Data & Research January 9, 2008

Political Differences

Democrats are frequently characterized as “tax and spend″ by those on the other side of the political spectrum.
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While that may be an unfair generalization, a new survey finds a connection between one’s political affiliation – and one’s thriftiness (1).
Republicans and those identifying themselves as independent voters were more likely to be making plans for saving more, according to a Harris online poll of 2,335 US adults.
Forty-three percent of Republicans were planning to save more in the year ahead, as were 44% of independents, while 27% of Republicans and 28% of independents were planning to save more for retirement. That compares with just 35% of Democrats looking to save more, and a mere 22% planning to save more for retirement.
Republican savings behaviors may simply be reflecting their relative optimism about their economic prospects; 30% said they were more secure about their financial situation, compared with just 14% of Democrats. Moreover 25% of Republicans said they thought the economy would improve this year, versus just 11% of Democrats.
On the other hand, independents – who were just about as pessimistic about the economy and their individual financial fortunes as Democrats – were just as committed to saving more as those more optimistic Republicans in the poll taken between December 4 and 12.
(1) I need no reminders that the GOP-dominated Congress proved to be just as “prolific” at spending, given the chance.
Data & Research January 9, 2008

Switch From DB to DC Lowered Retiree Replacement Income

New research from the Center for Retirement Research at Boston College (CRR) suggests the change in the retirement landscape from predominately defined benefit plans to mostly defined contribution plan coverage has decreased both household pension wealth and retiree income replacement rates.
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According to the CRR Issue Brief, during the period 1992 – 2004, the increase in DC plan participation and plan balances as DB plan coverage declined, was not enough to maintain average household benefits and income replace­ment rates. The typical household with a head who was 51-56 years old had about $114,000 in pension wealth in 2004, about 11% less than in 1992, the report said.

In addition, the CRR researchers found that between 1992 and 2004, the ratio of expected benefits to total current earnings of households (income replacement rate) declined from 32% to 26%.

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The researchers pointed out there will be a continuing dependence on employer-sponsored retirement plans as the role of Social Security lessens. According to the report, Social Security currently replaces around 40% of pre-retire­ment income for the average household, however, three factors will lead to a reduction of benefits relative to pre-retirement earnings:

  • The increase in full retirement age from 65 to 67,
  • Medicare premiums, which are deducted from Social Security are slated to rise dramatically, and
  • A greater share of benefits will be taxable under the personal income tax because the threshold levels above which benefits become tax­able are not indexed for inflation or wage growth.

The CRR used data from the Health and Retirement Study (HRS) for its comparison of employer-sponsored pension wealth across households with heads age 51-56 in 1992, 1998, and 2004.

HRS data indicated that in 1992, 62% of households were covered by an employer-sponsored plan, compared to 66% in 2004. However, while overall plan coverage remained stable, the proportion of older households with pensions relying solely on a defined benefit plan declined from 36% in 1992 to 19% in 2004.

At the same time, the number of households depending only on defined contribution plans for retirement income increased from 27% in 1992 to 44% in 2004. The number of households with both DC and DB coverage remained relatively stable (37% in 1992 v. 38% in 2004).

The CRR Issue Brief can be found here.

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