintiles

                                                            Married at age 62

                                                            Single at age 62

Source: GEMINI/PENSIM.

                                                  Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
                                                  spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
                                                  assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
                                                  no extension of raised pension contribution limits, and constant rates of coverage over time for DB
                                                  and DC pensions.


                                                  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.30
                                                  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


                                                  30
                                                   U.S. General Accounting Office, Private Pension: Issues of Coverage and Increasing
                                                  Contribution Limits for Defined Contribution Plans, GAO-01-846 (Washington, D.C.:
                                                  Sept. 2001).




                                                  Page 30                                                                  GAO-03-429 Retirement Income
                           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.

                           Figure 13: Median Monthly Household Retirement Income at Age 62 for
                           Generation X by Pension Status

                           Median value in 2001 dollars
                           5,000




                           4,000




                           3,000




                           2,000




                           1,000




                               0
                                     Married at           Single at              X             Y                  Z
                                      age 62               age 62

                                           Household receives no pension benefits

                                           Household receives pension benefits

                           Source: GEMINI/PENSIM.

                           Note: Retirement income includes Social Security and pension benefits and earnings of younger
                           spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
                           assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
                           no extension of raised pension contribution limits, and constant rates of coverage over time for DB
                           and DC pensions.



Retirement Income Varies   Simulated retirement income varies by educational attainment, marital
by Demographic Group       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



                           Page 31                                                          GAO-03-429 Retirement Income
couples without high school degrees receive pension benefits as opposed
to 87 percent of married college graduates.




Page 32                                       GAO-03-429 Retirement Income
Figure 14: Median Monthly Household Retirement Income at Age 62 by Educational
Attainment for Generation X

Median value in 2001 dollars
5,000                                               5000




4,000                                               4000




3,000                                               3000




2,000                                               2000




1,000                                               1000




    0                                                   0
                          co me




                                                                             co me
                                              te


                                       de ate




                                                                                                 te


                                                                                          de ate
                                     gr llege




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                                             ee




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                     te




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              dro hool



               ad l




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                    ut




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                                           ua




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                                           u




                                                                                              u
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               Sc



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                                     Gr




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        gh



            gh




                                                        gh



                                                               gh
    Hi



         Hi




                                                       Hi



                                                            Hi
                Married at age 62

                Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and constant rates of coverage over time for DB
and DC pensions. Educational attainment for married couples is defined as the attainment of the
Generation X birth cohort member—the spouse may have attained a different level of education.


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




Page 33                                                           GAO-03-429 Retirement Income
never married persons and divorced persons, even if one compares
retirement income per household member.31

Table 7: Median Monthly Household Retirement Income at Age 62 by Marital Status
for Generation X, in 2001 Dollars

                                                     Household                     Income per
                                                        income              household member
 Never married                                           $1,572                        $1,572
 Married                                                 $3,757                        $1,878
 Widowed                                                 $2,047                        $2,047
 Divorced                                                $1,389                        $1,389
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Simulations assume all workers retire completely at age 62, Social Security benefits are
reduced to funded levels, no extension of raised pension contribution limits, and constant rates of
coverage over time for DB and DC pensions.


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.




31
  Comparing the retirement incomes of single individuals to married couples is complicated
by the difference in household size. Comparing household income without adjusting for
household size makes married couples appear better off than they may actually be because
their incomes must support two people instead of one. Comparing income per household
member makes married couples look worse than they may actually be because it assumes
there are no savings associated with cohabitation. In this case, regardless of the measure
chosen, divorced and never married persons have lower median retirement incomes.




Page 34                                                         GAO-03-429 Retirement Income
               Figure 15: Median Monthly Retirement Income at Age 62 by Gender for Single
               Person Households for Generation X

               Median value in 2001 dollars
               2,500



               2,000



               1,500



               1,000



                500



                   0
                       Single      Single      V         W          X          Y           Z
                        male       female
               Source: GEMINI/PENSIM.

               Note: Retirement income includes Social Security and pension benefits. Single individuals include
               those divorced, widowed, or never married at age 62. Simulations assume all workers retire
               completely at age 62, Social Security benefits are reduced to funded levels, no extension of raised
               pension contribution limits, and constant rates of coverage over time for DB and DC pensions.


               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
Concluding     Security and pension benefits at age 62 suggest that both the Baby Boom
Observations   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.




               Page 35                                                          GAO-03-429 Retirement Income
                  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
Agency Comments   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.




                  Page 36                                         GAO-03-429 Retirement Income
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.

Sincerely yours,




Barbara D. Bovbjerg
Director, Education, Workforce
  and Income Security Issues.




Page 37                                        GAO-03-429 Retirement Income
                       Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


                       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
Analysis of Personal   (SCF), a triennial survey of U.S. households sponsored by the Board of
Wealth                 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




                       Page 38                                          GAO-03-429 Retirement Income
Appendix I: Scope and Methodology




was 25 to 34 years old.1 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).2 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.3 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




1
 Our analysis does not include every year of each generation. We selected household heads
age 25-34 in the SCFs corresponding to those born between 1928 and 1937; 1949 and 1958;
and 1964 and 1973.
2
 For individuals covered by pension plans, the SCF includes amounts accumulated under
defined contribution plans but does not capture the expected value of future benefits under
defined benefit plans.
3
Karen M. Pence, 401(k) and Household Saving: New Evidence from the Survey of
Consumer Finances (Federal Reserve Board of Governors Working Paper, Dec. 2001), 4.




Page 39                                                   GAO-03-429 Retirement Income
                        Appendix I: Scope and Methodology




                        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
Analysis of Simulated   in terms of the retirement income they can expect to receive and the likely
Retirement Income       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.4 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



                        4
                         These calculations were repeated for pension income and Social Security benefits
                        separately.




                        Page 40                                                  GAO-03-429 Retirement Income
         Appendix I: Scope and Methodology




         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.5


SSASIM   SSASIM6 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   GEMINI7 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




         5
          Comparing the retirement incomes of single individuals to married couples is complicated
         by the difference in household size. Rather than arbitrarily choosing an equivalence scale,
         we bounded the problem by comparing household income and income per household
         member. Comparing household income without adjusting for household size provides an
         upper bound for the income of married couples relative to the income of singles because it
         assumes that total household living expenses for two people are the same as for one.
         Comparing income per household member provides a lower bound for the income of
         married couples relative to the income of singles because it assumes there are no savings
         associated with cohabitation.
         6
         For more information on SSASIM go to http://www.polsim.com/SSASIM.html.
         7
         For more information on GEMINI go to http://www.polsim.com/GEMINI.html.




         Page 41                                                   GAO-03-429 Retirement Income
             Appendix I: Scope and Methodology




             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       PENSIM8 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);
         •   disability events;
         •   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



             8
             For more information on PENSIM go to http://www.polsim.com/PENSIM.html.




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                       Appendix I: Scope and Methodology




                       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).

Defined Benefit Plan   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 plan9 in the private sector.10

                       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).11 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.12 For this report


                       9
                        This section relies on data from the forthcoming report, Martin R. Holmer and Asa M.
                       Janney III, Policy Simulation Group. Characteristics of Pension Plans in the United
                       States, 1996-98, a report prepared at the request of the U.S. Department of Labor,
                       Employee Benefits Security Administration, Office of Policy and Research, Feb. 25, 2003.
                       10
                         However, DB plans in the future may differ as firms have been increasingly switching to
                       cash balance plans. Cash balance plans are a type of DB plan that combine certain features
                       found in both DB and DC plans. Participants’ benefits are determined by a formula, like a
                       DB plan, but benefits are expressed as account balances, similar to DC plans. U.S. General
                       Accounting Office, Cash Balance Plans: Implications for Retirement Income,
                       GAO/HEHS-00-207 (Washington, D.C.: Sept. 29, 2000) and Answers to Key Questions About
                       Private Pension Plans, GAO-02-745SP (Washington, D.C.: Sept. 18, 2002).
                       11
                           In our simulations all individuals retire at age 62.
                       12
                        See U.S. Department of Labor, Bureau of Labor Statistics, Employee Benefits in Medium
                       and Large Private Establishments, 1997, Bulletin 2517 (Washington, D.C.: Sept. 1999) and
                       U.S. General Accounting Office, Private Pensions: Implications of Conversions to Cash
                       Blance Plans, GAO/HEHS-00-185 (Washington, D.C.: Sept. 29, 2000).




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                            Appendix I: Scope and Methodology




                            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.


Defined Contribution Plan   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 plan13 in the private sector.14

                            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.15 At
                            retirement,16 individuals annuitize their account balances,17 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 earnings18 and the
                            employer match 50 percent of the employees’ contributions up to 5
                            percent.19 Employees can invest their contributions in their choice of
                            equities and fixed income assets, where the fixed income assets will




                            13
                             This section relies on data from the forthcoming report, Martin R. Holmer and Asa M.
                            Janney III, Policy Simulation Group. Characteristics of Pension Plans in the United
                            States, 1996-98, a report prepared at the request of the U.S. Department of Labor,
                            Employee Benefits Security Administration, Office of Policy and Research, Feb. 25, 2003.
                            14
                             This plan will most likely resemble a 401(k) plan.
                            15
                             Graded vesting implies that an employee’s nonforfeitable percentage of the employer
                            contributions increases over time until it reaches 100 percent. In our simulations the
                            nonforfeitable percentage reaches 100 percent after 5 years.
                            16
                             In our estimates all individuals retire at age 62.
                            17
                             In our simulations all individuals are assumed to purchase a nominal annuity.
                            18
                             The dollar limit on employee contributions is $11,000 for 2002, increasing by $1,000 per
                            year until reaching $15,000 in 2006 and is then adjusted for inflation in $500 increments.
                            19
                             By law, combined employer and employee contributions are limited to the lesser of
                            $35,000 or 25 percent of compensation in 2001. Beginning in 2006, combined contributions
                            will be limited to the lesser of $40,000 (indexed for inflation) or 100 percent of
                            compensation.




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                                                                 consist of Treasury bonds and corporate bonds.20 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.

Table 8: Participation Rates by Age and Salary, 2001

 Age                <$20,000                $20,000-$39,999                   $40,000-$59,999                  $60,000-$79,999                 $80,000-$99,999                    >$100,000
                                                                                                      a                               a                               a                          a
 <20                  17.2%                          44.4%
 20-29                32.1%                          65.9%                                   78.0%                            91.2%                           93.1%                     95.0%
 30-39                45.2%                          79.5%                                   89.0%                            94.1%                           95.6%                     97.0%
 40-49                49.9%                          83.2%                                   88.0%                            95.0%                           96.8%                     97.5%
 50-59                57.7%                          85.5%                                   83.7%                            93.8%                           96.6%                     97.9%
 60+                  64.0%                          86.7%                                   83.6%                            90.3%                           94.7%                     96.2%
Source: Research Report: How Well are Employees Saving and Investing in 401(k) Plans, Hewitt Financial Services, 2001.

                                                                 Note: In order to use these participation rates in our simulations, the salary categories listed in the
                                                                 table were normalized by dividing by the average wage index in 2001.
                                                                 a
                                                                  Not applicable.


                                                                 Data on contribution rates by age and salary are shown in table 9.

Table 9: Contribution Rates by Age and Salary, 1999

 Age                <$20,000              >$20,000-$40,000                  >$40,000-$60,000                 >$60,000-$80,000              >$80,000-$100,000                      >$100,000
 20-29                 5.1%                          5.3%                              6.8%                             7.4%                           6.8%                           4.8%
 30-39                 6.4%                          6.2%                              6.8%                             7.2%                           6.9%                           5.1%
 40-49                 6.9%                          6.7%                              7.1%                             7.3%                           6.8%                           5.0%
 50-59                 7.8%                          7.6%                              8.3%                             8.2%                           7.3%                           5.1%
 60+                   9.0%                          8.5%                              9.3%                             9.0%                           7.9%                           5.1%
Source: Contribution Behavior of 401(k) Plan Participants, Sarah Holden and Jack VanDerhei, ICI Perspective, vol. 7/no. 4, October 2001 and Research Report: How Well Are Employees Saving and
Investing in 401(k) Plans, Hewitt Financial Services, 2001.




                                                                 20
                                                                  The mean nominal rates of return, which all returns varied around, for each asset class
                                                                 was 6.3 percent for Treasuries, 6.8 percent for corporate bonds, and 10 percent for equities,
                                                                 consistent with the assumptions used by the Office of the Chief Actuary at the Social
                                                                 Security Administration.




                                                                 Page 45                                                                            GAO-03-429 Retirement Income
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Note: Since high income individuals are constrained by limits on total contributions within a given
year, and the rates in this table fall at higher salary levels, we used the data for the >$60,000 to
$80,000 salary range for those salaried above $80,000. In order to use these contribution rates in our
simulations, the salary categories listed in the table were normalized by dividing by the average wage
index in 1999.


Table 10 provides data on average asset allocation rates by age and
investment options.




Table 10: Average Asset Allocation Rates by Age and Investment Options, 2000

                          Equity                      Balanced                             Bond                           Money
 Age                      Funds                          Funds                            Funds                           Funds
 20-29                    77.7%                           8.0%                             7.1%                            5.8%
 30-39                    78.7%                           8.6%                             6.4%                            4.7%
 40-49                    74.1%                           9.7%                             7.7%                            6.1%
 50-59                    67.4%                          10.8%                             9.3%                            8.4%
 60+                      55.8%                          12.5%                            13.8%                           12.4%
Source: 404(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2000, Sarah Holden and Jack VanDerhei, ICI
Perspectives, vol. 7/no. 5, November 2001.

Note: Because the model we used has different investment categories than those listed in the table,
money funds were put into Treasury bonds, bond funds were put into corporate bonds, and balanced
funds were split evenly between equities and corporate bonds. Percentages in the table are percent
of account balances.


Data on the distribution of assets at termination by asset levels is shown in
table 11.

Table 11: Assets at Termination, 2000

                                                     Stayed                            Rolled                         Cashed
 Assets                                              in plan                            over                              out
 <$10,000                                               21%                              48%                             32%
 $10,000-$49,999                                        62%                              27%                             11%
 $50,000-$99,999                                        69%                              27%                              4%
 $100,000-$199,999                                      69%                              28%                              2%
 $200,000+                                              69%                              29%                              2%
Source: Building Futures: How Workplace Savings are Shaping the Future of Retirement, Fidelity Investments, 2001.

Note: In our simulations, if a job ends without disability or retirement, the individual has the choice to
rollover the funds to another retirement account. The percentages in the cashed out category were
used as the probability of not rolling the funds into another retirement account at termination. Also,
the dollar amounts were normalized by dividing by the average wage index in 2000.




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                            Appendix I: Scope and Methodology




Alternative Scenarios for
Pensions and Social
Security
Pensions                    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 holds21 and the other that the
                            provisions in EGTRRA, which raise the limits on both DB and DC plans, do
                            not sunset.22 We also considered the scenario where the shift in coverage
                            reached its extreme and Generation X only had access to DC plans.

Social Security             Our simulations of expected Social Security benefits consider two
                            different scenarios23 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.


Assumptions and             Simulating retirement income almost 30 years into the future requires
Limitations of the          many assumptions and simplifications and, consequently, our simulations
Simulation Analysis         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,


                            21
                              The sunset provision would return any changes made under EGTRRA to their previous
                            levels.
                            22
                             See appendix II for figures and tables showing the level of real retirement income,
                            replacement rates, and distributional statistics for the no sunset scenario.
                            23
                              For additional information on the benchmarks, see U.S. General Accounting Office, Social
                            Security: Program’s Role in Helping Ensure income Adequacy, GAO-02-62 (Washington,
                            D.C.: Nov. 30, 2001) and Social Security Reform: Analysis of Reform Models Developed by
                            the President’s Commission to Strengthen Social Security, GAO-03-310 (Washington, D.C.:
                            Jan. 15, 2003).




                            Page 47                                                   GAO-03-429 Retirement Income
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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.24 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 income25
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’s26 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.




24
 On the other hand, over the same period household net worth increased potentially
offsetting the impact of reduced saving rates on eventual assets in retirements. See U.S.
General Accounting Office, National Saving: Answers to Key Questions, GAO-01-591SP
(Washington, D.C.: June 2001).
25
  According to one analysis of the Survey of Consumer Finances, the top 10 percent of the
wealth distribution held nearly 70 percent of all wealth. Arthur B. Kennickell, An
Examination of Changes in the Distribution of Wealth from 1989 to 1998: Evidence
from the Survey of Consumer Finances, Federal Reserve Board (June 2000).
26
 The Board of Trustees, Federal Old-Age and Surviviors Insurance and Disability Insurance
Trust Funds, The 2001 Annual Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and Disability Insurance Trust Funds (Washington, D.C.: Mar. 19,
2001).




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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.27 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.28 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.


27
 The mean nominal rates of return, which all returns varied around for each asset class
was 6.3 percent for Treasuries, 6.8 percent for corporate bonds, and 10 percent for equities.
28
 We did not examine the relative generosity of our DB and DC plans.




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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,29 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.30 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



29
  Since the late 1960s inequality in individual earnings has been increasing as measured by
Gini coefficients and the ratio of the 90th percentile to the 10th percentile. From the late
1960s to the early 1990s inequality in household income increased as measured by the
share of aggregate income by income quintile. U.S. Bureau of the Census, The Changing
Shape of the Nation’s Income Distribution 1947-1998, Current Population Reports P60-
204 (Washington, D.C.: June 2000).
30
  Social Security Advisory Board, The 1999 Technical Panel on Assumptions and Methods:
Report to the Social Security Advisory Board, (Nov. 1999).




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Appendix I: Scope and Methodology




cohorts may not fully capture the experiences of the Baby Boom and
Generation X, respectively.




Page 51                                      GAO-03-429 Retirement Income
                      Appendix II: Alternative Scenarios
Appendix II: Alternative Scenarios


                      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-
Retirement Income     sunset pension scenario. Extending pension contribution limits beyond
Under the No-Sunset   2010 increases real retirement income and replacement rates for
                      Generation X relative to real retirement income and replacement rates for
Pension Scenario      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.

                      Table 12: Median Monthly Household Retirement Income and its Major
                      Components, at Age 62, if Social Security Shortfall Addressed by Increasing
                      Revenues

                                                                              Baby Boom                    Generation X
                      Retirement income                                           $3,156                        $3,481
                        Pension income (DB and DC)                                  $966                          $1015
                        Social Security benefits                                  $1,366                         $1,549
                      Source: GEMINI/PENSIM.

                      Note: Median values at age 62 discounted to 2001 dollars and DC account balances annuitized at
                      retirement. Not all components of retirement income are shown. Pension income is measured across
                      all individuals in the cohort. Median pension income for those covered by a pension is $1,509 for the
                      Baby Boom and $1,589 for Generation X. The rates of return for DC pension contributions vary over
                      time and by individual. Median spousal earnings for those spouses working are $3,295 for the Baby
                      Boom and $3,375 for Generation X.


                      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.




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Appendix II: Alternative Scenarios




Table 13: Median Monthly Household Retirement Income and its Major
Components, at Age 62, if Social Security Shortfall addressed by Reducing Benefits

                                                        Baby Boom                    Generation X
 Retirement income                                          $3,021                         $3,110
   Pension income (DB and DC)                                 $966                          $1015
   Social Security benefits                                 $1,234                         $1,199
Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account balances annuitized at
retirement. Not all components of retirement income are shown. Pension income is measured across
all individuals in the cohort. Median pension income for those covered by a pension is $1,509 for the
Baby Boom and $1,589 for Generation X. The rates of return for DC pension contributions vary over
time and by individual. Median spousal earnings for those spouses working are $3,295 for the Baby
Boom and $3,375 for Generation X.


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.

Table 14: Median Monthly Household Retirement Income and its Major
Components, at Age 62, if Social Security Shortfall Addressed by Reducing
Benefits and Generation X Having Only DC Pension Plans

                                                        Baby Boom                    Generation X
Retirement income                                           $3,021                        $3,195
  Pension income (DB and DC)                                  $966                          $1065
  Social Security benefits                                  $1,234                         $1,199
Source: GEMINI/PENSIM.

Note: Median values at age 62 discounted to 2001 dollars and DC account balances annuitized at
retirement. Not all components of retirement income are shown. Pension income is measured across
all individuals in the cohort. Median pension income for those covered by a pension is $1,509 for the
Baby Boom and $1,835 for Generation X. The rates of return for DC pension contributions vary over
time and by individual. Median spousal earnings for those spouses working are $3,295 for the Baby
Boom and $3,375 for Generation X.


Replacement rates for the Baby Boom and Generation X under the
different Social Security and pension coverage scenarios are shown in
table 15.




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                                           Appendix II: Alternative Scenarios




Table 15: Median Household Replacement Rates for Baby Boom and Generation X

                                                                                               Baby Boom                      Generation X
 Social Security Tax Increase Scenario, constant DB/DC                                              74.9%                           70.9%
 Social Security Benefit Reduction Scenario, constant DB/DC                                         71.0%                           63.3%
 Social Security Benefit Reduction Scenario, Generation X only has DC                               71.0%                           62.5%
Source: GEMINI/PENSIM.

                                           Note: The replacement rate is calculated as retirement income at age 62 divided by earnings at age
                                           61 for retired workers who worked at age 61 and whose spouses, if married, were the same age.



                                           The distribution of simulated retirement income is very similar across the
Distributional Figures                     generations and across scenarios. For both generations and in all
and Tables for the                         scenarios, retirement income is estimated to vary widely, pension benefits
                                           are less evenly distributed than Social Security benefits, and the less
Baby Boom and for                          educated, single women, and those without pensions have lower
Generation X under                         retirement incomes.
Alternative Scenarios                      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,1 which may result in retirement income
                                           varying more in Generation X than in the Baby Boom.




                                           1
                                            U.S. Bureau of the Census, The Changing Shape of the Nation’s Income Distribution
                                           1947-1998, Current Population Reports: P60-204 (Washington, D.C.: June 2000).




                                           Page 54                                                         GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 16: Proportion of Household Retirement Income for Each Quintile of the
Retirement Income Distribution at Age 62 for the Baby Boom
Percentage of income
70


60


50


40


30


20


10


 0
       Bottom 20%        Second quintile   Third quintile   Fourth quintile     Top 20%
     Retirement income quintiles

             Married at age 62

             Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and constant rates of coverage over time for DB
and DC pensions.




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                                                  Appendix II: Alternative Scenarios




Figure 17: Proportion of Household Pension Benefits and Household Social Security Benefits for Each Quintile of the Pension
Benefit and Social Security Benefit Distributions at Age 62 for the Baby Boom

Percentage of benefits                                                          Percentage of benefits
70                                                                              70


60                                                                              60


50                                                                              50


40                                                                              40


30                                                                              30


20                                                                              20


10                                                                              10


 0                                                                               0
     Bottom 20%          Second      Third     Fourth        Top 20%                 Bottom 20%        Second             Third     Fourth     Top 20%
                         quintile   quintile   quintile                                                quintile          quintile   quintile
     Pension benefit quintiles                                                       Social Security benefit quintiles

                                                            Married at age 62

                                                            Single at age 62

Source: GEMINI/PENSIM.

                                                  Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
                                                  spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
                                                  assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
                                                  no extension of raised pension contribution limits, and constant rates of coverage over time for DB
                                                  and DC pensions.




                                                  Page 56                                                                  GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 18: Median Monthly Household Retirement Income at Age 62 by Pension
Status for the Baby Boom

Median value in 2001 dollars
5,000




4,000




3,000




2,000




1,000




    0
          Married at           Single at              X             Y                  Z
           age 62               age 62

                Household receives no pension benefits

                Household receives pension benefits

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and constant rates of coverage over time for DB
and DC pensions




Page 57                                                          GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 19: Median Monthly Household Retirement Income at Age 62 by Educational
Attainment for the Baby Boom

Median value in 2001 dollars
5,000                                               5000




4,000                                               4000




3,000                                               3000




2,000                                               2000




1,000                                               1000




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        hS



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                                                                 hS
                                      Gr




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    Hig



          Hig




                                                       Hig



                                                             Hig
                 Married at age 62

                 Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and constant rates of coverage over time for DB
and DC pensions. Educational attainment for married couples is defined as the attainment of the
Baby Boom cohort member—the spouse may have attained a different level of education.




Page 58                                                           GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 20: Median Monthly Retirement Income at Age 62 by Gender for Single
Person Households for the Baby Boom

Median value in 2001 dollars
2,500



2,000



1,500



1,000



 500



    0
        Single      Single      V         W           X          Y          Z
         male       female
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security and pension benefits. Single individuals include
those divorced, widowed, or never married at age 62. Simulations assume all workers retire
completely at age 62, Social Security benefits are reduced to funded levels, no extension of raised
pension contribution limits, and constant rates of coverage over time for DB and DC pensions.


Table 16: Median Monthly Household Retirement Income at Age 62 by Marital Status
for the Baby Boom, in 2001 Dollars

                                      Household income          Income per household member
 Never married                                   $1,546                               $1,546
 Married                                         $3,783                               $1,891
 Widowed                                             $2,039                                   $2,039
 Divorced                                            $1,399                                   $1,399
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and constant rates of coverage over time for DB
and DC pensions.


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.



Page 59                                                          GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 21: Proportion of Household Retirement Income for Each Quintile of the
Retirement Income Distribution at Age 62 for Generation X When All Pensions Are
DC Pensions

Percentage of income
70


60


50


40


30


20


10


 0
       Bottom 20%        Second quintile   Third quintile   Fourth quintile     Top 20%
     Retirement income quintiles

              Married at age 62

              Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and employers with pension plans only offer DC
pensions.




Page 60                                                           GAO-03-429 Retirement Income
                                                  Appendix II: Alternative Scenarios




Figure 22: Proportion of Household Pension Benefits and Household Social Security Benefits for Each Quintile of the Pension
Benefit and Social Security Benefit Distributions at Age 62 for Generation X When all Pensions are DC Pensions

Percentage of benefits                                                          Percentage of benefits
70                                                                              70


60                                                                              60


50                                                                              50


40                                                                              40


30                                                                              30


20                                                                              20


10                                                                              10


 0                                                                               0
     Bottom 20%          Second      Third     Fourth        Top 20%                 Bottom 20%        Second             Third     Fourth     Top 20%
                         quintile   quintile   quintile                                                quintile          quintile   quintile
     Pension benefit quintiles                                                       Social Security benefit quintiles

                                                            Married at age 62

                                                            Single at age 62

Source: GEMINI/PENSIM.

                                                  Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
                                                  spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
                                                  assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
                                                  no extension of raised pension contribution limits, and employers with pension plans only offer DC
                                                  pensions.




                                                  Page 61                                                                  GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 23: Median Monthly Household Retirement Income at Age 62 by Pension
Status for Generation X When All Pensions Are DC Pensions

Median value in 2001 dollars
5,000




4,000




3,000




2,000




1,000




    0
          Married at           Single at              X             Y                  Z
           age 62               age 62

                Household receives no pension benefits

                Household receives pension benefits

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and employers with pension plans only offer DC
pensions.




Page 62                                                          GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 24: Median Monthly Household Retirement Income at Age 62 by Educational
Attainment for Generation X When All Pensions Are DC Pensions

Median value in 2001 dollars
5,000                                               5000




4,000                                               4000




3,000                                               3000




2,000                                               2000




1,000                                               1000




    0                                                   0
                           co me




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                                               te


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                                                            Hi
                 Married at age 62

                 Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
no extension of raised pension contribution limits, and employers with pension plans only offer DC
pensions. Educational attainment for married couples is defined as the attainment of the Baby Boom
cohort member—the spouse may have attained a different level of education.




Page 63                                                           GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 25: Median Monthly Retirement Income at Age 62 by Gender for Single
Person Households for Generation X When All Pensions are DC Pensions

Median value in 2001 dollars
2,500



2,000



1,500



1,000



  500



    0
        Single      Single      V         W          X          Y           Z
         male       female
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security and pension benefits. Single individuals include
those divorced, widowed, or never married at age 62. Simulations assume all workers retire
completely at age 62, Social Security benefits are reduced to funded levels, no extension of raised
pension contribution limits, and employers with pension plans only offer DC pensions.


Table 17: Median Monthly Household Retirement Income at Age 62 by Marital Status
for Generation X When All Pensions are DC Pensions, in 2001 Dollars

                         Household income                       Income per household member
 Never married                      $1,528                                            $1,528
 Married                            $3,892                                            $1,946
 Widowed                            $2,145                                            $2,145
 Divorced                           $1,358                                            $1,358
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Simulations assume all workers retire completely at age 62, Social Security benefits are
reduced to funded levels, no extension of raised pension contribution limits, and employers with
pension plans only offer 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.




Page 64                                                          GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 26: Proportion of Household Retirement Income for Each Quintile of the
Retirement Income Distribution at Age 62 for Generation X with Extension of Raised
Pension Contribution Limits

Percentage of income
70


60


50


40


30


20


10


 0
       Bottom 20%        Second quintile   Third quintile   Fourth quintile     Top 20%
     Retirement income quintiles

             Married at age 62

             Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
extension of raised pension contribution limits, and constant rates of coverage over time for DB and
DC pensions.




Page 65                                                           GAO-03-429 Retirement Income
                                                  Appendix II: Alternative Scenarios




Figure 27: Proportion of Household Pension Benefits and Household Social Security Benefits for Each Quintile of the Pension
Benefit and Social Security Benefit Distributions at Age 62 for Generation X with Extension of Raised Pension Contribution
Limits

Percentage of benefits                                                          Percentage of benefits
70                                                                              70


60                                                                              60


50                                                                              50


40                                                                              40


30                                                                              30


20                                                                              20


10                                                                              10


 0                                                                               0
     Bottom 20%          Second      Third     Fourth        Top 20%                 Bottom 20%        Second             Third     Fourth     Top 20%
                         quintile   quintile   quintile                                                quintile          quintile   quintile
     Pension benefit quintiles                                                       Social Security benefit quintiles

                                                            Married at age 62

                                                            Single at age 62

Source: GEMINI/PENSIM.

                                                  Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
                                                  spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
                                                  assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
                                                  extension of raised pension contribution limits, and constant rates of coverage over time for DB and
                                                  DC pensions.




                                                  Page 66                                                                  GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 28: Median Monthly Household Retirement Income at Age 62 by Pension
Status for Generation X with Extension of Raised Pension Contribution Limits

Median value in 2001 dollars
5,000




4,000




3,000




2,000




1,000




    0
          Married at           Single at              X             Y                  Z
           age 62               age 62

                Household receives no pension benefits

                Household receives pension benefits

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
extension of raised pension contribution limits, and constant rates of coverage over time for DB and
DC pensions.




Page 67                                                          GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 29: Median Monthly Household Retirement Income at Age 62 by Educational
Attainment for Generation X with Extension of Raised Pension Contribution Limits

Median value in 2001 dollars
5,000                                               5000




4,000                                               4000




3,000                                               3000




2,000                                               2000




1,000                                               1000




    0                                                   0
                           co me




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                                                            Hi
                 Married at age 62

                 Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are reduced to funded levels,
extension of raised pension contribution limits, and constant rates of coverage over time for DB and
DC pensions. Educational attainment for married couples is defined as the attainment of the
Generation X birth cohort member—the spouse may have attained a different level of education.




Page 68                                                           GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 30: Median Monthly Retirement Income at Age 62 by Gender for Single
Person Households for Generation X with Extension of Raised Pension
Contribution Limits

Median value in 2001 dollars
2,500



2,000



1,500



1,000



 500



    0
        Single      Single     V          W          X          Y         Z
         male       female
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security and pension benefits. Single individuals include
those divorced, widowed, or never married at age 62. Simulations assume all workers retire
completely at age 62, Social Security benefits are reduced to funded levels, extension of raised
pension contribution limits, and constant rates of coverage over time for DB and DC pensions.


Table 18: Median Monthly Household Retirement Income at Age 62 by Marital Status
for Generation X with Extension of Raised Pension Contribution Limits, in 2001
Dollars

                               Household income                Income per household member
 Never Married                            $1,598                                     $1,598
 Married                                  $3,912                                     $1,956
 Widowed                                  $2,108                                     $2,108
 Divorced                                 $1,403                                     $1,403
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Simulations assume all workers retire completely at age 62, Social Security benefits are
reduced to funded levels, extension of raised pension contribution limits, and constant rates of
coverage over time for DB and DC pensions.


Figures 31-35 and table 19 show the estimated distribution of retirement
income for Generation X assuming scheduled Social Security benefits, no




Page 69                                                         GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




extension of raised pension contribution limits beyond 2010, and a
constant rate of DB and DC pension coverage over time.

Figure 31: Proportion of Household Retirement Income for Each Quintile of the
Retirement Income Distribution at Age 62 for Generation X with Scheduled Social
Security Benefits

Percentage of income
70


60


50


40


30


20


10


 0
       Bottom 20%        Second quintile   Third quintile   Fourth quintile    Top 20%
     Retirement income quintiles

             Married at age 62

             Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are paid as scheduled under
current law, no extension of raised pension contribution limits, and constant rates of coverage over
time for DB and DC pensions.




Page 70                                                           GAO-03-429 Retirement Income
                                                  Appendix II: Alternative Scenarios




Figure 32: Proportion of Household Pension Benefits and Household Social Security Benefits for Each Quintile of the Pension
Benefit and Social Security Benefit Distributions at Age 62 for Generation X with Scheduled Social Security Benefits
Percentage of benefits                                                          Percentage of benefits
70                                                                              70


60                                                                              60


50                                                                              50


40                                                                              40


30                                                                              30


20                                                                              20


10                                                                              10


 0                                                                               0
     Bottom 20%          Second      Third     Fourth        Top 20%                 Bottom 20%        Second             Third     Fourth     Top 20%
                         quintile   quintile   quintile                                                quintile          quintile   quintile
     Pension benefit quintiles                                                       Social Security benefit quintiles

                                                            Married at age 62

                                                            Single at age 62

Source: GEMINI/PENSIM.

                                                  Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
                                                  spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
                                                  assume all workers retire completely at age 62, Social Security benefits are paid as scheduled under
                                                  current law, no extension of raised pension contribution limits, and constant rates of coverage over
                                                  time for DB and DC pensions.




                                                  Page 71                                                                  GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 33: Median Monthly Household Retirement Income at Age 62 by Pension
Status for Generation X with Scheduled Social Security Benefits

Median value in 2001 dollars
5,000




4,000




3,000




2,000




1,000




    0
          Married at           Single at              X            Y                 Z
           age 62               age 62

                Household receives no pension benefits

                Household receives pension benefits

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are paid as scheduled under
current law, no extension of raised pension contribution limits, and constant rates of coverage over
time for DB and DC pensions.




Page 72                                                         GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 34: Median Monthly Household Retirement Income at Age 62 by Educational
Attainment for Generation X with Scheduled Social Security Benefits

Median value in 2001 dollars
5,000                                               5000




4,000                                               4000




3,000                                               3000




2,000                                               2000




1,000                                               1000




    0                                                  0
                           co me




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                                               te


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                 Married at age 62

                 Single at age 62

Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Single individuals include those divorced, widowed, or never married at age 62. Simulations
assume all workers retire completely at age 62, Social Security benefits are paid as scheduled under
current law, no extension of raised pension contribution limits, and constant rates of coverage over
time for DB and DC pensions. Educational attainment for married couples is defined as the
attainment of the Baby Boom cohort member—the spouse may have attained a different level of
education.




Page 73                                                          GAO-03-429 Retirement Income
Appendix II: Alternative Scenarios




Figure 35: Median Monthly Retirement Income at Age 62 by Gender for Generation
X for Single Person Households with Scheduled Social Security Benefits

Median value in 2001 dollars
2,500



2,000



1,500



1,000



  500



    0
        Single      Single     V          W          X          Y          Z
         male       female
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security and pension benefits. Single individuals include
those divorced, widowed, or never married at age 62. Simulations assume all workers retire
completely at age 62, Social Security benefits are paid as scheduled under current law, no extension
of raised pension contribution limits, and constant rates of coverage over time for DB and DC
pensions.


Table 19: Median Monthly Household Retirement Income at Age 62 by Marital Status
for Generation X with Scheduled Social Security Benefits, in 2001 Dollars

                                    Household income           Income per household member
 Never Married                                 $1,810                                $1,810
 Married                                       $4,190                                $2,095
 Widowed                                       $2,306                                $2,306
 Divorced                                      $1,622                                $1,622
Source: GEMINI/PENSIM.

Note: Retirement income includes Social Security benefits, pension benefits, and earnings of younger
spouses. Simulations assume all workers retire completely at age 62, Social Security benefits are
paid as scheduled under current law, no extension of raised pension contribution limits, and constant
rates of coverage over time for DB and DC pensions




Page 74                                                         GAO-03-429 Retirement Income
                  Appendix III: GAO Contacts and Staff
Appendix III: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Alicia Puente Cackley (202) 512-7022
GAO Contacts      Barbara Smith (202) 512-3651


                  In addition to those named above, the following individuals made
Staff             significant contributions to this report: Michael J. Collins, Gordon Mermin,
Acknowledgments   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.




                  Page 75                                         GAO-03-429 Retirement Income
             Related GAO Products
Related GAO Products


             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.




             Page 76                                       GAO-03-429 Retirement Income
           Related GAO Products




           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.




(130130)
           Page 77                                      GAO-03-429 Retirement Income
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