Retirement Savings and Household Wealth: Trends from 2001 to 2004

Publication Date: May 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance; Labor

Type:

Abstract:

Since about 1980, the proportion of workers who participate in employersponsored retirement plans has remained stable at about half of the workforce. Over the past 25 years, however, there has been a shift by employers from defined benefit (DB) pensions -- which pay a retirement benefit in the form of a lifelong annuity -- to defined contribution (DC) plans, which are more like savings accounts maintained by employers on behalf of each participating employee. 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 depends on how much he or she contributes to the plan and how the plan's underlying investments perform.

Once every three years, the Federal Reserve Board collects data on household assets and liabilities through the Survey of Consumer Finances (SCF). According to the most recent survey, 47.9% of workers under age 65 participated in employersponsored retirement plans -- both DB and DC -- in 2004, down from 49.6% in 2001. The decline in retirement plan participation between 2001 and 2004 was most heavily concentrated among workers under 45 years old, male workers, non-white workers, unmarried workers, those who did not attend college, and those with household incomes in the bottom half of the income distribution.

The Survey of Consumer Finances shows that 56.3 million households owned at least one retirement account in 2004 -- whether an individual retirement account (IRA), a 401(k) plan, or other employment-based savings plan -- compared with 56.9 million households that owned at least one such account in 2001. The proportion of households that owned a retirement account fell from 53.4% in 2001 to 50.2% in 2004. The median balance in all such accounts (measured in 2004 dollars) rose from $30,462 in 2001 to $36,000 in 2004. The number of households that owned a defined contribution plan from current or past employment rose from 38.3 million in 2001 to 38.8 million in 2004. The median balance in these accounts (in 2004 dollars) rose from $19,172 in 2001 to $28,000 in 2004. The number of households that owned an IRA or Keogh plan for the self-employed fell from 33.4 million in 2001 to 32.6 million in 2004. The median balance in these accounts (in 2004 dollars) rose from $28,758 in 2001 to $30,000 in 2004.

The median value in 2004 of all retirement accounts owned by households headed persons between the ages of 55 and 64 was $88,000, up from $58,580 in 2001. For a 65-year-old retiring in May 2006, $88,000 would be sufficient to purchase a level, single-life annuity that would pay $653 per month, based on the federal Thrift Savings Plan's current annuity interest rate of 5.375%. This amount would replace just 15% of the median household income of $53,400 among households headed by individuals who were 55 to 64 years old in 2004.