Is there a “retirement crisis”?

Is there a “retirement crisis”? September 30, 2015

More on retirement.  Yes, I’m taking a break from the Pope, presidential politics, Planned Parenthood, the refugee/migrant crisis in Europe, etc., and revisiting an issue that’s actually related to my professional field:  retirement readiness.

The other day I shared some pretty appalling data, that an exceedingly small portion of American workers nearing retirement age have anything like the amount of savings they ought to have in order to retire at a standard of living resembling their pre-retirement lifestyle.  The data has a lot of deficiencies:  it comes from a telephone survey, so respondents might understate their savings, for one, and, an issue I didn’t address yesterday:  the survey specifically asks for respondents to exclude defined benefit pensions.  Now, I can well understand that, in a telephone survey, you’ll muddy up the results if you ask people to estimate the lump sum value of any expected future pensions, but it still means that a significant portion of retirement income for many retirees is systematically excluded from this polling — perhaps even more if individuals wrongly interpret the question and exclude not just defined benefit pensions but all retirement savings from their replies.

Oh, and just to mention:  retirees in this age group who have worked for a large employer long enough to be vested, will almost always have a defined benefit pension plan.  Their employers will likely have closed the plan to new entrants or frozen it altogether, and may have purchased annuities for existing participants, however.

The bigger question is this:  is there a “retirement crisis”?  For this to be the case, one of the two situations has to be true:

Either existing retirees are now living in poverty or an unacceptably-low standard of living,

or the data tells us that, due to changes of various sorts, future retirees will be significantly worse off than existing retirees, because of changes over time.

[As it happens, there is a debate about this, though only a small number of people take the “no” position, most notably Andrew Biggs and Sylvester Schieber in an article in National Affairs last year, which was subsequently disputed by in “Yes, there is a retirement savings shortfall” by Alicia H. Munnell of the Center for Retirement Research (which, by the way, has added a number of interesting working papers lately).   I won’t go into the details of the dispute, which is fundamentally about the sort of assumptions that one makes in doing projections of current workers’ saving and spending patterns, and investment returns pre- and post-retirement.]

And, on the one hand, there have definitely been changes:  for Americans who worked at large employers, the changes have been dramatic, as, not that long ago in the grand scheme of things, the large majority had traditional defined benefit pension plans available to them.  Surprisingly, though, a new report at the CRR claims that this shift has not affected total retirement savings, though this is a matter of lower contributions offset by the recent bull market.

The book Falling Short (again, by the CRR folks) highlights some other changes:  the fact that the Social Security retirement age increase is effectively a benefit cut, when comparing retirement at a given age now, compared to a generation ago; the increase in dual-income couples, who don’t benefit from the spouse’s benefit component of Social Security.  Of course, on top of that there’s the risk that future Social Security benefits will be cut.  (Hey!  Fun fact:  the Trust Fund is notionally depleted right when I hit retirement age.)

There’s another big (potential) change that I haven’t seen addressed anywhere (and want to poke around more to find):  how have savings patterns changed, in general, in the last generation?  Do current retirees have savings to draw on, other than 401(k)s and IRAs?

But the biggest thing I really haven’t seen research on is this:  to what extent have today’s retirees, especially those who, while middle-class, worked for employers without DB plans, actually seen income drops at retirement?  (And by “income” I mean spend-down of saving as well.)  And, more importantly,  to what extent has this impacted their quality of life?

Anyway, as you can tell, I’m more outlining a research wish-list than really sharing a lot of new information, so I’ll close with the classic Jane the Actuary cop-out:  what do you think?

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