That’s the claim of a new report by the National Institute for Retirement Security (NIRS), titled, appropriately enough, “Retirement in America: Out of Reach for Working Americans?” It contains a number of dire statistics. But how bad are things, really?
The report starts with historical context. Over the 34 year period from 1980, prevalence rates for access of private sector workers to retirement plans bounced around a bit, from 55.4% in 1980, dropping down to 51.4% in 1988, growing to 60.4% in 1999, then dropping steadily since then to 50.9% in 2014 (the end point of the data). Actual workers’ participation in plans followed the same pattern, but with lower rates since some workers choose not to participate; in 2014, only 40.1% of private sector workers participated in a workplace retirement plan. Why did rates drop? The authors say this is due to the aftermath of the 2001 and 2008 recessions, but more likely it’s a matter of increasing percentages of Americans working for the sort of contingent, contract, or small employers who have never had a practice of offering retirement benefits.
At the same time, ignoring traditional DB pensions and looking at only at retirement accounts (401ks, 403bs, IRAs, etc.), a mere 40.7% of working-age Americans had such accounts, as of 2013, though this statistic include working-age individuals rather than more narrowly workers, and rates are considerably lower for the age 21-34 group, 27.5%, than older workers. At the same time, not surprisingly, higher income working-age adults are far more likely to have retirement accounts:
- 15.8% of lowest quartile individuals (income less than $15,325),
- 27.65 of second quartile individuals ($15,325 – $30,660),
- 52.7% of third quartile individuals ($30,661 – $55,548),
- and 74.5% of top quartile individuals (income greater than $55,548)
had retirement accounts.
And, again looking at retirement accounts among working-age individuals, only 18.6% of Americans have greater than one times pay in retirement savings, and only 31.7% of Americans near retirement age (55 – 64) have more than one times pay, with an even smaller percentage of this age group exceeding 4 times pay (13.3%). Separately, the report measures the net worth of working adults; only 46.3% of these near-retirees have net worth (including not just retirement accounts but home equity, college funds, etc.) of greater than 4 times pay. Considering that Fidelity Investments recommends that one have saved ten times one’s income by the time one reaches a retirement age of 67 (with lesser targets for earlier ages), this suggests that that the vast majority of Americans are or will be unprepared for retirement: 78.2% of 35 – 44 year-olds, 79.8% of 45 – 54 year-olds, and 75.3% of 55 – 64 year-olds will not reach this target.
That sounds pretty dire. And NIRS has policy prescriptions to remedy the problem, from increasing Social Security benefits, to mandatory auto-enroll IRAs either state-sponsored or with employer mandates, the expansion of tax credits for low-income savers, and even changes in defined benefit funding rules and the creation of hybrid risk-sharing plan types to try to encourage employers to return to DB plan sponsorship.
But there are reasons to think the situation, while concerning, is not quite as bad as all that.
In the first place, the Fidelity targets are based on typical earners, who can expect a Social Security pay replacement of 40%, and they target an 83% of pay replacement level from age 67 to age 93. But lower-income earners receive relatively greater benefits from Social Security. In the second place, all of these statistics ignore Defined Benefit plans which do still exist for public sector workforce, and some of the NIRS analysis ignores other sorts of savings as well. These statistics are also based on individual income, and it’s not clear how a married couple in which one spouse had a retirement plan that provides for both would be treated in their data. As I discussed in a prior article, in the 2017 Federal Reserve survey, 75% of non-retiree adults (rather than only 40% in the NIRS report) reported having at least some form of retirement savings, including 55% with DC plans, 26% with DB pensions, 32% with IRAs, and 43% with other savings that they considered as retirement savings even though not in a retirement account.
Here’s another data source: the Center for Retirement Research calculates their own measure of retirement readiness, the National Retirement Risk Index (NRRI). This is based on survey data that’s conducted triennially, so the most recent figures are based on 2016 data. The figure represents the percent of households which are projected to fall more than 10% short of the CRR’s calculation of income needed in retirement, taking into account specific impacts of Social Security and other factors for different income levels, and assuming that individuals purchase annuities with their retirement account balances.
So, on the one hand, the NRRI reports a less dire situation than the NIRS calculations – only 50%, rather than three-quarters, of Americans are at risk of declining living standards in retirement.
But, in line with the NIRS data, the NRRI shows a generally worsening situation: the figure was about 30% in the 1980s (that is, 70% of Americans were deemed to be prepared for retirement), grew to the upper 30s and lower 40s in the 1990s and 2000s, and peaked at 53% in 2010, before dropping slightly in 2013 and 2016 to 50% at the time of the last calculation.
But these are all projections and hypothetical calculations. What has actually been happening? Forbes contributor Andrew Biggs wrote in the summer that “The Media’s Coverage of Retirement Saving Really is Terrible” and marshaled a number of studies to show that retirees are, at present, on average and even with respect to the lower-income folk, doing better than in the past, with incomes rising, not falling, and that yet another study, the Urban Institute’s Dynasim model
estimates that the median retiree in 2015 had income sources and assets sufficient to support a total annual income of $37,887. By 2025 real median incomes are projected to rise to $40,880, and to $42,165 by 2035. The Urban Institute model also projects that poverty rates in old age will fall, a reflection of high real incomes among the poor.
And yes, the media has no trouble finding retirees in financial straits, and you and I likely know people who, though middle-class, are not saving for retirement.
Ultimately it’s a glass-half-empty/glass-half-full situation.
Do we need to take drastic and urgent action to ensure that the next generation of retirees won’t have to all be eating dog food, per the stories one reads periodically? No, we don’t. But while there’s time to make a difference, we can still calmly and deliberately think about the best ways to ensure that Americans don’t fall through the cracks.
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