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

Organization of Our Chapter Introduction The Transition from Defined Benefit to Defined Contribution Plans Changes in the Tax Treatment of Pensions Administrative Issues Behavioral Economics, Financial Literacy and Conflicts of Interest The Challenges Ahead Conclusions

Background on 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

Background on 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

Background on 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 $7.0 trillion in defined contribution plans $8.8 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.

The Transition from Defined Benefit to Defined Contribution Plans The decline in DB plans The growth in 401(k)-type DC plans Rollovers from 401(k)s to IRAs

The Decline in DB Plans Employee Retirement Income Security Act of 1974 (ERISA) Factors contributing to the shift Funding and accounting requirements Administrative and other costs, and Workforce-related demographic changes and preferences

The Growth in 401(k)-Type DC Plans 401(k) plans are the most popular Individuals can contribute up to $19,000 in 2019 Administrative costs are lower No requirements to pay insurance premiums No actuarial computations Retirees usually take lump-sum distributions, not annuities Or rollover the balance into an IRA

Rollovers from 401(k)s to IRAs When a worker with a DC plan, changes jobs, that worker can: Keep the plan with the former employer; Take a lump sum; Paying a 10-percent penalty if before age 55 Roll over the account assets to the plan of a new employer if the plan of the new employer permits; or Roll over the account assets to an IRA

Changes in the Tax Treatment of Pensions Most Pensions: Exempt/Exempt/Taxable (EET) Employer contributions to a pension are not taxable to the employee The pension fund’s earnings are tax-exempt Employees pay tax only when they receive distributions in retirement Individual Retirement Accounts (IRAs) Individuals can contribute up to $6,000 to an IRA Individuals over age 50 can contribute another $1,000 Like private pensions, IRA earnings are tax-exempt, & distributions are taxable.

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)

Administrative Issues Funding Decreased use of employer stock Automatic Features Contribution, Escalating Amounts, Investments in Qualified Default Investment Alternative, Distribution as Lump Sum Efficiency Pressure on fiduciaries has decreased fees and costs, which are not directly regulated or capped Complexity Perspectives vary between employers and employees and between pre-and post-retirement periods Liquidity Has increased due to changes in tax treatment and the shift to DC plans High compared to other countries.

Behavioral Economics, Financial Literacy, and Conflicts of Interest Low levels of financial literacy Weak regulation of conflicts of interest in the financial advice industry

Challenges Ahead Expanding Coverage and Shift Away from Single-Employer Plans Auto-portability July 2019 approval of a vendor’s automatic portability program Funding Multiemployer Plans Lifetime Income Solutions

Conclusions No significant change in coverage Increased complexity for participants Increased liquidity Retirement gap estimated at between $4 and $28 trillion, and increasing

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 the Robert L. Dixon Collegiate Professor of Business and the Arthur F. Thurnau Professor of Business Law at the University of Michigan’s Ross School of Business, Ann Arbor, Michigan, dmuir@umich.edu; 1-734-763-3091; https://michiganross.umich.edu/faculty-research/faculty/dana-muir 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.