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Most US federal retirement plans are now fully funded, but since plan assets must legally be invested in federal securities, fund surpluses are used to reduce overall federal budget deficits. As a result, current taxpayers are not charged with the cost of future federal retirement obligations. Nevertheless, federal rules do require the employing federal agency to budget for current personnel’s accruing liability of retirement promises. Therefore, policy decisions regarding the number of federal civilian and military personnel and the design of their retirement benefits may be made with a better understanding of the costs.

This chapter uses a concept dubbed the asset/salary ratio (ASR) to examine factors that boost the chances that defined contribution plan participants will have sufficient assets to generate adequate retirement income. The authors show that, for a sample of higher‐education participants, assets are (on average) consistent with at least a 70 percent income replacement rate. Key factors predictive of success are an adequate contribution rate and long tenure in the system; having a portfolio weighted to equities is also beneficial but to a lesser extent.

An aging-population tsunami is sweeping the world, and capital markets have buffeted pension plans while retiree healthcare care costs rise without letup. This coincidence of shocks marks a crucial moment for global retirement security, since public and private retirement systems everywhere have fared poorly just as the massive Baby Boom generation moves into retirement. Clearly, urgent efforts are needed to enhance risk management for public and private pension systems around the world. This book explores three aspects of the evolution of risk and reward-sharing in retirement to offer guidance to pension fiduciaries, plan participants, and policymakers. First, it focuses on new perspectives for assessing retirement risks and rewards. Second, it evaluates efforts to insure retirement plans. Lastly, it provides several new strategies for managing retirement system risk. This chapter previews the remarkable findings by contributors to this volume.

This chapter discusses developments in managing risks in retirement plans. It begins with a brief analysis on why traditional defined benefit pension plans are being abandoned for defined contribution plans. It identifies key risks affecting both types of plans, and how these can be managed. An overview of the studies included in this volume is then presented.

Recent financial market and plan termination experiences have exposed the shortcomings of existing funding, disclosure, and premium rules governing private single-employer defined benefit pension plans in the United States. These rules were designed to provide predictability for plan sponsors and administrators by insulating pension plans from the realities of economic and financial market fluctuations. Unfortunately, current practice often overlooks key financial principles that arguably should inform a responsible set of pension rules and the insurance system backing the plans. This chapter outlines the key characteristics of pension plans needed to beneficially guide rule-making and offers examples drawn from proposed funding and premium rules.

It is sometimes argued that firms sponsoring defined benefit pensions are led to take higher risks because pension insurance premiums and funding requirements do not reflect the riskiness of the pension plan portfolio or sponsor bankruptcy risk. This perspective is tested by linking company data on expected default probabilities with newly-available information on pension plan assets. It is shown that moral hazard induced by the current pension insurance environment has influenced corporate pension plan sponsor funding outcomes, even controlling for cash availability. There is no evidence that the share of plan assets invested in equities is related to firm bankruptcy risk or the plan’s contingent claims on the pension insurance entity.

Financial advice tends to focus on financial assets, but other levers may be more important for most households. This chapter proceeds in three stages. First, we report a simple Excel spreadsheet exercise that provides a stylized example of the tradeoff between returns and time spent in the labor force. Next, we use data from the Health and Retirement Study (HRS) on pre-retirees age 51–64 to see how the gap between retirement needs and retirement resources is affected by working longer, taking out a reverse mortgage, controlling spending, and shifting all assets to equities with no risk. Last, we use a simple dynamic programming model to calculate a risk-adjusted measure of the value for the average household of moving from a typical conservative portfolio to an optimal portfolio. Our answer from all three exercises suggests that the focus on asset allocation is misplaced.

Reforms to the Employee Retirement Income Security Act (ERISA) embody a worker-security theory of pensions. This view received its most important early expression in the report of the President’s Committee on Corporate Pension Funds (Cabinet Committee). It became clear that the more stringent rules might apply to corporate plans when the Senate adopted Albert Gore’s (D, Tenn.) amendment to eliminate capital gains treatment for lump-sum distributions from any qualified retirement plan. The goal of the tax subsidy was to encourage firms to provide retirement income to employees. The technical group’s response to the Cabinet Committee’s proposals for expanding coverage and limiting tax avoidance was more ambivalent. Public Policy and Private Pension Programs appeared six months after Vance Hartke introduced his bill to create a termination insurance program and less than four months after Studebaker terminated the pension plan for workers in South Bend.

Today it is natural to associate mutual funds with retirement plans since funds are the largest funding medium for 401(k) and other defined contribution plans, as well as for Individual Retirement Accounts (IRAs). But for many years the retirement market was dominated by defined benefit plans, which did not invest in mutual funds. The revolution in retirement plans began in 1962 when Congress authorized self-employed individuals to establish “Keogh plans.” It accelerated with the enactment of the Employee Retirement Income Security Act of 1974, which created the first IRAs, and took a quantum leap forward in 1978 when Congress authorized the creation of 401(k) plans.

Today it is quite natural to associate mutual funds with retirement plans. After all, mutual funds are the largest funding medium for 401(k) and other defined contribution plans as well as for individual retirement accounts (IRAs). Mutual funds constitute one quarter of all U.S. retirement plan assets. The close association between mutual funds and retirement plans is a relatively new phenomenon. For many years, the corporate retirement market was dominated by defined benefit plans, which did not invest to any significant degree in mutual fund shares. Management of the smaller universe of defined contribution plans was dominated by banks and insurance companies, which did not make use of mutual funds. The revolution in retirement plans began quietly in 1962 when Congress permitted self-employed individuals to establish retirement plans. It accelerated with the enactment of the Employee Retirement Income Security Act of 1974, which created the first IRAs, and took a quantum leap forward in 1981 when Congress permitted all workers to have IRAs and the Internal Revenue Service adopted regulations laying the groundwork for 401(k) plans.

Employee Retirement Income Security Act of 1974 (ERISA) introduced a new conceptual frame of reference for federal pension policy. Although ERISA was known as the “pension reform law,” it has also had a major effect on medical provision in the United States. The political history of ERISA suggests that, without the threat of conflicting state laws, employers and unions that sponsor multistate health plans will oppose initiatives to create federal minimum standards for health plans or expand the liability of such plans. The tax treatment of pension plans created a significant disparity in the tax laws. ERISA’s limited regulation of welfare plans and its sweeping preemption provision produced a healthcare system in which there are different rules for plans sponsored by public- and private-sector employers and different rules for private-sector plans depending on whether a plan purchases insurance or self-insures. The major influences of ERISA on health policy are explained.

In 1974, President Gerald Ford signed the Employee Retirement Income Security Act, which revolutionized American private retirement practices. The legislation created the Individual Retirement Account (IRA), the cornerstone of modern retirement planning. The creation of massive individual and corporate retirement accounts has significantly reshaped financial markets.

This chapter elaborates how Studebaker Corporation came to play its role in the political history of the Employee Retirement Income Security Act (ERISA). The Studebaker-Packard Corporation terminated a pension plan the United Auto Workers (UAW) had negotiated for employees of the Packard Motor Car Company. Studebaker became “the most glorious story of failure in the business.” The Studebaker Corporation and the Packard Motor Car Company created pension plans for their production employees during the Congress of Industrial Organization’s (CIO) “pension stampede.” The Kaiser and Hudson shutdowns led the UAW to push for vesting in its next round of collective bargaining. Studebaker-Packard had avoided bankruptcy in 1958 by restructuring its debt, a move that passed “real control” of the firm into “the hands of New York bankers.” The Studebaker shutdown and the report of the President’s Committee put pension risks on the congressional agenda and launched the campaign for pension reform.

On Labor Day, President Gerald Ford signed the Employee Retirement Income Security Act of 1974 (ERISA). The enactment of ERISA presents a political puzzle. The political history of ERISA provides benchmarks for gauging how well current law suits emerging needs and an important counterpoint to the conventional wisdom about policy-making in the United States Congress. ERISA recast the federal government’s role in the private pension system. ERISA reflected a new conceptual framework for pension policymaking—the worker-security theory. Union officials who opposed pension reform used a related argument that stressed the economic constraints on the employment relationship. Jacob Javits’ tactics did not prevent members of Congress from exercising independent judgment in their consideration of pension reform legislation.

This chapter describes the challenges and opportunities that older Americans face, with a focus on retirement income security and the role of continued work later in life. We first overview the new world of retirement income security including a discussion of how a low return environment (e.g. low interest rates) exacerbates existing retirement income security challenges. We then document how older people have responded to the evolving retirement income landscape, especially when and how they exit the labor force, and we explore how continued work later in life can help mitigate some of the anticipated retirement security challenges. We then pose some important outstanding questions. The implications of societal aging depend in large part on how we harness or squander the labor resources of older individuals.

This chapter examines issues regarding the distribution and costs of Social Security benefits. Since the passage of the Employee Retirement Income Security Act (ERISA), much of the policy dialogue about employer-sponsored pension plans has focused on the “who” and the “how much” of the tax preferences. Policymakers’ concerns about high earners reaping too much subsidy from the tax deferral have led to repeated restrictions and reductions in pension contribution and benefit limits. Essentially the same concerns prompted policymakers to legislate widespread discrimination provisions and testing to ensure that retirement benefits were spread widely and fairly. The chapter considers policy issues of employer-sponsored retirement plans in relation to Social Security, along with payroll tax costs and benefits of Social Security participation. It presents data on the tax benefits of employer-sponsored retirement plans to show how the Social Security system interacts with private pensions. It also discusses the implications of Social Security spousal benefits and concludes by turning to the U.S. retirement policy.

H.R. 2, now christened the Employee Retirement Income Security Act of 1974 (ERISA), was among the first measures Gerald Ford signed after assuming the presidency. More than two months after the House passed H.R. 2, House and Senate staffers appeared still to be deadlocked on a number of issues. The first installment of the staff summary covered jurisdiction, vesting, funding, and portability. These four issues of conferees are addressed, together with termination insurance, effective dates for termination insurance, preemption, fiduciary standards, and taxation of retirement plans. The Steelworkers and Auto Workers pressed the conferees to phase in insurance coverage for benefit increases. They also urged the conferees to reconsider their earlier decision to phase in coverage for existing plans. On September 2, 1974, legislators and committee staff, officials from the executive branch, and representatives of labor and management gathered at the White House. The ERISA of 1974 was law.