Retirement in America – A Life of Poverty?
Wall Street Journal article raises the spectre of a retirement “crisis” in America. The WSJ article specifically claims Baby Boomers are less prepared for retirement than prior generations. In fact, society in general is much better off today than in the past. The article misrepresents the facts related to the decline of employer-sponsored defined benefit pension plans and suggests a causal relationship to the growth of 401(k) plans that just isn’t true. Employer-sponsored, individual account retirement savings plans continue to be the
best vehicle for improving long-term outcomes for American workers.
In a front page story in the June 23, 2018 print edition, Wall Street Journal
(WSJ) columnists bemoaned the lack of retirement preparedness by Baby Boomers. They wrote, “Americans are reaching retirement age in worse financial shape than the prior generation for the first time since Harry Truman was president.” Really?
Like the WSJ columnists, many academics and members of the media believe we have a retirement crisis.1
Hundreds of articles authored in recent years point to this crisis. One specifically asserts, “Based on current trends, we will soon be facing rates of elder poverty unseen since the Great Depression. By 2035, nearly 20 million retirees will be living in poverty or near-poverty. By 2050, that number will reach 25 million.”
Many academics and media single out the 401(k) for blame, “The decline of pensions and increase in 401(k) … plans is one reason many seniors aren’t as ready for retirement as the previous generation,” and “For many Americans facing a less secure retirement than their parents, the biggest reason is the shift from pensions to 401(k)-type plans.”2
Are they right? Are tens of millions of Baby Boomers consigned to a retirement of poverty? And is the 401(k) the villain here?Predicting the Future?
Stop right there. Many don’t even remember the past! A favorite is the 401(k) itself! Tax Code Section 401(k) was added by the Revenue Act of 1978 to discourage tax-deferred saving. The 401(k) restricted highly paid employee tax preferred savings by limiting it based on lower-paid workers contributions. Congress expected deferrals would be minimized. The Joint Committee on Taxation estimated: “Revenue effect: This provision will have a negligible effect upon budget receipts.” So, Congress added Section 401(k) to curtail deferrals and limit the revenue losses to the federal budget!
Today’s 401(k) could not possibly be what Congress envisioned – and thank goodness for that.
Will Baby Boomers Retire to a Life of Poverty?
Yes, certainly, some will.3
Some will live their entire lives in poverty – including years in retirement. But tens of millions? Perhaps not.
Official poverty statistics and trends from the past 60 years suggest poverty among older Americans has declined significantly and will continue to be modest – at least compared to children and younger adults4
- < Age 18: 17.6% (2016), 21.5% (2010), 15.6% (2000), 19.9% (1990), 17.9% (1980), 14.9% (1970), 26.9% (1959)
- Ages 18 – 64: 11.6% (2016), 13.8% (2010), 9.6% (2000), 10.7% (1990), 10.1% (1980), 9.0% (1970), 17.0% (1959)
- Age 65+: 9.3% (2016), 8.9% (2010), 9.9% (2000), 12.2% (1990), 15.7% (1980), 24.6% (1970), 35.2% (1959)
As of 2016, there were 320 million people in America, 47.9 million age 65+. Of those individuals, 4.5 million or 9.3% lived in (officially calculated) poverty. In 2035, 20 million would represent more than a quarter of the ~74+ million people age 65+, a more than tripling of the age 65+ poverty rate in just 15 years (even though two thirds of today’s workers now say they plan to work in retirement5
). Never say never, but not at all likely.
What can we learn from America’s oldest retirees who have lived in retirement? Data suggest older Americans' standard of living has remained constant or even improved in recent years even though most retirees have less income and noticeably less accumulated savings than what retirement experts predict is needed to avoid poverty:
- Older workers may have more retirement income than is generally understood6, and
- Many current retirees find income from Social Security, vested pensions and required minimum distributions provide a more than adequate amount of retirement income.7
And the gaps among lower-income Americans, comparing those who are working with those who are not working, are much less once adjusted for government transfer payments.8
One last point about poverty – official poverty is an income calculation. However, in their article, the WSJ columnists warn that debt levels have increased for those age 65+. They write that older Americans, “have high average debt, are often paying off children’s educations and are dipping into savings to care for aging parents.” However, debt is a wealth calculation. The authors fail to adjust for economic and wealth changes among older Americans. Age 65 is not what it used to be. Many more Americans age 65+ are still in the workforce and still buying cars, homes, etc.
The reporters fail to consider changes in debt relative to net worth.9
And if we use averages as they do, Baby Boomers have an average net worth in excess of $1 million! Due in part to the introduction of the 401(k) and tax-deferred savings, inflation-adjusted, average household wealth among older Americans has more than doubled in the last 28 years!10But Most of Today’s Retirees Receive a Monthly Pension, Right?
No. Most private sector workers never had a pension benefit and never will. Most worked for employers who never offered a plan. Where a plan was offered, many never became eligible to participate. And most who did participate did not work long enough to vest and qualify for benefits.11
The high point of private sector defined benefit pension coverage was 38% in 1979.12
But pension participation or coverage does not necessarily qualify you for a benefit at retirement. For example, before 1985, this commentator worked for the federal government as a civilian employee, the Federal Reserve Bank of Cleveland, Marathon, Cooper Industries and Tenneco. All had defined benefit pension plans. But, because I didn’t stay at any of those employers for 10 years, I never vested. I was not unique. Median tenure or longevity of American workers has consistently been below five years for the past few decades. Median tenure is currently 2.8 years for those ages 25–34.13
The median tenure for all age 25+ workers is 5.1 years. Workers born in the latter years of the baby boom (1957-1964) are now over age 50 – and they held an average of 11.9 jobs from age 18 to age 50, half of those during the ages 18 to 24.5 Finally, Census data suggest an emerging trend of turnover among older workers. One study showed that while 90+% of those ages 58 – 62 work full time, the percentage working for the same employer they had at age 50 declined from 70% (1983) to 46% (2006).14
Many who did accrue, or vest in a pension, cashed out or rolled it to an IRA.15
So, today’s retirees mostly rely on Social Security and savings; a minority have pension income and a fourth have (or had) wages.16
Today, an estimated 10,000 Baby Boomers will reach the traditional retirement age of 65. And every month, tens of thousands of Baby Boomers will stop working and successfully enter into retirement. Others plan to continue employment. Some will live in poverty, most will not. Many more will have accumulated assets in individual account retirement savings plans.
Part 2 of this three-part series confirms that the decline in DB pension plans started well before the advent of the 401(k), and that individual account retirement savings plans like the 401(k) are the vehicles most likely to improve America’s retirement financial health.Jack Towarnicky is the Executive Director of the Plan Sponsor Council of America.
T. Ghilarducci, T. James, There is a retirement crisis. And workers can’t fix it alone, Marketwatch
, 1/26/18, Accessed 6/25/18 at: https://www.marketwatch.com/story/there-is-a-retirement-crisis-and-workers-cant-fix-it-alone-2018-01-24
; See also
: Politico, How to solve the retirement crisis, A POLITICO Working Group Report. 06/07/18, Accessed 6/25/18 at: https://www.politico.com/agenda/story/2018/06/07/future-of-prosperity-retirement-report-000663
; See also
: C. Farrell, Calling For A Blue-Ribbon Panel On The Retirement Crisis, Forbes
, 5/20/18, Accessed 6/25/18: https://www.forbes.com/sites/nextavenue/2018/05/20/calling-for-a-blue-ribbon-panel-on-the-retirement-crisis/#7ad346be2031 See also
: S. Harris, America's Retirement Savings Crisis, 1/10/18, Accessed 6/25/18 at: https://www.jackson.com/financialfreedomstudio/articles/2018/01/americas-retirement-savings-crisis.html
H. Gillers, A. Tergesen, L. Scism, A Generation of Americans is Entering Old Age the Least Prepared in Decades, Low incomes, paltry savings, high debt burdens, failed insurance – the U.S. is upending decades of progress in securing life’s final chapter, Wall Street Journal
, 6/22/18, Accessed 6/25/18 at: https://www.wsj.com/articles/a-generation-of-americans-is-entering-old-age-the-least3
Benjamin Franklin, “Failing to plan, is planning to fail.”
4U.S. Census Bureau, Historical Poverty Tables: People and Families - 1959 to 2016 https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-poverty-people.html 11
5Retirement Confidence Survey, 2018, Employee Benefits Research Institute, Accessed 6/25/18 at: https://www.ebri.org/pdf/surveys/rcs/2018/2018RCS_Report_V5MGAchecked.pdf
6A. Bee, J. Mitchell, Do Older Americans Have More Income Than We Think? U.S. Census Bureau, July 2017. In 2012, households age 65+ had median income of $33,800, 9.1% lived in poverty. “… When we instead use an extensive array of administrative income records linked to the same CPS ASEC sample, … median household income was $44,400 (30% higher) and the poverty rate was just 6.9%. … the discrepancy is mainly attributable to underreporting of retirement income from defined benefit pensions and retirement account withdrawals. … We caution, however, that our findings apply to the population aged 65 and over in 2012 and cannot easily be extrapolated to future retirees. …” Accessed 6/10/18 at: https://www.census.gov/content/dam/Census/library/working-papers/2017/demo/SEHSD-WP2017-39.pdf
7Society of Actuaries, Post-Retirement Experiences of Individuals over 85 Years Old, May 2018, “… older Americans have learned to balance income and spending in the short run … (while) most have incomes of less than $2K per month (and have far fewer assets than might be recommended), they usually do not spend more than their income. … and they use these assets as an emergency fund (avoiding payouts) except to take the required minimum distribution, which they don’t necessarily spend. …” See: https://www.soa.org/research-reports/2017/2017-post-retire-exp-85-years-old/
8P. Gramm, R. Ekelund, How Income Equality Helped Trump. Working Americans sense that taxes and transfers now leave them little better off than those who work less. WSJ, 6/24/18. “… The most surprising finding is the astonishing degree of equality among the bottom 60% of American earners, generated in part by the explosion of social-welfare spending and the economic and wage stagnation during the Obama era. … The bottom quintile earned 2.2% of all earned income in 2013, but after adjusting for taxes and transfer payments, its share of spendable income rose to 12.9%—six times its proportion of earnings. The second quintile’s share more than doubled, rising from 7% of earned income to 13.9% of spendable income. For the third quintile … the increase was … from 12.6% to 15.4%.” Accessed 6/25/18 at: https://www.wsj.com/articles/how-income-equality-helped-trump-1529862473
9Federal Reserve, Survey of Consumer Finances, 2016. Median net worth for families with holdings (all in 2016 dollars): 1989: Ages 55 – 64: $182,600, Ages 65 – 74; $143,100, Ages 75+; $135,200. For comparison, 2016: Ages 55 – 64; $187,300, Ages 65 – 74; $223,400, Ages 75+: $264,800. Accessed 6/25/18 at: https://www.federalreserve.gov/econres/files/BulletinCharts.pdf
10Federal Reserve, Note 8 Supra. Average net worth (all in 2016 dollars): 1989: Ages 55 – 64: $574,300, Ages 65 – 74; $522,000, Ages 75+; $450,700; For comparison, 2016: Ages 55 – 64; $1,167,400, Ages 65 – 74; $1,066,000, Ages 75+: $1,066,900. -
Craig Copeland, An Analysis of the Retirement and Pension Plan Coverage Topical Module of SIPP, Employee Benefits Research Institute, May 2002, Accessed 6/25/82 at: https://www.ebri.org/pdf/briefspdf/0502ib.pdf
US Department of Labor, Form 5500 Summaries, Accessed 6/25/18 at: https://www.ebri.org/publications/benfaq/index.cfm?fa=retfaq13
Census Bureau, Employee Tenure in 2016, 9/22/16, Accessed 4/17/18 at: https://www.bls.gov/news.release/pdf/tenure.pdf See also
: Craig Copeland, Employee Tenure Trends, 1983 – 2016, Employee Benefits Research Institute, September 2017, Accessed 4/17/18 at: https://www.ebri.org/pdf/notespdf/EBRI_Notes_v38no9_Tenure.20Sept17.pdf
, See also
: Bureau of Labor Statistics, Number of Jobs, Labor Market Experience and Earnings Growth Among Americans at 50: Results from a longitudinal survey, 8/24/17 Accessed 4/17/18 at: https://www.bls.gov/news.release/pdf/nlsoy.pdf
Census Bureau, Note 2 Supra. See also
: G. Sanzenbacher, S. Sass, C Gillis, How Job Changes Affect Retirement Timing by Socioeconomic Status, Boston College Center for Retirement Research, IB#17-3, February 2017. Figure 1 highlights that the percentage of employed men, ages 58 – 62, who changed jobs at age 50 or later has increased from ~30% (1983) to ~50% (2003) to ~45% (2013). Accessed 6/10/18 at: http://crr.bc.edu/briefs/how-job-changes-affect-retirement-timing-by-socioeconomic-status/15
ICI Factbook 2018. As of year-end 2017: Retirement assets (all plans) totaled $28.2 trillion “… IRA assets totaled $9.2 trillion at year-end 2017 … Investment returns and rollovers from employer-sponsored retirement plans, more than new contributions, have fueled the growth of IRAs. For example, the IRS Statistics of Income Division reports $473B was rolled over to IRAs in tax year 2015, compared with $64B that was contributed. …” Accessed 6/10/18 at: https://www.ici.org/pdf/2018_factbook.pdf
Retirement Confidence Survey, Note 5, Supra