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Overview
State of U.S. Retirement Economics of Pensions Close Up on Public Pensions
National Retirement Risk Index ( 1983 2010) Working Households at Risk of Falling Short of PreRetirement Living Standard
28%
2006
Own or Spouse's DB Pension
2010
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Economics of Pensions
Pensions are unique in that they: Avoid the problem of over-saving by pooling the longevity risks of large numbers of individuals resulting in a 15% cost savings. Are ageless and therefore can perpetually maintain an optimally balanced investment portfolio rather than the typical individual strategy of down-shifting over time to a lower risk/return asset allocation resulting in a 5% cost savings. Achieve higher investment returns as compared to individual investors because of professional asset management and lower fees resulting in a 26% cost savings.
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Economics of Pensions
Economies of scale enable group pensions to provide same retirement benefit at half the cost of individual 401(k)-type account.
DB pensions cost 46% less than DC accounts for the same benefit. Conversely, DC system costs 83% more than DB system.
Source: NIRS, Better Bang for the Buck, 2008 13
Source: Center for Retirement Research at Boston College (data not provided for 1995, 1997, 1999)
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39
29
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10 20 30 Number of States 40 50
Source: Authors analysis of NCSL data. Changes affect some or all members of state -run plans in each state.
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33
DB + DC hybrid
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10 20 Number of States 30 40
Source: Authors analysis of NCSL data. Changes affect some or all members of state -run plans in each state. 17
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Workers would have only a 50% chance of reaching 60% of the benefit provided by the DB plan, at the same cost.
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Key Take-Aways
Quiet Crisis most Americans not prepared to be self-sufficient in retirement retirement. High cost for retirement insecurity for individuals, families, public assistance, broader economy. Americans see pensions as solution to relieve high retirement anxiety. Public pensions recovering from impacts of financial crisis, continuing pensions.
Questions?
Diane Oakley NIRS Executive Director 202.256.1445 doakley@nirsonline.org www.nirsonline.org