The Real Retirement Crisis: Assessing Retirement Savings Adequacy

Andrew G. Biggs, resident scholar at American Enterprise Institute, told attendees of the Plan Sponsor Council of America (PSCA) 71st Annual National Conference, that for most of his 20 years in the retirement industry, if someone had asked him if Americans are undersaving for retirement, he would have said they were.

 

However, he’s been looking at the research and claims that indicate there is a retirement crisis in America and suggests they are understating what Americans will have for retirement income and overstating what they will need. “The outlook is more positive than what the stories tell,” he said.

 

Biggs said retirement planning is about maintaining a person’s standard of living from work to retirement, and keeping consumption smooth over time. Total retirement savings in public- and private-sector retirement plans, individual retirement accounts (IRAs), annuities and Social Security income is about $48 trillion. According to Biggs, academic studies report a retirement savings gap of around $1 trillion; the Center for Retirement Research (CRR) estimates it at approximately $6 trillion and the National Institute for Retirement Security (NIRS) says it is $14 trillion.

 

Biggs argued that the Current Population Survey (CPS) on which many research studies are based is a “terrible source of information about retirement income.” This is because it counts regular payments, such as monthly Social Security benefits or monthly payments from annuities, or pensions as income, but if someone takes irregular payments, such as withdrawing from a defined contribution (DC) plan only when funds are needed, that is not counted as income. “The CPS only captures 58% of retirement income that Americans actually report to the IRS,” he says.

 

Data from the Internal Revenue Service (IRS) and the Census Bureau shows that the percentage of households receiving income from private retirement plans doubled from 1984 to 2007. According to IRS data, poverty in retirement is falling. “That is success,” Biggs said.

 

In addition, the Social Security Administration reports that one-third of retirees depend on Social Security for 90% of their retirement income. However, according to Biggs, research from economists Josh Mitchell and Adam Bee, using IRS data, shows only 18% of Americans are highly dependent on Social Security for retirement income, and only 12% receive 90% of income from Social Security. These economists find that a typical retiree has 114% of replacement income five years before claiming Social Security.

 

Biggs also noted that some studies say if retirees don’t have annuity payments, they will spend their money down and not have enough to last through retirement; however, government research shows that for people who retired in the 1920s, their net worth increased over time. “This is because people tend to spend less in retirement—they’re not buying houses or expensive cars,” Biggs said. “Most retirees are savers. They’re not drawing down retirement savings, but building up their assets. There are exceptions, but this is the trend.”

 

There is also the claim that health costs eat up retirees’ savings, but Biggs pointed out that the Consumer Expenditure Survey found health outlays are essentially flat over the years in retirement. Other surveys show the median household spends only $7,000 in long-term care. “Medicare does pay some, and other benefits may pay some,” Biggs said. “If health care costs were going through the roof, we would see more retirees file for bankruptcy, but the data shows more employees than retirees file for bankruptcy.”

 

According to Biggs, Federal Reserve data shows retirement savings are at record levels. Americans saved an average of 6% in 1975, but in 2013 was 8%. Biggs said this may seem small, but “if you go through life saving 8% versus 6%, you will have 33% more retirement income.”

 

He also noted that there are now two parties contributing to Americans’ retirement savings, the employee and the employer, where before it was only the employer. “Everyone talks about the good old days of DB [defined benefit] plans and the retirement crisis is because of the switch from DB to DC,” Biggs said. “But, at the peak, only 39% of Americans participated in a DB plan and a Congressional study found only 10% of those who participated in a DB plan actually received a benefit from it. Whether one gets money from a DB plan depends on vesting and funding.”

 

Biggs noted that Employee Retirement Income Security Act (ERISA) requirements caused many corporate plan sponsors to move away from DB plans, and that is why there are still so many public-sector DB plans—no ERISA requirements. He also points out that “even the smallest estimates of underfunding of government DB plans are bigger than the largest estimates of undersaving by households.” He adds, “This does not tell me we need to shift retirement savings from households’ hands into the government’s hands.”

 

Biggs does not say that attempts to overcome the retirement savings “crisis” are necessarily bad, but they need to be considered. For example, a study of Federal employees automatically enrolled in the Thrift Savings Plan showed savings did increase, but debt increased even more. “We try to get the poorest to save for retirement, but do they need to?” he queried.

 

“We need a better analysis of retirement savings issues and to rely less on interest group studies,” Biggs said. “If today’s workers are saving well and today’s retirees are doing well, then my gut says tomorrow’s retirees will be ok.”

 

Biggs suggested some things that do need to be done to improve retirement savings adequacy:

Fix the big problems – Social Security, the Pension Benefit Guaranty Corporation (PBGC) and state and local retirement plans are facing insolvency. Biggs suggests Social Security be enhanced for the poor.

Pick the low- hanging fruit – He recommended making auto enrollment universal and raising the default deferral rate, but considering exempting low-income employees from auto enrollment.

Addressing expanding retirement plan coverage for employees – Biggs said multiple employer plans (MEPs) will help, but wonders whether we should embrace state-run auto-IRAs or a federal alternative for employees without DC plans.

 

“If there’s a case for the auto-IRA, it is for lower-income people to use that in order to delay claiming Social Security,” Biggs said. “Even if you’re in the category of someone whose projected longevity is lower, there is still a lot of uncertainty, so I think there is value in insuring yourself from poverty at the point of life when you have fewer options, so I think that is a case for delaying Social Security claiming.”