The Real Retirement Crisis

  I recently picked up a book that states “why (almost) everything you know about the US retirement system is wrong” — and it’s definitely worth a read.

The book — titled The Real Retirement Crisis: Why (Almost) Everything You Know About the US Retirement System Is Wrong — is the work of American Enterprise Institute senior fellow Andrew Biggs — and it’s a comprehensive assessment of any number of the misstatements, mischaracterizations, flawed assumptions and downright obfuscations that plague any realistic assessment of the nation’s retirement system. Indeed, he argues that “factoids, however compelling, are no substitute for facts.”  

The Goal

Biggs outlines the goal of a retirement system as one that “allows individuals to maintain their preretirement standard of living in retirement.” In that regard, he (and academics generally) would say that lower-income individuals' preretirement are well-served by Social Security’s benefit structure. Indeed, the argument — based on a “lifecycle model,” with rational tradeoffs in terms of the present and future — means that some shouldn’t be saving — or expected to save — at the rates promoted. 

“Low earners and younger households are often saving for retirement in a textbook fashion, even if financial columnists and other well-intentioned but not well-informed commentators chide them for doing so,” he writes.

That said, the coverage of the nation’s retirement system in the media (and academia) is often skewered by both a misunderstanding of the past and present state of work and retirement and, sadly, many in the retirement industry itself suffer from the same myopia. 

Cost(s) of Bad Data

In a chapter titled “The Cost of Bad Data is the Illusion of Knowledge,” Biggs references a quote attributed (perhaps incorrectly) to Stephen Hawking — “the greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.” Something that we hope those — both in “the industry” and out — are mindful of going forward.       

In that regard, Biggs devotes a fair amount of the book to delving into those misalignments of perception and understanding that distort an objective evaluation of the system, and its progress. He buttresses those points with actual tax data, sentiment surveys of actual retirees (rather than those who haven’t yet experienced the realities), and any number of studies based on objective, administrative data, which are well-documented in the 31 pages of footnotes. 

Now, if you’ve kept up with Mr. Biggs’ writing over the years (and I have), you’ll find a fair amount of the criticisms familiar, though this format[i] provides more space for things like charts and graphs — and there are those aplenty here. 

In it (among other things) he debunks the notion(s) that:

There was a “golden age of pensions” with data that affirms just how uncommon such things were in the private sector, how few individuals actually qualified for a full pension (due to things like job turnover and steep vesting schedules), and how the costs of those benefits were rationally deemed not to be worth the cost by corporations (later in the book he points out that a similar conclusion might well be drawn by public-sector pensions, were they held to the same funding and accounting standards imposed on the private sector).

A large number of the population is unable to work longer (granted, some can’t — but consider that even way back in 1940, the average Social Security claiming age was 68.1 for men and 67.4 for women — and as Biggs notes, at a time when manual labor was more prevalent, and age/gender discrimination was not barred).

Social Security is the primary income source for the vast majority of Americans. Biggs points out that government surveys (notably the Current Population Survey[ii]) understate income in retirement by only considering “income on a regular basis” — ignoring money drawn from retirement accounts. That, in turn, misstates the average income of retirees, the official poverty rate for retirees, AND the percentage of retirees who receive nearly all their income from Social Security (as it turns out, only 12% of retirees receive 90% or more of their income from Social Security, though 42% receive half or more from that source).

Retirement healthcare expenses — especially long-term care — are a big financial concern for most individuals. It turns out that a small number of households spend a lot — but most spend little or nothing on long-term care. A 2017 study found that 75% paid less than $1,000, 90% paid less than $20,000 — versus the $150,000+ reported in some surveys for long-term care).

Individuals spend as much, and consistently, in retirement (note: families with kids, once those kids leave the nest, they actually spend a lot less).    

The United States’ private retirement system is inferior to those found in other countries. On one of my pet peeves, he also points out the flaws in reports that claim the U.S. system is inferior to other nations (“focuses on a consultant checklist, not actual income”), noting that the U.S. system[iii] produces a disposable income for 65 year-olds that is the highest among 24 OECD countries, and 60% higher than the median.[iv] Moreover, when retirees in these countries are asked about their confidence in maintaining their pre-retirement standard of living, the U.S. comes out well ahead — even besting the Netherlands, which is a perennial “favorite” of these ranking systems.  

That said, however interesting, I doubt that this single tome will persuade those who (want to) continue to proclaim there’s a retirement crisis, though one might well hope there might at least be some acknowledgement that what people think, and what they fear — might not be as dire as their imaginations create.

Ultimately, whether or not one concludes that there is a retirement “crisis,” Biggs quotes Census Bureau economist Josh Mitchell as observing “there is a crisis of retirement plan data.” 

And with this new book, Biggs has, once again, done a great job of filling at least some of those gaps.

• Nevin E. Adams, JD

 

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[i] Biggs does devote about a third of the book to lay the foundation for his solution to shoring up Social Security — one that he has also published previously, and one that includes taking away the current tax preferences for private sector retirement plans. The focus there is on whether those preferences are necessary to encourage worker savings (Biggs says it isn’t) — though there’s an imbedded assumption that it would have no impact on employer sponsorship/adoption — and I’ve seen data that suggests it would, and if that were to be the case, then there ostensibly wouldn’t be workplace plans in which workers could save.

[ii] See also Question Err?

[iii] In fact, towards the end of the book is a chapter titled “The Retirement Savings Gap is Really a Government Funding Gap,” where Biggs basically holds out the notion that the private system has done a much better job than the government-run programs as a cautionary note to those who would advocate shifting responsibility from the private sector, because “voters wish to be promised things without being asked to pay for them, and elected officials are often willing to oblige them.”

[iv] Granted, the firms are entitled to prize/value/rate whatever criteria they want for their rankings, but they never include the cost of those systems in terms of tax structures, nor the restrictions on access to funds prior to retirement that have been proven to encourage higher rates of participation and savings. 

Retirement Readiness Surges with Focus Shift to Actual Data

  “Sure, it will probably be more work, and generate fewer clicks,” commented one industry source, “but it’s the right thing to do.”

Yes, after years of relying on uninformed “guesses” from individuals ignorant of their financial needs and situation, the retirement industry, major media outlets, and a large number of academics have made a commitment to focus on actual data, rather than hypothetical extrapolations from incomplete datasets.

Another explained, “we always thought that exaggerating the depth of the retirement crisis would encourage people to save more — but that turns out not to be the case.” Those projections affixed labels like “magic” to those extrapolated numbers based on surveys of uninformed workers, which not only ignored real differences in incomes, location and age, but were typically also averaged to further obscure accurate results. Likely fueled by previous reports of needed retirement savings, surveys of individuals routinely exaggerated the real needs of retirement finances — fueling future projections as well. 

“While self-assessment can be a critical foundation for retirement needs planning, we are committed to sharing real-world perspectives on actual retirement needs,” noted one industry expert. We’re ready to call “bs” on inflated, uneducated and unrealistic “estimates.”     

Part and parcel of this previous approach — and reinforcing its messages — were academic studies that mixed results of those who participated in a workplace retirement plan with those who never had, and individuals within five years of retirement with those who had just started working. All breathless reported by a media then-clamoring for click-bait ready headlines.     

An academic noted that, “I’m not sure what people expected since we routinely built our projections on the projections of others, who were — as it turned out — based on survey data from — well, questionable sources. No wonder we kept coming up with the same results.”

Indeed, new research, published by the Oxford Newfound Institute of Nihilism (ONION), finds that workers — no longer persuaded by “retirement crisis” headlines that there wasn’t any point in trying — now are taking proactive steps to understand their situation, often with the help of trained advisors. Previous research had shown that fewer than half of workers had made even a single attempt to assess their retirement needs, and many of those had simply … guessed.

Ironically, despite this newfound and dramatic increase in confidence, the new retirement savings goals were not only more likely to produce a successful outcome, they were generally higher than the goals previously set by workers who had gone through the process.

In fact, some of the most dramatic impacts were recorded by participants in plans where employers had not only provided for automatic enrollment immediately upon hire, but who applied automatic enrollment retroactively to existing hires as well. “All these years, I just assumed my employer thought it was too late for me to start saving,” said one long-time worker who had just been automatically enrolled under such a program. 

A separate, plan sponsor-focused report found that the renewed focus and confidence translated into tangible workforce management benefits as well. “We found that a growing number of older workers were simply hanging on to their old jobs, afraid to retire because they had no idea how much they would need to have in retirement,” observed one. “Now, for the first time in a long time, we’re seeing workers actively plan for their retirement date with confidence. We should have done this years ago!”

No foolin’.

• Nevin E. Adams, JD

Note: Sure, it's April Fool’s, but while the post above has a certain tongue-in-cheek character, the implications are not as fictional as you might think. In fact, they are well within the realm of a very potential reality for millions more — with a little help from plan advisors, their plan sponsor clients and the cooperation of plan participants. Not holding my breath on the shift in focus by the media, academia, or — sadly — even the retirement industry itself.

Less Than You’d Think

 “Larry Fink Knows Less About Retirement Than You’d Think an Investment Billionaire Would.”

That’s the provocative title of a recent Substack column by Andrew Biggs, a senior fellow at the American Enterprise Institute.[i] Not that Biggs offered a truly harsh criticism. Rather, he equated the comments of Larry Finks with that of “someone who reads the newspaper, the same as you or me.” 

Of course, and as yours truly has commented on any number of occasions — and what Biggs calls out — is that “much of what you read about retirement in the newspaper or online or even in so-called studies just isn’t correct.” To put it mildly.

In this recent column, Biggs offers a detailed account of what the actual data shows versus what Mr. Finks (and SO many others[ii]) have held out as reality.

Those with no retirement accounts don’t have retirement savings.

Fink is quoted as saying that 57 million Americans “don’t have any savings or retirement plan.” However, Biggs points out that “the Federal Reserve’s Survey of Household Economics and Decisionmaking acknowledges that many Americans save for retirement outside of an employer-sponsor plan.” That happens to be things like IRAs, an ordinary savings or investment account, real estate, a small business or farm. 

Biggs notes that Fed data show that 84% of non-retirees and 92% of retirees have retirement savings over and above Social Security. He puts the number with NO retirement savings as about 10% of 200 million American adults, or 20 million. Many of those are young enough that it shouldn’t be a problem (now), and others — Biggs notes that Fed data indicates that two-thirds of these non-savers make less than $50,000 — so no retirement savings makes economic sense (again, for now) — but Social Security stands to do a good job of replacing that level of income.

Those depending on Social Security alone will be living in poverty. 

Speaking of which, Finks also cautioned that those who have only Social Security as a resource will find themselves “living in poverty, below the poverty line.” Now, if you don’t know where the poverty line is these days — well, I’m sure you’re not alone. 

But for those interested in the actual numbers, Biggs cites Social Security Administration statistics that show that a middle-income two-earner couple retiring in 2023 would receive about $44,400 in Social Security benefits per year — which would be more than TWICE the official poverty threshold. Even if only one member of the couple worked, they still would receive around $33,300, about 1.8 times the poverty line, he notes.  It’s not a LOT of income, mind you — but it’s not below the poverty line.

Most Americans only used to live to age 67.

This by way of commenting that the current retirement system is outdated — designed for a time when people didn’t live as long as they do today — true enough — to a point. But as Biggs points out, there’s a difference between life expectancy at birth — and life expectancy in retirement. He explains that in 1940 — the first year in which Social Security paid retirement benefits — a 65-year-old man could expect to live an additional 13 years and a 65-year-old woman an additional 15 years (according to the Social Security Administration). In 2025, life expectancy as of age 65 has increased to 19 and 22 years for men and women. So, that’s more years — but not nearly the gap implied by data that includes life expectancy at birth.

You’re now “on your own” when it comes to retirement.

The implication here is that people didn’t used to be “on their own” — presumably because everybody had an employer-provided pension. This is one of the more persistent myths of our time because we have actual data that not only shows that the absolute peak of pension coverage in the private sector was 39%. Moreover, Biggs reminds us that a 1972 NBC News investigation revealed that “9-in-10 employees who nominally participated in a traditional pension never received a penny from it, thanks to strict vesting rules and the occasional corporate bankruptcy.” That’s right — nary a penny. 

And — as Biggs reminds us, “according to the Bureau of Labor Statistics, 72 percent of private sector employees in 2024 had access to a retirement plan at work, far more than ever were offered a traditional pension.” In a real sense, most of us have always been on our own, we just didn’t know it. And now, thanks to the 401(k), we’re ever so much more likely to retire with something to show for it.

The good news? 

Biggs closes by noting that “more Americans are participating in retirement plans than in the past, Americans and their employers are contributing more to retirement plans, and we’re working longer and delaying claiming Social Security. In short, pretty much everything experts say Americans should be doing, we already are doing.” Which, of course, (as Biggs notes), “helps explain why Congressional Budget Office data show the average over-65 household’s income in 2021 was over twice the average in 1979, even after accounting for inflation. And why retirees’ incomes have grown significantly faster than incomes for working-age Americans.”

The scary thing to me is that the comments like those above — made in public forums and in the headlines — are viewed as not only factual, but uncontroversial — even by retirement industry leaders.  

In this business we tend to see the challenge of helping Americans prepare for retirement as a glass that’s only half-full, rather than appreciating the amazing progress we’ve made — progress that might be less than you’d think… especially if it’s based on flawed assumptions. 

- Nevin E. Adams, JD

 

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[i] You can read the rest of his impressive bio at Andrew G. Biggs | American Enterprise Institute - AEI

[ii] Some of these are a “repeat”:  Talking Points: Facts Versus Factoids and Talking Points: A Retirement Crisis of Complicity.

Crisis "Management"

Rarely a week goes by that a headline, survey or academic paper doesn’t proclaim the reality of a retirement crisis with the certainty generally reserved for topics like the existence of gravity, or the notion that the sun will rise in the east.

And certainly based on the data cited, there would seem to be a compelling case that trouble lies ahead for many. That said – as was pointed out by Andrew Biggs at the recent Plan Sponsor Council of America conference – the reality is that good, reliable data is hard to come by. Indeed, many of the reports cited in those headlines rely on what you would expect to be a reliable source; the Census Bureau’s Current Population Survey, or CPS.¹ Unfortunately, that reliable source turns out to be not-quite-so-reliable. It suffers from relying on what people tell the survey takers, but perhaps more significantly, Biggs, resident scholar at the American Enterprise Institute, pointed out that the survey only counts as income in retirement funds that are paid regularly – like a pension. “Irregular” withdrawals from retirement accounts – like IRAs and 401(k)s – aren’t included.

In fact, when you compare what retirees report to the IRS with what they report to the Census Bureau, only 58% of private retirement benefits are picked up, according to Biggs. Now, who do you suppose gets a more accurate read; the IRS² or the Census Bureau? And yet, the CPS data serves as the basis for a huge swath of academic research on retirement savings.

Social ‘Security’

Biggs noted that IRS data also draws into question some of the “common wisdom” on things such as dependence on Social Security. Consider that the Social Security Administration – who arguably has “skin” in the game – claim that a third of retirees are heavily dependent – to the tune of 90% or more of their income – on Social Security. However, a study based on IRS data found that only 18% of retiree households are heavily dependent on Social Security, and just one in eight retirees receive 90% or more of their income from Social Security. Don’t get me wrong – Social Security is clearly a vital and essential component of our nation’s retirement security – but the IRS data indicates that, for most, it isn’t a primary source at present.

Pundits have long worried that retirees wouldn’t have accumulated enough to live on in retirement, but data suggests that most retirees aren’t exactly burning through their retirement savings. Not that some aren’t drawing down too rapidly, mind you – and that’s a valid concern. But many, perhaps most – aren’t.

Data suggests that today’s retirees are actually in pretty good shape. In addition to the IRS data cited above, that sentiment is borne out by any number of surveys (perhaps most notably the Retirement Confidence Survey, published by the nonpartisan Employee Benefit Research Institute (EBRI) and Greenwald Associates) that continue to find that those already in retirement express a good deal more confidence about their financial prospects than those yet to cross that threshold. And certainly, the objective data available to us suggests that today’s retirees are better off than previous generations, though their retirement – and potential health issues – may at some point take a toll.

Still, in 2014, EBRI found that current levels of Social Security benefits, coupled with at least 30 years of 401(k) savings eligibility, could provide most workers — between 83% and 86% of them, in fact — with an annual income of at least 60% of their preretirement pay on an inflation-adjusted basis. Even at an 80% replacement rate, 67% of the lowest-income quartile would still meet that threshold — and that’s making no assumptions about the positive impact of plan design features like automatic enrollment and annual contribution acceleration.

Not that there isn’t plenty to worry about; reports of individuals who claim to have no money set aside for financial emergencies, the sheer number of workers entering their career saddled with huge amounts of college debt, the enormous percentage of working Americans who (still) don’t have access to a retirement plan at work (though not as enormous as some claim)…

That said, I shudder every time I hear an industry leader or advisor stand up in front of an audience and proclaim that there is a retirement crisis – because, however well-intentioned – they are almost certainly providing “aid and comfort” to those who would like to do away with the current private system as a failure, not a work in process.

What seems likely is that at some point in the future, some will run short of money in retirement, though they may very well be able to replicate a respectable portion of their pre-retirement income levels, certainly if the support of Social Security is maintained at current levels.

However, what seems even more likely is that those who do run short will be those who didn’t have access to a retirement plan at work.

- Nevin E. Adams, JD
 
Footnotes

1. Nor is that the only shortcoming in that widely utilized source. The nonpartisan Employee Benefit Research Institute (EBRI) has pointed out that a change in survey methodology in 2014 has produced some questionable plan participation results from the CPS – a finding subsequently validated by the Investment Company Institute. ↩
2. Not that IRS data can’t be misapplied. ↩