The Evolution of the U.S. Pension System: 1994–2019 Jonathan Barry Forman (“Jon”) University of Oklahoma   Dana M. Muir University of Michigan John A. Turner Pension Policy Center  European Network for Research on Supplementary Pensions (ENRSP) Seminar on 25 Years of (Supplementary) Pensions Friday, 6 September 2019 Antwerp, Belgium

Overview of the U.S. Economy Population ~ 327 million Gross Domestic Product, 2018 ~ $21 trillion $61,372 Median Household Income in 2017 $47,060 Average Wage in 2019 2019 Federal Poverty Guidelines $12,490 for a one-person household $16,910 for a two-person household

Retirement Income in the U.S. 48.6 million retirees in 2014 66.4 million in 2025 82.1 million in 2040 Sources of Retirement Income Social Security Pensions Individual Retirement Accounts (IRAs) Annuities Individual savings & a savings withdrawal plan

Social Security Social Security Inflation-adjusted pension benefits 44.5 million retirees in July of 2019 $1,472 per month, average benefit Social Security typically replaces ~ 35% of preretirement income Supplemental Security Income for the poor 2.3 million elderly beneficiaries $459 per month, average benefit *Social Security Administration, Monthly Statistical Snapshot, July 2019 (Aug. 2019), https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/2019-07.html.

Pensions, IRAs & Annuities U.S. has a voluntary pension system $34.0 Trillion Retirement Savings in 2018 $15.5 trillion in defined benefit plans $7.3 trillion in defined contribution plans $79.3 trillion in IRAs $2.6 trillion in annuities Only about half of American workers have a pension 66% of private-sector workers have access 49% participated Participation in IRAs is even lower Individuals rarely buy annuities Board of Governors of the Federal Reserve System, Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts: First Quarter 2019 94 tbl.L.117 (June 6, 2019), https://www.federalreserve.gov/releases/z1/20190606/z1.pdf.

Pensions: Favorable Tax Treatment Employer contributions to a pension are not taxable to the employee The pension fund’s earnings on those contributions are tax-exempt Employees pay tax only when they receive distributions of their pension benefits in retirement Exempt/Exempt/Taxable (EET)

Defined Benefit Plans Employer promises employees a specific benefit at retirement. Benefits often tied to years of service (yos) & final average pay (fap) E.g., a worker who retires after 30 years of service with final average pay of $100,000 would receive a pension of $60,000 a year for life ($60,000 = 2% × 30 yos × $100,000 fap) Default pay-out in the form of a life annuity

Defined Contribution Plans Employer may contribute, say, 5% of pay to an account for the worker E.g., a worker who earned $100,000 in a given year would have $5,000 contributed to an individual investment account for her ($5,000 = 5% × $100,000) 401(k) plans are the most popular Individuals can also contribute, up to $19,000 in 2019 Retirees usually take lump-sum distributions, not annuities Or rollover the balance into an IRA

Individual Retirement Accounts (IRAs) In 2019, individuals can contribute and deduct up to $6,000 to an IRA Individuals over age 50 can contribute and deduct another $1,000 (for a total of up to $7,000) Like private pensions, IRA earnings are tax-exempt, & distributions are taxable.

Major Shift from Defined Benefit Plans to Defined Contribution Plans Employee Retirement Income Security Act of 1974 (ERISA) Factors contributing to the shift:: (a) funding and accounting requirements (b) administrative and other costs, and (c) workforce-related demographic changes and preferences

The Growth in 401(k)-Type Defined Contribution Plans Administrative costs are lower No requirements to pay insurance premiums No actuarial computations

Roth IRAs and Roth 401(k) Plans Tax/Exempt/Exempt (TEE) approach Roth IRAs Contributions are not deductible (T) Instead, withdrawals are tax-free (E) (and earnings are tax-exempt) (E) Roth 401(k)s Contributions are not excludable Distributions are tax-free

Other Tax Changes Little incentive for low-wage workers to save: Very little wage growth in real wages over the last 25 or 30 years Their income tax rates have declined—to just 10 or 15% Since 2002, there is a tax credit of up to $1,000 for low- and moderate-income savers but the credit is not refundable There is a $500 tax credit for small businesses that adopt new pension plans (for up to three years)

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About the Authors Jonathan Barry Forman (“Jon”) is the Kenneth E. McAfee Centennial Chair in Law at the University of Oklahoma College of Law, 300 Timberdell Road, Norman, Oklahoma, 73019; jforman@ou.edu; 1-405-325-4779; http://www.law.ou.edu/directory/jonathan-forman. Dana M. Muir is John A. Turner is the Director of the Pension Policy Center, 3713 Chesapeake St. NW, Washington, DC 20016-1813; jturner49@aol.com; 1-202-686-6775; https://pensionpolicycenter.com/?page_id=12.