CONCLUSIONS

The new survey data provide a relatively complete overview of the distribution and level of retirement benefits that are currently being received by private sector workers. The data show several pronounced trends. Most significant among these is the shift in the form of benefits toward the receipt of lump sum distributions from defined contribution plans. There has also been a significant erosion of employer sponsored retiree health benefits.

The data indicate that in terms of the incidence of retirement income benefits the system has been relatively stable. Virtually all retirees receive Social Security benefits after the age of 65 and somewhat less than one half are able to supplement this income with a private pension benefit. There are several key factors including earnings, firm size and education level that are associated with the likelihood of receiving a private pension benefit. In 1994, just under one half of all benefit recipients reported the receipt of an annuity benefit, a decline of 12 percentage points from what was reported in the 1989 survey. The trend toward lump sums appears to be stronger for women than for men, a reflection of differing labor force patterns.

The number of lump sum recipients increased 50% from 1989 to 1994, reflecting the very strong growth rate during this period in the number of workers participating in 401(k) plans. Most of the increase in lump sum recipients results from workers withdrawing their plan assets when changing jobs. Among workers ages 55 and over with a prior job, the lump sum receipt rate doubled from 9% in 1989 to 18% in 1994. This trend should continue and may even accelerate as the number of workers with 401(k) plan accounts continues to increase.

The median amounts of the lump sum distributions that are being received remained relatively constant at a level below $10,000, with significant variation in favor of men and older workers. A large portion of these distributions continues to be used for purposes other than retirement income savings.

Among the workers receiving annuity benefits, the dollar value of these benefits continues to increase substantially with subsequent groups of new recipients, although the median level remains below $10,000 per year. These increases, however, are roughly proportional to the higher levels of earnings attained by recent retirees, which has resulted in a relatively stable income replacement rate from private pension annuities at about one-fourth of pre-retirement earnings at the time of initial receipt.

Overall Social Security and private pension benefits are replacing about 60% of nominal earnings. There is, however, a broad distribution around this median with many retirees replacing less than one half.

Only a small proportion of annuitants have received any cost of living adjustments. This has resulted in a significant erosion of the ability of their annuity to replace the real value of pre-retirement income. In terms of real replacement rates current retirees are replacing less than one half of the purchasing power of their prior earnings. This will require them to rely on individual savings or to continue working during retirement if they wish to maintain their standard of living.

The incidence of retirees receiving employer sponsored health benefits declined substantially. Between 1988 and 1994 the proportion of retirees with health coverage from their prior employer declined from 44% to 34%. This decline is associated with an overall decline in employer sponsorship of health plans and a decrease in retiree enrollment in plans when they are available.

Much of the decrease in retiree enrollment appears to be cost related. Among retirees with coverage, the proportion reporting that their former employer paid the entire premium declined from 42% in 1988 to 37% in 1994. The average amount of the premium cost paid by the retiree increased by about 10% from $874 to $960 during this period. Among retirees who were covered in their prior job and subsequently dropped coverage, 27% reported that this was because the coverage was too expensive. This represents an increase from 21% providing this response in 1988.

As with pension benefits, access to retiree health coverage varies significantly with a variety of factors. High rates of receipt of health benefits are generally associated with the same characteristics as the increased prevalence of pension benefits. Male retirees, those who have worked in larger firms, those covered by collective bargaining agreements, and those with higher levels of pre-retirement income have a far greater likelihood of maintaining employer sponsored health benefits in retirement.