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.

A Bad Example

You have to hand it to the Washington Post. At a time when millions of working Americans are finding a financial lifeline in their retirement savings, they managed to find in the questionable life choices of a half dozen individuals a condemnation of the nation’s private retirement system.

The piece, laboriously titled “Millions of baby boomers are getting caught in the country’s broken retirement system” is light (and selective) on data (they managed to get hold of a 2016 report by the Economic Policy Institute subtitled “How 401(k)s have failed most American workers,” some datapoints from the National Institute on Retirement Security (for those who have forgotten some of the issues with their database, see Data ‘Minding’” and a couple of quotes from none other than Teresa Ghilarducci). Indeed, the article isn’t really about factual data; rather it’s mostly reliant on the anecdotes of six individuals the author has somehow stumbled upon.

Weirdly, the article’s author (who is said to cover energy as his regular beat) does manage to find a kind of silver lining in these individuals’ predicaments, noting that “the coronavirus pandemic has scrambled the lives of these six boomers just as it has everyone else’s, though with no savings to worry about at least it hasn’t directly hurt them financially.”

And while the article claims that “none of these stories is an outlier,” well—judge for yourself.

One 70-year-old “had some good jobs over the years,” but her two divorces “involved lawyers, the need to set up new households, and a general drain on savings.” She admits that “I would rather be happy today than miserable 25 years from now. And so I made choices based on that rather than on the economics, which, you know, one could argue fairly successfully that I made some pretty stupid decisions.”

Another says he came down with non-Hodgkins lymphoma, figured he didn’t have long to live and was fed up anyway with life in “corporate America”—and so “retired”… at age 52. Thereafter he says he sold his house and cashed in his 401(k), which had about $100,000 in it, wound up stuck with back taxes, penalties and the like, but also bought a new car, gave some money to family members who needed it and, yes, went on a cruise because he thought he’d die soon. He admits, “I went through a lot of money very quickly.”

Other examples cited one individual who chose to pursue passion—and traded full-time employment for part-time—living in Manhattan. Another, a former truck driver, retired at 62—with $10,000 in his 401(k)—opting to retire now “because my body’s been beat up so bad after 40 years of driving.”

Not to demean or dismiss the financial hardships of the individuals chronicled in the article, but it was hard not to see in nearly all of these stories an abundance of personal choices that lead to their post-retirement “plight.” A point that the individuals featured make no bones about.

It’s not like dissing the retirement system or the 401(k) is a new “sport” for the media. And let's be honest - some will run short of money in retirement, and some—like the individuals featured in the article—may well be forced to make the tough decisions late in life that different decisions earlier could have forestalled.

It may not be the lifestyle they might choose, but many will nonetheless 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. In fact, an analysis in 2014 by the non-partisan Employee Benefit Research Institute 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, a full two-thirds (67%) of the lowest-income quartile would still meet that threshold—and that’s making no assumptions about the impact of plan design features like automatic enrollment and annual contribution acceleration.

It would be naïve to argue that the voluntary nature of the 401(k) design works for everyone, certainly not for those who don’t take advantage of the option, and it most assuredly won’t work for those who don’t have access to its benefits. That said, 401(k)s are working for far more people and in much more varied circumstances than the fear-mongering headlines acknowledge. It’s one thing, after all, to acquiesce to what has become a journalistic “creed”—that “if it bleeds, it leads”—and something else again to wield the knife.

It’s well past time to call out these reports—that “normalize” these “bad” examples—for what they really are: at best a naïve and misinformed parroting of surveys with questionable samplings and methodologies, and at worst serving as the agent of a long-standing and deliberately intentioned “plot” to kill the 401(k). They do so first by undermining its value, discounting and demeaning the modest tax deferrals that encourage most who have access to such programs to set aside their natural preferences for spending—and then discrediting as “rich”[i] those who do take advantage of the option and make thoughtful preparations for retirement (and who, ironically, may well wind up supporting those who didn’t via higher tax burdens because they actually have retirement income).

It’s been said that “a lie unchallenged becomes the truth.” If those of us who know better don’t start speaking up—and speaking out—you can bet that the drumbeat of coverage about the failure of the 401(k) will one day become a self-fulfilling prophecy.

- Nevin E. Adams, JD

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[i]You don’t have to be rich to do so—even among modest income workers ($30,000-$50,000/year), we’ve seen that workers are 12 times more likely to save via a workplace retirement plan than to open that individual IRA.

Question Err?

“Presumably, if workers earned income in a retirement account, it is safe to assume that they had a retirement account…”.

Ya think?

That somewhat self-evident statement is drawn from a recent Issue Brief by the non-partisan Employee Benefit Institute (EBRI). That it was necessary is a cautionary tale about the blind reliance on data, even from a credible source, that looks suspicious.

It relates to the Current Population Survey (CPS), Annual Social and Economic Supplement (fielded in March of each year) to the CPS, conducted by the U.S. Census Bureau – a report that had long been one of the most cited sources[i] of income data for those whose ages are associated with being retired.

‘Bold’ Move

The problem appears to have its roots in a well-intentioned attempt to provide a more accurate read on income from DC plans. Responding to research that indicated that the CPS misclassified and generally underreported income, particularly pension income, the Census Bureau in 2014 conducted a redesign of the CPS questionnaire that altered and added to questions on income in order to better capture income from pensions.

To do so, the authors of this survey added (IN BIG BOLD LETTERS) an instruction that respondents NOT INCLUDE DISTRIBUTIONS OR WITHDRAWALS FROM IRAS, 401(k)s, or SIMILAR ACCOUNTS. This “clarity” does, in fact, seem to have produced a more accurate read on that specific question. The reporting of pension income that year, and in subsequent iterations, has risen.

However, beginning with that version of the CPS, there was a commensurate sharp drop in both the overall percentage of workers participating in a retirement plan, a decline in the number of workers participating, and declines in participation among those most likely to participate. This result, by the way, was counter to other reputable data sources, including the upward trend in the number of active participants in private-sector plans according to tabulations of Form 5500 filings by the Employee Benefits Security Administration, findings on retirement plan participation from the Bureau of Labor Statistics’ National Compensation Survey (BLS-NCS).

Fall ‘Call’

How much did it drop? The EBRI report explains that for full-time, full-year wage and salary workers ages 21-64, the percentage participating in 2013 under the traditional questionnaire was 54.5% vs. 49.3% under the redesigned questionnaire. This number fell to 39.9% in 2018 despite a slight uptick to 41.4% in 2017. Moreover, the number of full-time, full-year wage and salary workers ages 21-64 estimated to be participating in an employment-based retirement plan decreased from 51.4 million in 2013 (under the traditional design) to 41.0 million in 2016. By the way, the number of active participants increased from 89.9 million in 2014 to 94.6 million in 2017 according to 5500 data.

So why did the question regarding pension income translate into such enormous declines in participation? Well, you have to engage in a bit of speculation, but the trend and the timing suggest that individuals responding to the CPS, told to exclude 401(k)s, 403(b)s, IRAs, etc. on the question regarding pension income basically applied that direction to questions regarding their participation in a plan.

Gap ‘Flap’?

The good news is that this aberrant result was caught almost immediately by EBRI, and later by groups such as the Investment Company Institute. And, when a subsequent version came out with the same aberrant results, those groups once again held that up to scrutiny. And yet, that CPS data was still “out there,” and for some constituted the “official” version of the state of retirement plan participation in the United States.

That said, the newest iteration of the CPS included a new question that might be a step along the way to a more accurate assessment. Specifically, EBRI researcher Craig Copeland notes that in the 2019 dataset, the CPS added variables relating to income earned in a retirement account – and that addition, coupled with the assumption that began this post, provides some hope for an accurate data read.

That additional question simply posits whether the respondent received interest income, and from what source(s) – including 401k, 403b, among other retirement accounts. Copeland has taken the number of workers who responded that they received income from one of the employment-based retirement accounts and added that to the number of workers who reported having a pension plan under the traditional questions (accounting for those responding yes to both) to provide an adjusted overall estimate of employment-based retirement plan participation.

What’s the Impact?

Recall for a moment the data on fulltime, full-year wage and salary workers ages 21-64, that had indicated a 54.5% participation in 2013, only to drop below 40% in 2018 with the new questionnaire. However, taking into account the information from the new question, Copeland finds that the adjusted percentage participating jumps to 59.0% for this group in 2018. Similar, positive results are found for the other categories as well – results, it should be noted, that are much more in line with other data sources.

Now, despite those positive results, Copeland cautions since this is just one year of data, “a trend is obviously indeterminable.”

That said, I can’t help but be reminded about that old story about the optimistic child who awakens on Christmas morning and finds a heap of horse manure under the tree, rather than the anticipated – and still responds, “With all this manure, there must be a pony somewhere!”

Seems as though Dr. Copeland has found a pony in this data, after all.

- Nevin E. Adams, JD

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[i]See Data ‘Minding. Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Data "Minding"

Just when you thought retirement plan projections couldn’t get any worse…

Last week the National Institute on Retirement Security released a report – “Retirement in America | Out of Reach for Most Americans?” that claimed that the median retirement account balance among all working individuals is… $0.00. Moreover, that same report claims that “57 percent (more than 100 million) of working age individuals do not own any retirement account assets in an employer-sponsored 401(k)-type plan, individual account or pension.”

It’s not the first time the NIRS has produced reports finding significant problems with the nation’s private retirement system. Indeed, this report “builds on previous NIRS research published in 2015,” though the conclusions presented here seem unusually stark.
Then, as now, the NIRS conclusions rely heavily on self-reported numbers from the Federal Reserve’s Survey of Consumer Finances (SCF) and the U.S. Census Bureau’s Survey of Income and Program Participation (SIPP). The report’s authors acknowledge that the latter “oversamples” lower-income household which, as the report notes, are less likely to be covered by, or to participate in, an employer-sponsored retirement plan.

‘Self’ Sufficient?

The issues with self-reporting have been well-documented – so much so that even the report’s authors acknowledge (albeit in a footnote) that it “…can be problematic for the reporting of account balances and participation in particular types of retirement plans, such as DB pension plans.” In fact, previous research by Irena Dushi, Howard M. Iams and Jules Lichtenstein using SIPP data matched to the Social Security Administration’s (SSA’s) W-2 records found that the DC pension participation rate was about 11 percentage points higher when using W-2 tax records compared with respondent survey reports, “suggesting that respondents either do not understand the survey questions about participation or they do not recall making a decision to participate in a DC plan.” Those authors also found inconsistencies between the survey report and the W-2 record regarding contribution amounts to DC plans. In fact, those researchers found that about 14% of workers who self-reported nonparticipation in a defined contribution (DC) plan had, in fact, contributed (per W-2 records), while 9% of workers self-reported participation in a DC plan when W-2 records indicated no contributions.

Supplementing SIPP survey reports with actual information on tax-deferred contributions in W-2 records, the researchers found that the percentage of employees who were offered a retirement plan increased from 72% in 2006 to 75% in 2012, whereas the participation rate in any retirement plan among all private-sector workers increased from 58% to 61% over this period (a difference that may seem small, but is statistically significant at the 5% level).

Participation, Rated

Compounding the issues, for participation data, the NIRS draws on the Current Population Survey (CPS), even though the report’s own footnotes acknowledge that “the 2014 redesign of CPS produced much lower participation rates for working Americans in years after 2014 (participation in 2014 was at 40.1% but at 31.7% in 2017), which has not been fully explained.” They aren’t the only ones to take note of this aberration (see CPS Needs a New GPS and Commonly Cited Participation Gauge Misses the Mark, Study Says), but decide, for reasons not fully explained, to rely on the data there anyway. Indeed, a June 2018 report on the impact of the changes in the CPS by the nonpartisan Employee Benefits Research Institute (EBRI) cautions that “the estimates from the most recent surveys could easily be misconstrued as erosions in coverage, as opposed to an issue with the design of the survey.”

Moreover, when it comes to assessing retirement readiness, the NIRS analysis extrapolates 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, although this year the report’s authors acknowledge that those are “rule-of-thumb multipliers and are not based on detailed projections of the income needs of individuals,” all of which, in the authors’ words means that their “analysis in aggregate terms, is broadly suggestive rather than definitive.”

Median, Well…

However, much of the data – and key elements, such as wealth, income, participation and retirement savings – that underlie the conclusions is “self-reported” which, as noted above, even the report’s authors acknowledge “…can be problematic…”. It is perhaps a necessary “evil” when seeking to draw broad-based conclusions from limited samplings, but – particularly when sweeping generalizations are posited based on the medians of such samplings, when labels like “typical” are affixed and assumed without explanation – well, let’s just say that caution in applying the conclusions seems well-advised.

Not that the report is completely off the mark; it points out that those with access to retirement plans are significantly better off than those who lack that access, but also that retirement plan coverage has languished at about the 40% level in the private sector for some time now. Clearly solutions that help work to close this coverage gap, and provide more workers with an easier opportunity to save (let’s face it, nothing stops folks from walking down to their local financial services institution and opening an IRA, but the data suggests that those with access to a plan at work are 12 times more likely to do so) are needed.

Ultimately, the recommendations put forth by the NIRS report authors – to strengthen social security, expand access to workplace retirement plans, and expand the saver’s credit – should serve to narrow the gaps in retirement plan access and adequacy.

Even if the data that outlines the situation – and purports to justify those actions – leaves something to be desired.

- Nevin E. Adams, JD