The Transformation of the American Pension System: Was It Beneficial for Workers?

Ch 8 - Conclusions and Policy Recommendations

255 8 Conclusions and Policy Recommendations SUMMARY OF PRINCIPAL FINDINGS The 1980s and 1990s witnessed the unraveling of the traditional DB pension system in favor of DC pension coverage. The study in this book addresses three key questions. First, have U.S. households in general gained from this transformation? Second, if not, which groups gained and which groups lost out? Third, has the transformation of the pension system lowered or raised overall wealth inequality? The main finding is that DC plans did very well during the 1980s and 1990s, when the stock market boomed, and that they more than fully compensated for the decline of DB pension plans. The overall value of pension wealth rose sharply over these two decades, and overall pension coverage increased, at least during the 1990s. However, between 2001 and 2007, when the stock market slackened, there was a marked slowdown in the growth of both DC and overall pension wealth, and overall pension coverage dipped slightly. Moreover, when the stock market tanked from 2007 to 2009, there was a sharp projected drop in DC pension wealth. Indeed, from 2001 to 2009, there was virtually no change in average DC pension wealth and in average overall pension wealth. I begin the study using conventional net worth in order to provide a backdrop to the analysis of retirement wealth. Over the 2001–2007 period, median net worth grew by 19 percent, even faster than during the 1990s (and 1980s). Wealth inequality was also up very slightly from 2001 to 2007. The most notable finding for the 2001–2007 period was the sharply rising debt-to-income ratio, which reached its highest level in almost 25 years at 119 percent in 2007 for all households. The debtequity ratio also climbed, from 14.3 percent in 2001 to 18.1 percent in 2007.Among the middle three wealth quintiles there was a huge increase Wolff.indb 255 Wolff.indb 255 11/21/2011 9:19:37 AM 11/21/2011 9:19:37 AM 256 Wolff in the debt-income ratio, from 100 to 157 percent from 2001 to 2007, and an almost doubling of the debt-equity ratio, from 32 to 61 percent. I also updated the wealth figures to July 1, 2009, on the basis of changes in housing and stock prices. My projections indicate that while mean wealth (in 2007 dollars) declined by 17 percent from 2007 to 2009, median wealth plunged by 36 percent. The projections also suggest a steep rise in wealth inequality, with the Gini coefficient advancing from 0.834 to 0.865. The racial disparity in wealth holdings was almost exactly the same in 2007 as in 1983, with a ratio of average net worth holdings of 0.19 and a ratio of median wealth of about 0.07 in both years. In contrast, Hispanic households made progress relative to white (non-Hispanic) households, with the ratio of average net worth holdings rising from 0.016 in 1983 to 0.026 in 2007 (there was little change in the ratio of median wealth). Young households (under the age of 45), after some relative gains from 1983 to 1989, saw their relative wealth position deteriorate over the years 1989 to 2007. In 2007, 56 percent of male workers (currently employed) under the age of 65 had some type of DC account, 19 percent had some form of DB entitlement, and altogether, 62 percent had some form of pension coverage. Corresponding figures for female workers were only slightly lower than those for men. Pension coverage was lower for workers under age 47 than those aged 47–64: 53 versus 75 percent. Figures for female workers were very similar to those for men. From 1989 to 2001, overall coverage rose moderately, by 3.2 percentage points for male workers and 3.9 percentage points for females. However, trends were very different for DC and DB coverage. Defined contribution coverage climbed by 13 percentage points for men and 10 percentage points for women, while DB coverage plummeted by 12 and 11 percentage points, respectively. However, from 2001 to 2007, male pension coverage fell by 6.4 percentage points, while female pension coverage increased by 1.7 percentage points. As a result, whereas in 1989 and 2001 there was about a 10 percentage point gap in pension coverage between male and female workers, by 2007 the gap was almost completely eliminated. The loss in pension coverage for men from 2001 to 2007 was almost all from the...