This book, subtitled “The Coming Retirement Crisis and What to Do About It,” was published back in December, at which time it was reviewed in the Economist, and I summarized their prescription, as presented: “work, save, move,” that is, work longer, save more, and tap into home equity.
Now, the “move” part really doesn’t get much airtime in the book itself; it’s largely about working longer and saving more. As to the working longer, they emphasize that there is no real meaning to the “Social Security Normal Retirement Age” any longer, because, once one hits eligibility to begin collect benefits at age 62, those benefits increase in an actuarially equivalent way until age 70, a relatively recent change that, they say, most people don’t understand. They offer some modest strategies for how to make “work longer” work, such as communicating with your employer, when you’re in your 50s, that you intend to stick around for quite some time yet, and, in fact, staying with your current employer rather than trying to do something new in your later years (quite the opposite of the approach of “Unretirement“), because there’s no fallback if your entrepreneurial “encore career” is a bust — but don’t really acknowledge that, rather often, early retirement isn’t voluntary but the result of unemployment or disability. And they encourage readers to maintain their health, and build up their skills — but even as we’re working in offices rather than factories, our cognitive abilities decline, too.
As to saving more, they don’t really break new ground. Why don’t people save, and what could influence them to save more? In addition to the usual suspects, the authors point to student loans as a culprit, as well as a general lack of knowledge of what savings rate is really required — and the difficulty is that required savings rate varies so wildly depending on the inputs into your model: retirement age, assumed asset return, approach to asset-spending in retirement, etc. (Here I’d add that the benefit formula of Social Security itself is a culprit; the progressive formula has a philosophical justification, but it leaves us unable to really estimate, for our individual income levels, how much income Social Security will provide.) The answers? No new ground here. Autoenrollment, yes, and at higher levels than the 6% rate. Preventing “leakage” when moving jobs.
But here’s what’s really more interesting: their breakdown of why we’ve got a problem — why there’s more reason for concern now than a generation ago.
With respect to employer-provided benefits, it’s clear that the change from Defined Benefits to 401(k)s has been rapid and thorough. A generation ago, roughly half of private sector workers had Defined Benefit plans; the numbers have dropped substantially (though, flipping through, I can’t find a specific number) as they’re replaced by 401(k) plans. One data point I’d like to see is this, though: are employers spending less on their employees than in the past? DB plans rewarded long-service employees, with smaller accruals for younger employees than older ones, and, at the same time, used to be viewed as cheaper for employers, when they were able to assume higher asset returns and lower life expectancies than is currently the case.
Anyway, that’s just one piece: the other issue is that Social Security provides lower benefits, in a couple respects: not just anticipated future benefit reductions, but also the already-reduced benefits due to the increased Normal Retirement Age, the fact that benefits are taxable at a given income level, the fact that Medicare premiums reduce checks, and the shift to two-earner households. This last item is interesting: a worker and a never-employed spouse, as a household, receive a total Social Security benefit of, say, not 40% of preretirement income but 60%, when adding in a spouse’s benefit at 50% of the primary earner’s benefit. For a two-earner household, there is no “extra” benefit; each spouse simply receives their own benefit based on their own earning records.
So my first thought here was, “wow, this is really interesting” — and it is actually ironic that this two-earner couple, financially better off than the one-earner couple, has a more difficult time reaching their target pay replacement ratio (which the authors suggest should be 75%). But this is the difficulty with “replacement ratio” approaches to retirement planning and policy discussions. They further address the suggestion by some that, because couples become empty-nesters before they retire, they really only need an income equivalent to what they were accustomed to spending during their parenting years, less the expenses of raising their children, which, of course, they no longer have. Data is scarce, they say, but what data there is suggests that couples boost their consumption in the years after their children more out, and become accustomed to more luxuries than during their child-rearing years. And that further suggests that our public policy priority should not be replacement rates at all but simply doing what we can to enable more Americans to have retirement income that moves beyond basic needs but is more in line with middle-class expectations.
Second observation is that this is not a “pig in a python” issue; that is, the funding issues in Social Security are not simply baby-boomer related, and everything settles down into a “normal” adequately-funded state after they die off. Rather, Social Security’s funding issues are long term, based on lower birth rates and greater longevity than when the benefit formulas and contribution rates were settled on. They don’t, however, discuss the issue of whether the Trust Fund is “real” — but I’ll throw my two cents in here and say that the “reality” of the Trust Fund, or lack thereof, is irrelevant: yes, there are “bonds” that the Social Security Administration can “redeem,” but each such bond has to be covered by the government by, surprise!, issuing more debt, so the larger issue is the ability of the economy to sustain increased levels of government debt. If this were a nonissue, if the government could just issue as much debt as it pleases with no ill-effects, then none of this is a worry at all. And, of course, back when the “Trust Fund” began to be built up, the decision should have been made to build it up in a true Investment Fund, however great the concerns about politicized investing may have been. But it’s too late now, isn’t it?
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