Surface Conditions

Nevin AdamsBy Nevin Adams, EBRI

Our first home was in the Northwest suburbs of Chicago, a split-level (my wife’s preference), walking distance to the commuter train (my preference), and within our stipulated price range (“our” preference).  Much as we liked the house, we were not the first owners, and there were certain things we wanted to “fix.”  The first of these was the family room, where we figured to spend a lot of our time and which the previous residents had seen fit to line with pine paneling.  Our plan was to take down that paneling and replace it with wallpaper, to modernize and “open up” the room.

My previous experience with wallpapering was limited; in this case my job (as I understood it from my wife) was to take the lead in pulling down the paneling, and then to pretty much stand back and learn.  As I pulled back that first strip of paneling, I was nearly blinded by a flash of orange…which was from what turned out to be a misbegotten shade of 1970s floral print wallpaper which lay underneath the paneling.  “No problem,” my wife assured me; in fact, this might actually work to our benefit, she said, in that it implied that the previous owners would have treated the wall before putting up that paper.

Well, after 15 minutes of struggling to separate the paper from what lay beneath it, it was clear that they had NOT done so.  Moreover, one of the previous owners had apparently pasted the orange floral print over ANOTHER wallpaper, this one some hideous lime green.  Nor, as it turned out, was that the last of the layers (we stopped counting at six).  While we had made what we thought were reasonable conclusions about the size of the project based on the topline evidence, it was now clear that more—much more—was going on underneath (and apparently had been for some time).  Fortunately, we discovered that reality before I had ripped down so much paneling that we were committed to that course of action.

A growing concern for employers, workers, and policymakers alike is the changing composition of the American workforce and what that might mean for benefit plan designs, succession planning, and workforce management.

A recent EBRI Notes article examining the most recent U.S. Census Bureau data on labor-force participation notes that the labor-force participation rates of younger workers increased when those of older workers declined or remained low during the late 1970s to the early 1990s; and while both increased for a period of time in the latter half of the 1990s, as the labor-force participation rates of younger workers began to decline in the late 1990s, the rates for the older workers continuously increased.  The report explains that, in 1997, workers ages 25–54 accounted for 83.9 percent of all workers ages 25 or older, while those ages 55–64 accounted for 12.0 percent, and those ages 65 or older, 4.1 percent.  However, by 2012, the fraction of older workers expanded; those ages 55–64 represented nearly 1 in 5 workers, while those 65 or older constituted 7.0 percent of the labor force.  Meanwhile, the percentage of workers 25 or older represented by those ages 25–54 slipped to 73.8 percent.

However, a closer examination of trends within the group ages 55 and older reveals some additional patterns of interest.  For those ages 55–64, the upward trend in the 1990s and into the 2000s was driven almost exclusively by the increased work force participation of women, while the male participation rate was flat to declining.  That is, until you look at the rate for those ages 65 or older, where the EBRI analysis shows that labor-force participation increased for both males and females over that period.

So, while it’s not clear whether older workers are filling a workforce gap or closing off opportunities for younger workers, older workers— notably older female workers— are certainly more plentiful in the labor force today, with potential workforce planning implications.

Ultimately, of course, it’s important to know what the numbers are and to examine the trends those numbers suggest over time.  However, and as the EBRI analysis reveals, sometimes you can’t fully understand the topline trends—and shouldn’t commit to a course of action—without first knowing what’s underneath.

  • Notes

The April EBRI Notes article “Labor-force Participation Rates of the Population Ages 55 and Older, 2013” is available online HERE.

Myth Understandings

Nevin AdamsBy Nevin Adams, EBRI

A frequent criticism of the 401(k) design is that it was “never designed” to provide a full retirement benefit, unlike, as it’s often stated or implied, the defined benefit plan.

Moreover, while there is a very real tendency to focus on the CURRENT balance[i] in a defined contribution/401(k) plan and treat that as the ultimate outcome, for reasons I’ve never really been able to understand, people tend to think and talk about defined benefit (DB) plans in terms of the benefit they are capable of providing, rather than the actual benefits paid.

However, the data show that some of the common assumptions about defined benefit pensions are out of line with the realities, including:

Once upon a time, everybody had a pension.

“Coverage” is a hot topic among policymakers these days, or more accurately, the lack of it. One of the most frequently invoked criticisms of the current system is that so many American workers don’t have access to a retirement plan at work. But in 1979, only 28 percent of private-sector workers participated in a DB plan, with another 10 percent participating in both a DB and defined contribution (DC) plan. By any measure, that’s a long way from “everybody.”

The reality is that more private-sector workers are participating in a workplace retirement plan today than in 1979.

People used to work for the same employer their whole careers.

My kids think their generation is the first to anticipate having many employers during their careers, but the reality is that American workers, certainly in the private sector, have long been relatively mobile in the workforce. Median job tenure of the total workforce has hovered at about five years since the early 1950s (in fact, as EBRI’s latest research points out, the average median job tenure has now risen, to 5.4 years).[ii] The data on employee tenure—the amount of time an individual has been with his or her current employer—show that career jobs never existed for most workers and have continued not to exist for most workers.

And that has implications for pension benefits.

Everybody who had a pension got a full benefit.

Those who know how defined benefit plan accrual formulas work understand that the actual benefit is a function of some definition of average pay and years of service. Moreover, prior to the mid-1980s, 10-year cliff vesting schedules were common for DB plans. What that meant was that if you worked for an employer fewer than 10 years, you’d be entitled to a pension of … $0.00.

As noted above, the American workforce has, since the end of World War II, been relatively, and consistently, mobile. Between 1987 and 2012, among private-sector workers, fewer than 1 in 5 have spent 25 years or more with one employer. Under pension accrual formulas, those kinds of numbers meant that, even among the workers who were covered by a traditional pension, many would actually receive little or nothing from that plan design.

And that’s for those who were covered in the first place[iii].

People used to get more retirement income from pensions than they do today.

There are undoubtedly different challenges ahead for retirees than for prior generations – longer lives, higher health care costs, the pressures of affording long-term care – but when it comes to sources of retirement income for those over the age of 65, there has been remarkably little change over the past several decades.

Social Security is and has been a consistent source, representing somewhere between 40 and 45 percent of aggregate income (excluding non-periodic distributions from DC plans and IRAs) during most of that time, and into the current time, according to data from the Census Bureau. Pension annuity income, which constituted about 16 percent of aggregate income in 1976, rose to as high as 21 percent in the early ’90s – about where it stands today.

There’s no question that some Americans in the private sector have derived, and will continue to derive, significant retirement income from DB plans, and DB plans did and can deliver for the portion of the population that does stay with one employer/plan for a full career[iv].

The data show, however, that many Americans were not covered by those plans, even in the “good old days,” and that even many of those who were covered, for a time anyway, were not likely to receive the full benefit that the design was capable of delivering because they didn’t have, or take advantage of, the opportunity.

Sound familiar?

Notes

[i] Worse, that 401(k) balance is frequently an AVERAGE 401(k) balance, which includes the relatively small balances of those who have just started saving with those who have had a full career to save. That’s why reports from the EBRI/ICI 401(k) database have long differentiated average and median balances by age and tenure. See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2012.”

[ii] See “Employee Tenure Trends, 1983–2012.”

[iii] Expectations for pension benefits appear to exceed the reality, even among workers. The 2014 Retirement Confidence Survey found that while 56 percent of workers expect to receive benefits from a defined benefit plan in retirement, only 31 percent report that they and/or their spouse currently have such a benefit with a current or previous employer. See here

 [iv] For an analysis of possible outcomes from DB and 401(k) plans, see “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans.”

 

Work “Forces”

Nevin AdamsBy Nevin Adams, EBRI

A couple of years ago, my wife and I sat down with an advisor to revisit our financial plan.  Having gathered all the requisite information regarding assets, debt, insurance, and retirement savings, he turned to me and asked how long I planned to work.

Being in a profession that I not only enjoy, but one relatively unbounded by physical constraints; having some appreciation for the various financial trade-offs associated with the decision to retire, yet desirous of the ability to have more leisure time with my family—conscious of the fact that I have made a career studying and writing about such decisions—I paused to reflect….

And then my wife, with a smile on her face, laughed and said, “Oh, he’s going to work forever!”

Well, that wasn’t the answer I had in mind, but apparently I’m not the only one rethinking retirement.  In 1991, just 11 percent of workers expected to retire after age 65, according to the Retirement Confidence Survey (RCS)[i]. Twenty-three years later, in 2014, 33 percent of workers report that they expect to retire after age 65, and 10 percent don’t plan to retire at all. At the same time, the percentage of workers expecting to retire before age 65 has decreased, from 50 percent in 1991 to 27 percent.  Those expectations notwithstanding, the median (midpoint) age at which workers expect to retire has remained stable at 65 for most of the 24-year history of the RCS.

Moreover, a recent EBRI Notes article[ii] confirms that the labor-force participation rate for those ages 55 and older rose throughout the 1990s and into the 2000s when it began to level off, but with a small increase following the 2007-2008 economic downturn.  While for those ages 55-64 the upward trend was driven almost exclusively by the increased labor-force participation of women, among those age 65 or older, the rate increased for both males and females over that period.

The report notes, however, that the labor-force participation rates of younger workers increased when those of older workers declined or remained low during the late 1970s to the early 1990s, but as the labor-force participation rates of younger workers began to decline in the late 1990s, the rates for the older workers continuously increased – suggesting either that older workers filled the void left by younger workers’ lower participation, or that the higher representation in the workforce by older workers served to limit the opportunities for younger workers, either directly or perhaps by discouraging them from pursuing employment.

As the EBRI report notes, this upward trend in labor-force participation by older workers is perhaps related to workers’ desire for continued access to employment-based health insurance, to provide some additional years of employment to accumulate savings and/or pay down debt, or maybe even simply because they want to work.

Whatever their motivation(s), these trends highlight a number of key concerns for employers and policy makers: Will workers who want—or need—to increase their financial resources by working longer be able to find jobs?  How might workforce management (and health care costs) be affected by those decisions?  What could delayed workforce entry mean to the retirement savings accumulations of younger workers?

Ultimately, of course, and as the trends tracked and analyzed by EBRI have long indicated, the road through retirement is often influenced by the paths we take to retirement—and when, how, and if we are able to make the transition.

  • Notes

[i] See “The 2014 Retirement Confidence Survey: Confidence Rebounds—for Those With Retirement Plans.”

[ii] The April EBRI Notes article, “Labor-force Participation Rates of the Population Ages 55 and Older, 2013,” is available online here.

 

Use It or “Lose” It

By Nevin Adams, EBRI

nevinadams

At the time that EBRI was founded 35 years ago, I was about six months into a job doing pension accountings for a large Midwestern bank. At the time, I didn’t realize I’d still be working with those kinds of issues in 2013—in fairness, like most recent college graduates, I wasn’t really thinking about anything that was 35 years in the future. I had a job, a car that ran, and a reasonably nice stereo in an apartment in the Chicago suburbs that didn’t have much else.

My employer had a nice defined benefit (DB) pension, and an extraordinarily generous thrift-savings plan, but those weren’t big considerations at the time. I had to wait a year to participate in the latter (pretty much standard at the time), and as for the former—well, you know how exciting pension accruals are to 22-year-olds (even those who get paid to do pension accountings). Turns out, I worked there for nearly a decade, and walked away with a pretty nice nest egg in that thrift savings plan (that by then had become a 401(k)), and a pension accrual of…$0.00.

At the time, I didn’t think much about that.  Like many private-sector workers, I hadn’t contributed anything to that pension, and thus getting “nothing” in return didn’t feel like a loss.

By the time I left my second employer (this time after 13 years), the mandated vesting schedules had been shortened by legislation—but even then, the benefit I hope to collect one day won’t amount to much on an annual basis, and won’t be anything like the benefit that plan might have provided if only I had remained employed there – for the past 20 years. Instead, like my service with that prior employer, that DB benefit is frozen in time. That result stands in sharp contrast with the 401(k) balances I have accumulated and that continue to grow, despite having changed employers twice since then.

Of course, national tenure data suggest that my job experience was something of an anomaly.  When you consider that median job tenure in the United States  has hovered in the five-to-seven-year range going back to the early 1950s[i], there have doubtless been many private-sector workers who were, for a time, like me, participants in a traditional defined benefit pension plan, only to see little or nothing come of that participation[ii].

I often hear people say that 401(k)s were “never designed to replace pensions,” a reference to the notion that the benefit defined by most traditional pension plans stood to replace a significant amount of pre-retirement income at retirement.  Now, there’s no question that the voluntary nature of the 401(k) programs, as well as their traditional reliance on the investment direction and maintenance by participants, can undermine the relative contribution of the employer-sponsored plan “leg” to a goal of retirement income adequacy.

However, what often gets overlooked in the comparison with 401(k)s is that when you consider the realities of how most Americans work, traditional defined benefit realities frequently fell short of that standard as well. Indeed, in many cases, based on the kinds of job changes that occur all the time, and have for a generation and more, they could provide far less[iii].

In both cases, it’s not the design that’s at fault—it’s how they are used, both by those who sponsor these programs, as well as those who are covered by them.

Notes 


[i] See “Employee Tenure Trends, 1983–2012” available here.  

[ii] And a great number of private-sector workers never participated in a defined benefit plan.  See “Pension Plan Participation” available here.  

[iii] A recent EBRI Issue Brief provides a direct comparison of the likely benefits under specific types of defined contribution (DC) and DB retirement plans. See “Reality Checks: A Comparative Analysis of Future Benefits from Private-Sector, Voluntary-Enrollment 401(k) Plans vs. Stylized, Final-Average-Pay Defined Benefit and Cash Balance Plans”.

Tenure, Tracked

By Nevin Adams, EBRI

Adams

Adams

Sooner or later as a parent you’ll be told—as you doubtless you told YOUR parents—that “that’s not the way things are now!” It’s a potent retort to whatever social more is at issue because, whether it involves a choice in dress, curfew, or even resumé preparation, our perspectives are often shaped (and sometimes distorted) by our recollection of the way things were for us at comparable points in time. Or, as we must sometimes admit, “the way things used to be.”

When it comes to things like working careers, there is a widespread assumption that past generations worked for a single employer for all, or most of his/her working years, and then retired with a pension and a gold watch. In contrast, current American workers are believed to change jobs (much) more frequently. In fact, many champion the defined contribution plan design as a better “fit” for today’s workforce, which—certainly in the private sector—is seen as lacking the kind of tenure necessary to accrue sufficient benefits under a traditional pension design.¹As it turns out, the latest data on employee tenure from the January 2012 Supplement to the U.S. Census Bureau’s Current Population Survey (CPS) show that the overall median tenure of workers—the midpoint of wage and salary workers’ length of employment in their current jobs—was slightly higher in 2012, at 5.4 years, compared with 5.0 years in 1983.

In fact, as a recent EBRI Notes article points out, the data on employee tenure (the amount of time an individual has been with his or her current employer) show that those so-called “career jobs” NEVER existed for most workers. Indeed, over the past nearly 30 years, the median tenure of all wage and salary workers age 20 or older has held steady, at approximately five years.

Looking inside those long-term numbers, different trends emerge. For example, the median tenure for male wage and salary workers was, in fact, lower in 2012, but the median tenure for female wage and salary workers increased (from 4.2 years in 1983 to 5.4 years in 2012). This long-term increase in the median tenure of female workers more than offsets the decline in the median tenure of male workers, leaving the overall level slightly higher over the long term.

When you focus on trends among older male workers (ages 55–64), the group that experienced the largest change in their median tenure during the period covered by the report, median tenure fell from a level that would not normally be considered career-length—14.7 years in 196—to just 10.7 years in 2012.

Ultimately, when it comes to job tenure trends,² the way things look today is remarkably consistent with “the way it used to be.” However, as is often the case, a closer look at the underlying data highlights that even the things we expect to be different aren’t always different in the ways we expect.

Notes

¹ See also “The Good Old Days,” online here.

² The EBRI report highlights several implications of these trends: the effect on defined benefit accruals (even for workers still covered by those programs), the impact of the lump-sum distributions that often accompany job change, and the implications for social programs and workplace stability. “See Employee Tenure Trends, 1983–2012,” online here.

U.S. Job Tenure Ticks Up, But Still Short

Blog.Notes.Dec12-Tenure.Pg1 Americans who have jobs are staying in them longer as overall job tenure in the United States ticked up in 2012, but U.S. job tenure is still shorter than many assume.  The median (mid-point) length of time on the job for American workers in 2012 is just 5.4 years, according to new research from EBRI.

“Career-long jobs never existed for most workers,” said Craig Copeland, EBRI senior research associate and author of the report. “Historically, most workers have repeatedly changed jobs during their working careers, and all evidence suggests that they will continue to do so in the future.”

The EBRI report reveals that the historical data show that the U.S. workforce has always had relatively low median tenure: The idea of holding a full-career job and retiring with the proverbial “gold watch” is a myth for most people.

Copeland added that the overall trend of higher job tenure masks a small but significant decrease in median tenure among men (despite its increasing in recent years), which has been offset by an increase in median tenure among women. He added that the once-striking gap between long-tenure public and private sector workers is beginning to narrow.

The full report is published in the December 2012 EBRI Notes, “Employee Tenure Trends, 1983-2012,” online at www.ebri.org

Blog.Notes.Dec12-Tenure.Fig1

Feb-2012 EBRI Issue Brief: Expenditure Patterns of Older Americans

A detailed look confirms that older Americans (50 or above) spend less in retirement, and that home-related expenses remain the top spending category.

But health costs are the second-biggest expense for older Americans, and data show that demographic sub-groups such as singles, blacks, and high school dropouts are outspending their resources in retirement, according to a new report by the nonpartisan Employee Benefit Research Institute (EBRI).

“Home and home-related expenses remain the single largest spending category for older Americans, followed by health care expenses,” said Sudipto Banerjee, research associate with EBRI and author of the new report. “However, health care spending is the only component which steadily increases with age: It captures around 10 percent of the budget for those between 50–64, but increases to about 20 percent for those age 85 and over.”

The EBRI report notes that before retirement, people pay FICA (Social Security) taxes, incur work-related expenses, and set aside money for retirement. But after retirement, most people have different financial obligations, and, as a result, retirees may be able to maintain their level of preretirement well-being with very different income levels.

The full article, “Expenditure Patterns of Older Americans, 2001‒2009,” appears in the February 2012 EBRI Issue Brief, online here.  It documents the income and expenditure patterns of Americans who are retired or close to retirement, using data from the Health and Retirement Study (HRS) and its supplement Consumption and Activities Mail Survey (CAMS). Both surveys are conducted by the Institute for Social Research at the University of Michigan.

The press release is online here.