The U.S. Retirement System Will Fail Most Future Retirees

Careful research done by Ph.D economists conclude we face a huge retirement shortfall. We are about eight to nine years away from Social Security’s inability to pay full benefits; all boomers are past age 60, and the typical Gen Y and Millennial is predicted to do a little worse or much worse than the cohorts of their big brothers, sisters, and parents. The erosion in retirement security is worse for the bottom 60% or so of the earnings distribution. Yes, it’s a crisis.

Early boomers at the top of the income distribution have benefited from run-ups in the stock market, owning houses, and having employers who helped them save in retirement accounts and funded defined benefit plans. The top 20% of earners get 44% of all the employer contributions according to Vanguard who examined 401(k) – type employer plans. The nation’s private, commercial, voluntary employer – retirement plans exacerbate pay inequity and retirement income inequality.

Even Andrew Biggs, economist at the conservative think tank, American Enterprise Institute (which has been associated with advocating partially privatizing and reducing Social Security benefits) agrees federal and state tax law steer tax breaks to the top earners.

And, can we really say we don’t have a retirement crisis for regular working households when new 2022 data from the Federal Reserve Bank’s Survey of Consumer Finance, shows households in the middle 70% of the income distribution, aged 50-65, have a median retirement account savings of $86,000 and a median debt of $89,700? If you withdraw from your $86,000, say between age 65 and 70, traveling, buying a car— you’ll look comfortable. But all that money could be gone by your mid-seventies and then it’s Social Security all the way to the end.

Almost half of middle-class workers will be downwardly mobile to be poor or poor retirees.

About 40% of middle-class older workers are projected to be downwardly mobile into poverty or near poverty when they re ach age 62 and beyond. Disagreements rest on the definition of “poverty.” How can a serious researcher say $13,000 a year is a standard to shoot for; I reject the U.S. definition of poverty and so do most experts and practitioners.

The U.S. poverty measures depart from internationally acceptable standards and consistently lowballs how much hardship we have. No serious researcher uses the U.S. standard as a measure of financial deprivation. Most antipoverty programs define poverty as 150% or 200% of the official rate. According to the U.S. official number, you are a poor elder if your annual income is below about $13,000. Internationally, an American elder is counted as poor when their incomes fall below 50% of median, which is about $21,000. Measured this way, economist Siavash Radpour and I found downward mobility worsening after the pandemic.

The U.S. has the highest rate of elder poverty of any of our peer advanced-Western countries. By international standards, one out of four elder Americans over 65 live in a chronic state of want, in comparison the elder poverty rate is a low 5% in the Netherlands and about 10% in Germany, which is not atypical. This is a crisis and a shame.

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

Tony Webb, Michael Papadopoulos, and I found in the Illusory Benefits of Working Longer that without working, 79% of people in 2028 age 62-70 would not be able to afford their pre-retirement living standards or stay about de-facto poverty levels. And we included everything we could estimate — defined benefit plan benefits, Social Security, home equity (we might have missed coins people have in their couch)!

I can see how this grim assessment puzzles people if you just encountered a careful paper by Peter J. Brady of the Investment Company Institute and Stephan Bass at Internal Revenue Service concluding retirement income is robust. But they didn’t look forward. They didn’t predict how boomer income would do as boomers aged or the money Gen Y and younger would have at retirement. They only studied the relatively-advantaged 1945 birth cohort at age 72 and included earnings from paid work. And people working aren’t retired. This cohort also got the best part of traditional defined benefit pension plans, they were able to collect peak Social Security benefits before the raising the retirement age cut benefits for middle boomers and younger, and who got the most out of a steady increase in housing asset values.

Deniers also cherry – pick surveys show most retirees feel comfortable. But comfort levels depends on the survey. We surveyed the surveys. The results depend on who you ask. Eight robust and frequently-cited surveys on retirement confidence conducted by government bodies, research groups, and industry advocates show a wide range of retirement anxiety, from a high of 71% to a low of 32%. Levels of retirement anxieties differ by age, working status, and retirement status. The majority of near retirees in the middle and lower incomes are the most nervous about their retirement futures. And they should be.

Bottom line. The startling finding that 79% of age 62 – 70 don’t have enough retirement income, without working surprised me. But projections based on real wealth data from the University of Michigan convinces me it’s true. New data could change my mind.

Biggs is right. This assertion needs modifying: “Nearly half of older Americans have no retirement savings and must rely solely on Social Security in old age.” I should have written:

Nearly half of older Americans have no retirement savings and will likely have the bulk of their income coming from Social Security by the time they die.

I agree 100 percent dependence on Social Security is rare. And the Census Bureau analyzed only 12.2 percent of seniors get at least 90 percent of their income from Social Security. I agree many people have Social Security and other forms of income at young old ages. But as you age those other sources of income fade away. Work disappears, cash piles are spent, expenses rise, you live longer and sicker than you think, and levels eroded away by inflation.

As MIT economist James Poterba and colleagues note — in research that needs updating — a substantial fraction of persons die with virtually no financial assets and rely almost entirely on Social Security benefits for support. True, many of these households may be deemed to have been prepared for retirement because their income in old age was not substantially lower than their low income in their late 50s or early 60s. But saying a high replacement rate of a very low income (which is what incomes are right before retirement typically) is surely a poor way to judge sufficiency.

Going Backwards

Retirement crisis deniers promote their rosy picture about retirement by taking snapshots when people are relatively young retirees and working at older ages in professional jobs. The average income of 70-year-olds looks a lot different than the median income of 75- or 80-year-olds.

And we are going backwards. People in retirement used to be closer together in terms of income and wealth. People in retirement now and in the future are farther apart, retirement income inequality is growing along with longevity inequality. See the new book Longer Lives Are for the Rich .

Additionally, economists John Sabelhaus and Alice Henriques Volz find that the people in the top wealth levels are doing a bit better (based on the wealth they have they expect to use in old age) than people born 10 and 20 year years earlier. A rosy picture there. But a full 50% of people at the bottom of the wealth distribution are doing worse than their older sisters and brothers’ cohort and parents’ cohort who were at the same place in terms of their wealth at their age. This isn’t about how much they will get; it is a finding that shows our retirement system has aged so that some people are going backwards, and inequality is increasing.

Retirement financial security for Baby Boomers and Generation Xers is worse than for earlier retirees. I agree with Alicia Munnell, I don’t care what you call the problem – a crisis or very bad problem — “roughly half of households are not in good financial shape in retirement.”

And, Harvard economist Karen Dyson et. al. agree the younger cohorts will likely do worse than current retirees.

Denying The Retirement Problem Rejects Bold Action

The retirement crisis deniers don’t show up advocating more revenue into Social Security. The retirement crisis deniers say that 12.9% or 10% poverty measured the American way shows we don’t have to make large reforms. But the facts are restoring and expanding Social Security would prevent major setbacks. In “How-Gloomy is the Retirement Outlook- respected Urban Institute researchers Karen Smith and Richard Johnson show that median age-70 income will be higher for Millennials than previous generations, but this cohort faces a higher risk of seeing falling living standards in retirement.

Higher income in retirement does not mean being better off if people face more expenses and are living longer. As Forbes contributor Howard Gleckman writes, the biggest threat to over half of earners retirement security — those in the lower and middle class — is to not do anything about fully funding and expanding Social Security.

In the end, one of the best portraits of the retirement crisis comes from a compilation of academic work and government statistics. Check out the Chartbook, for snapshots older workers’ status and retirement wealth.

Make up your own mind about whether we have a problem so big we need to fix the commercial and voluntary system and Social Security. I guess you can still think everything is fine and there is nothing to be done, but I would want to see the numbers. for me the facts show otherwise.