The issue of retirement savings in the United States needs more sensible discussion and fewer sensationalist headlines such as The Retirement Crisis is Much Worse Than You Think and Fears of a Retirement Crisis are Overblown – and These Numbers Prove It. Unfortunately, discussions of this topic are rife with simplistic and misleading statistical arguments. Data show that retirement savings accounts are woefully small. The median retirement savings for families with the head of household between 56 and 61 is $21,000. The averages look a lot better, but that is because the average is skewed by a small percentage of wealthy households. Even so, the average retirement savings for households in this age range is $244,000, which would provide perhaps $13,000 a year (optimistically) in long-term retirement income. This includes IRA accounts and 401(k)s and other similar accounts. Only about 60% of households have any savings in retirement accounts at all. Those who say there is no crisis note that surveys of retirees suggest that most are doing fine. Fully 80% of retirees report that they have enough income to “live comfortably,” which allows commentators to claim that there is no retirement crisis. The level of poverty among senior citizens is very low as well.
The previous paragraph provides excellent examples of misleading statistics. The actual statistics cited are correct, but the conclusions drawn on the basis of these statistics are not conclusive. Let’s start with the data on low balances in retirement savings accounts (IRAs and 401(k)s and other self-directed accounts). The first mistake is to assume that these accounts represent a household’s total available assets for funding retirement income. This is an incredibly strong assumption. Households may own a wide variety of other assets. First and foremost, of course, is one’s home. Especially with massive run-ups in real estate values, homes can be a valuable source of retirement income through the use of reverse mortgages or downsizing. Some percentage of workers have traditional pension plans, which are not included in this accounting. In addition, households may have taxable investment accounts that they plan to tap in retirement. They may own rental real estate. Households’ total net worth is a more sensible basis for estimating the assets available for funding retirement. The average and median net worth of households of people 60+ are about $1.1 million and $230,000, respectively.
We have established that looking at balances of savings in retirement accounts is not sufficient to establish that there is a retirement crisis. It is equally problematic to draw conclusions from the level of poverty among seniors or from the percentage of retirees who report that they can live comfortably. Today’s retirees are typically in a vastly different situation than current workers should expect, primarily due to the disappearance of traditional pension plans. One third of today’s retirees have income from a traditional pension plan. Only 13% of today’s private-sector workers have traditional pensions. Government workers are much more likely to have a traditional pension, but the benefits from these plans are typically smaller than those given to older generations. The take-away here is that the adequacy of current retirees’ finances have little relevance to whether current workers face a retirement crisis.
So where does this leave us? Balances in retirement savings accounts (IRAs, 401(k)s, and related accounts) won’t provide much income for people retiring in their sixties, except for the wealthiest of households. That is fairly clear. We cannot reliably determine how much of retirement income is expected to come from other sources, including part-time work in retirement or staying in the workforce until later ages. As people stay healthy and capable into their later years, more are continuing to work beyond traditional retirement ages. This factor alone would alleviate much of the problem of under-saving.
Estimating the (in)adequacy in retirement assets is difficult. Current workers face a vastly different retirement than current retirees. Looking at current retirement savings levels suggests that we face a serious problem. If we look at estimates of total household net worth, things look better but looking at current retirees net worth and income may have little predictive value for younger workers. Current workers are far less likely to have traditional pensions but are more likely to remain healthy and capable until later ages. Current workers are far more likely to have educational debt and, as a result, will be delayed in building up savings. While simplified statistics (such as those presented in the first paragraph) make great headlines, they are not actually very useful and can be very misleading. Retirement finance is a complex multi-faceted problem and, especially given the vast disparity among American households, simplistic “sound bite” conclusions are not very helpful.
Geoff Considine on Finance and Economics 