NEW YORK - The three-legged stool has cracked, and it is defined contribution plans that have failed to hold up their end.
Even as the stock market reached unprecedented heights, the retirement wealth of the typical baby boomer, aged 47 to 63, dropped 11% between 1989 and 1998, according to a recent study by Edward N. Wolff, professor of economics at New York University. If you add net worth into the equation, the typical boomer's "augmented wealth" fell 16.7%. And, 43% of baby boomers would not be able to replace even half of their pre-retirement income, down from 30% in 1989.
What's more, fewer boomers will have enough retirement income to put them above the poverty line, according to Mr. Wolff's study, "Retirement Insecurity." The study was published by the Economic Policy Institute.
Mr. Wolff's analysis looks at all three legs of the retirement income stool - retirement plans, Social Security benefits and personal savings - but he squarely lays the blame for the projected loss in retirement income on the country's switch from a pension system based primarily on defined benefit plans to one dominated by defined contribution plans.
"Under the new defined contribution plans, employers just put in less money than they did in defined benefit plans," Mr. Wolff said in an interview.
His study uses 1989-'98 data from the Federal Reserve Board and the Internal Revenue Service
Burden on employees
While many employers make matching contributions, a participant's ultimate defined contribution account balance depends largely on the employee's contributions, he said.
This creates an unequal system because low-income workers generally do not have enough money to invest in the plan, Mr. Wolff added.
So, only households with retirement wealth above $1 million had consistent increases in their retirement wealth, after inflation. The rest of households saw their retirement nest eggs plummet.
Some of the other findings:
* Nineteen percent of workers were in 1998 unable to generate enough income in retirement to cross the poverty line.
* For the typical person older than 47, which would include baby boomers and their parents, retirement wealth - the sum of defined contribution, defined benefit and Social Security - dropped 6.9%.
Why aren't boomers better off in a world where defined contribution plans help to support the stool? After all, Mr. Wolff noted, retirement wealth in defined contribution plans rose 838.1% during his study period, more than making up for a 39.4% decline in wealth held in defined benefit plans.
One reason is that pension coverage by either a defined benefit or a defined contribution plan has stagnated, growing by only 3.5 percentage points, the study found.
"When you look at the statistics, the percent of workers who now have a (defined benefit or defined contribution) pension plan is only slightly greater than under the old (defined benefit) system," Mr. Wolff said.
"At this rate it will take 113 years to achieve pension coverage for all households," according to the study.
At the same time, the typical worker's potential Social Security income fell by 13.4%, even though more people were covered by Social Security - 99%, up from 86%.
Plus, the stock market boom that made defined contribution plans more alluring is over, he said.
And rank-and-file workers generally are not sophisticated investors, he noted.
"The point is that employees who had defined benefit plans now actually prefer them," Mr. Wolff said.
"In some cases, (a defined contribution plan is) a nice supplement, but certainly, it's not a substitute for the old defined benefit system."
Another study, conducted last year for the Center for Retirement Research at Boston College, indicates future retirees might have more money in retirement than they think.
The study, by Cori E. Uccello, a consultant for the Urban Institute, Washington, contends surveys showing that Americans might need additional savings to allow them to maintain their current living standards in retirement "may exaggerate the extent of the savings shortfall."
Her study is based on a model that takes into consideration that a person's earnings fluctuate from year to year; therefore, at any given time, 50% of households could fall below the median target of savings - including pension and defined contribution plan assets - needed to retire comfortably.
Using wealth-to-earnings targets to assess the adequacy of savings ignores that, due to fluctuation, current earnings may not accurately reflect average lifetime earnings, Ms. Uccello said.
The majority of households are saving enough, she said.
Ms. Uccello concedes, however, that as Social Security benefits and defined benefit pension income decrease, future retirees will have to rely more heavily on household savings to fund their retirements.
"The shift in private pensions from defined benefit plans ... to defined contribution plans ... may result in a reduction in pension income," Ms. Uccello concluded.
"As a result, future retirees may need to rely more heavily on household savings to fund their retirement years."