PensionReforms' summary and comments

This is the second report from the authors on this kind of topic.  PensionReforms looked at their projections of 401(k) retirement savings (and the relatively smaller rise in Defined Benefit style savings) in the coming decades here.

This report widens the look forward to include potential retirement wealth from Social Security - the US Tier 2 Defined Benefit pension that underpins Americans' retirement incomes.

"We have projected the accumulation of 401(k) assets for families retiring through 2040. Our goal has been to understand how the rise of personal retirement saving plans will change the wealth of persons at retirement. In particular, we compare the sum of Social Security wealth and 401(k) assets for families that attain age 65 in 2000 to the sum of Social Security wealth and 401(k) assets in 2040.  We consider the growth of retirement assets by Social Security wealth decile as well as by lifetime earnings decile.  Because the projections are based on a series of assumptions with uncertain validity, the projections are subject to considerable uncertainty.  We believe, however, that the projections provide a reasonable indicator of how the rise in 401(k) plans will affect the total retirement assets of future retirees."

Given the expected decline in Defined benefit wealth (covered in the earlier report), this report focuses on just 401(k) plans and Social Security. Because of measurement issues, IRA assets are also excluded though expected rollovers from 401(k) plans to IRA plans are counted.   

"Our projections show that if the historical rate of equity return continues in the future then, on average, the sum of family Social Security wealth plus the 401(k) assets of retirees will more than triple between 2000 and 2040 (in year 2000 dollars). If the equity return is equal to the historical rate less 300 basis points, the sum of these retirement assets will more than double."

The report also looked at the distribution of these two components of expected wealth across "deciles of lifetime earnings":
"We find that the rate of growth of the sum of Social Security wealth and 401(k) assets is surprisingly uniform across deciles of the distribution of lifetime earnings. Assuming historical rates of equity return, we find that the sum of these retirement assets more than doubles between 2000 and 2040 for all but the first two deciles of the distribution of lifetime earnings. Our projections also show little growth in the sum of Social Security and 401(k) assets for families in the lowest decile of lifetime earnings; the projected growth for families in the second decile is 50 percent."

The report also looked at an assumed return in the 401(k) savings of 300 basis points (that's 3 percentage points) less than the historical average - adding Social Security wealth to this produces a range of possible outcomes:
"Assuming historical rates of return, the sum of these retirement assets at age 65 in 2040 ranges from a low of 228 percent to a high of 378 percent of the sum in 2000 (excluding the larger increase for the 1st decile). If the future rate of return on equities is equal to the historical rate less 300 basis points, the sum of Social Security wealth and 401(k) assets at age 65 in 2040 ranges from 179 percent to 258 percent of the sum in 2000, depending on the Social Security wealth decile."

PensionReforms notes:
-   These calculations were done a year before the 2008 financial crisis.  That will significantly write down the first decade values of the assets accumulated to date (the projections started in 2000) and also reduce the historical return calculation of 9.86% used as the basis of the projections for the 401(k) component.
-   The disparities of income during employees' working life tend to be magnified in retirement because of the impact of 401(k) wealth.  Social Security wealth, by contrast, is more redistributive.
-   The apparent dispersion implied in the total expected retirement wealth between the bottom lifetime earnings' decile (no change) the second decile (50% increase) and the other eight deciles (a doubling at decile 3 through to a quadrupling at decile 9) may be an unacceptable outcome from a democratic perspective.  It may force either a real improvement in Social Security wealth at the bottom end and/or a reduction in the value of incentives to save at the top end.  The projected disparity may not happen in the manner suggested.
-   Defined Benefit pension wealth may, in the light of the 2008 events, assume more significance than recent trends might have indicated.

PensionReforms also notes that 40 year projections of this kind are, as the report itself says, utterly dependent on the assumptions. (File size 281 KB; 540 pp) 263