Monday, April 24, 2017

Is There a Retirement Crisis? A Wall Street Journal Online Debate

In today’s Wall Street Journal I “debate” Alicia Munnell of the Center for Retirement Research on whether Americans face a “crisis” of inadequate retirement saving. I think both sides make good points and readers will have to judge for themselves.

But I think a graphic featured in the story makes some of my point for me. The right-hand side of the graphic shows the Center for Retirement Research’s estimates of the percentage of households who are at risk of an inadequate retirement income. The left-hand side shows total retirement savings as a percentage of GDP, from the Federal Reserve’s flow of funds database.


But here’s the thing: only one of these two charts shows data. The Fed figures are based on tabulations of balances in IRA, 401(k) and other savings accounts, along with the benefits accrued by participants in defined benefit pension plans. These show that retirement savings have roughly tripled as a percentage of GDP since 401(k)s were introduced in 1979.

The right-hand figure isn’t data. It’s the CRR’s interpretation of how many households have inadequate retirement savings, based both upon data (mostly from the Survey of Consumer Finances) and the CRR’s interpretation of what counts as an adequate retirement income.

So to make these figures consistent, the CRR has to hold that there are other factors that more than offset a tripling of retirement savings. I talk about some of these factors in this National Affairs article from 2014, but the short story is that I don’t buy it. Sure, life spans have gone up a bit and the Social Security retirement age has increased by a year. But Americans are also retiring 2 years later than they used to. And again, there’s that tripling of retirement savings.

Maybe Americans still aren’t saving enough, even if they’re saving more than they used to. I doubt it, given that most current retirees say that they’re doing just fine. But still, I think it’s hard to make the case that tomorrow’s retirees will be significantly worse off than today’s are. 

1 comment:

WilliamLarsen said...

There is going to be a Social Security Crisis. Is this the same thing as a retirement crisis? In a previous article you presented that if the payroll tax increases, savings adjust downward. So the next question would be can "Politicians" create a retirement crisis in two camps: Social Security and Private savings?

When I talk to people I find that those over 55 generally seemed to accept that social security is a lousy investment they were forced into. When I talk to younger people, they see social security as a ponzi scheme and won't be there for them when they reach Full Retirement age. Yet neither group has ever calculated or considered what the rate of return is on SS-OASI payroll taxes versus benefits? I did this decades ago and created a chart by birth year what each cohort as a whole gets back from Social Security versus what that cohort paid into and indexed by the US Treasury Rate for each year. Early baby boomers do not get a $1 back for each $1 of combined OASI payroll tax and US Treasury interest, but something less. I am in he middle and it looks like I would get 55 cents for each combined dollar input. My children though and all others born after 1983 can expect at most 29 cents back for each dollar.

Is there a retirement crisis? This is more political spin as is the 75 year solvency period. Looking at 75 years and including all revenues while excluding all liabilities outside the 75 years even though they were accrualed during the 75 years is a ponzi scheme.

I think your time frame is too short and too short sighted. I suggest you broaden your time horizon.

Keep in mind the OASI benefit formula is based on wage growth. Wages generally have buying power. Based on a particular year, those wages can be associated with a standard of living. OASI is not adjusted in retirement by a wage index, but by the cpi. Generally the CPI is associated with a basket of goods. So when your OASI benefit is calculated based one when you turn 60, it sets your standard of living index so to speak for social security to that particular year.

Future cohorts who earn a higher wage, have a higher standard of living and when they turn 60, their OASI benefit will be based on the standard of living at age 60. Hopefully it will be higher than our standard of living. However, some individuals look at these higher benefits as generous compared to today and are looking at ways to use those higher wages in the future to keep reforms from happening.

Why should future cohorts have a higher benefit than today? The answer is they have higher wages and paid higher payroll taxes.