The retirement crisis that isn’t
When you apply for a widow's benefit after reaching your full retirement age, you're entitled to receive 100 percent of the amount your late spouse was collecting. Credit: iStock
Ask pretty much anyone and they’ll tell you: Americans are undersaving for retirement. It’s not just thought to be a few households falling through the cracks. Rather, there’s a perception that, after a “golden age” of traditional pensions that lasted from World War II until about 1970, most Americans won’t have nearly enough income in retirement to maintain their pre-retirement standards of living. Financial writer Jane Bryant Quinn states the view succinctly: “America’s retirement savings system has failed.” All the Democratic presidential candidates have proposedexpanding Social Security benefits to address this “retirement crisis.”
But new data shed light on America’s retirement system, both how it compares with the systems in other countries and how retirement savings are developing over time. The results may surprise you.
On Dec. 1, the Organization for Economic Cooperation and Development (OECD) updated its Pensions at a Glance survey of retirement saving in more than 30 countries. The United States’ Social Security program is indeed less generous than most OECD countries’ plans. Americans who earn the average wage each year of their careers will receive Social Security benefits equal to about 35 percent of the current average U.S. income. Note that comparing a country’s retirement benefits withthat country’s current average income is different from a “replacement rate” that compares retirees’ benefits withtheir own pre-retirement earnings. Nevertheless, these data show that while Social Security is comparable to retirement programs in Britain (30 percent) and Canada (33 percent), it’s still below the OECD average of 53 percent.
But retirement income security is about more than just government benefits. It also includes private retirement saving and work in retirement, where the United States does very well. The total incomes of Americans age 65 or older are equal to 92 percent of the national average income, according to the OECD. The United States ranks 10th out of 32 OECD countries and above countries such as Sweden (86 percent), Germany (87 percent) and Denmark (77 percent). In absolute dollar terms, U.S. seniors have the second-highest average incomes in the world, behind tiny Luxembourg.
But what about working-age Americans? Hasn’t their retirement saving fallen? Using Federal Reserve and Social Security Administration data, I tallied the total assets Americans have built for retirement, including 401(k) and Individual Retirement Account balances and benefits accrued under traditional pensions and Social Security. As of 1996, the first year for which full data are available, Americans’ total retirement assets were equal to 2.7 times total personal incomes. By early 2015, retirement assets had risen to 4.1 times personal incomes.
In fact, the historical shift from traditional pensions to 401(k) plans has not reduced retirement saving, Boston College’s Center for Retirement Research recently concluded. It’s true that with 401(k)s, workers themselves bear the risks related to how their retirement funds are invested. But retirement saving is more widespread: More Americans have retirement plans today than did during the “golden age.” And unlike with traditional pensions, which pay a decent benefit only to long-term employees, members of America’s mobile workforce can carry their 401(k) plans with them as they change jobs.
Are some Americans falling short? Unquestionably, and retirement policy needs to help them. For instance, unmarried, less- educated women are far less likely to be financially prepared for retirement, in part because many fail to meet Social Security’s 10-year vesting period to qualify for benefits. Paying a universal minimum benefit to all retirees, which Social Security doesn’t currently do, would reduce old-age poverty caused by short working careers.
Likewise, many small businesses don’t offer 401(k) plans, due to the high fixed costs of establishing the plans. “Starter 401(k)s” with lower regulatory costs or multiple- employer 401(k)s could make offering retirement plans more affordable.
But massive Social Security expansions are unnecessary and unaffordable. Unnecessary because, as the OECD data show, when government retirement programs offer more generous benefits, households do less to prepare for retirement. On average, for each dollar of additional retirement benefits paid by an OECD government, households in that country generate 82 cents less in income through personal saving or work in retirement. Across-the-board benefit hikes would almost certainly result in lower retirement saving by middle- and upper- income households, which receive most of the benefit increases under expansion plans such as those proposed by Democratic presidential candidate Bernie Sanders.
Benefit expansions are also unaffordable. While the Democratic presidential candidateshave promised expanded Social Security benefits, none have proposed plans that would enable Social Security to pay for the benefits it already has promised. That’s important, since Social Security’s long-term funding shortfall rose by 58 percent from 2008 to 2015.
The data show that the biggest retirement danger isn’t that Americans haven’t saved enough. It is politicians, both past and present, who promise Social Security benefits without paying for them. That’s the true retirement crisis the presidential candidates need to address.
Andrew G. Biggs, a resident scholar at the American Enterprise Institute, was principal deputy commissioner of the Social Security Administration from 2007 to 2008. He served on the Society of Actuaries’ Blue Ribbon Panel on Public Pension Plan Funding from 2013 to 2014.
