Retirement Crisis: Real, or Hype?
“Have we got a crisis, or merely a series of hard problems?” That question, posed by American Enterprise Institute Resident Fellow Alex Pollock at a July 15 discussion at AEI’s Washington, DC offices, captured the ultimate issue the expert panel addressed.
Charles Ellis, founder of Greenwich Associates, a consulting firm serving the financial services industry, set a backdrop for where we are today. “The shift from defined benefit to defined contribution is done. There is no way it will not proceed to its conclusion,” he said, adding that the fundamental system and longevity have both changed.
“We’ve shifted the responsibility for virtually every decision from the corporation to individuals,” Ellis continued, adding his observation that individual investors do not do a good job of investing, nor of saving — and that economic demographics can heighten those conditions.
AEI Resident Scholar Andrew Biggs argued that how one assesses retirement readiness depends in part on how retirement savings are measured. It is common, he said, to hear that Americans are increasingly reliant on Social Security, but he noted that often measurements of retirement income do not account for 401(k) balances and distributions — and that as a result, hundreds of billions are not factored in to those assessments. Similarly, Ellis suggested that the value of houses should be factored in as well.
Another factor affecting the level of retirement readiness that is not often discussed is the standard of living one expects to maintain after retirement, Biggs argued. He framed it in terms of “keeping up with the Joneses” versus a steady income that allows a household to maintain its standard of living. The latter measure, he said, yields a much lower tally of people who have insufficient retirement savings. Ellis expressed a similar sentiment, noting the importance of how “a lot” is defined in the context of retirement savings.Overstated?
So are we facing a retirement crisis? Biggs called the idea “overstated.” To him, it’s obvious and unarguable that people should better prepare for retirement. “For the average person, saying we should save more is the equivalent of saying you should love your mother more,” he said.
“If there is a retirement crisis, it’s not where you think it is,” said Biggs, adding, “the real problem is on the government side.” In his view, it’s “putting too many eggs in a very risky basket” to depend on Social Security and state and local governmental retirement systems.
“If we take action soon, it’s not a crisis,” said Ellis. But failure to do so, he warned, could result in many retired and elderly people going broke.What to Do?
The answer, Ellis argued, includes “keeping individual freedom sacrosanct,” but also adding mandatory features to the retirement saving system, with participants having the opportunity to opt out. Biggs said he is “not philosophically opposed to mandatory enrollment” but that the key consideration with that approach “is how close to the goal does universal enrollment get you?”
Both said that part of the answer lies with Social Security. Biggs argued that it should be reformed and made “a much better safety net for those with low incomes.” He also suggested that the formula by which Social Security benefits are calculated should be simplified to better enable individuals to know how much they have and can expect
Empowerment is part of the equation, too. Biggs suggested that public policy could do more to encourage saving for retirement. Giving individuals a template regarding how much of their retirement savings they should spend also would help, Ellis said.
Considerations centering around age are a factor as well. Ellis suggested that how “normal retirement age” is defined is directly relevant, saying that that, “We don’t do as good a job as we could of making it easy for people to understand the consequences of retiring at certain ages.” And he argued that waiting until age 70 to claim Social Security benefits can help as well, since doing so could sharply increase the amount of benefits one receives.