A Diversity of Risks

The Challenge of Retirement Preparedness in America

a study from the Bipartisan Policy Center


Many Americans are anxious about their retirement prospects. In fact, a recent Gallup poll found that not having enough money for retirement is the number one financial worry among Americans.
For some, this concern is justified, as they face the daunting prospect of running short
of money in their later years.


Read the full report: A Diversity of Risks (PDF)

But there is considerable variation in preparedness for retirement, and the challenges are more complicated than many realize. When evaluating the retirement security landscape,
complexity is the one constant. Potential sources of retirement income are numerous and varied, including: continued work (perhaps on a part-time basis), Social Security benefits, drawdown of personal savings, workplace retirement plans, annuities, home equity, financial support from family members, and more. Understanding this patchwork and building a solid foundation upon which to retire is no easy task for the average American. Additionally, even for those who do accumulate substantial resources, retirees’ incomes and living standards are subject to a variety of risks, such as poor investment
choices or returns, unexpected medical bills, outliving one’s savings, and needing expensive long-term care. The U.S. retirement landscape is difficult to describe for the “average” person because the state of any particular retiree’s finances depends so heavily on which sources of income they have, how much they have, and what life events occur that could drain their nest egg. The Bipartisan Policy Center’s (BPC) Commission on Retirement Security and Personal Savings is examining the U.S. retirement system. Next year, the commission will make comprehensive recommendations to improve
the financial security of Americans preparing for and in retirement. In advance of these recommendations, BPC staff is producing a series of white papers to highlight the retirement security challenges that public policy can address. After a brief overview of the retirement system, this first
white paper explores retirement preparedness through the lives of four fictional families, showing how they are preparing for retirement, what they could be doing better, and the risks that they will face over the course of their working years and their retirements.

Retirement Plans

Workplace retirement plans are an important component of the U.S. retirement system. But this leg of the proverbial retirement stool has experienced a major upheaval over the past few decades. Defined benefit (DB) plans, often referred to as pensions, have become increasingly uncommon, and more workers are amassing savings in defined contribution (DC) accounts, such as 401(k)s and 403(b)s. This transition was more accidental than intentional; DC accounts were originally supplements to DB pensions, but today those accounts are typically the sole employer retirement plan offering. In recent years, there have been important innovations in DC plan design, such as auto-enrollment and
default investment options that automatically reallocate to more conservative assets as retirement approaches. There is much to learn from the results of these developments as plan sponsors and policymakers continue their efforts to improve the private-sector retirement system.

Defined Benefit

In a DB plan, the employer manages the investments, accepts the investment risk, and must offer the employee the option of a lifetime annuity—a monthly stream of payments through the end of their life (and, usually, any spouse’s life). A traditional DB benefit is the classic pension, in which the retiree receives a monthly payment that is based on length of service and final salary (often defined as
an average of earnings in the last few years of employment or in a few years with the highest earnings).

More recently, so-called “hybrid” DB plans have become popular, especially cash balance plans. In a cash balance plan, the employer is responsible for making and investing contributions and guarantees a specified rate of return on those contributions (instead of a final percentage of salary benefit), and each employee “owns” a virtual account (consisting of the contributions and the promised earnings)
that they can either annuitize or, more typically, receive as a lump sum when they retire or leave the employer.




Founded in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle,
Bob Dole, and George Mitchell, the Bipartisan Policy Center (BPC) is a nonprofit
organization that drives principled solutions through rigorous analysis, reasoned
negotiation, and respectful dialogue. With projects in multiple issue areas, BPC
combines politically balanced policymaking with strong, proactive advocacy and
This report is a product of BPC’s Economic Policy Project (EPP) staff and does
not necessarily represent the views or opinions of members of the Commission on
Retirement Security and Personal Savings, the Bipartisan Policy Center, its founders,
or its Board of Directors.
BPC staff would like to thank members of the Commission and outside experts who
provided valuable insight on the content of the paper. BPC staff authors include
Steve Bell, Shai Akabas, Brian Collins, and Alex Gold. Many thanks to Kelly Isom for
her support and to Alex Cave and Jacob Morello for their excellent assistance with
research and writing.