Developments in pension.

• Author: Mitchell, Olivia S.

The share of the world's population over age 60 will triple between 1990 and 2030, exceeding 30 percent among developed countries by then. This massive demographic shift will force insolvency on many of the large unfunded public social security programs that evolved after World War II.

Are funded pension plans necessary for retirement system reform? This is one subject I explore in my research on pensions in developed and developing countries. In each case, I ask how pensions function, what effects they have on work and saving, and how pensions help public and private stakeholders to share the risks of old age. Ultimately, I am interested in how to design pension plans to increase their efficiency and insulate them from a range of political and financial challenges.

Retirement Saving Adequacy in the United States

The U.S. situation brings some of these problems into focus very clearly. Our Old Age, Survivors, and Disability Insurance (OASDI) program under Social Security faces an unfunded obligation of approximately $9 trillion. Fixing this shortfall would require either benefit cuts of about 25 percent or tax increases of approximately the same magnitude.(1) Such a massive change in the system portends ill for prospective retirees in the baby boom generation as well as current retirees. In a recent study using the Health and Retirement Survey (HRS), James Moore and I found that most Americans have saved too little to preserve their current consumption standards in retirement. This nationally representative and longitudinal study of respondents aged 51 to 61 in 1992 and their spouses describes multiple sources of household wealth and determinants of old-age poverty for a group who are on the verge of retirement.

The HRS inquires about respondents' net housing and financial wealth describes employer-provided plans enabling us to calculate pension wealth and links data from the survey expected Social Security benefits derived from earnings records gathered from Social Security files.2 We use the Social Security Administration's "intermediate" economic and demographic assumptions, and conclude that median total household wealth (that is, net financial wealth plus net housing equity, pension wealth, and Social Security wealth) for this group is approximately $350,000. Pension benefits, net home equity, and net financial wealth each contribute about one fifth of the total, and anticipated Social Security benefits make up the remaining two fifths.

Is this enough money to retire on? Obviously the answer depends on one's benchmark; in our work, we ask how much additional saving would be required in order to retire at a specified age and to smooth consumption in retirement. Our analysis has three steps: 1) projecting HRS respondents' current assets to retirement; 2)...