Brief Chronology of the Retirement Security Projection Model®
The original version of Retirement Security Projection Model® (RSPM) was used to analyze the future economic well-being of the retired population at the state level. The Employee Benefit Research Institute and the Milbank Memorial Fund, working with the governor of Oregon, set out to see if this situation could be addressed for Oregon. The analysis focused primarily on simulated retirement wealth with a comparison to ad hoc thresholds for retirement expenditures, but the results made it clear that major decisions lie ahead if the state’s population is to have adequate resources in retirement.
Subsequent to the release of the Oregon study, it was decided that the approach could be carried to other states as well. Kansas and Massachusetts were chosen as the next states for analysis. Results of the Kansas study were presented to the state’s Long-Term Care Services Task Force on July 11, 2002, and the results of the Massachusetts study were presented on Dec. 1, 2002. With the assistance of the Kansas Insurance Department, EBRI was able to create Retirement Readiness Ratings based on a full stochastic decumulation model that took into account the household’s longevity risk, post-retirement investment risk, and exposure to potentially catastrophic nursing home and home health care risks. This was followed by the expansion of RSPM, as well as the Retirement Readiness Ratings produced by it, to a national model and the presentation of the first micro-simulation retirement income adequacy model built in part from administrative 401(k) data at the EBRI December 2003 policy forum. The basic model was then modified for Senate Aging testimony in 2004 to quantify the beneficial impact of a mandatory contribution of 5 percent of compensation.
The first major modification of the model occurred for the EBRI May 2004 policy forum. In an analysis to determine the impact of annuitizing defined contribution and IRA balances at retirement age, EBRI was able to demonstrate that for a household seeking a 75 percent probability of retirement income adequacy, the additional savings that would otherwise need to be set aside each year until retirement to achieve this objective would decrease by a median amount of 30 percent. Additional refinements were introduced in 2005 to evaluate the impact of purchasing long-term care insurance on retirement income adequacy.
The model was next used in March of 2006 to evaluate the impact of defined benefit freezes on participants by simulating the minimum employer contribution rate that would be needed to financially indemnify the employees for the reduction in their expected retirement income under various rate-of-return assumptions. Later that year, an updated version of the model was developed to enhance the EBRI interactive Ballpark E$timate® worksheet by providing Monte Carlo simulations of the necessary replacement rates needed for specific probabilities of retirement income adequacy under alternative risk management treatments.
RSPM was significantly enhanced for the May 2008 EBRI policy forum by allowing automatic enrollment of 401(k) participants with the potential for automatic escalation of contributions to be included. Additional modifications were added in 2009 for aPension Research Council presentation that involved a winners/losers analysis of defined benefit freezes and the enhanced defined contribution employer contributions provided as a quid pro quo.
A new subroutine was added to the model to allow simulations of various styles oftarget-date funds for a comparison with participant-directed investments in 2009. In April 2010, the model was completely reparameterized with 401(k) plan design parameters for sponsors that have adopted automatic enrollment provisions.
The new model was used to analyze how eligibility for participation in a defined contribution plan impacts retirement income adequacy in September 2010. It was also used to compute Retirement Savings Shortfalls for Baby Boomers and Generation Xers in October 2010.
In October 2010 testimony before the Senate Health, Education, Labor and Pensions Committee on “The Wobbly Stool: Retirement (In)security in America,” the model was used to analyze the relative importance of employer-provided retirement benefits and Social Security.
In February 2011, the model was used to analyze the impact of the 2008–2009 crisis in the financial and real estate markets on retirement income adequacy.
An April 2011 article introduced a new method of analyzing the results from the RSPM. Instead of simply computing an overall percentage of the simulated life paths in a particular cohort that would not have sufficient retirement income to pay for the simulated expenses, the new method computed the percentage of households that would meet that requirement more than a specified percentage of times in the simulation.
In a July 2011 EBRI Notes article, it provided preliminary evidence of the impact of the “20/20 caps” on projected retirement accumulations proposed by the National Commission on Fiscal Responsibility and Reform.
The August 2011 EBRI Notes article evaluated the importance of defined benefit plans for households, assuming individuals retire at age 65, while demonstrating the impact of defined benefit plans in achieving retirement income adequacy for Baby Boomers and Gen Xers.
EBRI’s September 2011 Senate Finance testimony analyzed the potential impact of various types of tax-reform options on retirement income adequacy. This was expanded in the November 2011 EBRI Issue Brief and a new set of survey results were added to the model in the March 2012 EBRI Notes article.
The May 2012 EBRI Notes article provided 2012 updates for the previously published EBRI Retirement Readiness Ratings as well as the Retirement Savings Shortfalls. The new findings were explored in more detail in the June 2012 EBRI Notes article by looking at the percentage of Gen Xers who were relatively “close” to satisfying the retirement income adequacy thresholds and providing additional detail on the magnitude of the shortfalls. Future eligibility for 401(k) plans makes a significant difference in reducing the percentage of households with shortfalls of $200,000 or more for all gender/family status combinations, but single females experience the largest absolute reduction in the percentage of those with shortfalls in this range.
The August 2012 EBRI Notes article provided additional evidence on whether deferring retirement to age 70 would provide retirement income adequacy for the vast majority of Baby Boomers and Gen Xers. The September 2012 EBRI Notes article analyzed the impact of increasing the default contribution rate for automatic enrollment 401(k) plans with automatic escalation of contributions. The November 2012 EBRI Notes article reclassified the RRRs to provide additional information on those substantially above the threshold; close to the threshold; and substantially below the threshold.
RSPM was featured prominently in the Money Magazine, March 2013, cover feature, “Dream Big, Act Now: Six Secrets of Retirement” and discussed by Jean Chatzky on the March 7th episode of Morning Joe.
The results in the March 2013 EBRI Notes article are based on a modified version of RSPM to assess the probability that respondent households would not run short of money in retirement if they did, in fact, accumulate the amount they said would be required in the 2013 Retirement Confidence Survey.
On April 12, 2013 (the day the Fiscal Year 2014 budget proposal was unveiled) RSPM simulation results were used in the EBRI release on The Impact of a Retirement Savings Account Cap