Do We Face A Retirement Crisis?Advisor Perspectives
The popular view among Americans is that we face a retirement crisis. Traditional pensions have almost disappeared in the private sector and been replaced by 401(k)s with less than 50% participation and inadequate savings. According to one survey, 88% of Americans fear we face a retirement crisis.
But receiving far less publicity are views from a few experienced researchers pointing to evidence that retirees are actually doing okay. I’ll sort out these differing views.
An ominous outlook
Over the past 40 years, there has been a dramatic shift in the private sector from traditional defined-benefit pensions to retirement-savings plans, mostly IRAs and 401(k)s. In the early 1980s over 60% of private sector employers offered defined-benefit (DB) plans, and that has declined to less than 20% today. And benefits have been frozen in many DB plans and not offered to new employees. Retirement savings plans have not made up for the loss of traditional pensions. Only about 50% of workers have employer-sponsored plans, and many who are offered such plans either fail to participate or contribute adequately. This recent Wall Street Journal report cited a statistic from the Center for Retirement Research at Boston College (CRR): For households nearing retirement age and participating in a 401(k), the median balance in tax-advantaged investment accounts is $135,000. Such a balance would only produce about $600 per month if annuitized at age 65.
Those are not the only issues with retirement-savings plans. “Leakages” from such plans are common as families lack other funds when emergencies arise, and workers often cash out when they change jobs. Employees lack the skills to allocate assets and manage money in these plans, and, when they get to retirement, are particularly clueless about how to convert retirement savings into sustainable lifetime income. And there are special difficulties for certain segments of the population such as “gig” workers, single women (many widowed) and minorities.
The Social Security Administration estimates that 21% of married couples and 43% of single seniors rely on Social Security for 90% or more of their income. Professor Teresa Ghilarducci and Tony James point out in their book, Rescuing Retirement, that for the median income worker, Social Security minus Medicare premiums cover only 29% of pre-retirement income compared to 70% that is typically cited as the replacement rate needed to maintain one’s lifestyle. Lower-income workers will typically do better than 29% because of the progressive nature of the Social Security benefit formula, but many will not be able to maintain their lifestyle in retirement.
Since 2006 the CRR has been publishing and regularly updating the National Retirement Risk Index (NRRI) that estimates the percentage of Americans in various age groups who are at risk of not being able to support their current lifestyle in retirement. In their most recent reporting the CRR highlighted a worrisome trend that the outlook for Baby Boomers and Generation Xers is far less promising than for current retirees. It estimates that 50% of households are at risk of not being able to maintain their living standards in retirement, and, when health care costs are explicitly taken into account, the outlook worsens.
To some extent, the lack of voluntary savings for retirement reflects the financial strains that many working families face. Real-wage growth has flattened since the late 1970s. In this blog post, economist Robert Reich discussed the middle-class squeeze brought on by flat wages, and how American have coped – women moving into the work force, longer hours and less savings and more debt. His view is that the middle-class has reached the limits of these coping mechanisms. This state of affairs does not bode well for Americans needing to save more to pay for retirement.
Given the above evidence, it seem that the answer to the question, “Do we face a retirement crisis?” is a definite “yes” and it would be a miracle if we did not.
Read the full article here by Joe Tomlinson, Advisor Perspectives