Retirement plans undergo significant shift, study shows

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A study of retirement contributions has found a major transition over the last 25 years away from traditional pensions toward individually controlled retirement accounts, and a dramatic increase in retirement saving overall, according to the National Bureau of Economic Resources study titled "The Transition to Personal Accounts and Increasing Retirement Wealth: Macro and Micro Evidence."|ret||ret||tab|

Between 1975 and 1999, the total value of assets set aside to support retirement increased from $400 billion to more than $12 trillion. To put this in perspective, $12 trillion is equal to about $350,000 for every American over age 65 today. |ret||ret||tab|

The study by James Poterba, Steven Venti and David Wise points to a fundamental and ongoing transition in the economics of retirement. For past generations of retirees, the large majority of income support has come from Social Security and, for some, a traditional employer-provided pension benefit. Retirees typically owned homes, but few had enough financial assets to support even six months of their retirement.|ret||ret||tab|

The past two decades, however, have seen the emergence of an entirely new component of retiree finances. The most widely known retirement saving programs are individual retirement accounts and employer-sponsored 401(k) plans. Other retirement saving programs include 403(b) plans for employees in nonprofit and educational organizations, 457 plans for state and local employees, the Thrift Savings Plan for federal employees, and Keogh plans for self-employed workers. |ret||ret||tab|

While many types of retirement programs have had an important impact in increasing retirement saving, the employer-sponsored 401(k) plan has been the single most important source of growth. The number of active participants increased from essentially no participants in 1981 to nearly 40 million active participants in 1997.|ret||ret||tab|

The study also explored whether the new retirement saving plans have displaced traditional pension plans. The investigators find little displacement probably less than 11 percent of the total plan contributions of 401(k) participants. The amount of new saving taking place in IRAs, 401(k) plans, and similar retirement accounts dwarfs any decline in traditional pension coverage.|ret||ret||tab|

While the focus of the study is to document the overall growth of retirement saving in the United States, the study also illustrates the potential impact of saving trends on individual workers who contribute to 401(k) plans, or similar plans, throughout their working careers. For example, a middle-income worker approaching retirement today might have earned a salary that grew from around $9,000 at age 25 to $22,000 at age 40 to $37,000 at age 55, and so on. If this person had contributed 9 percent of his earnings to a 401(k) plan beginning at age 25, they would have accumulated about $575,000 in retirement saving by age 65. This hypothetical example, the investigators suggest, will become the reality for more of retiring workers in the United States. |ret||ret||tab|

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