It’s in vogue to catastrophize about the state of retirement savings in the United States. Pundits and academics alike often cite average 401(k) account balances from surveys as evidence that the United States is facing a looming retirement savings crisis. Some even go even further and claim the 401(k) system itself is the sinister cause of this calamity.
Their reasoning usually goes something like this: Back in the good old days, workers were covered by defined benefit pension plans, which offer workers lifetime payments in retirement based on how long they worked for their employer and their salary when they leave. Then in 1978 Congress created 401(k) accounts, in which workers accumulate retirement savings in personal accounts based on annual contributions and investment earnings. Since then employers have moved away from traditional pensions in favor of 401(k)s, decimating worker retirement security.
It’s a compelling story, but it’s mostly wrong.
Yes, employers have shifted from offering defined benefit plans to offering defined contribution plans such as 401(k)s, and workers should probably be saving more for retirement. But the notion that the shift is causing a retirement crisis is hogwash.
Given the ubiquitous claims of a retirement crisis, we should expect to see big changes over time in retirement plan coverage, participation and savings. To qualify as a crisis, the situation today should be dramatically different than in past decades. But that’s not what the numbers show. Retirement plan participation and savings rates have been relatively stable over the last 40 years.
In 1979, nearly 40% of private-sector workers participated in a defined benefit plan and fewer than 20% participated in a defined contribution plan, according to estimates by the Employee Benefit Research Institute. That same year, 45% of private-sector workers participated in at least one employer-provided retirement plan.
More than 30 years later, participation by plan type had shifted significantly. As of 2011, nearly 15% were enrolled in a defined benefit plan and more than 40% were in a defined contribution plan. But the overall participation rates stayed the same at 45%. (Some employees were enrolled in both plans.) Boston College’s Center for Retirement Research has documented similarly stable trends between 1989 and 2016.
The shift to defined contribution plans has not resulted in fewer workers participating in a retirement plan.
Retirement plan participation is probably better than these figures indicate. Recent research by the Social Security Administration suggests that retirement plan participation rates that rely on surveys of workers — like those cited by the Employee Benefit Research Institute — are likely underreported. According to the Bureau of Labor Statistics, which surveys employers, more than 70% of workers have access to an employer-provided retirement plan and 55% participate in them. Research also suggests that Social Security will provide an adequate, or close to adequate, retirement for those who don’t participate or have very low retirement savings.
Even though there has not been a decline in retirement plan coverage or participation, the shift to defined contribution plans could lead to a reduction in retirement savings because workers and their employers could choose to save less each year than they would have under a defined benefit plan. However, Federal Reserve data show that total retirement savings (all money set aside for retirement in both defined benefit and defined contribution plans) relative to wages is at an all-time high, more than doubling since 1980.
What’s more, annual savings rates appear to be relatively constant over time, meaning people are saving about the same share of their income for retirement as they did in the past. The fact that retirement savings are at an all-time high and savings rates have remained stable as plan offerings have changed defies the claim that the shift to 401(k)s promulgated a retirement crisis.
It’s true that public opinion research shows that more Americans are worried about having enough money to live comfortably in retirement, up from just over 30% in 2002 to about 45% today. But the increase may be due to a heightened awareness of retirement issues more than anything else. In a Gallup Poll last year, nearly 80% of retirees reported having enough to live comfortably. And federal government data show that retiree households’ incomes have risen significantly over the last 30 years.
The fact that eight in 10 retirees report being financially OK — and retiree incomes are rising — should be a clear indication that we are nowhere near a retirement crisis.
Many aspects of our retirement system need to improve, chief among them the large underfunding of Social Security and state and local pension systems. Policymakers and other advocates should also find ways to help more people achieve a secure retirement by enhancing Social Security benefits for low-income workers, improving retirement plan coverage and savings rates, and increasing the availability of lifetime payment options in retirement.
Raising a furor over a nonexistent retirement crisis is diverting attention away from these and other important issues. We need to get beyond the doomsday approach to retirement savings policy so that we can pragmatically tackle the real issues at hand — and leave the next generation of American workers with a more stable retirement system.
Josh B. McGee is a senior fellow at the Manhattan Institute and a member of the Texas Pension Review Board.