Millions of Retirees Face Reduced Standard of Living in Retirement

Many of the nation's 77 million baby boomers could experience declining living standards in their golden years, according to an analysis prepared by economist Jeffrey R. Brown, assistant professor of finance at the University of Illinois at Urbana-Champaign's College of Business, and a former Senior Economist with the White House Council of Economic Advisors.

In a study released today by Americans for Secure Retirement, an organization representing business, women, consumer, rural and minority interests, Professor Brown asserts that the increased life expectancy of baby boomers combined with the decline in traditional retirement programs that provide a steady source of income will create a unique 21st Century retirement security problem. "Never before in history have so many individuals had the opportunity, and the difficult challenge, to support themselves financially for decades after retirement." The study, entitled The New Retirement Challenge, warns that our nation has overlooked a major factor in its debate over retirement security, concluding: "too little attention has been paid to ... how a retiree converts her nest egg into a sustainable stream of retirement income that will last as long as she lives."

Key findings of "The New Retirement Challenge" include:

• Americans, especially women, are living longer than ever in retirement. Today the average retiree can expect to spend approximately one-fourth of his or her life in retirement. At the beginning of the 20th century, life expectancies at birth were only 51.5 years for males and 58.3 years for females. A full century later, in the year 2000, life expectancy at birth was nearly 80 years for males, and over 84 years for females. That is a 25-year increase in life expectancies over a single century. Today's 65-year old woman can expect, on average, to live nearly an additional 20 years, and there is approximately a one in three chance that she will live to age 90.
• Longer life spans require not only greater financial resources but also greater control over how they are managed and spent. Even those who have carefully saved and built sizeable retirement nest eggs will likely find that retirement brings a host of new financial challenges. One of the most important of those challenges is determining how to convert one's nest egg into a sustainable stream of retirement income, especially in the face of so much uncertainty about how long one will live and what future expenditure needs will be.
• Access to guaranteed retirement income has dropped sharply in the last decade. While baby boom retirees will live longer in retirement than ever, fewer than ever participate in employer-sponsored defined benefit plans that provide a steady income for as long as they live in retirement. From 1992 to 2001, the percentage of family heads who participated in defined benefit plans declined from 59.3 percent to only 38.4 percent.
• Policymakers must think beyond just encouraging savings. Policymakers have long recognized the value of using public policy to provide incentives for households to increase their retirement savings. For example, there are now a wide range of financial tools available to provide individuals with opportunities to save for retirement in a tax advantaged way. At the same time, there are virtually no tax or other policy incentives in place to encourage households to engage in careful dis-saving, especially among those households with limited access to employer-sponsored retirement plans. Policymakers concerned with lifelong retirement income security should give careful consideration to both issues.
• Annuities could provide many baby boomers with a steady stream of income in retirement to complement Social Security. Brown points to financial products available in the private market which can help insure that individuals have adequate incomes at advanced ages, even if they live to age 100 and beyond. In particular, life annuities provide a guaranteed source of monthly income that cannot be outlived. By providing insurance against a drop in one's standard of living at older ages, life annuities ought to play a central role in the portfolios of retirees.
• Policymakers should look to encourage annuitization. According to the report, there are two reasons for policymakers to care about annuitization policy. The first is a desire to help Americans achieve lifelong financial security. The second is to try to limit the future fiscal pressures that will be placed upon federal, state and local governments from means-tested programs at a time when the nation's entitlement programs will already be under significant financial stress.

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A bill introduced in Congress earlier this year would help address many of the issues cited in this report. The "Retirement Security for Life Act of 2004," introduced in July by Nancy Johnson (R-CT), John Tanner (D-TN), Phil English (R-PA), and Stephanie Tubbs Jones (D-OH), enjoys bi-partisan support. The legislation would give Americans more control over their retirement and empower them to receive a steady income for life through the use of products like annuities. Under the proposal, individuals would not pay federal taxes on one-half of the income generated by lifetime annuities, up to a maximum of $20,000 in excluded income per year. For a typical American in the 25% tax bracket, this would provide an annual tax savings of up to $5,000.

In addition to his current position, Professor Brown is a faculty research fellow at the National Bureau of Economic Research. Previously, he was an assistant professor at Harvard University's Kennedy School of Government. During 2001-2002, Professor Brown served as Senior Economist at the White House Council of Economic Advisers, and as a staff member for the President's Commission to Strengthen Social Security. He holds a Ph.D. in economics from MIT, a Master's degree from Harvard University, and a B.A. from Miami University.