Is a glass half empty or half full? It can depend on one’s perspective. And in the case of how well retirement plans – and those saving through them – are doing, it also can depend on the data one gathers and considers. And how one interprets it.
In a May 1 session at the Plan Sponsor Council of America’s annual conference, American Enterprise Institute Resident Scholar Andrew Biggs offered a perspective on U.S. retirement readiness. In “The Real Retirement Crisis: Assessing Retirement Saving Adequacy,” he posited that “the other side of the coin is to show how well these plans have worked,” even though it is common to warn that people are not saving enough. “There is a much more positive story to tell,” he said.
Poverty in old age is decreasing in the United States, Biggs asserted, and “that is mostly due to increases in private retirement savings.”
Biggs noted that when told that retirement readiness is better than is commonly believed, some will counter that it may be true now, but that it may not be in the future. He begged to differ, asserting that if income replacement rates are as high as they are now, “a lot of things have to go wrong” to bring levels down to a level where one should worry.
Biggs argued that retirees aren’t running out of money. For one thing, he said, “People tend to spend less as they get older” and that “most retirees are net savers.” And he noted that some argue that health care costs are increasing for retirees, but that there is research that shows that retiree outlays for health care are not increasing as a percentage of income.
Biggs also posited that the “good old days” weren’t really so good — that at the peak of defined benefit coverage, only 39% of private sector workers participated. In fact, he said that some have a “fetish” with DB plans, and suggested that they may not be a panacea since they depend on vesting and other factors and that even at DB plans’ peak, many people never saw benefits from them.
Now, Biggs said, in 80% of married households at least one spouse participates in a retirement plan, and that the Federal Reserve says that retirement savings are at record levels. “The reality is that more people are saving more than they ever have,” he said.
The ultimate goals for retirement saving, Biggs said, are twofold: protection from poverty and maintaining a standard of living. “But there is no agreement on how we’re doing,” he said. For instance, he observed that based on accrued Social Security benefits and private pensions, total retirement savings in the United States are equivalent to $48 trillion. And yet, studies find a retirement savings gap of anywhere from 2% to 29%. “Who’s right?” he asked.
“Is there a retirement crisis today?” Biggs asked. “You’ll see a lot statistics,” he told attendees, continuing, “A lot is based on data that’s not very good.”
Biggs cited the U.S. Census Bureau’s Current Population Survey as an example of “a terrible source” of information on retirement income, remarking that it systematically undervalues the amount of retirement savings. The IRS is a much more accurate and reliable source of such information, he said.
The Social Security Administration, he said, reports that one-third of retirees are heavily dependent on Social Security, and that the Government Accountability Office (GAO) goes farther and says that “many older U.S. adults rely primarily, if not completely, on Social Security.” But the GAO, he says, relies on the Current Population Survey, “which captures barely half of benefits from private retirement plans,” and “measures reliance based on households rather than individuals.”
And yet, even the Census Bureau itself does not agree on the measure of retirement readiness, Biggs observed. While the Population Survey is an incomplete measure, he notes that Adam Bee and Joshua Mitchell of the Census Bureau found in their research that only 18% of retiree households are heavily dependent on Social Security, and that Social Security comprises 90% of the income of just 12% of retired individuals. “To get these results,” said Biggs, “all you have to do is get better data.”
Still More Work to Do
Despite the positive indicators, Biggs said, there is an area where retirement readiness is falling short: government plans. Nearly all of them are underfunded, he said, amounting to between $14 trillion and $26 trillion. He added that even the smallest estimates of government retirement plan underfunding are bigger than the highest estimated household undersaving.
Biggs said that state-run auto-IRA programs “almost certainly” will increase retirement savings, but may not have that effect on household saving.
What else can be done? Biggs suggested that there are other steps that can be taken to improve retirement readiness:
- better analysis of retirement savings issues;
- fixing the big problems: Social Security, the ability of the Pension Benefit Guaranty Corporation to cover plans and benefits, and state and local plans; and
- picking the low-hanging fruit to work on first: auto-enrollment, default contribution rates and addressing the needs of low-income workers.
The hard part, Biggs said, is how to expand coverage, whether to embrace state auto-IRA plans and whether to provide a federal alternative for workers who do not have a 401(k) plan. And he added that the effect of high amounts of debt when people enter retirement does worry him. “It’s a legitimate issue,” he said.