Sunday, July 13, 2008

A bad story (that I happen to agree with)

Today's Washington Post has a story entitled "Many Retirees Face Prospect of Outliving Savings, Study Says." Here's a quote:

The study, set to be released tomorrow, finds that Americans will have to drastically reduce their standard of living before retirement to live comfortably, or even avoid destitution, later in life. Middle-income Americans entering retirement now will have to reduce their standard of living by an average of 24 percent to minimize their chances of outliving their financial assets, the study found. Workers seven years from retirement will have to cut their spending by even more -- 37 percent.

And here's a quote from University of Maryland economist Peter Morici:

"Most people, if they look at their life expectancy and they think they will live to 90, they are nuts to retire at 60. They're going to be living in poverty at 80," said Peter Morici, an economist at the University of Maryland. "I think it's a wake-up call to baby boomers to get serious about getting their houses in order."

Now, with rising life expectancies and fewer defined benefit pensions, it is more important to think about making your money last. A 65 year old may have an average life expectancy of around 83, but there's a non-trivial chance of living to 90, 95 or beyond. You need to play for those years if you don't want to end up running short.

So what's the problem with the article? The study, undertaken by Ernest & Young, was commissioned by Americans for a Secure Retirement, a group that essentially lobbies on behalf of the insurance industry to get government subsidies for annuities. Now, I think more people should annuitize and subsidies might be a good idea, but there's very little hint in the article that the study might be self-serving. There are plenty of good academic studies, including some that conclude that most American retirees are doing just fine. (For example, this paper which concludes that "Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are undersaving is generally small.") I'm not sure we need to rely on studies funded by groups with a clear financial incentive.

Second, while it's nice to have a quote from an outside expert, Peter Morici is a trade economist – and I'm sure a fine one – not an expert in retirement issues. There are a lot of readily available experts on broad retirement security – say, Alicia Munnell at Boston College or Olivia Mitchell at the Pension Research Council – and a story would benefit from talking to them.

So again, the story's conclusions are good, but I'm not so keen on how they got there.

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