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. 

Top 10 Pet Peeves About the Retirement Industry — Part II

Last week, I shared five of my Top 10 Pet Peeves about the Retirement Industry. Here’s the rest of the list.

Making “apples to oranges” comparisons of world pension systems.

Let’s face it — nobody wants to be “average.” And yet, there are now a handful of retirement industry consultants that, each year, publish a ranking of how the world’s retirement systems rate — and year after year the United States generally comes in about the middle of the pack.

Considering just how diverse these systems and the populations they serve are — one might well wonder at the need to rank them. But rank them they do, employing a relatively complex rating system to do so. The most recent was by Mercer — who, once again — held the U.S. in relatively poor esteem compared with the Netherlands, Iceland, Denmark and Israel. The Nordic countries are a perennial favorite here — though they all happen to be (much) smaller in population, and more culturally and racially monolithic than the U.S.

They all also have different approaches to taxes, and social infrastructure. Said another way, these rankings never consider the cost — both monetarily — to society and the mandatory worker contributions they require — and in terms of pre-retirement access to those funds. No, they myopically focus on the level of benefits provided and the security of those promises — not irrelevant considerations, of course — but one that glosses over some of the choices that might have to be made — or eliminated — in order to achieve them.

Not that Americans might not be willing to make them — if they were told what they were. But labelling the American system (slightly above) “average” isn’t telling the whole story.

Ignoring the existence and impact of Social Security.

Once upon a time, we talked about retirement as having three legs: Social Security, workplace savings/pensions, and personal savings. But to a number of vocal pundits, the full burden has been put … on the 401(k). A system that, as I noted previously, everybody decries as never being intended to be a retirement plan.

Well, before there was a 401(k) — and even before the advent of ERISA — there was Social Security, a program designed to provide retirement income to working Americans. It remains absolutely integral to even the most rudimentary retirement planning calculation, and with good reason. But it too was “never intended” to provide a full replacement of pre-retirement income in retirement, though it does for many lower-income Americans. 

That said, despite a looming financing shortfall — and a fairly widespread notion that those benefits aren't "enough" for a full retirement income replacement, you don't see headlines in the New York Times — or folks going on book tours — proclaiming that program was a "mistake" the way some do about the 401(k). The reality is that Social Security — like the 401(k) — has undergone significant changes in scope, funding, and mission since its 1935 inception. While deliberate, it might fairly be termed “mission creep.”

The (other) reality is that the 401(k) actually does a pretty good job of what workplace savings was always designed to do — supplement the foundation that Social Security provides — and yes, even for lower-income individuals. It has been — and continues to be — an essential element of retirement security for middle-income workers, for whom Social Security benefits alone likely fall short of their pre-retirement income levels and needs. It, like Social Security, is an essential element of the three-legged stool. But we need to quit carrying on like the 401(k) should be expected to be THE retirement income source (and that it’s a failure if it doesn’t).   

Using compounding “Magic” to make mountains our of molehills.

Albert Einstein is said to have called compounding the eighth wonder of the world. While that certainly applies to finances and savings growth, it can also be used to exaggerate financial issues. 

For example, a couple of years back a firm (that was in the business of capturing IRA rollovers) put out a jaw-dropping statistic that claimed there were $1.35 trillion in “forgotten” 401(k) accounts?  That’s TRILLION, with a “T”. 

That jaw-dropping number was the headline from a report titled, “The true cost of forgotten 401(k) accounts,” authored by “the Capitalize research team” — and yes, if accurate, that would mean that about a fifth of all 401(k) assets have been “forgotten.” Sound suspicious? Here’s another data point: The report goes on to estimate that these 24.3 million accounts that have been “forgotten” have an average balance of… $55,400 per account. 

Now, numbers like that are generally reserved for emails regarding a Nigerian prince. Fortunately, these authors showed their “math” — and — suffice it to say they pulled a couple of actual data points, extrapolated a much larger reality from those data points, and did a couple of rounds of multiplication to expand the population impacted, and the compounded the financial impact. And if that weren’t enough, they further extrapolated that impact to be an ongoing annual expansion of the problem. 

More recently, there was a report from Vanguard that claimed that job-changing could cost your retirement $300,000. That was a jaw-dropping number on its own (p.s., if a projection is jaw-dropping, beware) — particularly when you get into the report and find that it’s based on a projection based a median participant making $60,000 per year. 

Most of the coverage focused on the impact resulting from participants who had been auto-enrolled, and then auto-escalated to a point, changed jobs, and then (re)started participation at a new plan, (re)auto-enrolled at a lower deferral rate than where they left off at their old plan. The problem there, of course, isn’t the job change itself, it’s the individual not taking the time/energy to adjust the rate of savings with the new plan. By the way, job changers with VOLUNTARY enrollment saw NO decrease in savings rates. 

But as you look deeper into the report, the researchers also focus on folks getting a raise with the job change (10%, on average, they assume), but not commensurately increasing their deferrals — so, on a relative basis, the report calls this a reduction in savings (this is the way government does tax math, by the way). Moreover, there were job changers that saw even higher raises with the job change — and, according to the math here, “suffered” a commensurately larger decrease in savings — at least relative to the rates at which they were saving previously.

Ultimately, of course, this makes it sound like people are LOSING retirement savings, when in fact it’s really more about leaving money on the table (and they admit that there are a multitude of reasons why folks might legitimately be saving differently along with a job change).

Still, the headlines have been trumpeting this as a scary development — one that some are (already) saying means that the 401(k) design is flawed, and not equipped to deal with today’s job changers. 

Except, of course, that the median job tenure of the American workforce is pretty much unchanged since WWII.   

The bottom line? If the headline is jaw-dropping, go look at the methodology and fine print. 

Claiming that 401(k)s are only for the “rich.”

Well, first off, you need to get those folks to tell you who they consider rich. There’s certainly an argument to be made that those making higher incomes might well get a “bigger” benefit from the pre-tax preferences — but studies have shown that constraints like non-discrimination tests and 402(g) limits bound those in such that the benefits higher income workers receive are in rough proportion to their income(s). 

Indeed, if those “upside-down incentives” were the only forces at work, one might reasonably expect to find that the higher the individual’s salary, the higher the overall account balance would be, as a multiple of salary. However, a couple of years back — drawing on the actual administrative data from the then-massive EBRI/ICI 401(k) database, and specifically focusing on workers in their 60s (broken down by tenure and salary), then-EBRI Research Director Jack VanDerhei found that those ratios hold relatively steady. In fact, those ratios are relatively flat for salaries between $30,000 and $100,000, before dropping substantially for those with salaries in excess of $100,000 (see here).

The reality is that the 401(k) has been remarkably equitable in encouraging participation, even among workers of very modest incomes. For them — and for the middle class, generally — the 401(k) has been the only way they (can) save.

Referring to recordkeeping as a “commodity.”

For years, recordkeeping services — complex and difficult as they can be to provide accurately and consistently (not to mention profitably) — have been characterized (some might say disparaged) as a “commodity,” while fee compression (and the aforementioned complexities) continue to fuel consolidation in that industry. 

Honestly, as a former recordkeeper (though it’s been awhile), I’ve never understood how anyone who had any real appreciation for a business as varied, complex, and demanding as that of keeping up – and keeping up accurately – with individual participant accounts over the course of a working career – would be willing to refer to those services as “interchangeable.” Or why any firm that provides those complex services in these challenging times would be willing to let others do so. Certainly, any participant, plan sponsor, or advisor who has seen the integrity of that data put at risk by clumsy and inattentive hands can attest to the impact that a failure to do so. Indeed, I’m shocked by the leaders in our industry who label it as such — leaders that I think might well feel differently if they had spent even a small amount of time in those shoes.

Without question, recordkeeping is not only a challenging business, it is expensive to stay current with technology, to keep processes and programs current not only with changes both in the laws and regulations, but the nuances of individual plan designs. And as if that weren’t enough, cybersecurity has recently emerged as a significant threat – little wonder in view of the enormous amount of sensitive financial data to which these “commodity” producers are entrusted.

Where recordkeeping does seem to have been “transformed” into a commodity business is in the pricing of those services. Like the gasoline drawn from a pump, economists would tell you that, since commodity products are “interchangeable,” they compete (only) on price – and to do so (profitably) requires that that you have to achieve economies of scale – and the continued downward pressure on fees for those services continues to force firms to exit or flee to the embrace of larger players.

Further fueling those trends, the plaintiffs’ bar has latched onto the “commodity” concept, having (apparently) determined that it is “appropriate” to be compensated for these services by a flat per-participant charge (it started at $35/participant, but has since moved lower). 

Regardless, my personal experience is that those who find themselves working with a service provider or TPA that views those critical services as a “commodity” will, in short order, be looking for a new one.

One More

Well, that’s my list, and while I worked hard to limit it to 10, I have one more to share; what really ticks me off is those who give a microphone (and/credibility) and SHARE those comments (however well-intentioned) to those who say any of the above. And that goes DOUBLE for those in this industry who should know better!

Got one (or more) you’d like to add? Do so in the comments!

- Nevin E. Adams, JD

A Retirement Crisis of Complicity

 A recent headline asks: “Why Aren’t We Talking About America’s Retirement Crisis?”  Really? It seems to me that that’s ALL we’re talking about!

Even more ironically, that headline appeared in an op-ed crafted by none other than Teresa Ghilarducci (and her new co-author, Christopher Cook) who, so far as I can discern, talks (and writes books) about little other than the so-called “crisis.” And this specific op-ed, as hers often do, got picked up in syndication (see this link for details).  

But then, this week I stumbled across a LinkedIn post from Andrew Biggs, which matter-of-factly stated, “After a period of trying-in-good-faith, I've concluded I have to be more, um, forthright in calling out, shall we say, misinformation regarding Americans' retirement income security.” Said another way, it appears that Mr. Biggs has come to the conclusion – as I have – that polite commentary and even-handed discussions are insufficient to put to bed what continue to be extreme mischaracterizations (and, in some cases, outright lies) about the true state of retirement in America.

Thankfully, in an article posted on Forbes (titled “Fact-Checking Cook and Ghilarducci on Retirement (Again),” Biggs once again takes to task a follow up to his earlier response to (yet) another set of exaggerated claims and assertions by the pair. 

Here’s the latest:

“Nearly half of today’s middle-class adults will be poor or near-poor in retirement.”

Now, that’s a pretty bold statement – and one made without much backing. Actually, the article links to work by the New School (where Ghilarducci is the Bernard L. and Irene Schwartz Professor of Economics at the New School for Social Research in New York City) and is based on “Authors’ calculation using the 2014 Survey of Income and Program Participation.” Note “author’s calculation.” 

Biggs provides his own analysis of data, noting that the Census Bureau defines “near poverty” as having an income between 100% and 125% of the federal poverty threshold, while, according to Census Bureau research, (only) about 6.9% of age 65+ Americans have incomes below the poverty line. He then notes that about 14.8% had incomes below 150% of the poverty line, which is above near-poverty – and that if you split THAT group in half, then around 12.9% of current seniors are either poor or near-poor – TODAY.  

But by most objective measures (Biggs cites the Social Security Administration and the Urban Institute), he suggests that elderly poverty will DECLINE in the coming decades. Beyond that, he comments – as he has previously – that the vast majority of Americans who are poor in old age were poor PRIOR TO retirement. So, where does the conclusion that “nearly half” will be poor or near poor come from? While some of that might be attributed to the specifics of the aforementioned “author’s calculation,” another subtle clue can be found in the reference to “according to internationally-recognized measures”; we’ve seen those in Ghilarducci’s recommendations before – those are the ones that unfavorably compare the economic standards of life in America to Kazakhstan.   

“Nearly half of older Americans have no retirement savings and must rely solely on Social Security in old age.”

As it turns out, this is a two-fer – and Biggs breaks it down as follows. He points out – as he has previously – that the “nearly half of older Americans have no retirement savings” counts only individual retirement accounts. It completely ignores things like pensions (which, according to the Federal Reserve, Americans’ accrued benefits under traditional pensions top $16 trillion). It also excludes a taxable investment account, real estate, a farm or small business, and so forth. Biggs notes that, if you include all forms of retirement savings (and why wouldn’t you, unless you were trying to make a point?), you find a totally different picture. He cites the Federal Reserve, relying on its Survey of Household Economics and Decision-making, in finding that 88% of Americans aged 60 and over have retirement savings on top of Social Security. 

The second part – the level of reliance on Social Security – is also overstated. Biggs cites Social Security Administration researcher Lynn Fisher’s research using IRS data matched to government household surveys to examine how heavily retiree households rely on Social Security. She found that only 4.5% of elderly persons received all their income from Social Security for all of their income. “In other words, literally one-tenth of the figure Cook and Ghilarducci claim,” Biggs notes.  He also explains that the Census Bureau analyzed the number of seniors who receive at least 90% of their income from Social Security – just 12.2%, despite using a lower bar than Cook and Ghilarducci.

About 79% of people aged 62 to 70 can’t afford their pre-retirement living standards.

There’s plenty of actual IRS data – you know, the kind that people provide to the IRS under penalty of law – available to show that retirement income tends to compare favorably with pre-retirement.  Biggs turns to data from economists Peter Brady and Steven Bass that tracked incomes from ages 55 through 72 – and found that for the typical household, income drops by only 12% from age 55 to 65. Which, of course, means that the typical 65-year-old has a “replacement rate” of about 88%.  Beyond that, he explains that for the poorest 25% of seniors, their incomes increase in retirement.

And then there’s the alternative of just asking folks in retirement. Again, he references the Fed’s Survey of Household Economies and Decision-making which found that among 52-to-61-year-olds from 2019-2023, 76% said they were at least “Doing okay” – but among 62-to-70-year-olds, 82% did so. Among those age 75 and over, 86% said they were at least doing okay financially, the best in any age group. 

Of course, op-eds aren’t subjected to the same level of scrutiny as news – not that there’s been any shortage of news coverage on the topic of the looming retirement crisis. Let’s face it, there have been – and continue to be – a series of one after another industry survey that simply parrots the concerns of working Americans – the vast majority of which don’t seem to have ever tried to figure out their financial needs or reserves in retirement, apparently relying solely on the screaming headlines that assure them that retirement Armageddon is just over the horizon. It doesn’t help matters that retirement industry leaders echo and reinforce that perception.    

That said, and to answer Ghilarducci’s question, at least some of us are not just talking, but are actively working to forestall the retirement “crisis” she and others have been “promoting” for the past several years. No doubt, some will struggle in retirement – as they have prior to that date. But we need to quit excusing such “promotion” as anything other than hyperbole designed to sell books, inspire televised interviews and promote “solutions” that would undermine the amazing success of the private retirement system. 

If we don’t – well, we’re quite simply being a complicit enabler in helping spread that narrative by our silence.

- Nevin E. Adams, JD

Critiquing the Retirement ‘Crisis’

 It’s been said that a crisis is a terrible thing to waste. But what if it’s a figment of your imagination?

“Crisis” is a word much bandied about these days, most particularly as a label applied to retirement—by foes and fans alike. Indeed, while not so long ago headlines posed that premise as a question (“Is there a retirement crisis?”), it is now generally posited as a current reality (often accompanied by an exclamation point)—even though an examination of objective data (and a clinical application of the term “crisis”[i]) suggests otherwise.

To a certain extent, such hyperbole is understandable; “crisis” is, after all, one of those descriptors that cry out for swift and decisive action—and the industry of employee benefits has had its fair share. Let's be honest - claiming that we are in the middle of a crisis is most assuredly a better bet in terms of getting a book deal, a televised interview, or hundreds of thousands of “clicks.”

And certainly over the course of my career, any number of leading retirement “industry” voices have referred to the “retirement crisis” as a motivation not only to get about the business of helping more working Americans prepare for retirement, including the encouragement of employers to not only offer access to retirement plan benefits, but to include design features, such as automatic enrollment and qualified default investment alternatives (QDIA), as well as to foster greater and more effective utilization of those benefits. 

More recently that same label has been used by critics of the 401(k) system (and private sector retirement plans generally) to further their claims that the system is “broken,” that it disproportionately benefits the wealthy, and that the incentives tied to the deferral of income have no real impact on the decision to save—claims all-too-unfortunately given credence every time someone in this industry uses the term “retirement crisis” as a current reality.

But is there really a retirement “crisis”? By any number of objective measures, the answer is “no,” or at least “not yet.” Doubtless there are some heading into precarious financial waters—though most were in those waters prior to retirement as well (trust me, if your financial circumstances ahead of retirement weren’t good, there’s nothing about retirement likely to cure that predicament). That said, actual data from real tax returns suggests that those in retirement are faring pretty well, certainly compared with pre-retirement. Moreover, those actually living in retirement seem more confident about their continued prospects than those viewing it from the pre-retirement perspective. 

Yet, we are surrounded by headlines that tout “averages” or even median savings levels that belie the reality that the age, tenure and costs of living vary widely, often dramatically among those responding to those surveys. We are bombarded by reports that dramatize notions of retirement confidence—or retirement “magic” numbers—generally taken among individuals who have never stopped long enough to do even a single approximation of what resources would be required tell us nothing (though they do seem to generate “clicks” and fan the fears of the equally uninformed). Ditto academic papers that imbed assumptions that are used to extrapolate results that are then absorbed and imbedded by other academic papers to further extrapolate results. Garbage in, after all… and then we apply the “magic” of compounding. 

However “accidental” its origins, in the space of just a few decades the 401(k) has become America’s retirement savings plan—in a way that the traditional defined benefit pension plan never really did (at least not in the private sector). That said, the past several years have seen dramatic improvements in access, efficacy, and participation in these programs—and that has not been an accident. The retirement system’s traditional three-legged stool has certainly undergone some needed rebalancing over time—and let’s face it, there may once have been three-legs to that stool, but they were NEVER equal.

Those who denigrate or deny the success of the 401(k) typically exaggerate its value to higher-income workers (though their inclusion fosters designs like employer matching contributions, not to mention the very existence of such programs) and at the same time gloss over the strikingly high participation rate of even modest-income workers. Perhaps more significantly, they myopically overlook its enormous value to the middle class—who stand to have less proportionate income replacement from Social Security.

Yes, despite evidence to the contrary, and for reasons I still can’t fully comprehend, there remain critics who seem bound and determined to “throw away” the 401(k).

Though it seems to me that would be throwing the baby out with the bathwater…

- Nevin E. Adams, JD 

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[i] A review of the dictionary definition of crisis reveals the following perspectives: “A crucial or decisive point or situation; a turning point”; an “unstable condition, as in political, social, or economic affairs, involving an impending abrupt or decisive change”; a “sudden change in the course of a disease or fever, toward either improvement or deterioration.”