Retirement Savings and Household Wealth in 2007
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[Excerpt] About half of all workers in the United States participate in an employer-sponsored retirement plan of some kind, a proportion that has remained relatively stable over the past thirty years. Beginning in the early 1980s, however, employers began to move away from traditional pension plans also known as defined benefit (DB) plans to defined contribution (DC) plans, like those authorized under section 401(k) of the Internal Revenue Code. Unlike DB plans, which are required by federal law to offer a benefit in the form of a life annuity, DC plans are individual accounts that typically pay the employee a lump sum at retirement. In 2007, approximately 21 million workers in the private sector participated in defined benefit plans, while more than 40 million workers participated in defined contribution plans. One of the key distinctions between a defined benefit plan and a defined contribution plan is that in a DB plan, it is the employer who bears the investment risk. The employer must ensure that the pension plan has sufficient assets to pay the benefits promised to workers and their surviving dependents. In a DC plan, the worker bears the risk of investment losses. The worker’s account balance at retirement will depend on how much has been contributed to the plan over the years and on the performance of the assets in which the plan is invested. Because DC plans and Individual Retirement Accounts (IRAs) represent a large share of the assets available to households to pay their expenses during retirement, Congress needs current, detailed information on amounts that workers have accumulated in these plans to assess both workers’ preparedness for retirement and the effectiveness of the tax incentives created for retirement savings plans. Once every three years, the Board of Governors of the Federal Reserve System collects data on household assets and liabilities through the Survey of Consumer Finances (SCF). The most recent such survey was conducted in 2007, and the survey results were released to the public in February 2009. This CRS report presents data from the 2007 SCF with respect to household ownership of, and balances in, retirement savings accounts. Because the majority of assets held in retirement accounts are invested in stocks, trends in stock prices have a significant impact on households’ retirement account balances. As a result of the broad decline in stock prices in 2008, the retirement account balances that households reported on the 2007 SCF may be greater than many of those households would report in 2009. The effect of the current recession on household finances will be reflected in the next SCF, which will be fielded in 2010. Nevertheless, the 2007 SCF provides the most comprehensive and current data available on the amount and type of retirement assets owned by American households. In 2007, 53% of U.S. households owned at least one retirement account, whether an individual retirement account, a 401(k) plan, or other employment-based retirement account. The median combined balance of all retirement accounts owned by households with at least one account was $45,000. Twenty-five percent of households had total retirement account balances of $140,000 or more, and 25% of households had total retirement account balances of $11,000 or less. The median value in 2007 of all retirement accounts owned by households headed by persons between the ages of 55 and 64 was $100,000. For a 65-year-old man retiring in April 2009, $100,000 would be sufficient to purchase a level, single-life annuity that would pay income of $700 per month for life, based on current interest rates. Because women have longer average life expectancies than men of the same age, $100,000 would purchase a level, single-life annuity that would pay income of $650 per month for life to a 65-year-old woman retiring in April 2009.