The Role of Employer-Provided Benefits in Americans’ Confidence About Retirement

Journalists and researchers have focused considerable attention on the baby boomers’ retirement readiness, as well as the retirement prospects for later generations. While expert opinion provides a valuable perspective, the expectations of American workers themselves are also important. Rising health costs, the economic downturn, the spiraling cost of gas and the slumping housing market have eroded many workers’ confidence in a comfortable retirement future.¹ Inadequate retirement and health benefits may exacerbate workers’ worries, prompting many to delay retirement.²

To get a better understanding of the value and effects of employer-sponsored retirement benefits and how current retirees are faring, Watson Wyatt Worldwide asked a national panel of older workers and recent retirees about their benefits, retirement planning, expectations in retirement and related issues. Our observations about the relationship between employer-provided benefits and Americans’ confidence in their retirement readiness are based on our 2007 U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans.

Confidence in Living a Financially Comfortable Retirement
Although most respondents are optimistic about having enough financial resources to live comfortably during their early retirement years, they are less sanguine about their later years. Confidence declines sharply between five-year and 20-year horizons.

As shown in Table 1, more than 90 percent of older workers are confident or somewhat confident of having sufficient financial resources to live comfortably for the first five years of retirement (63 percent are very confident). However, the percentage of older workers who are somewhat or very confident about living comfortably more than 20 years into retirement drops to roughly 62 percent, and the percentage who are very confident falls to about 22 percent.

Table 1: Older Workers' Financial Confidence Declines as Retirement Horizon Lengthens

	5 years into retirement	10 years into retirement	15 years into retirement	20 years into retirement	More than 20 years into retirement
Not at all confident	5.6%	5.8%	9.1%	23.9%	14.8%
Not too confident	4.0%	8.7%	15.0%	23.1%	23.5%
Somewhat confident	27.4%	33.6%	42.1%	36.6%	39.4%
Very confident	63.0%	51.9%	33.8%	16.4%	22.3%
Total	100.0%	100.0%	100.0%	100.0%	100.0%

Source: Watson Wyatt Worldwide, U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, 2007.

Table 2 shows retirees’ confidence over different retirement horizons. Most retirees — roughly 85 percent — are somewhat or very confident of being financially comfortable for the next five years. As with the older workers, however, their confidence declines as the retirement horizon lengthens. Only about 33 percent are very confident and 36 percent are somewhat confident about their financial security 20 years into the future.

Table 2: Retirees' Financial Confidence Declines as Retirement Horizon Lengthens

	The next 5 years	The next 10 years	The next 15 years	The next 20 years
Not at all confident	9.3%	8.2%	11.9%	17.3%
Not too confident	6.0%	7.8%	14.9%	13.4%
Somewhat confident	23.7%	32.2%	36.2%	36.3%
Very confident	61.0%	51.8%	37.0%	33.0%
Total	100.0%	100.0%	100.0%	100.0%

Source: Watson Wyatt Worldwide, U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, 2007.

To assess the effect of older workers’ confidence in their financial future on their plans for retirement, we show the average expected retirement age by confidence level for various retirement periods (Table 3). Those older workers who are most confident about living comfortably after retirement plan to retire earlier than those who are less confident.

On average, older workers who are not at all confident of having sufficient financial resources for the first five years of retirement plan to wait until they are nearly age 67 to retire. Older workers who are very confident of having enough resources for their first five years of retirement plan to retire at age 63. Older workers who are very confident of being financially comfortable after 20 years of retirement expect to retire at an even younger age — the average is 61.5 years. Clearly, older workers who are more confident of having adequately planned for retirement (and whose plans have borne sufficient fruit) can stop working and still maintain their lifestyle.

Table 3: Effects of Financial Confidence and Length of Retirement Period on Older Workers’ Average Expected Retirement Age

	5 years into retirement	10 years into retirement	15 years into retirement	20 years into retirement	More than 20 years into retirement
Not at all confident	66.9	66.8	66.5	66.1	65.4
Not too confident	67.7	66.3	65.6	64.4	64.1
Somewhat confident	64.2	64.4	63.8	63.4	63.1
Very confident	63.0	62.6	62.2	62.5	61.5

Source: Watson Wyatt Worldwide, U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, 2007.

The Role of Retirement Benefits
Over the years, defined benefit (DB) coverage rates have dropped, while defined contribution (DC) coverage rates have risen sharply. For better or worse, Americans have become more responsible for and involved in their retirement planning. They often choose their contribution rates and investments, and their retirement age depends more on their own readiness and desires than on plan requirements. Older workers must decide in the wake of their past financial decisions and outcomes whether they can afford to retire, and the decision is a weighty one.

Eighty-four percent of older workers report having at least a DB plan with their current employer, while approximately 5 percent have only a DC plan and 11 percent have no retirement plan at all.³ We compare the confidence levels of older workers with and without DB plans in Table 4.

A worker’s plan type exerts a powerful influence on his or her confidence level. About 93 percent of older workers with a DB plan are somewhat or very confident of having enough resources to live comfortably five years into retirement, compared with about 77 percent of older workers who either have only a DC plan or have no retirement plan. Workers with no retirement plan must depend entirely on Social Security, personal savings or family members.

For all workers, the further away the projected retirement horizon, the lower the confidence level. However, older workers with a DB plan remain more confident of having a financially comfortable retirement than those without a DB plan.

Table 4: Effect of Plan Type and Length of Retirement Period on Older Workers' Confidence in Their Retirement Resources

	5 years into retirement		10 years into retirement		15 years into retirement		20 years into retirement		More than 20 years into retirement
	Have DB or DB and DC plan	Have DC plan only or no plan	Have DB or DB and DC plan	Have DC plan only or no plan	Have DB or DB and DC plan	Have DC plan only or no plan	Have DB or DB and DC plan	Have DC plan only or no plan	Have DB or DB and DC plan	Have DC plan only or no plan
Not at all confident	4.3%	13.1%	4.3%	14.4%	7.0%	20.4%	12.7%	26.6%	21.5%	37.4%
Not too confident	2.8%	10.2%	7.3%	15.4%	13.7%	22.6%	22.7%	28.1%	22.8%	24.7%
Somewhat confident	26.6%	31.6%	33.4%	34.9%	43.9%	32.2%	41.4%	27.7%	38.6%	25.5%
Very confident	66.3%	45.1%	55.0%	35.3%	35.4%	24.8%	23.2%	17.6%	17.1%	12.4%
Total	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%

Source: Watson Wyatt Worldwide, U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, 2007.

We also asked retirees the type of retirement plan from which they receive benefits. Table 5 shows retirees’ confidence in having sufficient financial resources for a comfortable retirement separately for those who receive benefits from a DB plan and those who receive benefits from a DC plan only or do not have an employer-sponsored plan. However, it is important to note that none of today’s retirees have had a full career under a DC plan. So simply having a DC plan through one’s current employer or receiving benefits from a DC plan is not necessarily determinative.

Similar to older workers, retirees who receive benefits from a DB plan are more confident than those who do not. About 89 percent of retirees with a DB plan are somewhat or very confident about their financial prospects for the next five years, compared with 82 percent of retirees with only a DC plan or no retirement plan. Moreover, about 73 percent of retirees who receive retirement benefits from a DB plan are somewhat or very confident of a financially comfortable future 20 years later, compared with 64 percent of retirees who either receive benefits only from a DC plan or have no employer-sponsored retirement plan.

Table 5: Effect of Plan Type and Length of Retirement Period on Retirees’ Confidence in Their Financial Resources

	The next 5 years		The next 10 years		The next 15 years		The next 20 years
	Have DB or DB and DC plan	Have DC plan only or no plan	Have DB or DB and DC plan	Have DC plan only or no plan	Have DB or DB and DC plan	Have DC plan only or no plan	Have DB or DB and DC plan	Have DC plan only or no plan
Not at all confident	6.3%	13.8%	4.9%	12.0%	8.5%	16.1%	14.3%	20.7%
Not too confident	4.6%	4.3%	6.7%	6.4%	13.0%	19.0%	12.6%	14.9%
Somewhat confident	21.5%	25.5%	32.9%	28.7%	39.5%	25.7%	39.3%	26.4%
Very confident	67.6%	56.4%	55.5%	52.9%	39.0%	39.2%	33.8%	38.0%
Total	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%

Source: Watson Wyatt Worldwide, U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, 2007.

The Role of Retiree Health Benefits
Large employers traditionally have provided retiree health insurance to retirees under age 65 and as a supplement to Medicare benefits for those older than 65. In recent years, however, many employers have scaled back their retiree health benefits and some have eliminated them altogether. This trend is a consequence of rising health costs, the increasing number of older workers and retirees, and stricter requirements for postretirement accounting disclosures.

Among companies that still provide retiree health insurance, the benefits for future retirees will be significantly less generous than those for current retirees. Many of these companies have cut costs by capping contributions, shifting premium costs to retirees, scaling back prescription coverage and stepping up service requirements. To gauge the effect of expecting or having retiree health insurance on older workers’ and retirees’ perceptions of their financial preparedness, we cross-tabulate their confidence in their financial future at different points in retirement with whether or not they have (or expect to have) retiree health insurance.

As Table 6 shows, older workers who are counting on retiree health insurance are more likely to be financially confident than other older workers (although, of course, these workers might not actually receive the retiree health benefits they are expecting). About 93 percent of older workers who expect to have retiree health insurance are somewhat confident or very confident about having enough retirement resources five years into retirement, compared with roughly 87 percent of those who will be left to their own devices until Medicare kicks in.

Although all confidence levels decline as the retirement period increases, older workers who plan on receiving retiree health insurance remain more confident than other workers. About 57 percent of older workers who expect to have retiree health insurance are somewhat or very confident about having enough resources after 20 years of retirement, compared with roughly 46 percent without such expectations.

Table 6: Effect of Retiree Health Insurance and Length of Retirement Period on Older Workers' Confidence in Their Financial Resources

	5 years into retirement		10 years into retirement		15 years into retirement		20 years into retirement		More than 20 years into retirement
Confidence level	With retiree health insurance	Without retiree health insurance	With retiree health insurance	Without retiree health insurance	With retiree health insurance	Without retiree health insurance	With retiree health insurance	Without retiree health insurance	With retiree health insurance	Without retiree health insurance
Not at all confident	3.9%	8.4%	3.9%	8.6%	6.5%	13.2%	11.3%	20.3%	19.9%	31.1%
Not too confident	3.2%	4.7%	6.6%	11.7%	12.3%	19.4%	22.8%	24.8%	23.0%	23.1%
Somewhat confident	25.2%	30.8%	32.3%	35.3%	44.5%	38.7%	41.2%	36.7%	38.2%	32.7%
Very confident	67.7%	56.1%	57.2%	44.4%	36.7%	28.7%	24.7%	18.2%	18.9%	13.1%
Total	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%

Source: Watson Wyatt Worldwide, U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, 2007.

As shown in Table 7, about 95 percent of retirees with retiree health insurance say they are somewhat confident or very confident about their financial resources over the next five years, compared with roughly 72 percent of retirees without retiree health insurance. As with the older workers, confidence levels decrease as the retirement horizon lengthens. About 77 percent of retirees covered by retiree health insurance are somewhat or very confident of having sufficient retirement resources over the next 20 years, compared with only 58 percent of other retirees.

Table 7: Effect of Retiree Health Insurance and Length of Retirement Period on Retirees’ Confidence in Their Financial Resources

	The next 5 years		The next 10 years		The next 15 years		The next 20 years
	With retiree health insurance	Without retiree health insurance	With retiree health insurance	Without retiree health insurance	With retiree health insurance	Without retiree health insurance	With retiree health insurance	Without retiree health insurance
Not at all confident	3.2%	16.9%	3.3%	15.3%	6.1%	20.7%	11.2%	26.7%
Not too confident	2.0%	11.6%	4.1%	13.3%	12.6%	18.5%	12.1%	15.4%
Somewhat confident	24.4%	23.2%	34.0%	30.4%	40.7%	30.3%	40.7%	30.6%
Very confident	70.4%	48.3%	58.6%	41.0%	40.6%	30.5%	36.0%	27.3%
Total	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%	100.0%

Source: Watson Wyatt Worldwide, U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, 2007.

Conclusions
Retirement has been a different experience for each generation of retirees. In the recent past, retirement was a secure and comfortable experience for many American workers, largely because health care costs remained manageable and many retirees enjoyed guaranteed lifetime benefits from a DB plan.

But researchers and policymakers are worried about what retirement will be like for today’s older workers, whose golden years will be challenged by a slumping housing market, slowing economy and rising health costs, along with uncertainty about what they can expect from our ailing Social Security and Medicare programs.

According to U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, many recent retirees and older workers are apprehensive about their financial security and comfort during retirement, particularly over the long haul. Older workers and retirees without retiree health or DB retirement plans appear to feel more vulnerable than those bolstered by better health coverage and the assurance of lifetime income.

The confidence gap between those with a DB plan and those without is wide, particularly as the retirement period lengthens. We find the widest confidence gap, however, between retirees with and without retiree health benefits. Five years into the future, there is a 23 percentage point difference in confidence levels between retirees with and without a retiree health plan. Surprisingly, the confidence gap between workers with and without expectations of receiving retiree health benefits is only 6 percentage points, although the gap widens as the retirement horizon grows longer.

Current trends and the responses from older workers and retirees pose several questions. As more companies drop their retiree medical plans and transition away from traditional DB plans, are employees changing their saving behavior appropriately? Do those with less assured financial futures plan to work longer or to retire from one job and start another? Is phased retirement an option for many workers? Are workers in some industries more likely to be subject to reduced retirement benefits than those in other fields?

Retirement benefits play an enormous role in workforce planning. The provision or lack of retiree health care and DB plans affects attraction, retention and retirement — whether a company attracts the types of workers it needs, retains the workers it wants to keep and is able to predict and to some extent control when workers retire. All companies must understand their employees’ needs, views and expectations, and adopt a comprehensive benefit plan design that best fits their company’s current and projected workforce needs.

About the Surveys
Watson Wyatt’s U.S. Surveys of Older Employees’ and Retirees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans were conducted in May 2007. The surveys were completed by approximately 2,600 employees and 2,400 retirees separately. Almost half the employees in the sample were matched to their specific plan design using Watson Wyatt’s COMPARISON^TM database. The older workers were aged 50 to 65, and the average age was 55.8. The retirees were aged 60 to 75, and the average age was 65. The survey weights are designed by post-stratifying to the March 2006 Current Population Survey data using probabilities based on sex, age, marital status and having a pension plan. More details will be available in a forthcoming technical report.

¹ EBRI Issue Brief, No. 316, April 2008.
² Watson Wyatt Worldwide, “Predictive Factors for Retirement Timing,” 2008.
³ Because current employees from large firms are overrepresented in our survey, many employees are covered by both a DB and a DC plan.