CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

Individual account retirement plans, such as 401(k) plans and individual retirement accounts (IRAs), have continued to increase their share of retirement assets, and this share is projected to grow further, particularly for private-sector workers. Consequently, tracking the percentage of workers who have these plans and how much has been accumulated in them is an important indicator of how workers are financially preparing for retirement. This paper uses the most recent data (2005) from the Survey of Income and Program Participation (SIPP), conducted by the U.S. Census Bureau, to examine the prevalence of these accounts among workers ages 21-64. In brief, the most current data show that the large increase in the number of 401(k)-type plans and the number of participants in those plans, which had grown sharply through the 1990s, have subsequently grown at a slower pace. Ownership of both 401(k)-type plans and IRAs has risen significantly, as have assets in 401(k)-type plans and IRAs.

The paper begins with an examination of the ownership of IRAs and participation in 401(k)-type plans (singularly and in combination) among workers ages 21-64. Next, it investigates the average contribution, the percentage of participants contributing the maximum amount, and the average earnings in 401(k)-type plans and IRAs. Finally, it presents the latest official government data on the assets and participants, where they are available for these accounts.

PAUL A. SMITH, Federal Reserve Board of Governors
Email: paul.a.smith@frb.gov
DAVID A. LOVE, Williams College - Department of Economics
Email: dlove@williams.edu
LUCY C. MCNAIR, Board of Governors of the Federal Reserve System
Email: lucy.c.mcnair@frb.gov

We construct two measures of the current wealth adequacy of older U.S. households using the 1998-2006 waves of the Health and Retirement Study (HRS). The first is the ratio of comprehensive wealth - defined as net worth plus the expected value of future income streams - to the wealth that would be needed to generate expected poverty-line income in future years. By this measure, we find that the median older U.S. household is reasonably well situated, with a poverty ratio of about 3.9 in 2006. However, we find that about 18 percent of households have less wealth than would be needed to generate 150 percent of poverty-line income over their expected future lifetimes. Our second measure is the ratio of the annuitized value of comprehensive resources to pre-retirement earnings. This measure identifies a median replacement rate of about 105 percent, with about 13 percent of households experiencing replacement rates of less than 50 percent. Comparing the leading edge of the baby boomers in 2006 to households of the same age in 1998, we find that the baby boomers show slightly less wealth, in real terms, than their elders did, and single boomers show a bit higher incidence of inadequacy than did their elders. Nonetheless, the median single boomer appears to have adequate resources. Moreover, we find a rising age profile of annualized wealth, even within households over time and after controlling for other factors, suggesting that older households are not spending their wealth as quickly as their survival probabilities are falling.

RUTH HELMAN, Mathew Greenwald & Associates
Email: RUTHHELMAN@GREENWALDRESEARCH.COM
JACK VANDERHEI, Temple University - Risk Management & Insurance & Actuarial Science, Employee Benefit Research Institute (EBRI)
Email: TEMPLE@VANDERHEI.COM
CRAIG COPELAND, Employee Benefit Research Institute (EBRI)
Email: COPELAND@EBRI.ORG

This paper presents key findings from the 18th annual Retirement Confidence Survey® (RCS), a survey that gauges the views and attitudes of working-age and retired Americans regarding retirement, their preparations for retirement, their confidence with regard to various aspects of retirement, and related issues. The 18th wave of the RCS finds that Americans' confidence in their ability to afford a comfortable retirement has dropped to its lowest level in seven years, reflecting worries about health costs, the economy, and home values. Decreases in confidence occurred across all age groups and income levels but was particularly acute among younger workers and those with lower incomes. However, this decreased confidence does not appear to have affected the way most Americans plan and save for retirement. Moreover, the RCS finds that faulty assumptions still hinder a realistic assessment of the preparations needed to ensure a financially secure retirement. In addition, the survey found that about half of workers (47 percent) say they and/or their spouse have tried to calculate how much money they will need for a comfortable retirement, up considerably from the low point of 29 percent measured in 1996. As before, the 2008 survey finds that doing a retirement savings calculation is particularly effective at changing worker behavior: 44 percent who calculated a goal changed their retirement planning, and of those almost two-thirds (59 percent) started saving or investing more.

The 2008 Retirement Confidence Survey® was conducted in January 2008 through 20-minute random telephone interviews with 1,322 individuals (1,057 workers and 265 retirees) age 25 and older in the United States. The RCS was co-sponsored by the Employee Benefit Research Institute (EBRI), a private, nonprofit, nonpartisan public policy research organization; and Mathew Greenwald & Associates, Inc., a Washington, DC-based market research firm.

LESLIE E. LINFIELD, Institute for Financial Literacy
Email: llinfield@financiallit.org

How effective is economic stimulus in the form of tax rebates? The Recovery Rebates and Economic Stimulus for the American People Act of 2008 amends the Internal Revenue Code to grant tax rebates of the lesser of net income tax liability or $600 to individual taxpayers ($1,200 for married taxpayers filing joint returns) and allows additional rebates of $300 for each child of an eligible debtor. Determining how taxpayers intend to utilize this windfall is a critical step in determining the potential impact of this proposed economic stimulus. The Institute for Financial Literacy, a 501(c)(3) tax exempt nonprofit financial counseling and education organization, posed the following question to former and current clients: "How will you spend the proposed tax rebate?" Over 900 participants answered the question, choosing from the categories of Buy Something, Pay Debt, Put into Retirement Savings, Put into Regular Savings or Other. Demographic information was also collected from survey participants in the categories of gender, age cohorts and geographic region. This report found that most survey respondents intended to Pay Debt (48%) with their prospective tax rebate checks, followed by place funds into Regular Savings (22%), Buy Something (13%), Other (12%) and Retirement Savings (4%). Further study is recommended to determine why Americans are expressing such a significant preference for debt reduction and a low preference for retirement savings at this time. The results of this study may also be an early indication of the educational effectiveness of both the pre-filing Bankruptcy Credit Counseling and the post-filing Bankruptcy Debtor Education.

IAN AYRES, Yale Law School, Yale School of Management
Email: ian.ayres@yale.edu
BARRY J. NALEBUFF, Yale School of Management
Email: barry.nalebuff@yale.edu

By employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time. Using stock data going back to 1871, we show that buying stock on margin when young combined with more conservative investments when older stochastically dominates standard investment strategies - both traditional life-cycle investments and 100%-stock investments. The expected retirement wealth is 90% higher compared to life-cycle funds and 19% higher compared to 100% stock investments. The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 years.

THOMAS POST, Humboldt University of Berlin - School of Business and Economics
Email: tpost@wiwi.hu-berlin.de
HELMUT GRÜNDL, Humboldt University of Berlin - Faculty of Business
Email: gruendl@wiwi.hu-berlin.de
JOAN T. SCHMIT, University of Wisconsin - Madison - Department of Actuarial Science, Risk Management and Insurance
Email: JSCHMIT@BUS.WISC.EDU
ANJA ZIMMER, Humboldt University of Berlin - School of Business and Economics
Email: azimmer@wiwi.hu-berlin.de

Much of the industrialized world is undergoing a significant demographic shift, placing strain on public pension systems. Policymakers are responding with pension system reforms that put more weight on privately managed retirement funds. One concern with these changes is the effect on individual welfare if individuals invest suboptimally. Using micro-level data from the United States and Germany, we compare the optimal expected lifetime utility computed using a realistically calibrated model with the actual utility as reflected in empirical asset allocation choices. Through this analysis, we are able to identify the population subgroups with relatively large welfare losses. Our results should be helpful to public policymakers in designing programs to improve the performance of privately organized retirement systems.