Pension Sponsorship and Participation: Summary of Recent Trends

This report discusses trends that will affect the economic well-being of future retirees.

Pension Sponsorship and Participation: Summary of Recent Trends Patrick Purcell Specialist in Income Security September 11, 2009 Congressional Research Service 7-5700 www.crs.gov RL30122 CRS Report for Congress Prepared for Members and Committees of Congress Pension Sponsorship and Participation: Summary of Recent Trends Summary According to the U.S. Census Bureau’s Current Population Survey (CPS), the number of privatesector workers between the ages of 25 and 64 whose employer sponsored a retirement plan fell from 53.5 million in 2007 to 52.3 million in 2008. The number of private-sector workers who participated in employer-sponsored retirement plans fell from 44.1 million in 2007 to 42.9 million in 2008. The proportion of all 25 to 64 year-old workers in the private sector, whether employed full time or part-time, who participated in employer-sponsored retirement plans decreased from 45.1% in 2007 to 43.6% in 2008. Between 2000 and 2008, the number of private-sector workers between the ages of 25 and 64 who participated in employer-sponsored retirement plans fell by 3.2 million, declining from 46.1 million to 42.9 million. The percentage of workers who participated in employer-sponsored retirement plans fell from 50.3% in 2000 to 43.6% in 2008. A CRS analysis of the CPS indicates that, among private-sector workers aged 25 to 64 who were employed year-round, full-time: • The percentage of workers whose employer sponsored a retirement plan was 59.9% in 2007 and 59.0% in 2008. • The percentage of workers who participated in employer-sponsored retirement plans was 52.0% in 2007 and 51.1% in 2008. • Only 25.8% of workers at firms with fewer than 25 employees participated in an employer-sponsored retirement plan in 2008, compared to 45.9% of workers at firms with 25 to 99 employees and 63.6% at firms with 100 or more employees. • Among those who were employed year-round, full-time, 51.2% of men and 51.0% of women participated in an employer-sponsored retirement plan in 2008. • Only 43.3% of private-sector workers aged 25 to 34 and employed year-round, full-time participated in an employer-sponsored retirement plan in 2008, compared to 50.9% of workers aged 35 to 44, 55.4% of those aged 45 to 54, and 56.6% of those aged 55 to 64. • Black, Hispanic, and other non-white workers were less likely to have participated in an employer-sponsored retirement plan than white, non-Hispanic workers. Fifty-seven percent of white workers participated in an employersponsored retirement plan in 2008, compared to 45.6% of black non-Hispanic workers, 30.3% of Hispanic workers, and 47.9% of other non-white workers (mainly Asian-American and Native American workers). • Only 27.7% of workers whose annual earnings were in the lowest quartile in 2008 (under $28,000) participated in a retirement plan at work, compared to 68.6% of workers whose earnings were in the top quartile (above $65,000). The CPS – a survey of households – shows fewer private-sector workers participating in employer-sponsored retirement plans than are reported by the National Compensation Survey (NCS), which is a survey of business establishments. According to the CPS, the proportion of private-sector workers aged 25 to 64 who participated in an employer-sponsored retirement plan of some kind fell from 45.0% in 2005 to 43.6% in 2008. In contrast, NCS data indicate that 50% of workers in the private sector participated in employer-sponsored retirement plans in 2005 and 51% of private-sector workers participated in employer-sponsored retirement plans in 2008. Congressional Research Service Pension Sponsorship and Participation: Summary of Recent Trends Contents Background: Employment and an Aging Workforce ....................................................................1 Life Expectancy Continues to Increase..................................................................................1 Labor Force Participation Begins to Drop After Age 55 .........................................................1 Congress and Retirement Income Policies .............................................................................2 Two Kinds of Retirement Plans: Defined Benefit and Defined Contribution ..........................2 Who Bears the Investment Risk?.....................................................................................3 The Number of Defined Benefit Plans Is Declining .........................................................4 Recent Trends in Retirement Plan Sponsorship and Participation.................................................4 Plan Participation by Full-Time vs. Part-Time Employment ..................................................4 Plan Participation by Size of Firm .........................................................................................6 Plan Participation Among Men and Women...........................................................................8 Plan Participation by Employee Age......................................................................................9 Plan Participation by Employee Race .................................................................................. 10 Plan Participation by Employee Earnings ............................................................................ 11 Another Measure of Retirement Plan Participation: The National Compensation Survey ........... 13 Tables Table 1. Labor Force Participation Rates in 2008 by Age and Sex...............................................2 Table 2. Participation in Retirement Plans by Full-Time vs. Part-Time Employment ...................6 Table 3. Participation in Retirement Plans by Size of Firm..........................................................8 Table 4. Participation in Retirement Plans by Sex .......................................................................9 Table 5. Participation in Retirement Plans by Age..................................................................... 10 Table 6. Participation in Retirement Plans by Race ................................................................... 11 Table 7. Participation in Retirement Plans by Annual Earnings ................................................. 13 Table 8. Percentage of Private-Sector Employees Participating in Employer-Sponsored Retirement Plans .................................................................................................................... 16 Contacts Author Contact Information ...................................................................................................... 17 Congressional Research Service Pension Sponsorship and Participation: Summary of Recent Trends Background: Employment and an Aging Workforce The aging of the American population has made retirement income an issue of increasing concern to the Congress and the public. Although Americans are living longer than ever before, most retire before age 65. Moreover, while the nation’s population continues to grow, the decline in birth rates that followed the post-World War II “baby boom” and the continued lengthening of life spans will result in fewer workers relative to the number of retirees. These trends will affect the economic well-being of future retirees because pensions and Social Security benefits will be paid over longer periods of time by a working population that is shrinking relative to the number of retirees and savings will have to be stretched over longer retirements. In addition, it is likely that fewer future retirees will have income from employer-sponsored defined benefit pensions. Life Expectancy Continues to Increase The average life expectancy of Americans born in 1960 was 69.7 years. It has been estimated that those who are born in 2010 will live for an average of 78.3 years.1 A man who reached age 65 in 1960 could expect to live another 13.0 years, while a woman who turned 65 in 1960 had a remaining life expectancy of 15.8 years. A man who reached age 65 in 2005 could expect to live another 16.8 years, while a woman who turned 65 in 2005 had a remaining life expectancy of 19.8 years.2 As more people live into old age, the age-profile of the population will shift. In 1960, 16.7 million people in the United States, 9.2% of the population, were aged 65 or older. In 2010, there will be 40.2 million Americans aged 65 or older, representing 13.0% of the population. By 2030, according to projections made by the Census Bureau, there will be 72.1 million people aged 65 or older, comprising 19.3% of the U.S. population.3 Labor Force Participation Begins to Drop After Age 55 The proportion of the population that is either working or looking for work is called the “labor force participation rate.” As indicated by the data in Table 1, the labor force participation rate starts to drop significantly after age 55. In 2008, 91% of men aged 25 to 54 – including 88% of those aged 45 to 54 – were working or looking for work in a typical month during the year. Similarly, 76% of women aged 25 to 54 – including 76% of those aged 45 to 54 – were working or looking for work in a typical month during the year. Among men aged 55 to 64, only 70% were employed or looking for work in an average month. Among women aged 55 to 64, just 59% were working or looking for work in a typical month in 2008. When income is no longer derived from earnings, individuals depend more on pensions, interest and dividends, withdrawals from their savings, and—when they become eligible through age or disability—Social Security. The aging of the U.S. population will place strains on the components of the traditional “three-legged stool” of retirement income: Social Security, pensions, and personal saving. 1 U.S. Census Bureau, 2008 National Population Projections, August 2008. 2 U.S. National Center for Health Statistics, National Vital Statistics Reports, United States Life Tables, Vol. 57, No. 1, August 2008 3 U.S. Census Bureau, 2008 National Population Projections, August 2008 Congressional Research Service 1 Pension Sponsorship and Participation: Summary of Recent Trends Table 1. Labor Force Participation Rates in 2008 by Age and Sex Age Men Age 25 to 54 —Age 45 to 54 Age 55 to 64 Age 65 and up Women Age 25 to 54 —Age 45 to 54 Age 55 to 64 Age 65 and up Total Number of People (thousands) Number in the Labor Force (thousands) Labor Force Participation Rate (percent) 62,078 21,512 16,123 16,002 56,202 18,928 11,345 3,436 90.5 88.0 70.4 21.5 63,574 22,448 17,367 21,160 48,195 17,075 10,270 2,808 75.8 76.1 59.1 13.3 Source: U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings (January 2009). Congress and Retirement Income Policies The Internal Revenue Code was first amended to provide favorable tax treatment for qualified pension and retirement plans in the 1920s. These provisions have been expanded and modified many times since then. Among the tax exemptions that apply to traditional “defined benefit” pension plans are the deduction of pension contributions from employer income, exclusion of employer contributions to pension plans from employee income, and tax exemption of the earnings of pension trusts.4 In “defined contribution” plans such as those authorized under section 401(k) of the tax code, income taxes are deferred until retirement on employer and employee contributions to the plan and on the investment earnings of the plan. By establishing the tax-favored status of pension plans and defining the terms under which tax exemptions and deductions are granted, federal tax law has both encouraged the growth of retirement plan coverage among workers and shaped the development of pensions and retirement savings plans. Congress also has sought to protect the pension benefits earned by workers through direct regulation of pension plans, most notably through the Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406). ERISA also may have influenced the development of employer-sponsored retirement plans. Since its enactment, defined contribution (DC) plans have proliferated while the number of defined benefit (DB) plans has fallen. Two Kinds of Retirement Plans: Defined Benefit and Defined Contribution Retirement plans are legally classified as either defined benefit (DB) plans or defined contribution (DC) plans. In a defined benefit plan, the retirement benefit usually is based on an employee’s salary and number of years of service. With each year of service, a worker accrues a benefit equal to either a fixed dollar amount per month or year of service or a percentage of his or her final pay or average pay. 4 Defined benefit pensions are taxed when the employee receives benefits during retirement. Congressional Research Service 2 Pension Sponsorship and Participation: Summary of Recent Trends A defined contribution plan is much like a savings account maintained by the employer on behalf of each participating employee. The employer and/or the employee contributes a specific dollar amount or percentage of pay into the account, which is usually invested in stocks and bonds. When the worker retires, the retirement benefit that he or she receives will be the balance in the account, which is the sum of all the contributions that have been made plus interest, dividends, and capital gains (or losses). The worker usually has the choice of receiving these funds as a lump sum, a series of fixed payments over a period of years, or in the form of a life annuity. In recent years, many employers have converted their traditional pensions to hybrid plans that have characteristics of both DB and DC plans. The most popular of these hybrids has been the cash balance plan. A cash balance plan looks like a DC plan in that the accrued benefit is defined in terms of an account balance. The employer makes contributions to the plan and pays interest on the accumulated balance. However, in a cash balance plan, the account balances are merely bookkeeping devices. They are not individual accounts that are owned by the participants. At retirement, the employee must receive an amount equal to the contributions to the plan plus the interest that has been credited to the plan. Legally, therefore, a cash balance plan is a defined benefit plan. Who Bears the Investment Risk? In a defined benefit plan, it is the employer who bears the investment risk of the plan, while in a defined contribution plan it is the employee who bears the investment risk. In a DB plan, the employer promises to provide retirement benefits equal to a certain dollar amount or a specific percentage of the employee’s pay. The employer contributes money to a pension trust that is invested in stocks, bonds, real estate, or other assets. Retirement benefits are paid from this trust fund. The employer is at risk for the amount of the retirement benefits that have been promised to employees and their survivors. If there are insufficient funds in the pension trust to pay the accrued benefits, the firm that sponsors the pension plan is legally obligated to make up the difference by paying more money into the pension fund. This can be done over a period of years. In a DC plan, it is the employee who bears the risk that his or her retirement account might not increase in value by an amount sufficient to provide adequate income during retirement. If the contributions made to the account by the employer and the employee are insufficient, or if the securities in which the account is invested lose value or increase in value too slowly, the employee risks having an income in retirement that is not adequate to maintain his or her desired standard of living. If this situation occurs, the worker might choose to delay retirement. Many factors affect a firm’s decision to sponsor a retirement plan and a worker’s decision to participate in the plan. In any given year, changes in the business climate—inflation, interest rates, wage increases, the cost of other benefits (such as health insurance), trends in business revenues and profits—could weigh more heavily in a firm’s decision to establish or continue a retirement plan than the potential tax advantages it could gain by sponsoring a plan. Likewise, an employee’s decision to participate or not to participate in a retirement plan may be affected by such variables as the rate of growth of wages, the rising cost of employee health insurance premiums, his or her confidence in the financial status of Social Security, and whether another family member already participates in a retirement plan. Congressional Research Service 3 Pension Sponsorship and Participation: Summary of Recent Trends The Number of Defined Benefit Plans Is Declining According to the Pension Benefit Guaranty Corporation (PBGC), the number of PBGC-insured defined benefit plans fell from 114,396 in 1985 to 29,400 in 2006.5 The number of workers participating in defined benefit plans fell from 27 million in 1985 to 19.5 million in 2008.6 According to the PBGC, 17% of defined benefit plans, accounting for 8% of plan participants, have been placed by their sponsors under a “hard freeze.”7 Under a hard freeze, no new participants are admitted to the plan and current participants do not accrue any additional benefits. An additional, but not precisely known, number of employees work for employers who have placed their defined benefit pensions under a “soft freeze.” Under a soft freeze, no new participants are admitted to the plan but current participants continue to accrue benefits. Watson Wyatt, the actuarial consulting firm, recently reported that 607 of the 1,000 largest companies in the United States sponsored defined benefit plans in 2009. Of these 607 firms, 190 (31.3%) had put their defined benefit pension plans under either a hard freeze or a soft freeze. 8 Recent Trends in Retirement Plan Sponsorship and Participation Every month, the Census Bureau conducts the Current Population Survey (CPS) among a nationally representative sample of approximately 97,000 households, primarily for the purpose of estimating the rates of employment and unemployment. During March of each year, the survey includes supplemental questions about employment, income, health insurance, retirement plan participation, and receipt of government benefits during the previous calendar year. This information allows analysts and researchers to calculate the number and percentage of workers who reported whether their employer offered a retirement plan and whether they participated in the plan. Responses can then be categorized by demographic and economic characteristics, such as the worker’s age, race, sex, income, and the size of firm at which they worked. Unfortunately, because the CPS asks only two pension-related questions—if the worker’s employer offered a retirement plan and if the worker was included in the plan—we cannot ascertain from this survey whether the plan was a defined benefit plan or a defined contribution plan. Plan Participation by Full-Time vs. Part-Time Employment The data presented in Table 2 compare retirement plan participation among year-round, full-time wage-and-salary workers in the private sector with participation among workers who were employed part-year or part-time. Workers with part-year or part-time employment are much less likely than full-time workers to be employed by a firm that sponsors a retirement plan. Part-time and part-year workers also are less likely to participate if their employer sponsors a plan. 5 Pension Benefit Guaranty Corporation, Pension Insurance Data Book 2008. The total number of participants in defined benefit plans insured by the PBGC was 38 million in 1985 and 44 million in 2008. These figures include workers currently participating in DB plans, individuals who are vested in a former employer’s plan but are not yet collecting pensions, and retirees collecting pensions from PBGC-insured plans. 7 Pension Benefit Guaranty Corporation, Pension Insurance Data Book 2008. 8 Watson Wyatt Insider, July 2009. 6 Congressional Research Service 4 Pension Sponsorship and Participation: Summary of Recent Trends The proportion of year-round, full-time workers employed at firms that sponsored a retirement plan fell from 59.9% in 2007 to 59.0% in 2008. The participation rate among these workers fell from 52.0% in 2007 to 51.1% in 2008. Between 1990 and 2000, plan participation among fulltime workers increased from 54.6% to 57.4%. It has since fallen by more than six percentage points. Between 2007 and 2008, the proportion of part-time or part-year workers employed by firms that sponsored a retirement plan fell from 38.3% to 37.2%. The percentage of part-year and part-time workers who participated in employer-sponsored retirement plans was unchanged from 2007 to 2008, at 23.0% in both years. The lower rate of retirement plan participation among part-year and part-time workers is one of the reasons that women are less likely than men to have participated in an employer-sponsored retirement plan. There is little difference in retirement plan participation between men and women who work year-round, full-time. (See Table 4.) Women, however, are more likely than men to work part-year or part-time. In 2008, 78.9% of men between the ages of 25 and 64 who were employed in the private sector worked year-round, full-time compared to 66.4% of working women in this age-group.9 Consequently, although women who worked full-time in 2008 were as likely as their male counterparts to have participated in a retirement plan (51.0% of women vs. 51.2% of men), the retirement plan participation rate among all women 25 to 64 years old who worked in the private sector in 2008 was lower than the participation rate among working men in that age group. (41.6% of women participated in a retirement plans vs. 45.3% of men.) 9 CRS estimates based on the March 2009 CPS (not shown in accompanying tables). Congressional Research Service 5 Pension Sponsorship and Participation: Summary of Recent Trends Table 2. Participation in Retirement Plans by Full-Time vs. Part-Time Employment (Private-sector wage and salary workers, ages 25 to 64) Workers (thousands) Full-Time 1990 1995 2000 2005 2006 2007 2008 Part-Time 1990 1995 2000 2005 2006 2007 2008 All Workers 1990 1995 2000 2005 2006 2007 2008 Employer Sponsors a Plan Employee Participates in a Plan Workers Percent Participants Percent 53,026 60,687 70,177 72,331 74,542 74,588 72,036 33,323 38,344 46,499 43,195 42,601 44,645 42,525 62.8 63.2 66.3 59.7 57.2 59.9 59.0 28,955 33,298 40,304 37,347 36,676 38,756 36,817 54.6 54.9 57.4 51.6 49.2 52.0 51.1 23,608 23,790 21,420 23,394 22,660 23,187 26,362 8,838 9,348 9,708 9,337 8,566 8,891 9,806 37.4 39.3 45.3 39.9 37.8 38.3 37.2 5,273 5,508 5,756 5,707 5,287 5,322 6,069 22.3 23.2 26.9 24.4 23.3 23.0 23.0 76,633 84,477 91,597 95,725 97,201 97,775 98,398 42,161 47,692 56,207 52,532 51,167 53,536 52,331 55.0 56.5 61.4 54.9 52.6 54.8 53.2 34,228 38,806 46,060 43,053 41,963 44,078 42,886 44.7 45.9 50.3 45.0 43.2 45.1 43.6 Source: Congressional Research Service analysis of the Current Population Survey, various years. Plan Participation by Size of Firm The data displayed in Table 3 show that from 1990 to 2008, the number of workers between the ages of 25 and 64 who were employed in the private sector and worked year-round, full-time at firms of all sizes increased from 53 million to 72 million. At the same time, the number of such workers whose employer offered a retirement plan increased from 33.3 million to 42.5 million. The proportion of year-round, full-time workers who were employed at firms that offered a retirement plan rose from 62.8% in 1990 to 66.3% in 2000. By 2008, it had since fallen to 59.0%. Retirement plan participation among employees of small firms rose between 1990 and 2000, but has recently declined, and access to employer-sponsored retirement plans remains substantially lower in small firms than in firms with 100 or more employees. The data displayed in Table 3 show that since 2000, the proportion of workers in firms with 100 or more workers whose employer sponsors a retirement plan has fallen from 80.5% to 73.5%. Nevertheless, workers at large firms remain substantially more likely than employees of small firms to work for an employer that sponsors a retirement plan. In 2008, 29.3% of full-time workers at firms with fewer Congressional Research Service 6 Pension Sponsorship and Participation: Summary of Recent Trends than 25 employees were employed at firms that sponsored a retirement plan, down from 34.2% in 2000. This was still higher than the 25.1% of workers at small firms whose employer sponsored a retirement plan in 1990. Among workers at firms with 25 to 99 employees, 53.7% were employed at firms that sponsored a retirement plan in 2008, compared to 58.5% in 2000 and 49.5% in 1990. Table 3 also shows the percentage of year-round, full-time employees in the private sector who participated in an employer-sponsored retirement plan.10 This statistic takes into account the impact of employers that do not sponsor a plan on overall retirement plan participation rates. Among firms of all sizes, the proportion of year-round, full-time employees between the ages of 25 and 64 who participated in a retirement plan fell from 52.0% in 2007 to 51.1% in 2008. This was lower than the participation rates of 57.4% in 2000 and 54.6% in 1990. In firms with fewer than 25 employees, just 25.8% of full-time employees between the ages of 25 and 64 participated in a retirement plan in 2008, down from 29.3% in 2000, but higher than the 21.6% who participated in a plan in 1990. In firms with 25 to 99 employees, retirement plan participation was 45.5% in 2007 and 45.9% in 2008, a statistically insignificant change Both of these participation rates were lower than the participation rate of 49.4% in 2000, but higher than the 41.7% participation rate in 1990. Participation in retirement plans among workers in firms with 100 or more employees fell from 65.4% in 2007 to 63.6% in 2008. The 2008 participation rate was 6.6 percentage points lower than the participation rate of 70.2% in 2000 and 6.2 percentage points lower than the participation rate of 69.8% in 1990. Among private-sector workers aged 25 to 64 who were employed year-round, full-time, there was a net decline of 3.5 million participants in employer-sponsored retirement plans between 2000 and 2008, Of this number 3.3 million (94%) were employed at firms with 100 or more employees. 10 Not all employees whose employer sponsors a retirement plan are eligible to participate. For example, employees under age 21, those who have been employed for less than one year, and those who work fewer than 1,000 hours in a year can be excluded from the plan. Retirement plans also may cover certain positions within a firm but not others. Congressional Research Service 7 Pension Sponsorship and Participation: Summary of Recent Trends Table 3. Participation in Retirement Plans by Size of Firm (Private-sector wage and salary workers, ages 25 to 64, employed year-round, full-time) Size of Firm Workers (thousands) Under 25 Employees 1990 12,119 1995 14,627 2000 16,591 2005 19,200 2006 19,406 2007 19,449 2008 18,752 25 to 99 Employees 1990 7,892 1995 9,108 2000 10,492 2005 11,214 2006 11,489 2007 11,367 2008 10,865 100 or More Employees 1990 33,014 1995 36,951 2000 43,094 2005 41,917 2006 43,646 2007 43,772 2008 42,418 All Firms 1990 53,026 1995 60,687 2000 70,177 2005 72,331 2006 74,542 2007 74,588 2008 72,036 Employer Sponsors Plan Employees Participating Workers Percent Participants Percent 3,042 3,715 5,575 5,569 5,160 5,702 5,500 25.1 25.4 34.2 29.0 26.6 29.3 29.3 2,619 3,109 4,857 4,851 4,434 4,954 4,833 21.6 21.3 29.3 25.3 22.9 25.5 25.8 3,904 4,923 6,139 5,975 5,829 6,041 5,837 49.5 54.1 58.5 53.3 50.7 53.1 53.7 3,291 4,188 5,186 5,070 4,889 5,166 4,985 41.7 46.0 49.4 45.2 42.6 45.5 45.9 26,378 29,706 34,692 31,562 31,612 32,903 31,188 79.9 80.4 80.5 75.5 72.4 75.2 73.5 23,045 26,000 30,262 27,425 27,353 28,636 26,998 69.8 70.4 70.2 65.4 62.7 65.4 63.6 33,323 38,344 46,499 43,195 42,601 44,645 42,525 62.8 63.2 66.3 59.7 57.2 59.9 59.0 28,955 33,298 40,304 37,347 36,676 38,756 36,817 54.6 54.9 57.4 51.6 49.2 52.0 51.1 Source: CRS analysis of the Current Population Survey, various years. Plan Participation Among Men and Women Table 4 shows the rates of participation in employer-sponsored retirement plans by men and women between the ages 25 and 64 who were employed in the private sector and worked yearround, full-time. Between 1990 and 2000, the proportion of men whose employer sponsored a retirement plan rose from 63.3% to 66.2%. By 2008, it had dropped to 58.3%. The proportion of women who worked at firms that sponsored a retirement plan increased from 62.1% in 1990 to 66.4% in 2000. In 2008, 60.1% of women who worked year-round, full-time were employed at firms that sponsored a retirement plan. Thus, in 2008 women who were employed year-round, Congressional Research Service 8 Pension Sponsorship and Participation: Summary of Recent Trends full-time were more likely than men to have worked for an employer that sponsored a retirement plan. Men and women, however, were almost equally likely to have participated in an employersponsored retirement plan. In 2008, 51.2% of men who were employed year-round, full-time participated in an employer-sponsored retirement plan, compared to 51.0% of women. Both of these participation rates were lower than the 2000 participation rates of 58.3% for men and 56.1% for women. The participation rate for men was 7.1 percentage points lower in 2008 than in 2000. The participation rate for women was 5.1 percentage points lower in 2008 than in 2000. Table 4. Participation in Retirement Plans by Sex (Private-sector wage and salary workers, ages 25 to 64, employed year-round, full-time) Workers (thousands) Men 1990 1995 2000 2005 2006 2007 2008 Women 1990 1995 2000 2005 2006 2007 2008 Employer Sponsors Plan Employees Participating Workers Percent Participants Percent 32,208 36,504 41,516 42,881 44,210 43,844 42,120 20,389 23,008 27,463 25,136 24,898 25,897 24,541 63.3 63.0 66.2 58.6 56.3 59.1 58.3 18,242 20,359 24,220 22,021 21,616 22,600 21,555 56.6 55.8 58.3 51.4 48.9 51.6 51.2 20,817 24,182 28,661 29,450 30,332 30.744 29,916 12,934 15,336 19,036 18,059 17,703 18,749 17,984 62.1 63.4 66.4 61.3 58.4 61.0 60.1 10,713 12,939 16,083 15,326 15,060 16,156 15,261 51.5 53.5 56.1 52.0 49.7 52.6 51.0 Source: Congressional Research Service analysis of the Current Population Survey, various years. Plan Participation by Employee Age Table 5 displays rates of participation in employer-sponsored retirement plans among workers who were employed in the private sector and worked year-round, full-time, according to their age. Young workers—aged 25 to 34—were less likely than middle-aged and older workers to be employed at a firm that sponsored a retirement plan in 2008. They also were less likely to have participated in a retirement plan than older workers. In 2008, 54.4% of workers 25 to 34 years old worked for an employer that sponsored a retirement plan, and 43.3% of workers in this age group participated in an employer-sponsored plan. Thus, 79.6% of those aged 25 to 34 who worked for a firm that sponsored a plan participated in the plan (0.433/0.544 = 0.796). In contrast, among workers 55 to 64 years old, 61.7% worked at firms that sponsored a retirement plan, and 56.6% participated in an employer-sponsored plan. Thus, among workers aged 55 to 64 who worked for a firm that sponsored a retirement plan, 91.7% participated in the plan (0.566/0.617 = 0.917).11 11 Some of the difference in participation rates is because workers under 35 are somewhat more likely to be in their first year with an employer and can be excluded from participating in the plan. Employees who work fewer than 1,000 (continued...) Congressional Research Service 9 Pension Sponsorship and Participation: Summary of Recent Trends Table 5. Participation in Retirement Plans by Age (Private-sector wage and salary workers, ages 25 to 64, employed year-round, full-time) Employee Age 25 to 34 1990 1995 2000 2005 2006 2007 2008 35 to 44 1990 1995 2000 2005 2006 2007 2008 45 to 54 1990 1995 2000 2005 2006 2007 2008 55 to 64 1990 1995 2000 2005 2006 2007 2008 Workers (thousands) Employer Sponsors Plan Employees Participating Workers Percent Participants Percent 19,344 19,759 20,398 19,677 20,359 20,053 19,234 11,489 11,673 12,803 10,577 10,648 10,895 10,458 59.4 59.1 62.8 53.8 52.3 54.3 54.4 9,135 9,337 10,173 8,268 8,371 8,625 8,325 47.2 47.3 49.9 42.0 41.1 43.0 43.3 16,989 20,439 23,362 21,688 21,875 21,448 20,214 11,042 13,235 15,479 12,893 12,313 12,793 11,926 65.0 64.8 66.3 59.5 56.3 59.7 59.0 9,871 11,742 13,559 11,289 10,781 11,119 10,295 58.1 57.5 58.0 52.1 49.3 51.8 50.9 10,922 14,042 18,489 20,466 21,188 21,265 20,645 7,148 9,240 12,951 12,995 12,959 13,449 12,772 65.5 65.8 70.1 63.5 61.2 63.2 61.9 6,586 8,381 11,787 11,686 11,542 12,200 11,433 60.3 59.7 63.8 57.1 54.5 57.4 55.4 5,771 6,446 7,929 10,500 11,120 11,821 11,943 3,644 4,196 5,267 6,730 6,681 7,508 7,369 63.1 65.1 66.4 64.1 60.1 63.5 61.7 3,363 3,838 4,785 6,104 5,981 6,812 6,765 58.3 59.5 60.3 58.1 53.8 57.6 56.6 Source: CRS analysis of the Current Population Survey, various years. Plan Participation by Employee Race The March 2003 CPS introduced newly expanded categories of race and ethnicity, making comparisons with prior years problematic. In Table 6, race and ethnicity are categorized as white (...continued) hours in a year and those under age 21 also can be excluded from participating, but neither group is represented in Table 5. Congressional Research Service 10 Pension Sponsorship and Participation: Summary of Recent Trends non-Hispanic, black non-Hispanic, Hispanic, and other. The “other” category includes mainly persons whose heritage is Asian, Native American, Eskimo, or Pacific Islander. In 2008, the likelihood of being employed at a firm that sponsored a retirement plan was highest for white non-Hispanic workers and lowest for Hispanic workers. Black non-Hispanic workers and “Asian/Other” workers were about equally likely to have worked for an employer that sponsored a retirement plan. Among white non-Hispanic workers, 64.2% worked for an employer that sponsored a retirement plan, and 56.6% participated in an employer-sponsored plan. Among Hispanic workers, just 38.0% worked for an employer that sponsored a retirement plan and only 30.3% participated in an employer-sponsored retirement plan. Of workers who classified their race and ethnicity as black non-Hispanic, 55.9% worked for an employer that sponsored a plan and 45.6% participated in a plan, while among Asian-American and other workers, 56.0% worked for an employer that sponsored a retirement plan and 47.9% participated in a plan. Table 6. Participation in Retirement Plans by Race (Private sector wage and salary workers, ages 25 to 64, employed year-round, full-time) Employee Race Workers (thousands) White, Non-Hispanic 2002 49,012 2005 49,952 2006 50,627 2007 50,835 2008 49,297 Black, Non-Hispanic 2002 7,078 2005 7,511 2006 7,927 2007 7,805 2008 7,470 Hispanic 2002 8,942 2005 10,208 2006 10,982 2007 10,834 2008 10,262 Other 2002 4,062 2005 4,660 2006 5,007 2007 5,114 2008 5,007 Employer Sponsors Plan Employees Participating Workers Percent Participants Percent 32,711 32,490 31,740 33,251 31,642 66.7 65.0 62.7 65.4 64.2 28,836 28,618 27,817 29,291 27,899 58.8 57.3 55.0 57.6 56.6 4,156 4,295 4,224 4,499 4,176 58.7 57.2 53.3 57.6 55.9 3,363 3,491 3,468 3,675 3,408 47.5 46.5 43.8 47.1 45.6 3,582 3,775 3,843 4,065 3,902 40.1 37.0 35.0 37.5 38.0 2,777 2,964 3,032 3,310 3,110 31.1 29.0 27.6 30.6 30.3 2,356 2,636 2,794 2,830 2,805 58.0 56.6 55.9 55.4 56.0 1,996 2,274 2,358 2,481 2,399 49.2 48.8 47.1 48.5 47.9 Source: Congressional Research Service analysis of the Current Population Survey, various years. Plan Participation by Employee Earnings Table 7 shows the relationship between earnings and participation in an employer-sponsored retirement plan. In Table 7, workers’ annual earnings from wages and salaries—as reported on Congressional Research Service 11 Pension Sponsorship and Participation: Summary of Recent Trends the CPS—are ranked by quartile. In 2008, one-quarter of private-sector wage and salary workers between the ages of 25 and 64 who were employed year-round, full-time earned more than $65,000. Another quarter had earnings between $41,000 and $65,000. The next quartile had earnings between $28,000 and $41,000, and those in the lowest quartile earned less than $28,000. In 2008, 72.9% of year-round, full-time workers in the private sector with annual earnings in the top quartile were employed by firms that sponsored a retirement plan, and 68.6% of workers in the top earnings quartile participated in a retirement plan. Both of these percentages were lower than the rates in 2000 and 1990. In 2000, 80.2% of year-round, full-time workers in the private sector with annual earnings in the top quartile were employed by firms that sponsored a retirement plan, and 75.5% of workers in the top earnings quartile participated in a retirement plan. The equivalent sponsorship and participation rates in 1990 were 77.9% and 73.7%, respectively. The percentage of workers employed at firms that sponsored a retirement plan and the percentage who participated in these plans were progressively lower in each of three lowest earnings quartiles. For example, among workers in the lowest earnings quartile in 2008, 38.4% were employed at firms that sponsored a retirement plan, and 27.7% of workers in the bottom quartile participated in a retirement plan. Both of these percentages were lower than the comparable rates in 2000 and 1990. In 2000, 44.9% of year-round, full-time workers in the private sector with annual earnings in the bottom quartile were employed by firms that sponsored a retirement plan, and 32.1% of workers in the bottom earnings quartile participated in a retirement plan. The equivalent sponsorship and participation rates in 1990 were 41.2% and 30.3%, respectively. Low-wage workers are not only less likely to work for an employer that sponsors a retirement plan; they also are less likely to participate if a plan is offered. Among employees whose earnings in 2008 were in the top quartile, 72.9% worked for an employer that sponsored a retirement plan and 68.6% participated in a retirement plan. Therefore, the participation rate among employees in the top earnings quartile whose employer sponsored a retirement plan was 94.1% (0.686/0.729 = 0.941). Among workers whose 2008 earnings were in the bottom quartile, only 38.4% worked for an employer that sponsored a retirement plan and just 27.7% participated in a retirement plan. Thus, the participation rate among low-wage employees whose employer sponsored a retirement plan was 72.1% (0.277/0.384 = 0.721). Congressional Research Service 12 Pension Sponsorship and Participation: Summary of Recent Trends Table 7. Participation in Retirement Plans by Annual Earnings (Private-sector wage and salary workers, ages 25 to 64, employed year-round, full-time) Worker’s Annual Earnings Highest Earnings Quartile 1990 1995 2000 2005 2006 2007 2008 Second-Highest Earnings Quartile 1990 1995 2000 2005 2006 2007 2008 Third-Highest Earnings Quartile 1990 1995 2000 2005 2006 2007 2008 Lowest Earnings Quartile 1990 1995 2000 2005 2006 2007 2008 Employer Sponsors Plan Employee Participates Percentage of Workers Percentage of Workers 77.9 77.1 80.2 74.4 70.9 73.8 72.9 73.7 73.0 75.5 70.3 66.7 69.2 68.6 72.0 72.4 74.3 68.6 66.8 69.4 67.3 64.2 65.1 67.1 61.5 59.9 62.8 60.1 61.3 61.0 66.0 59.0 56.2 59.1 59.2 51.4 51.3 55.5 49.8 46.3 49.7 49.7 41.2 42.4 44.9 39.0 36.6 38.4 38.4 30.3 30.4 32.1 27.5 26.2 27.7 27.7 Source: CRS analysis of the Current Population Survey, various years. Another Measure of Retirement Plan Participation: The National Compensation Survey The Bureau of Labor Statistics collects data from employers about paid leave, health insurance, retirement plan participation, flexible spending accounts, and other employee benefits as part of Congressional Research Service 13 Pension Sponsorship and Participation: Summary of Recent Trends the National Compensation Survey (NCS). This survey is conducted annually among a nationally representative sample of private-sector business establishments. 12 The term establishment usually refers to a single place of business at a particular location or all branches of a business in a particular metropolitan area or county. An establishment might be a branch or small operating unit of a larger firm. In contrast, a firm comprises all of the establishments that together form a corporation, partnership, or other business entity.13 According to the data collected from employers through the National Compensation Survey, 51% of workers in the private sector participated in employer-sponsored retirement plans in March 2008. (See Table 8.) Twenty percent of private-sector workers participated in defined benefit plans and 43% participated in defined contribution plans. Approximately 12% of private-sector workers participated in both types of plan. The NCS indicates that 67% of employees in establishments with 100 or more workers participated in an employer-sponsored retirement plan in March 2008, while only 37% of employees at establishments with fewer than 100 employees participated in an employer-sponsored retirement plan. The data from the NCS also indicate that among full-time workers, 60% participated in an employer-sponsored retirement plan in March 2008, compared to just 24% of part-time workers. While it is not necessarily surprising that the retirement plan participation rates reported by the NCS differ from those of the CPS, nor that the NCS shows higher rates of participation, in recent years the difference in the results shown by the two surveys has increased. Since the NCS was first fielded in its current form in 2003, it has indicated a small increase in retirement plan participation, whereas the CPS data indicate that retirement plan participation has been falling over the same period of time. In 2003, the NCS indicated that 49% of private-sector workers participated in a retirement plan whereas the CPS data showed a participation rate of 47% for that year. This two percentage point difference was small enough to be inconsequential for most analytical purposes. The March 2008 NCS, however, indicated that the proportion of privatesector workers participating in employer-sponsored retirement plans had risen to 51%, whereas the March 2009 CPS (which asked about retirement plan participation in 2008) showed that participation in retirement plans among private sector workers had fallen to 43%. The increase in the difference in participation rates between the two surveys is troubling for policy analysts because it complicates the process of estimating both the proportion of workers without employer-sponsored retirement plans and the trend in retirement plan participation rates. Analysts might reasonably expect that in any given year the NCS would show a higher rate of retirement plan participation than the CPS because the business owners and benefits specialists who are interviewed for the NCS might have greater knowledge about the retirement benefits they offer than the household members who are interviewed for the CPS. Although this could explain why the NCS would show a higher participation rate than the CPS in any given year, it cannot explain why the difference between the two surveys has grown over time. Some of the increase in the difference in retirement plan participation rates reported by the NCS and the CPS could be due to trends in the realm of defined benefit plans, particularly the significant increase in recent years in the number of DB plans that have been “frozen” by 12 For more information on the National Compensation Survey, see U.S. Department of Labor, National Compensation Survey, Employee Benefits in the United States, March 2008, available at http://www.bls.gov/ncs/ebs/sp/ebnr0014.pdf. 13 In the Census Bureau’s Current Population Survey, employer characteristics are reported at the level of the firm, which may include more than one establishment. Congressional Research Service 14 Pension Sponsorship and Participation: Summary of Recent Trends employers. As was noted earlier, the PBGC has reported that 17% of all insured DB plans were under a hard freeze in 2008. The consulting firm Watson Wyatt has found that 190 of the 607 companies (31%) in the Fortune 1000 that sponsor defined benefit plans had placed their plans under either a hard freeze or a soft freeze as of July 2009. Employees of a firm that sponsors a DB plan, but who are unable to participate because of either a hard freeze or a soft freeze, would probably report on the CPS that they do not participate in a retirement plan (unless they participate in a defined contribution plan). Even some participants in plans that have been frozen might report on the CPS that they do not participate in a plan if they are no longer accruing benefits under the plan because of a hard freeze and they participate in no other plan. The employer of such an individual, however, would likely report that the employee participates in a DB plan because he or she has previously accrued benefits under the plan, and also because the employer is required to continue to fund the plan even if future benefit accruals have been frozen. It is also possible that the proportion of private-sector workers – especially younger workers – who know whether their employer sponsors a DB may be falling, As the number of DB plans has fallen and as 401(k) plans have become the most prevalent form of employer-sponsored retirement plan, worker knowledge about DB plans could be decreasing. If a worker is unaware of an employer’s DB plan – and does not participate in a DC plan – the worker would likely report on the CPS that he or she does not participate in an employer-sponsored retirement plan. 14 One way to assess whether the downward trend in plan participation indicated by the CPS is real or is the result of problems with the survey would be to compare CPS data from recent years with results from other household surveys that ask about retirement plan participation, such as the Survey of Income and Program Participation (SIPP) and the Health and Retirement Study (HRS). With respect to the National Compensation Survey, in order for the NCS to continue to offer accurate estimates of the proportion of workers who are accruing benefits under defined benefit pension plans, the survey will need include a question or questions about whether the DB plans sponsored by employers are under either a soft freeze or a hard freeze. 14 The Bureau of Labor Statistics recently broadened the definition of access to employer-sponsored retirement plans. This will affect take-up rates calculated from the NCS but not participation rates, which are the topic of this discussion. See N. Kramer and A. Zilberman, “New Definitions of Employee Access to Paid Sick Leave and Retirement Benefits in the National Compensation Survey,” Compensation and Working Conditions Online, December 23, 2008. Congressional Research Service 15 Pension Sponsorship and Participation: Summary of Recent Trends Table 8. Percentage of Private-Sector Employees Participating in Employer-Sponsored Retirement Plans Type of Retirement Plan All Types Establishment Size 1-99 Workers March 2003 March 2004 March 2005 March 2006 March 2007 March 2008 100 or More Workers March 2003 March 2004 March 2005 March 2006 March 2007 March 2008 Work Schedule Full-Time Workers March 2003 March 2004 March 2005 March 2006 March 2007 March 2008 Part-Time Workers March 2003 March 2004 March 2005 March 2006 March 2007 March 2008 All Workers March 2003 March 2004 March 2005 March 2006 March 2007 March 2008 Defined Benefit Defined Contribution 35 37 37 37 37 37 8 9 9 9 9 9 31 32 32 33 33 33 65 67 67 67 66 67 33 34 36 33 32 33 51 53 53 54 53 55 58 60 60 60 60 60 24 24 25 23 23 24 48 50 50 51 50 51 18 20 19 21 23 23 8 9 9 8 9 10 14 14 14 16 18 18 49 50 50 51 51 51 20 21 21 20 20 20 40 42 42 43 43 43 Source: U.S. Department of Labor, National Compensation Survey. Note: Data represent 102 million workers employed in the private sector in 2003 and 107 million workers employed in the private sector in 2008. Congressional Research Service 16 Pension Sponsorship and Participation: Summary of Recent Trends Author Contact Information Patrick Purcell Specialist in Income Security ppurcell@crs.loc.gov, 7-7571 Congressional Research Service 17