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February 28,
2002
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 Good Morning.
This morning, I’m going to present a brief overview of the
current state of retirement savings in the U.S. I’ll
be doing this by looking at the sources of income of those aged 65 and older and
also talking a little bit about how those sources might shift in the future.
Several research studies say we are simply not saving enough for
retirement.
One study,
done in the year 2000 by a department at Ohio State University, found 56% of all
households are inadequately prepared for retirement: they are not accumulating
enough resources to maintain their pre-retirement standard of living.
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Another study, done last year by Aon Consulting and Georgia
State University, found retirees are spending at relatively high levels while
workers are saving at quite a low level.
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People need, the study determined, between 74% and 83% of their
pre-retirement income to preserve their standard of living in retirement.
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This and other research suggests,
first, there is an urgent need for effective retirement savings education and
second, personal savings are going to become an even more important source of
retirement income.
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 The
four main sources of income for those aged 65 and older are:
Social Security, which makes up 38% of
their income; retirement plan benefits, which make up about 1/5 of the aggregate
income; asset income, contributing about 1/5; and earnings, contributing a
little over 1/5. A small percent of aggregate income comes from other
sources.
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Although about 40% of the aggregate
income of those 65 and older comes from Social Security, actual reliance on
Social Security is highly dependent on income.
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 As you can see in this table, if you
divide those 65 and over into quintiles of income, those in the lowest quintile
receive 82% of their income from Social Security; while those in the highest
quintile receive only 19% from Social Security.
Those in the highest
quintile depend as much or more on retirement plans, asset income, and earnings
as they do on Social Security.
You can’t, however, underestimate
the importance of Social Security. As you can see in the bar on the far right
hand side of this chart, Social Security is the only source of income for almost
20% of Social Security beneficiaries. For 2 out of 3, shown on the
bar on the left, Social Security provides more than half of their income.
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 While
Social Security is the mainstay of most people’s retirement income, retirement
plan benefits make up 1/5 of the aggregate income.
Retirement plans in this chart include payments of private and
public pensions, 401(k) plans, IRAs, and Keoghs.
Although coverage rates in employment-based plans haven’t
changed much, remaining at about 50% over the last 30 years for full-time
workers in the private sector, what has changed, quite dramatically, are the
type of plans employers are offering.
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 Traditionally,
employers sponsored defined benefit plans.
Defined contribution plans have begun replacing and supplementing defined
benefit plans at a rapid rate.
There are several important differences between these two types
of plans, which I have listed here. The bottom line is that it is up to
the participant in a defined contribution plan to make sure his or her
retirement benefit is adequate by usually, contributing to the plan, and often,
making investment decisions. In defined benefit plans, the plan sponsor
funds the benefit and is responsible in making sure the promised retirement
benefit will be there when the participant retires.
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 You
can see from these two sets of pie charts, the first from 1978 and the second
from 1998, how the number of defined contribution plans and participants have
increased as a percentage of the total plans and participants over the last 20
years. In 1978, defined contribution plans
were 71% of all retirement plans; they are now 92%.
In 1978, defined contribution plans
covered 1/3 of plan participants, now they cover almost 60% of total
participants.
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For about ½ of all workers with
retirement plans, a defined contribution plan is their only plan.
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The implications of these statistics
are significant: Risk and responsibility of retirement income from
employment-based retirement plans has moved from employers to employees.
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 As this chart shows, 3 out of 5 people age 65 and older have
asset income but it makes up only about 1/5 of their aggregate income.
Asset income, here, includes interest, dividends, rent,
royalties and income from estates or trusts.
A
person will be hard-pressed to reach a replacement ratio of 70 or 80% without
personal savings to supplement Social Security and employment-based plans.
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 Personal savings include certain assets
and contributions to retirement plans.
Aon Consulting found people across all
incomes and age levels they studied saved 5% or less of their income.
The Congressional Research Service
reports that about 40% of workers between 25 to 64 own retirement savings
accounts to which they contribute, such as 401(k)s, IRAs and Keoghs, but
the amount saved is quite small: the average saved by individuals was
$34,000; the median was $14,000, meaning more than half had saved less
than $14,000 in these accounts.
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In the aggregate, Americans are saving
only a penny of every after-tax dollar of disposable income.
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 Earnings amount to about 1/5 of the aggregate income of those 65
and older.
Future
retirees are more likely to work for several reasons, including the following:
The earnings test has been eliminated. When a person
reaches age for full Social Security benefits, the Social Security benefits are
no longer reduced for earnings. Previously, there was a $1 reduction in
Social Security benefits for every $3 earned. These changes will encourage
people to work after reaching their Social Security retirement age.
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 People are living longer. A woman
retiring today at 65 can expect to live at least 19 more years; a man, about 16
years. If people continue to retire early and live longer, they have many
more years in retirement to fund.
People are concerned about health care
coverage and there has been an erosion in employment-based retiree health care
coverage. People are likely to continue working to remain
covered or to pay for health care coverage.
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When asked in several recent surveys whether they plan to work in retirement,
most people say they will. They don’t plan to retire fully, but
will work in some capacity.
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 Finally, the eligibility age for
unreduced Social Security benefits has increased from 65 to 67. As
you can see in this table, the Social Security age for those who turned age 62
in 2000 is 65 and 2 months. For those who turn age 62 in year 2022
and beyond, retirement age for Social Security is 67.
This change is particularly important
because it means not only waiting longer for unreduced benefits, but if a person
retires early at age 62, his or her benefits will be reduced over a five year
period rather than the previous three year period. This is equivalent to a
30% reduction versus a 20% reduction if you retire at age 62. Conversely,
delayed retirement will increase benefits.
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 To
conclude, although it’s important to get a snapshot of what retirement income
looks like in the aggregate, in the end, retirement security is primarily the
culmination of a series of very personal decisions (or nondecisions) over the
course of an individual’s lifetime with a very personal financial impact.
The most effective retirement savings education will make it
clear to people that they hold retirement security in their own hands and will
motivate them to develop and live by their own personal retirement savings
strategy.
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 We know, through research, ideas about
retirement income are highly dependent on a person’s age and beliefs about
retirement itself. Older individuals believe Social Security and
traditional employment-based plans will be important sources of income; younger
people believe they will need to rely on personal savings.
It was with
this generational and life stage perspective that the agenda for the 2002 Summit was framed.
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Assistant
Secretary of Labor Ann Combs will now introduce you to the generations and
describe the expected outcomes of the Summit.
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