Retirement Income from Employer Plans Increasing

Retirees across all income groups are collecting more retirement income from employer-sponsored retirement plans than in the mid-1970s.

An ICI study, “A Look at Private-Sector Retirement Income After ERISA, 2011” found that in 2011, 33% of retirees received income—either directly or through a spouse—from private-sector retirement plans, compared with 21% in 1975. The median income received by those with private-sector pension income was $6,300 in 2011 compared with about $4,700 in 1975 (in 2011 dollars). The research examines private-sector retirement income trends since 1974, just after the Employee Retirement Income Security Act (ERISA) was enacted.

The study also revealed that an increase in DC plan coverage over time has kept U.S. worker access to private-sector retirement plans steady since the 1970s. While coverage has been consistent, an increasing number of private-sector workers have worked for employers that sponsor defined contribution (DC) pension plans, while the number having worked for employers that sponsor defined benefits (DB) plans decreased. In 1975, nearly 90% of active participants in private-sector retirement plans had primary coverage through DB plans, dropping steadily over time to below 50% by the 1990s. By 1998, 44% of active participants in private-sector retirement plans had coverage through DB plans.

Coverage by a pension plan does not always result in retirement income, the study found. The historical prevalence of retirement income from private-sector DB plans may be overstated by only looking at pension coverage, rather than receipt of pension income. Many retirees may have worked for companies that offered DB plans; however, because private-sector workers change jobs often, the combination of vesting rules and back-loaded benefit accrual resulted in many retirees getting little or no retirement income from private-sector retirement plans.

The ICI report also revealed Social Security benefits continue to serve as the foundation for retirement security in the U.S. and represent the largest component of retiree income and the predominant income source for lower-income retirees. In 2011, Social Security benefits were 57% of total retiree income and more than 85% of income for retirees in the lowest 40% of the income distribution.

“As policymakers consider retirement savings policies, it is important that they understand that private-sector pension income has tended to increase over time rather than decrease. The share of retirees receiving private-sector pension income increased by more than 50% between 1975 and 1991, and has remained fairly stable since,” said Peter Brady, ICI senior economist and coauthor of the report. Further, among those receiving income from private-sector pensions, the median amount of inflation-adjusted income—which had remained fairly flat between 1975 and 1991—has increased nearly 40% since 1991.”

The study was coauthored by Brady and ICI associate economist Michael Bogdan. More information can be found here.