“Half” Baked?

I’ve never been much good in the kitchen.  I’ve neither the patience/discipline to follow most recipes, nor the innate sense for the right balance of ingredients that those with culinary talent seem to have.  That said, I learned the hard way years ago that if you mix the right items in the wrong order, or the wrong amounts of the right items, leave something to bake too long – or not long enough – the results can be disastrous.

A recent report by the Pew Charitable Trusts posed the question, “Are Americans Prepared for Their Golden Years?”  Perhaps not surprisingly, the report indicated that many are not.  What was surprising, however,  was the assertion that Gen-Xers (those born between 1966 and 1975), in the Pew analysis, looked to be in even worse shape than either early or late Boomers.

Previous EBRI research has found that approximately 44 percent of simulated lifepaths for Baby Boomer and Gen-Xer households are projected to run short of money in retirement, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted.  However, that includes a wide range of personal circumstances, from individuals projected to run short by as little as a dollar to those projected to fall short by tens of thousands of dollars.  Looking specifically at Gen X, many of which have decades of saving accumulations still ahead of them, nearly one-half (49.1 percent) of the simulated lifepaths of that demographic are projected to have retirement resources that are at least 20 percent more than is simulated to be needed, while approximately one-third (31.4 percent) are projected to have between 80 percent and120 percent of the financial resources necessary to cover retirement expenses and uninsured health care costs (see Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model).

However, in reviewing the Pew report and its associated methodology, several key differences in approach emerge.  On the one hand, the Pew report assumes that workers will receive credit for a full career in the accrual of Social Security benefits, and it also imputes a full-career accrual of defined benefit pension benefits – though many individuals don’t wait till full retirement age to collect on the former (accepting lower benefits), and many don’t accumulate enough service to be entitled to the latter (see “The Good Old Days”, “Employee Tenure Trends, 1983–2012“).  This assumption likely exaggerates the retirement readiness of older workers, who are more likely to have some defined benefit accrual.

On the other hand, the Pew report appears to assume no further contributions, either by employer or employee, to the defined contribution balances as of 2010.  That’s right, no further contributions beyond the self-reported participant balances of 2010, and no earnings projection on those assumed non-existent contributions, either.  This assumption likely serves to understate the future retirement readiness of younger workers, who have years, and in many cases decades, of savings ahead of them.

Based on the combination of those assumptions and the well-documented trend away from defined benefit plans and toward a greater reliance on defined contribution designs, it’s little wonder that the Pew report concludes that Gen Xers will be worse off than Boomers.

In sum, whether you’re baking a cake or evaluating research conclusions, if it seems a bit “off,” it’s generally a good idea to carefully review the recipe – and double check the ingredients.

Nevin E. Adams, JD

The Pew Charitable Trusts report, “Retirement Security Across Generations” is available online here.