Perhaps consensus is a part of who we are as a people. But voices offering new ideas that challenge accepted mindsets are also part of who we are. And that applies to the discussion concerning retirement savings and preparedness as much as it does for anything else.
There was lively debate in the May 15 House Budget Committee hearing on those topics. Among the experts who testified before the committee on May 15 was Andrew Biggs, Resident Scholar at the American Enterprise Institute. His testimony centered on “facts, figure and ideas with which Members of Congress may not be familiar,” and he said that some of them would be “surprising and contrary to what you believe or have read” but that they are “well-backed by data and evidence.”
People are saving more than ever. “The news media rarely mention it, but Americans today are putting aside a substantially larger share of their paychecks toward retirement than ever before,” says Biggs. He cites data from the National Income and Product Accounts that in 1984, combined employer and employee contributions to workplace retirement plans stood at 9.9% and rose to 12.8% in 2017.
Retirement savings are higher than they ever have been. Biggs cites Federal Reserve data showing that retirement savings were equivalent to 48% of total employee wages in 1975, “at the peak of worker coverage in traditional pension plans,” but were seven times higher in 2017 and amounted to more than 337% of employee wages.
Retirees say that they’re doing fine. A strong majority of Retirees — 80% — told Gallup that they have sufficient funds to “live comfortably” and not just survive, reports Biggs. And he cites other figures as well: 78% of retirees in a study by Health and Retirement say their retirement is as good or better than the years before, and 75% of Americans age 65 or older told the Federal Reserve in its Survey of Consumer Finances in 2016 that they have at least enough income to maintain their standard of living.
The poverty rate for retirees is falling. Among the statistics that Biggs cites is a U.S. Census Bureau analysis of IRS tax data in 2017 that found that in 1990, 9.7% of retirees had income under the poverty threshold; in 2012, 6.7% did. He adds that the Social Security Administration’s Model of Income in the Near Term projects that trend will continue.
Coverage by traditional pensions was not that high in their “golden age.” Private-sector workers’ participation in traditional pensions hit its peak in 1973, Biggs said, and even then only stood at 39% peaked at only 39 percent of private sector workers in 1973; “to make matters worse,” he adds, “strict vesting rules often required up to 15 years in a job before qualifying for any benefits.”
Social Security benefits are more adequate than you think. Biggs challenges the common contention that Social Security replaces 40% of pre-retirement earnings, citing Congressional Budget Office figures that say that for middle-income retirees, Social Security replaces between 54% and 60% of career-average earnings, depending upon the birth cohort.
The typical retiree has a pre-retirement income replacement rate better than what financial planners recommend. Biggs cites a variety of data that shows that retirees are exceeding the 70% replacement rate that financial planners say will allow retirees to maintain their standard of living after retirement. To wit:
- IRS data says retirees now “typically have incomes equal to 90% of their average pre-retirement earnings”;
- the Investment Company Institute and IRS in 2017 research found that the average middle income retiree household earned 113% of what it earned just before retirement; and
- in 2017, two Census Bureau economists found a median replacement rate of 94% of earnings from the 15 years before retirement.
U.S. Retirement Plan Assets Are Far Larger than Other Countries’. Organisation for Economic Cooperation and Development (OECD) figures, says Biggs, that the median for developed countries is for retirement funds to amount to the equivalent of 19% of gross domestic product (GDP); however, in the United States, they are the equivalent of 150% of GDP. He adds that the United States also has “more favorable demographics for Social Security than other countries have for their pay-as-you-go retirement plans” and that retirees here are “far more financially secure” than are retirees in other countries.
The way Social Security is fixed can have a significant effect on the economy. “Social Security is big: the biggest federal program, the biggest tax most workers pay, and the biggest source of income for most retirees,” says Biggs. “Given its size, it’s not surprising that changes to Social Security can affect the economy,” he adds. “How we fix Social Security can have a dramatic effect on Americans’ future incomes and the resource available to the federal government to address healthcare, debt and other priorities,” Biggs asserts.
Seniors’ out-of-pocket health spending is not eating that much more of their incomes. Out-of-pocket health expenses have increased, Biggs observes, but argues that retirees’ incomes on the average have been growing faster. He does include the caveat, however, that “This doesn’t mean that retirees have no problems funding health care expenses: health costs can be highly variable, meaning that simple averages don’t tell the whole story.” Nonetheless, Biggs says, “the fact that average incomes have risen as quickly as the average retiree’s health expenses says that the retirement saving system is doing its job well.”
Pension plans are not a bellwether. Biggs disputes the conventional wisdom that says that the collapse of traditional pension plans will trigger “the true retirement crisis.” Says Biggs, “the data show that is unlikely.” The majority of pension plan benefits are paid by public-sector plans, he says, and posits that “Those benefits aren’t going away anytime soon.” Not only that, he argues, pension plan assets comprise a smaller percentage of the gross domestic product than 401(k) plans and IRAs.
Retirement inequality has not worsened due to the shift from traditional pensions to 401(k)s. “It’s sometimes claimed that the shift from defined benefit pensions to 401(k)s has made retirement savings more unequal,” says Biggs. “However, he notes, “Federal Reserve research published in 2019 show that the distribution of retirement plan savings are very similar today to when traditional pensions were predominant.” Not only that, he says, the Federal Reserve found that retirement preparation is even more equal when Social Security is factored in.
The real gap in retirement savings is in government. Biggs argues that studies show that overall, Americans are saving adequately for retirement, but that “there is a massive retirement savings gap in government plans, from Social Security to federal employee and military pensions to state and local government plans.” Not only that, he says, government plan underfunding is estimated to range from $14 trillion to $26 trillion.
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