Chapter 37: Retirement planning and financial literacy
In the USA and around the world, individuals and their families are increasingly responsible for securing their own financial well-being. Before the 1980s, many US workers relied for their retirement security mainly on Social Security and employer-sponsored defined-benefit (DB) pension plans. Today, by contrast, baby-boomers are increasingly relying on defined-contribution (DC) plans and individual retirement accounts (IRAs) to finance their golden years. Indeed, in 1980, about 40 percent of private-sector pension contributions went to DC plans; by the year 2000, almost 90 percent of such contributions went to personal accounts – mostly 401(k) plans (Poterba et al., 2008). The transition to the DC retirement saving model has the advantage of permitting more worker flexibility and labor mobility than in the past, yet it also imposes a greater responsibility on individuals to save, invest and decumulate their retirement wealth sensibly. Moreover, as many DB plans have been frozen or terminated, the individually managed accounts will increasingly become the mainstay of retirement. For this reason, individuals are increasingly being called to ‘roll their own’ retirement saving and their financial security in retirement will depend on their own financial decisions and behavior. Given this trend toward individual responsibility, in this chapter I investigate the extent to which Americans are equipped to make decisions about their pensions. Specifically, I study whether older workers have made plans for retirement as well as examine their retirement savings.
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