Is the dream of a comfortable retirement dashed for aging baby boomers and younger generations? It sure seems that way after looking at the study released by the Employee Benefits Research Institute on March 19. The Washington (D.C.) think tank’s 23rd Retirement Confidence Survey reports nearly half of workers surveyed have little to no confidence they’ve saved enough for a decent retirement. Among those surveyed who provided financial data, 57 percent say the value of their household savings is less than $25,000 (excluding the value of their home and any traditional defined benefit pension plan). “Retirement worry is highest in 23 years,” said USA Today; “Workers Saving Too Little to Retire,” the Wall Street Journal; “Americans more downbeat than ever about retirement, study says,” the Los Angeles Times; and “Most Workers Have Less Than $25,000 For Retirement,” Financial Advisors Magazine.
Really? Is this where the average American worker finds himself—busted, broke, financially ill-prepared for old age? It’s a depressing thought for a number of reasons, considering all the media devoted to retirement planning, strategies for managing 401(k)s and IRAs, and planning tips for old age. Sure, the information is often overwhelming. Still, the message from the boom in retirement stories is unmistakable: Save for old age. Is the American employee that myopic?
Simply put, no. There are many things to worry about in the American economy, but the gloom runs far too deep when it comes to aging and retirement. For one thing, the U.S. economy is only now leaving behind the worst downturn since the 1930s. The EBRI survey captures the mood following the financial trauma of the Great Recession and Anemic Recovery. The finances of an aging population should improve in coming years with the revival of the stock market, housing market, and labor market. For another, for workers in their 50s, now that the kids are out of the house (hopefully) and retirement is less distant (where did the time go?), more will focus on saving for retirement.
Many scholarly studies that take a comprehensive look at the finances of an aging population are less pessimistic. These studies view household finances as a pyramid (to borrow a metaphor from an Investment Company Institute study, “The Success of the U.S. Retirement System”). The components of the pyramid are Social Security, homeownership, employer-sponsored retirement plans (private-sector and government employer plans), as well as traditional defined benefit plans and defined contribution plans, such as a 401(k); IRAs and other savings, from bank deposits to cars. The kicker to “Are All Americas Saving ‘Optimally’ for Retirement?” a 2009 study by John Karl Scholz and Anath Seshadri, economists at the University of Wisconsin-Madison and William Gale, economist at the Brookings Institution, nicely captures the overall sentiment: “But we see little in the descriptive data or our model-based analyses that leads us to think that households are making large, systematic errors in their financial preparation for retirement.”
I would add that most of those with a shortfall will work a few years more, probably part time, perhaps as a contract worker. Putting in additional time earning an income is hardly an unrealistic expectation for many aging boomers, considering today’s 65-year-old is comparable in health and mortality to a 54-year-old in 1947, according to John Shoven, economist at Stanford University. The catchphrase, “65 is the new 55,” isn’t just a hopeful baby boomer bumper sticker.
The bigger takeaway from more comprehensive studies into retirement adequacy is how the discussion about Social Security has gone way off track in Washington. For the past three decades, Washington has been obsessed with the so-called Social Security crisis and the need to cut back on benefits. Policymakers should reverse course, fast.
The flaws in the private pension system are worrisome. A mere 42 percent of private-sector workers ages 25 to 64 have a pension on the job. The result is that more than one-third of U.S. households end up with no pension coverage during their entire work lives, according to calculations by the Center for Retirement Research at Boston College. During bad economic times, such as the recent recession, many companies reduce their pension benefits by, say, cutting back or even eliminating the employee match. State and local government pensions cover more workers, but in recent years states and localities have learned the hard way that they’ve overpromised and underfunded retirement plans. The next decade or so will be dominated by governments scaling back on pensions.
Social Security is the cornerstone of America’s retirement system. The system covers most workers, it’s administratively cheap, and it’s designed for a mobile labor force. “For most households, one of the most valuable resources is their Social Security retirement benefits,” write the co-authors of “The Success of the U.S. Retirement System.” Since its creation in 1935, “Social Security has [been] transformed into a comprehensive government-provided pension for workers with lower lifetime earnings and a strong foundation for retirement security with higher lifetime earnings,” they add.
Instead of chiseling away at the Social Security cornerstone, let’s bolster it into an improved national retirement system. There are a number of ways to shore up the program’s underlying finances without cutting into benefits. For example, raising the cap on wages subject to payroll taxes from its current $113,700 for 2013 to around $250,000 extends the projected date of 2033 for exhausting the system’s reserves for another four decades or so. Eliminating the cap altogether essentially gets rid of any funding shortfall for the next 75 years.
The more intriguing ideas are ways to improve Social Security as a national retirement system. For example, policymakers could tweak it in ways that encourage people to work longer. Participants who have paid into Social Security for 35 or 40 years could be considered done. The worker and his or her employer would no longer fork out Social Security taxes, a boost to the bottom line of both. To reach out to workers without access to a retirement savings at work, a program of voluntary additional contributions could be built on top of the Social Security system.
Building on Social Security’s existing strengths, rather than weakening them, is a sound way of strengthening the retirement pyramid. It would also offer some relief from the stress many aging workers feel about their living standards in old age.
