WASHINGTON, DC--Baby boomers' retirement income will be less certain and have fewer guarantees than that of many earlier retirees because of the shift away from "traditional" defined benefit pensions, according to a new research report by the nonpartisan Employee Benefit Research Institute (EBRI).

The April EBRI Issue Brief features original research on the long-term implications of the growth of defined contribution plans (such as 401k plans) and the decline of defined benefit plans for future retirees. It focuses on the expected increase in retirees' reliance on income from sources that are not guaranteed for life--a change that puts many Americans at increased risk of outliving their resources if they do not plan wisely and save for retirement.

"This report quantifies and projects the sources of retirement income that Americans are likely to depend on, how those sources are changing, and the very real risk that many Americans face of outliving their money," Salisbury said.

The report presents results from EBRI's Retirement Income Projection Model that quantify how much the importance of individual account plans (such as 401ks) is expected to increase because of these changes in private retirement plan patterns. For example, EBRI's model shows that:

For today's retirees with either defined benefit, defined contribution and/or IRAs, approximately 39 percent of pension wealth for males would be available from defined benefit plans and 49.7 percent for females; defined contribution and cash balance plans would provide 33.2 percent for men and 32.5 percent for women; and IRA's would provide 27.8 percent for men and 17.8 percent for women.

For the youngest baby boom males (born in 1964) the analysis finds that 26.4 percent of their pension wealth will be provided through defined benefit plans, a decline of 32.4 percent compared with today's retirees, while their female counterparts will see their defined benefit pension wealth fall to 37.2 percent, a decline of 25 percent. Defined contribution plans will provide 33.7 percent of the retirement wealth for men in this birth cohort, and 31.9 percent for women, the analysis found. IRAs will expand their role the most, reaching 39.9 percent for men and 30.9 percent for women.

The EBRI analysis noted that the shift to defined contribution plans was due to changes in the work force and business environment. For employees, defined contribution plans benefits are less age-sensitive, in that benefits payable upon job termination to younger workers are usually higher under defined contribution plans than under traditional defined benefit plans. Also, years of service under defined benefit plans with age and service requirements are not usually transferable from employer to employer.

Some of the report's other main findings:

• A reason for public policy concern about income adequacy for future retirees is that Social Security's age for payment of full-retirement benefits is rising, and projected long-term financial shortfall could result in a reduction in the current-law benefit promises made to future generations of retirees. Another reason is that fewer baby boomers will be retiring with "traditional" pension annuities that historically have been the predominant source of pension-provided retirement income. This raises the question of whether individual decisions on "spending or saving" pension distributions will lead to retirement income.
• Results from the EBRI Retirement Income Projection Model show, for both men and women, an appreciable drop in the percentage of private retirement income that will be paid as an annuity. Consequently, there is a clear increase in the proportion of retirement assets that retirees--rather than pension plan managers--will have to manage. This shift in responsibility involves the individual (rather than the pension plan) bearing the risk of investment losses.
• Since most retirees' non-Social Security retirement income will be withdrawn as a lump sum or in self-initiated periodic payments, rather than as a monthly paycheck for life arriving from the pension plan, retirees will need either to purchase an annuity from an insurance company or carefully manage their individual rate of spending in order to make their assets last throughout their retirement years.

"The dramatic growth of 401k-type retirement plans that pay in lump-sum distributions rather than annuities, and the increasing payment of lump sums from defined benefit pension plans, means that individuals are increasingly responsible for decisions that will determine their future retirement: Whether to spend it immediately--or whether to roll over and save the lump sum, how to invest it, and how fast they can spend it in retirement and not outlive the money," said EBRI President and CEO Dallas Salisbury. "More workers than ever will have the opportunity for pension-provided income to supplement Social Security--and they will also have the opportunity to have it disappear by personal decision long before they die."

Salisbury added: "This report serves to underline the tremendous importance of expanding financial literacy education, beginning at the earliest possible ages, and extending it to today's worker and retirees. The shift to a personal responsibility retirement model will only be successful if financial literacy rises."

EBRI Issue Briefs are monthly topical periodicals providing expert evaluations of employee benefit issues and trends, including critical analyses of employee benefit policies and proposals. Members of the press may request complimentary copies of EBRI Issue Brief no 232, "The Changing Face of Private Retirement Plans," from Alicia Willis at (202) 775-9132. Reporters may also obtain an executive summary of the report at www.ebri.org/ebripubs.htm. Full-text copies of the report are available online by contacting Danny Devine (202) 775-6308, e-mail: devine@ebri.org for the "press only" password. Others may purchase copies for $25 prepaid or pdfs for $7.50 prepaid by calling (202) 775-9132.

EBRI is a private, nonprofit, nonpartisan public policy research organization based in Washington, DC. Founded in 1978, its mission is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI does not lobby and does not take positions on legislative proposals. EBRI receives funding from individuals, employers of all types, unions, foundations, and government.