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Private-Sector Retirement Plans Play Increasingly Important Role Across All Incomes

Nov. 19, 2010 — Among all income groups, retirement income from employer-sponsored retirement plans is more prevalent among retirees today than in the mid-1970s, when sweeping new retirement plan regulations were enacted, according to a study released by the Investment Company Institute.

"A Look at Private-Sector Retirement Plan Income After ERISA" finds that, in 2009, 34% of retirees received income — either directly or through a spouse — from private-sector retirement plans, compared with 21% in 1975. The median income received by those with private-sector pension income increased to $6,000 in 2009 from about $4,500 in 1975 (in 2009 dollars). The research examines private-sector retirement income trends since 1975 — just after the Employee Retirement Income Security Act (ERISA) was enacted.

"Looking at the entire period from 1975 to 2009, the data show that, contrary to conventional wisdom, private-sector pension income has become more prevalent, not less prevalent, over time," said Peter Brady, ICI senior economist and co-author of the report. "Retirement policy discussions often seem to start from the premise that retirees' pension income has fallen over time. This report refutes that belief and provides some historical context for these policy discussions by examining trends in retiree income from private-sector pensions."

U.S. worker access to private-sector retirement plans has remained pretty consistent since the 1970s. While coverage has been consistent, an increasing share of private-sector workers has worked for employers that sponsor defined contribution (DC) pension plans, and a decreasing share has worked for employers that sponsor defined benefit (DB) pension plans. In 1975, 87% of active participants in private-sector retirement plans had primary coverage through DB plans, dropping steadily over time to below 50% by the 1990s. By 1998, 56% of active participants in private-sector retirement plans were covered by a primary DC plan, and 39% had a supplemental DC plan.

The historical prevalence of retirement income from private-sector DB plans may be overstated by only looking at pension coverage, rather than receipt of pension income. Many employees may have worked for companies that offered DB plans, but, because private-sector workers change jobs often, the combination of vesting rules and back-loaded benefit accrual resulted in many retirees getting little or no retirement income from the plans.

"There seems to be a belief that there was a golden age of pensions — a time in our history when most private-sector workers retired with a monthly pension check that replaced a significant amount of their salary. The facts support a different narrative: there was no golden age," Brady said. "The good news is private-sector retirement income has increased over time and, to date, the shift from DB pensions to DC pensions has not led to a decline in private-sector pension income. Furthermore, the typical amount of private-sector pension income that we observe in the historical data can be generated by relatively modest accumulations in DC plans or IRAs."

Since 1975, there has been little change in the importance of Social Security benefits in providing retiree income: Social Security benefits continue to serve as the foundation for retirement security in the U.S. and represent the largest component of retiree income and the predominant income source for lower-income retirees. In 2009, Social Security benefits were 58% of total retiree income and more than 85% of income for retirees in the lowest 40% of the income distribution. Even for retirees in the highest income quintile, Social Security benefits represented more than one-third of income in 2009.

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