Beware All the Retirement 'Crisis' Reports
If the amount of press ink used to report a study is any indicator of its contribution to public understanding, the National Institute on Retirement Security's (NIRS) 2013 report, "The Retirement Savings Crisis: Is It Worse than We Think?" might be the gold standard on the subject of retirement security. The report concludes that 84% of Americans are falling short of reasonable retirement savings targets and, even when total net worth is considered, two-thirds are at risk of an inadequate retirement income. The total "retirement savings gap," NIRS claims, may reach $14 trillion. According to New York Times writer Nancy Folbre, "The report lends weight to the longstanding criticisms of the increased reliance on individual savings in the United States retirement system." It also implicitly supports proposals to expand Social Security, despite the system's $10 trillion funding shortfall.
NIRS has a fancy name and high-flying membership, which includes a long list of public-employee retirement plans, unions, the AARP, financial management and insurance companies, and some pension consultants. But as we show in a comprehensive article on the so-called "retirement crisis" recently published in National Affairs magazine, the substance of the NIRS study should give pause to anyone considering drastic policy actions.
The NIRS study's methods seem simple enough. NIRS starts with retirement saving guidelines outlined in a 2012 Fidelity Investments' report. Fidelity's guidelines assume that individuals will work until age 67 and their retirement incomes should replace 85% of their pre-retirement earnings. To reach this goal, Fidelity's hypothetical workers start saving at age 25, putting away 6% of pay, with their saving rate rising to 12% by age 31 and remaining constant at that level until retirement.
NIRS then compares Americans' actual savings to what the Fidelity contribution rates suggest they should have saved, using data from the Federal Reserves' Survey of Consumer Finances. If households' actual savings fall short of the Fidelity guidelines, they are considered at risk and the shortfall is logged toward the "retirement saving gap."
But it's in the details where the NIRS study bogs down. For instance, Fidelity's 85% replacement-rate target is higher than many other estimates. The Social Security Administration notes that "Most financial advisors say you'll need about 70% of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living." Similarly, an SSA-sponsored 2009 study by University of Wisconsin economists John Karl Scholz and Ananth Seshadri calculated that the typical person should optimally have a retirement income equal to 68% of their average career-long earnings, adjusted for inflation. Adopting these lower replacement rate targets would produce dramatically different results.
Likewise, even if we accept an 85% replacement rate target for the average earner, NIRS ignores Social Security's progressive benefit formula, which provides a higher replacement rate for lower earners. As a result, low earners would need to save less to on their own to hit an 85% replacement rate while high earners would need to save more. But if high earners are generally better prepared for retirement than low earners, which doesn't seem unreasonable, then NIRS's unrealistic treatment of Social Security benefits will increase the share of households deemed by NIRS to be saving inadequately.
Finally, NIRS ignores the fact that individuals can save for retirement at different rates but still reach the same goal. Although Fidelity makes clear that its suggested saving rates are merely "rules of thumb," NIRS allows no room for deviation. NIRS effectively requires that workers contribute 6% of pay to their retirement savings plan at age 25, increase saving rates by one percentage point each year up to 12% of pay, and then contribute that amount annually until retirement. But if, for instance, workers instead contributed 6% per year from age 25 to age 40 and then increased the contribution rate by one percentage point per year up to 20%, at age 67 they would have the same accumulated savings as NIRS workers.
Yet under this alternative savings pattern, workers fall behind the NIRS benchmark savings levels by 21% at age 30, 34% at age 40, and 23% at age 50, even though they end up exactly on target by retirement age. After getting early-life debts and start-up expenses under control, many workers can ramp up retirement contributions during peak earning years and as their children leave home. Yet at every point except at retirement, NIRS would judge these workers at risk of an inadequate retirement income because they deviated from a set of arbitrary guideposts.
Together, these dubious and outright incorrect assumptions render NIRS's shocking conclusions meaningless and useless to policymakers. Other studies, from highly respected researchers, find very different results. For instance, RAND Corporation economists Michael Hurd and Suzanne Rohwedder concluded that 83% of married couples and 70% of singles are adequately prepared for retirement. Likewise, the University of Wisconsin's Scholz and Seshadri, along with the Brookings Institution's William Gale, conclude that only around 26% of households are currently under-saving for retirement. For those who are under-saving, the median shortfall is $32,000, which is about 17% below the median optimal wealth level.
This doesn't mean that many Americans shouldn't save more for retirement. And policies to improve retirement security - most importantly, making Social Security a solvent truly effective safety net for the poor - are important. But outrageous statistics derived from dodgy methods do nothing to inform the important debate regarding how to assure a safe and comfortable retirement for all Americans.