Paying for Retirement
Will baby boomers have a rough time when they retire?
By Mary H. Cooper

As the first members of the baby-boom generation enter middle age, concern is mounting that millions of Americans in this huge population group won't be able to retire in comfort. Social Security payments will only meet a small part of most retirees' financial needs. The other traditional sources of retirement income -- employer-sponsored pension plans and personal savings -- may be less secure. Pension. . . .

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Will baby boomers be as well-off in retirement as their parents?

An Early Perspective September 1993.. Baby boomers in general will have higher real retirement incomes than older people today for a variety of reasons. First, as long as real wage growth is positive on average during the next 20 to 40 years, boomers will have higher real pre-retirement earnings than today's older people had in their working years. With current law, this growth will increase the level of boomers' Social Security benefits. Pension benefits will be higher as well, and higher earnings now will enable boomers to save more for retirement. Second, increases in women's participation in the labor force imply that more boomers will have acquired additional years of work experience before retirement. Not only will more women be eligible for their own Social Security and pension benefits, but also their income from these sources in some cases will be higher. Third, boomers will be more likely to receive income from pensions as a result of recent changes in the pension system. Finally, baby boomers may inherit substantial wealth from their parents.

B. Douglas B. Douglas Bernheim Professor of economics and business policy at Princeton.. From testimony before The House Committee On Ways And Means, Sept. 21, 1993.

Basic Retirement Plans

Defined-Benefit Plans: These tax-deferred retirement savings plans provide employer-guaranteed monthly benefits. Workers who participate become vested, or entitled to full benefits, after a maximum of five years of service. Benefit payments typically are calculated on the basis of final average annual earnings and number of years worked. Typical retirement age is 64,# but beneficiaries may retire as early as 55 and receive 62 percent of the full amount. Slightly more than half the people covered by these plans will receive “integrated” benefits, or benefits that are reduced by some portion of their income from Social Security.

Defined-Contribution Plans: These tax-deferred retirement savings accounts -- known in the private sector as 401(k) plans -- are funded mainly by contributions from employees. Employees may contribute any amount up to a fixed percentage of their earnings, and employers usually match these contributions with a lesser amount. Typically, employees choose among three investment options, including stocks, bonds or a mix of both. Participants are allowed to borrow money from their 401(k) accounts, but unauthorized early withdrawals of funds are penalized, and taxes also are due on the amount withdrawn. Plans similar to 401(k)s outside the private sector are 403(b) plans for employees of nonprofit, charitable, religious or educational organizations; Section 457 plans for state and local government workers; and federal thrift savings plans for federal government employees.

Profit-Sharing Plans: These tax-deferred savings plans share company profits, if any, with employees and typically offer investment options in stock or bond funds. Loans and withdrawals for emergency expenses generally are not permitted. There usually is a vesting period requiring workers to complete several years of service before participating.

Keogh Plans: Self-employed workers, including moonlighters who have retirement coverage through their employers, can choose among several types of tax-deferred investment plans called Keoghs. The profit-sharing Keogh, for example, allows participants to defer taxes on up to 13 percent of their earnings from self-employment, up to a maximum of $30,000 a year, and set the money aside in tax-deferred Keogh accounts.

Simplified Employee Pension (SEP): Similar to Keogh plans but simpler to set up and administer, simplified employee pensions are a popular choice for self-employed people who have no employees. The conditions are similar to the profit-sharing Keogh.

Individual Retirement Accounts (IRA): Workers who aren't covered by employer-sponsored retirement plans or who earn up to $25,000 (unmarried) or $40,000 (married couples) can deduct up to $2,000 a year they put in an IRA. Workers with higher earnings can make deductions on a sliding scale, up to $35,000 for singles and $50,000 for married couples.

# KPMG Peat Marwick, Retirement Benefits in the 1990s, September 1993.