A recent report by the GAO paints a pretty bleak picture of American retirement. Is it accurate?
For the most part,
the report covered familiar ground, bemoaning the “marked shift” away from the traditional defined benefit pension plan (glossing over
how few private sector workers
were covered by these plans, even in their heyday, and the fraction of
those who received a full pension), and highlighting low savings rates,
the pervasive lack of broad-based access to workplace retirement plans
and the daunting challenges confronting even those who do enjoy that
access.
The report also spends several of its 173 pages chronicling (with
pictures) the ways in which “leakage” also undermines retirement
savings. And for good measure, it invokes the findings of the
Melbourne Mercer Global Pension Index
— which the GAO calls the “most comprehensive” — that ranks the U.S.
retirement system 20th out of 25 countries surveyed (and gives us a “C”
grade). Indeed, the report treads such familiar ground in such a
familiar way that it hardly seems controversial.
In fairness, having seen, studied and even commented on the data,
reports and surveys cited in the GAO report, the authors can hardly be
faulted for their air of pessimism. As they explain in their
introduction, “More and more people are retiring, and many are living
longer in retirement. Health care costs are rising, Social Security is
stretched to the limit, and debt — both personal and public — is a
threat to financial security.” But in retreading this “familiar” ground,
they also restate as fact some things that have been drawn into
question — and gloss over some more recent findings that provide
valuable context.
‘Over’ Looked?
For example, the 2013 Survey of Consumer Finance (SCF) is a widely
cited report, and is invoked repeatedly by the GAO in its assessment of
the resources available to American workers in retirement. This is a
reputable and well-regarded source of consumer information, drawn from a
sampling of about 6,000 households (different ones every cycle). That
said, the information contained is “self-reported,” which is to say that
it tells you what individuals think they have (or perhaps wish they
had), but not necessarily what they actually have. Now, the GAO has
previously relied on this data — and in fact recalls a 2015 report by
the GAO that claimed (and was titled) “
Most Households Approaching Retirement Have Low Savings.”
The rationale for the “most” in the 2015 report headline appears to
come from its focus on households age 55 and older, where the GAO noted
that (only) 48% had some retirement savings, and thus one might
reasonably assume that the remaining 52% had no retirement savings — and
that would seem to be the case. However, 23% of that 52% said they had a
defined benefit plan. Now, that assessment may be inaccurate (see
above), but if they do, in fact, have a DB plan, that plus Social
Security might well be sufficient. So, “most” have no savings, but about
half of that “most” might not need savings. Admittedly, that
distinction makes for a clumsy headline.
Among those age 55-64 with no
retirement savings, the median net worth was $21,000 (about half of
these had no wage or salary income), while among those in the same age
bracket with any retirement savings, their median net worth was
$337,000. Compared to those with retirement savings, these households
(those aged 55-64 with no retirement savings) have about one-third of
the median income and about one-fifteenth of the median net worth, and
are less likely to be covered by a DB plan. The bottom line is that,
even accepting the self-reported data of these individuals, there is a
considerable disparity, and one that suggests that a more targeted
analysis (and dare I suggest remedy) might be more in order.
In evaluating things like retirement income and coverage, the GAO
report draws on information from, among other sources, the Current
Population Survey (and in some cases other reports based on that
information). While it is one of the most-cited sources of income data
for those whose ages are associated with being retired (typically ages
65 or older), and has also been used to provide annual estimates of
employment-based retirement plan participation, a 2014 redesign of the
questionnaire has resulted in much lower estimates of the percentages of
workers who participate in an employment-based retirement plan. In
fact, the non-partisan Employee Benefit Research Institute (EBRI)
has cautioned
that it has resulted in historically “sharp and significant” reductions
in the levels of worker participation in employment-based retirement
plans.
Missed ‘Out’?
Not mentioned in the GAO report (but cited in
a recent Forbes article by Andrew Biggs of the American Enterprise Institute) is
an analysis
by Census Bureau economists Adam Bee and Joshua Mitchell, who used IRS
data to measure the share of new retirees receiving benefits from
private retirement plans. Biggs notes that in 1984, only 23% of new
retirees received any sort of private pension benefits, but by 2007, 45%
of new retirees received private pension benefits.
As for the aforementioned ranking of the U.S. retirement system, it’s
really hard to compare apples to oranges, as such comparisons
inevitably do. But in the
Forbes article noted above, Biggs
reminds us that Mercer measures adequacy by virtue of things like tax
preferences for retirement savings, ages at which participants can
access their savings, whether savings must be annuitized, etc. As things
to consider, perhaps — but a ranking based on subjective weightings and
criteria that includes certain qualitative factors doesn’t necessarily
produce an objective result.
‘Post’ Retirement
Another recent analysis, “
Using Panel Tax Data to Examine the Transition to Retirement”
— conducted by Peter J. Brady and Steven Bass of the Investment Company
Institute and Jessica Holland and Kevin Pierce of the IRS — found that
most individuals were able to maintain their inflation‐adjusted net
work‐related income after claiming Social Security. Looking only at how
much individuals reported as net income on their taxes the year before
they started drawing Social Security benefits, compared with the three
years after they began that draw, they found that, looking at working
individuals age 55 to 61 in 1999 who did not receive Social Security
benefits that year, three years after they started claiming Social
Security (which could be viewed as a proxy of sorts for entering
retirement) that median ratio of net work‐related income at that point
compared to net work‐related income one year before claiming was 103% —
which means, of course, that three years later, they are actually
reporting (slightly) higher income levels than they were prior to
retirement. Does that mean they will still be doing so a decade later?
No — but why not even an acknowledgement that such results have been
documented with actual IRS data?
Other Points
The GAO report does remind us that where you work matters (in 2016,
89% of workers in information services had access to an
employer-sponsored plan, compared with 32% of workers in the leisure and
hospitality industry), and how you work matters (“one reason
lower-income workers lack access to employer-sponsored retirement plans
is that they struggle to meet plan eligibility requirements related to
sufficient tenure and hours worked”) in terms of having access to a
retirement plan, and how much you make really matters (“…workers in the
lowest income quartile were nearly four times less likely to work for an
employer that offered a retirement plan, based on our analysis of 2012
SIPP data, controlling for other factors”). And it highlights the
critical importance of, and the very real danger posed to the nation’s
retirement security by the projected shortfalls in Social Security.
On the other hand, for some reason the GAO report cites the creation
of the QDIA safe harbor as a failure of sorts, in that no surge in new
plan adoption accompanied it (completely disregarding
the huge boost to diversified savings and increased participation via automatic enrollment that has resulted). Ditto
the demise of the MyRA,
whose dismal take-up rate stood in some contrast to its shockingly high
cost. It had a different — and more sympathetic — perspective on the
state-run programs for private sector workers, decrying the
uncertain status of such offerings after the signing of legislation that
overturned the safe harbor rule from the Obama administration.
Ultimately, the GAO report makes one very simple
recommendation:
the appointment of an independent commission to “comprehensively
examine the U.S. retirement system and make recommendations to clarify
key policy goals for the system and improve how the nation can promote
more stable retirement security.” All well and good.
But here’s hoping that, should such a committee be formed, it will
look beyond the all-too-familiar ground that the GAO chose to tread.
- Nevin E. Adams, JD
While I’ve had the opportunity over the past decade and change to
peruse plenty of filings and findings related to excessive fee suits,
the recent amended filing in a case
against New York University (NYU) included something new – a long list
of statements and acknowledgements by plan fiduciaries that, according
to the plaintiffs, “displayed an alarming lack of understanding of basic
terms and principles in investment management and fiduciary best
practices.” Indeed, one of the plan committee members was called out for
their “remarkable unawareness of basic facts” relating to the plan.
