Gooseneckers, Misleading Medians, and the Art of Retirement Alarmism

 Did you hear about the one that claimed an “average” American worker has less than $1,000 saved for retirement?

Well, here’s hoping you didn’t — that your day was occupied with real issues, or perhaps even better that you saw the headline, recognized it for the ludicrousocity[i] of the claim, and scrolled on without clicking, sharing, or commenting. 

But some didn’t. Drawn like a moth to a flame (or perhaps more precisely, gooseneckers at the scene of a horrific accident), some likely did click, if only to see the preposterous assumptions and/or incredulous inverse compounding applied to create such a ridiculous conclusion.

The CBS report cites “research” (and I use that term loosely here) by the National Institute on Retirement Security (NIRS) which — if one has paid attention to its previous outputs might more credibly be called the National Institute on Retirement INsecurity. I say that because the organization — which labels itself “nonpartisan” — nonetheless, and unapologetically definitely has a mission. That mission is the promotion of defined benefit plan designs — and while there’s nothing wrong with that, in the absence of good positive private sector trends to highlight there, they instead tend to find ways to bash what has become the nation’s retirement plan design alternative — the 401(k).

As for this most recent attempt,[ii] you don’t have to dig deep, or delve into footnotes to see just how data was convoluted to derive that click-bait crafted outcome. They simply took data from what appeared to be a reliable government source — though it happens to be a self-reported number of accumulated savings[iii] taken by the government — for all employed adults aged 21-64. Yes, you read that correctly.

Oh, and then picked the median of that wildly diverse range of experiences. 

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So — you take the accumulated savings of a 21-year-old — and mush it together with that of someone on the brink of retirement…. Honestly, you can stop right there, and know that this is a stupid, although ostensibly mathematically accurate, result. Seriously. You might just as well take the mid-day temperature of the Sahara Desert, the midnight temperature of Antarctica, add them together and to derive the temperature in Omaha, Nebraska. 

And yet, that’s the kind of math that is the basis for the headline. 

Then, presumably to provide some “balance,” NIRS produced a median number for those who had some retirement savings — again, though — every worker from age 21-64 — and provided a median of $40,000. 

But again, a mathematically accurate result[iv] that tells us…nothing.[v] 

To its credit, the NIRS report itself (eventually) acknowledges what actually matters: access to a workplace retirement plan, the need to address Social Security’s funding shortfall, and the drag student loan debt places on retirement readiness.

But those realities are buried beneath a click-bait headline built on a median so broad as to be meaningless. That isn’t analysis — it’s alarmism dressed up as math. And while it may generate attention, it amounts to click-bait journalism enabled by irresponsible and misleading “research.”

Don’t fall for it — and by all means, don’t spread it around.

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• Nevin E. Adams, JD

 

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[i] Yes, it’s a made-up word.

[ii] See Retirement in America: An Analysis of Retirement Preparedness Among Working-Age Americans - NIRS.

[iii] Andrew Biggs notes that in this data sampling from the Survey of Income and Program Participation (SIPP), the bottom quintile of earners have median annual earnings of just about $20,000 even for those aged 35 and over. In other words, these are people who are barely working – very few hours and weeks worked, typically at very low wages. See Does the typical American have only $955 saved for retirement?

[iv] One assumes, but considering the logic in the compilation, it may bear double-checking.

[v] The CBS report went further, of course — just in case you weren’t panicked enough, they juxtaposed the bizarre medians noted above with some generalizations about how much income you’d need in retirement, layered it in with worries about Social Security (and some exaggerated assumptions on how much/many Americans rely heavily on it), and even threw in a reference to Trump Accounts to generate even more clicks.    

The Gaps in Retirement Savings "Gaps"

As spring follows winter, so apparently do dire predictions about the nation’s retirement prospects.

For example, the Center for Retirement Research (CRR) at Boston College now claims we are looking at a $7.7 trillion dollar “retirement gap” for American workers, up from $6.6 trillion five years ago. Meanwhile, a new report by the National Institute on Retirement Security (NIRS) on what it called the “Continuing Retirement Savings Crisis” didn’t cite a specific aggregate gap, but a year ago NIRS employed a similar approach to suggest that that gap was likely somewhere between $6.8 trillion and $14 trillion.

While these outcomes are cited widely (the CRR’s as recently as last week in a U.S. Senate hearing), the underlying methodologies and assumptions are worth understanding. Both rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF), and while both track the progress of American retirement readiness by examining how individuals in the SCF did over time, they fail to acknowledge that doing so compares the balances and readiness of two completely different groups of individuals at different points in time. The NIRS analysis builds on that shaky foundation by incorporating some assumptions about defined benefit assets and extrapolating target retirement savings needs based on a set of age-based income multipliers — income multipliers, it should be noted, that have no apparent connection with actual income, or with actual spending needs in retirement. But then, the math is easier.

There’s no question that there is a gap between what Americans are likely to need to live comfortably in retirement and the resources available to fund it. The non-partisan Employee Benefit Research Institute (EBRI) recently updated its EBRI Retirement Readiness Rating and found that the retirement savings gap was $4.13 trillion for all U.S. households (not just those who have retirement plan balances, though it uses actual 401(k) data for those who do have such plans, rather than relying on self-reported estimates), where the head of the household is between 25 and 64, inclusive. That may be well short of the projections offered by the NIRS and CRR, but it’s a big number, nonetheless.

Indeed, considering the enormity of that gap, policymakers — and Americans generally — might well feel like throwing up their hands and despair of ever closing it (indeed, earlier this month NIRS published a survey indicating that 86% of Americans believe the nation faces a retirement crisis).

What is unfortunately often lost in the trillion-dollar gap headlines (and the concurrent surveys that, unsurprisingly, talk about our deteriorating confidence about our retirement) is that not everyone has a retirement savings gap. Ironically, considering their differing methodologies, the CRR, NIRS and EBRI all put the number at about 50%. (EBRI’s number, which in its assumptions and use of actual data seems more conservative, says the number at risk of running short of money in retirement is in the low 40% range.)

How big is the gap at an individual level? The EBRI analysis breaks it down into manageable numbers: For those on the verge of retirement (Early Baby Boomers), the deficits vary from an aggregate of $19,304 (per individual) for married households, to $33,778 for single males and $62,734 for single females. If you look only at the individuals who do have gaps (EBRI’s projections, which take into account the potential costs of nursing home care and living expenses based on real experience, rather than arbitrary replacement ratios, indicate that about 57% will have sufficient retirement income), the gap for Early Boomers ranges from $71,299 per individual for married households to $93,576 for single males and $104,821 for single females.

Not surprisingly, those eligible to participate in workplace retirement plans fare better. Also not surprisingly, those who have jobs are more likely to have incomes and access to a workplace retirement plan — and those who work for larger employers are more likely to have both larger incomes and access.

However, even EBRI’s estimates include 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. For those seeking to understand, and perhaps craft solutions for, the current projected shortfalls, this is an important distinction, and one given short shrift by a headline’s focus on the aggregate.

There are, of course, broad policy changes that can, and have, made a big difference, nationally and at a plan level — things like automatic (and immediate) enrollment, contribution acceleration and prudent selection of a default investment option, not to mention ideas (or legislation) that expand access to those plans.

That said, ultimately the retirement savings gap is an aggregation of individual savings gaps. And as advisors well know, you close those one individual at a time.

- Nevin E. Adams, JD