INTRODUCTION

The traditional retirement income model in the United States has been the three legged stool of Social Security, an employer pension, and private savings. The assumption has been that, to varying degrees, workers will require all three elements to provide adequate income during their retirement. The breadth of the receipt of the first two elements, Social Security and employment based pensions, and the benefit levels of recent retirees provides a key perspective on the current system and an important indicator of what current workers can anticipate.

After a long period of very rapid growth in the Post-war period, the proportion of the workforce covered under the private pension system has been relatively constant for more than twenty years. In that same period the nature of the system has changed significantly. For a long time it was a common practice for firms sponsoring pension and health insurance plans to provide retirees with a lifetime pension annuity financed entirely by the employer and lifetime health plan coverage paid for, at least in part, by the employer. While these types of benefits are still widespread, shifts are occurring in both the type and financing of retirement benefits.

Most new pension plans being adopted are 401(k) type plans, financed primarily by voluntary employee contributions. The growth of these plans has resulted in lump sum distributions replacing lifetime annuities as the most common form of benefit payment. Most lump sum distributions are taken upon job change rather than at retirement. These distributions can be rolled over into an Individual Retirement Account or another plan and used for retirement. However, many persons receiving pre-retirement distributions spend rather than save the payments.

The capacity of the current retirement income system to provide benefit levels that will enable current and future retirees to maintain their standard of living in retirement depends on several key factors. These include the size of the distributions that will be generated from the increasingly prevalent defined contribution plans, the use of these assets by participants who are likely to receive them at various points in their working lives, and the level of annuity benefits that the defined benefit system will produce. The most direct measure of the adequacy of these benefits is the extent to which they are able to replace, over the nearly twenty years the typical American worker can expect to be retired, the real value of pre-retirement income.

Given the increasingly high cost of health insurance, the ability of retirees to receive health coverage through an employer provided health plan can be an important component of the total retirement package. Fewer employers are now offering lifetime health plan coverage to retirees than in the past. Among employers that continue to provide health insurance, there is a trend toward shifting more of the costs of premium payments to the retirees.

This report contains findings derived from the Special Supplement to the September 1994 CPS on the pension receipt and health plan coverage status of retirees.