Legislative Proposals Could Help Retirement Income Adequacy: EBRI

Younger employees would benefit most from a requirement for employers to offer retirement plans, while older employees would benefit most from providing the option of guaranteed income for life from defined contribution (DC) plans.

Since 2003, the Employee Benefit Research Institute (EBRI) has used its Retirement Security Projection Model (RSPM) to evaluate retirement income adequacy on a national basis. EBRI’s use of RSPM typically is confined to analysis of the current retirement system. The EBRI Retirement Savings Shortfalls (RSS) give the size of the deficits that households are simulated to generate in retirement.

Recently, EBRI used its model to simulate the effect on retirement income adequacy from certain legislative proposals, including:

  • Requiring retirement plans for all but the smallest employers,
  • Covering part-time employees,
  • Introducing auto portability,
  • Providing the option of guaranteed income for life from 401(k) and 403(b) plans,
  • Allowing open multiple employer plans (MEPs), and
  • Modifying required minimum distributions.

Requiring retirement plans for all but the smallest employers

In one scenario, EBRI assumes all employers are required to offer defined contribution (DC) plans, except those with fewer than 10 employees. Its analysis assumes all new plans would be auto-IRAs with a 6% default contribution rate that escalates by 1% per year until it reaches 10% of pay. Based on experience observed from OregonSaves, a 30% opt-out is assumed for all new eligibles.  As expected, the youngest age cohort (35 to 39) would have the largest benefit—a 15.2% decrease in retirement deficit—since they would be exposed to the enhanced coverage for a longer period of time. Those in the 40 to 44 age cohort are simulated to have a 12.4% reduction in deficit, and those ages 45 to 49 are simulated to have a 10.3% reduction in deficit. Cohorts older than 50 are also simulated to have reductions in retirement deficits; however, the reductions are less than 10%.

Changing the scenario to have a cap on auto-escalation of 15%, the youngest cohort is simulated to have a 17% reduction in retirement deficit. Those in the 40 to 44 age cohort are simulated to have a 14.2% reduction in deficit, while those ages 45 to 49 are simulated to have an 11.7% reduction in deficit. Again cohorts older than 50 are simulated to have a reduction in retirement deficit less than 10%.

Covering part-time employees

Using its assumptions but including coverage of part-time employees, EBRI found the youngest cohort is simulated to have a 17.3% reduction in retirement deficit. Those in the 40 to 44 age cohort are simulated to have a 14.5% reduction in deficit, while those ages 45 to 49 are simulated to have an 11.9% reduction in deficit. Cohorts older than 50 are simulated to have reductions in retirement deficits that are less than 10%.

Introducing auto portability

EBRI explains that auto portability is designed to retain DC assets within the retirement system and reduce “leakage” from cashouts upon employment termination. When auto portability is in place, the youngest cohort is simulated to have a 27.1% reduction in retirement deficit, while those in the 40 to 44 age cohort are simulated to have a 23.5% reduction in deficit. Those 45 to 49 are simulated to have a 19.8% reduction in deficit, and those in the 50 to 54 age cohort are simulated to have a 14.7% reduction in deficit. Those ages 55 to 59 are simulated to have a 10.3% reduction in deficit. Cohorts older than 60 are also simulated to have reductions in retirement deficits; however, the reductions are less than 10%.

Providing the option of guaranteed income for life from 401(k) and 403(b) plans

EBRI found that having half of all 401(k) or 403(b) plan distributions taken in the form of guaranteed income for life at age 65 actual increases the retirement deficit for those who die prior to age 85. Those who die five years into retirement (by age 70) are projected to have a $74 average increase. The average increase in deficits for those who die between 70 and 75 is $876. The increase gradually scales down to $617 for those who die between ages 75 and 80 and to $532 for those who die between ages 80 and 85.

For those who die after age 85, however, the purchase of a single premium immediate annuity with 50% of the 401(k) or 403(b) account balance provides reductions in average retirement deficits. For those who die between ages 85 and 90, the average retirement deficit decreases by $1,014. The reductions in average retirement deficits increase substantially for those who die at later ages: $1,831 for those who die between 90 and 95, $3,140 for those who die between 95 and 100, and $4,027 for those who die after age 100. Overall, the impact of using 50% of the 401(k) or 403(b) balance to buy a single premium immediate annuity at age 65 is to decrease retirement deficits by $985.

Allowing open multiple employer plans (MEPs)

The potential impact of open MEPs on retirement income adequacy is heavily dependent upon plan sponsor adoption of such retirement vehicles, EBRI concedes. Rather than make assumptions about adoption, EBRI models a scenario in which all workers currently ages 35 to 39 benefit from the availability of an open MEP for all years during which they might not be eligible for another type of employer-sponsored retirement plan. Workers are divided into four quartiles according to their lack of eligibility. For example, those in the lowest “lack of eligibility” quartile are workers who are eligible for an employer-sponsored retirement plan for all future years in their working career as well as those who lack only a few years of eligibility. 

The percentage reduction in retirement deficits from the introduction of open MEPs for these individuals is de minimis (3.5%), EBRI says. However, the second quartile is simulated to have an 11.7% reduction in retirement deficit from open MEPs, while the third quartile is simulated to have a 23.2% reduction. Individuals in the highest quartile (where the most lack eligibility) are simulated to have a 26.7% reduction in average retirement deficit.

Modifying required minimum distributions

 

It has been proposed to raise the age for taking required minimum distributions (RMDs) from 70 ½ to 72. EBRI found an ad hoc increase in life expectancy of 5% with no increase in the age provides relatively small decreases in IRA distributions—0.2% for total balances and 0.3% for non-Roth balances.

However, when the 5% increase in life expectancy is combined with a one-year increase in the RMD starting age, to 71 ½, the decreases in IRA distributions are 2.7% (total) and 3.2% (non-Roth). In a scenario in which the RMD age is increased to 72 ½, EBRI found the decreases in IRA distributions are 5.3% (total) and 6.5% (non-Roth). EBRI also provides an analysis in which the ad hoc increase in life expectancy is 10%.

“By quantifying the impact of potential changes, EBRI allows plan sponsors, providers and policymakers to better understand their ramifications. This, in turn, can lead to better decision-making that affects the lives of millions of American workers,” EBRI concludes in its Issue Brief about the research.

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