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

Appendix D: Extended Results on Retirement Adequacy

295 Appendix D Extended Results on Retirement Adequacy Table D.1 Average Annual Real Rates of Return Used in Annuity Calculations Average rates of return (%) Asset type Period available Period chosen Nominal Real Owner-occupied housinga 1968–2007 1968–2007 5.96 1.39 Business and nonhome real estateb 1953–2007 1960–2007 6.96 2.63 Liquid assetsc 1965–2007 1965–2007 5.48 0.88 Financial assetsd 1955–2007 1960–2007 7.54 3.19 Defined contribution accountse 1986–2007 1986–2007 6.72 3.58 Mortgage debt 1960–2007 0.00 −4.04 Nonmortgage debt 1960–2007 0.00 −4.04 Inflation rate (CPI-U average)f 1960–2007 4.21 1965–2007 4.55 1968–2007 4.58 1986–2007 3.03 NOTE: Real Rate of Return = (1 + Nominal Rate) / (1 + ΔCPI) − 1. a Owner-occupied housing: U.S. Census Bureau (2009, Table 943). Updated with data from the National Association of Realtors, Washington, DC: Median Sales Price of Existing Single-Family Homes for Metropolitan Areas, at www. Realtor.org/research. b Business and nonhome real estate: Holding gains (taken from the Flow of Funds table R.100) divided by equity in noncorporate business (taken from the Flow of Funds Table B.100). c Liquid assets: The weighted average of the rates of return on checking deposits and cash, time and saving deposits, and life insurance reserves. The weights are the proportion of these assets in their combined total (calculated from the Flow of Funds Table B.100). The assumptions regarding the rates of return are zero for checking deposits, the rate of return on a one-month CD (taken from the table “H.15 Selected Interest Rates,” published by the Federal Reserve and available at http://www .federalreserve.gov/releases/h15/data.htm) for time and saving deposits, and one plus the inflation rate for life insurance reserves. d Financial assets: The weighted average of the rates of return on open market paper, Treasury securities, municipal securities, corporate and foreign bonds, corporate equities , and mutual fund shares. The weights are the proportion of these assets in total Wolff.indb 295 Wolff.indb 295 11/21/2011 9:20:01 AM 11/21/2011 9:20:01 AM 296 Wolff financial assets held by the household sector (calculated from the Flow of Funds Table B.100). The assumption regarding the rate of return on open market paper is that it equals the rate of return on one-month finance paper (taken from the Table H.15 “Selected Interest Rates,” published by the Federal Reserve and available at http://www .federalreserve.gov/releases/h15/data.htm). The data for the rates of return on other assets are taken from the Economic Report of the President 2005, Table B.73. The assumptions regarding Treasury securities, municipal securities, corporate and foreign bonds, and corporate equities are, respectively, the average of Treasury security yields, high-grade municipal bond yields, the average of corporate bond yields, and annual percent change in the S&P 500 index. Mutual fund shares are assumed to earn a rate of return equal to the weighted average of the rates of return on open market paper, Treasury securities, municipal securities, corporate and foreign bonds, and corporate equities. The weights are the proportions of these assets in the total financial assets of mutual funds (calculated from the Flow of Funds Table L.123). e Pension (defined contribution) accounts: Net acquisition of financial assets (taken from the Flow of Funds Table F.119c) divided by total financial assets of private defined-contribution plans (taken from the Flow of Funds table L.119c). f Inflation rate: Calculated from the CPI-U, published by the Bureau of Labor Statistics. SOURCE: Wolff, Zacharias, and Masterson (2009). Table D.1 (continued) Wolff.indb 296 Wolff.indb 296 11/21/2011 9:20:02 AM 11/21/2011 9:20:02 AM 297 Table D.2 Composition of Expected Mean Retirement Income Based on Wealth Holdings and Expected Pension and Social Security Benefits, 1989, 2001, and 2007 (%) Nonhome, nonpension wealth Home equity Defined contribution plans Defined benefit pensions Social Security Total 1989 Aged 47–64 41.6 13.9 8.1 19.0 17.5 100.0 Aged 47–55 42.0 13.7 11.1 16.9 16.3 100.0 Aged 56–64 40.9 14.2 3.3 22.4 19.2 100.0 Aged 47–64 Non-Hispanic whitea 43...