Pension Income Rises Despite DB-to-DC Shift
Another one bites the dust.
“One” in this case being the notion that the shift in emphasis from defined benefit plans to defined contribution designs has produced a decline in retirement income. In fact, a new study finds that more retirees are receiving retirement income from private-sector retirement plans than in 1975, the year after the Employee Retirement Income Security Act (ERISA) came into being.
The study, “A Look at Private-Sector Retirement Plan Income After ERISA, 2013, ” finds that in 2013, a third of retirees received private-sector retirement plan income—either directly or through a spouse—compared with only about one-in-five (21%) in 1975. According to the report by the Investment Company Institute), the median income received by those with private-sector retirement plan income was approximately $6,600 in 2013, compared to about $4,900 in 1975 (in 2013 dollars).
Since 1991, there has been a more than 40% increase in the median amount of inflation-adjusted income received by those with income from private-sector pensions.
The report noted that coverage by a DB plan does not always result in retirement income. Moreover, the historical prevalence of retirement income from private-sector DB plans may be overstated by looking only at pension COVERAGE (those eligible for participation in a plan), rather than actual receipt of pension income.
The ICI report notes that, while many retirees may have worked for companies that offered DB plans at some point in their career, the combination of vesting rules and “back-loaded” benefit accrual designs resulted in many retirees getting little or no retirement income from these plans. In 1975, when nearly 90% of private-sector workers with retirement plans were covered by DB pension plans (NOTE: that’s far from all private-sector workers), only about one in five retirees received ANY income from private-sector retirement plans. Moreover, among retirees with private-sector retirement plan income in 1975, ICI notes that the median annual income received per person was about $4,900 (in 2013 dollars).
The report notes that in 2013, Social Security benefits represented 57% of total retiree income and more than 85% of total income for retirees in the lowest 40% of the income distribution. Even for retirees in the highest income quintile, Social Security benefits represented one-third of income in 2013.