Do Older Americans Have Enough Money Saved To Last Through Retirement? An Analysis

Retirement graph

Do older Americans have enough money saved to last through retirement? It’s a question asked often, but a definitive answer is hard to come by.

An article published in the October issue of Pension Benefits takes aim at answering that question using a metric called the Retirement Readiness Rating (RRR), developed by the Employee Benefit Research Institute.

The analysis, which originally appeared in the EBRI’s June newsletter, was conducted using several different scenarios; the first scenario and the resulting analysis can be seen in Figure 1, above. More on the results:

Figure 1 shows the results assuming that 100 percent of the simulated deterministic expenses are met; in other words, 100 percent of the average expenses (based on post-retirement income) for components likely to be encountered on a regular basis (e.g., food, housing, transportation). In addition to these relatively predictable expenses, the stochastic costs arising from nursing home and home health-care expenses are assumed to be covered in years when the model simulates their existence.

Note that in Figure 1, while 5 percent or less of those in the second-, third-, and highest-income quartiles would run short of money in the first year of retirement, more than 2 in 5 (43 percent) of those in the lowest-income quartile would, based on deterministic and stochastic costs. Moreover, by the 10th year in retirement (assuming retirement at age 65), nearly 3 in 4 (72 percent) of the lowest-income quartile households would run short of money, while fewer than 1 in 5 (19 percent) of those in the second-income quartile would face a similar situation. Only 7 percent of those in the third-income quartile and 2 percent of those in the highest-income quartile are simulated to run short of money within a decade.

By the 20th year in retirement (again, assuming retirement at age 65), more than 4 in 5 (81 percent) of the lowest income quartile households would run short of money, compared with 38 percent of those in the second-income quartile that would face a similar situation. Only 19 percent of those in the third-income quartile and 8 percent of those in the highest-income quartile are simulated to run short of money by the twentieth year. These values continue to increase until all households either run short of money or there are no surviving retirees. By the 35th year in retirement (age 100, assuming retirement at age 65), 83 percent of the lowest-income quartile households would run short of money and almost half (47 percent) of those in the second-income quartile would face a similar situation. Only 28 percent of those in the third-income quartile and 13 percent of those in the highest income quartile are simulated to run short of money eventually.

A summary of the full results:

The results presented in Figures 1 through 6 show that the years of retirement before Baby Boomer and Gen Xer households run short of money vary tremendously by:

  • Preretirement-income quartile.
  • The percentage of average deterministic costs assumed paid by the household.
  • Whether or not nursing home and home health-care expenses are included in the simulation.

However, even when 100 percent of average deterministic costs are paid by the household and nursing home and home health-care expenses are included (Figure 1), only the households in the lowest-income quartile eventually end up with a majority of the households running short of money during retirement.

Each of the six analyses with results presented in Figures 1 through 6 show the same stark conclusion: The lowest preretirement income quartile is the cohort where the vast majority of the shortfall occurs, and the soonest. When nursing home and home health-care expenses are factored in (Figures 1, 3 and 5), the number of households in the lowest-income quartile that is projected to run short of money within 20 years of retirement is considerably larger than those in the other three income quartiles combined. Indeed, as the results across multiple scenarios and assumptions show, the lowest-income quartile is the most vulnerable, while longevity and long-term care are the biggest risk factors across the entire income spectrum.

The full analysis, including all six scenarios, can be read in the October issue of the Pension Benefits, or the EBRI’s June newsletter.


Video: Do The Dutch Have The Pension Problem Solved?

The Dutch pension system is in the news again after an extensive New York Times report that shined light on a pension system that is “scrupulously funded” and “brutally honest” about its pension liabilities.

In light of that report, we though it would be appropriate to re-visit this 2013 video by PBS, which can be viewed above.

From the video description:

As cities and states across the U.S. grapple with their pension programs, we travel to one country — The Netherlands — that seems to have its pension problem solved. Ninety percent of Dutch workers get pensions, and retirees can expect roughly 70% of their working income paid to them for the rest of their lives. Olaf Sleijpen of the Central Bank of the Netherlands says “I think what makes it successful is that you basically force people to save for their old age.”

Exploring Defined Benefit Distribution Decisions By Public Employees

Pink Piggy Bank On Top Of A Pile Of One Dollar Bills

When public workers with defined benefit plans leave their jobs, they are usually given the option to either withdraw their accrued retirement savings as a lump sum or keep their retirement account open, to be redeemed upon retirement.

If the employee elects to go the lump-sum route, they can roll that money over into an IRA or simply accept it as taxable income and pay the associated penalty for early withdrawal.

Employees around the country make this decision every day. But it’s one with significant retirement implications, and there’s little understanding as to what drives people to decide one way or the other.

In a paper recently published in the Journal of Public Economics, Robert L. Clark, Melinda Sandler Morrill and David Vanderweide explore the decision-making process.

The basic findings of the paper:

Using administrative data from the North Carolina state and local government retirement systems, we find that over two-thirds of public sector workers under age 50 separating prior to retirement from public plans in North Carolina left their accounts open and did not request a cash distribution from the pension system within one year of separation.

Furthermore, the evidence suggests many separating workers, particularly those with short tenure, may be forgoing substantial monetary benefits due to lack of knowledge, understanding, or accessibility of benefits. We find no evidence of a bias toward cash distributions for public employees in North Carolina.

More detailed findings from the paper:

We find that fewer than one-third of all terminating public employees requested a LS [lump sum] within one year of separation, despite the finding that for over 70% of terminations, the LS was larger than the estimated PDVA. These results indicate a low probability of leakage from retirement funds, although many workers are seemingly forgoing the possibility of higher retirement income possible from rolling over funds to an IRA.

We offer several potential explanations for why the distributional choice from a public pension plan is more complex than a simple wealth comparison at a point in time. First, separating participants in TSERS qualify for retiree health insurance from the State Health Plan with no premium as long as they are receiving a monthly annuity from TSERS…Despite the difference in coverage of retiree health insurance in the two systems, we do not see a large difference in the distributional choices between separating workers that will qualify for retiree health insurance and those that will not.

Second, we consider the likelihood that terminated participants may plan to return to public employment. The expectation of returning to public employment might make maintaining the account the optimal choice for these individuals…

workers are not responding to incentives of outside investment options. We do find that when the state unemployment rate rises, individuals are significantly less likely to withdraw funds. This could be due to selection into who is separating employment, or it may be that individuals more heavily rely on defaults in times of economic turmoil.

The final explanations we consider for why public sector workers in North Carolina do not withdraw funds at a higher rate are financial literacy, peer effects, and inertia. The default is to leave funds in the system. The behavior we observe is consistent with many individuals accepting the default option and forgoing potentially more valuable benefits.

The paper, titled “Defined benefit pension plan distribution decisions by public sector employees”, can be read in full here.


Photo by www.SeniorLiving.Org

You’ve Heard of Minimum Wage. What About a Minimum Pension?

Sack filled with one hundred dollar bills. RetirementMinimum wage laws are designed, in theory, to give every worker a livable wage and a decent standard of living. But what if the same concept was applied to retirement savings?

Third Way, a moderate think tank, has proposed just that: a minimum, mandatory “pension” that all employers would give their employees based on hours worked.

From the proposal:

We propose a minimum pension law—a requirement that employers contribute a minimum of 50 cents per hour worked, for every worker, into a retirement plan. A minimum pension would provide all workers with the opportunity to create their own personal wealth—providing for a more secure retirement and a reduction of the current wealth disparity in our country. With improved access to simple investment vehicles and tax breaks that aid small businesses, employers would largely benefit too.

And from International Business Times:

“A minimum pension sounds like a minimum wage, and it is,” David Brown and Kimberly Pucher, the authors of Third Way’s report, wrote. “The minimum pension requires that, in addition to wages, employees must receive at least 50 cents an hour in retirement contributions.”

That’s a minimum contribution of $1,000 a year to full-time, full-year workers, to be indexed for inflation.

Third Way drafted the proposal, in part, because of a recent barrage of statistics suggesting many Americans aren’t nearly as ready for retirement as they’d like. From International Business Times:

The public sector and most private sector companies offer retirement plans, but about 30 percent of non-retired Americans have no money saved for retirement, the Federal Reserve reported last month. Most workers who aren’t saving for retirement have lower incomes and two-thirds of them work for companies that don’t offer a retirement savings plan, according to Boston College’s Center for Retirement Research. Many of those who are saving aren’t saving enough, so though Americans pay $140 billion each year subsidizing retirement accounts, millions are nearing retirement with little or nothing saved.

You can read the entire proposal here.


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Controversy Surrounds Pensions of Retired Detroit-Area Politicians

Detroit, Michigan

Some Michigan residents are questioning the retirement package of Detroit-area politician Robert Ficano, who lost re-election last month after becoming embroiled in several scandals but still retired with a 401(k) worth between $1.5 and $2 million.

But experts say the retirement package is relatively “normal”, and the public’s outrage should be directed at a policy implemented by Ficano that sweetened the pensions of his appointees. From Detroit News:

[Ficano’s deal] allowed workers to use retirement savings to buy into defined benefit plans that guaranteed them a percentage of their best years’ salaries.

In 2011, he upped the offer to his appointees, waiving rules that required retirees to be at least 55 and allowing them to buy years of service at a discount.

Among others, the plan created pensions that paid former Ficano adviser William Wolfson $124,000 per year at age 50; personnel director Tim Taylor $118,000 per year; and former chief of staff Matt Schenk $96,711 per year at age 41. Schenk’s plan alone will cost taxpayers $4 million over its lifetime if he lives to be 82.

Pension officials say the deals strained the retirement system, which is funded at 48 percent.

The average pension for county retirees is about $22,000 per year. Retired workers don’t feel bad for Ficano, said Joyce Ivory, president of AFSCME Local 1659.

“Our workers suffered tremendously under Bob,” said Ivory, whose 700-member union represents clerks, wastewater treatment workers and others.

“So there’s no sympathy for his retirement plan. It’s just ‘goodbye.’ ”

Ficano declined requests for comment.

Documents obtained by Detroit News contain estimates that Ficano contributed about $100,000 to his 401(k) during his career.

Report Reveals World’s Largest Pension Funds


Towers Watson released its annual Global 300 report and revealed the largest pension funds in the world. Six of the 20 largest funds were public funds in the United States.

From Asia Asset Management:

With more than US$1.2 trillion in assets, Japan’s Government Pension Investment Fund (GPIF) was for the tenth-year running ranked as the world’s largest retirement savings manager in an annual Towers Watson report.


North America remained the largest region in terms of assets, accounting for 41.4% of the worldwide total. According to the consulting firm, the leading 300 players now make up 47% of pension assets globally.

Here are the 20 largest pension funds in the world, according to the report:

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Source: Towers Watson

Gen X Retirements At Risk? Not So Fast, Says EBRI


Even smart people can disagree with each other. Who knew?

A great example of that sentiment is playing out right now, as a handful of nationally renowned retirement research groups have found each other at odds with the other’s conclusions about the retirement security of the next few waves of retirees.

Retirement savings (or a lack there-of) have been getting a lot of press lately. The Federal Reserve recently released data that suggested 20 percent of people aged 55-64 had zero money saved for retirement. All in all, 31 percent of people surveyed said they had no retirement savings at all.

Two other recent studies make similarly striking claims—a 2013 Pew Charitable Trusts study found that newer retirees would have far less income during retirement than their baby boomer predecessors. Likewise, a 2012 study by the Center for Retirement Research (CRR) found nearly half of households in their 50’s were “at risk” for a rocky retirement.

But the Employee Benefit Research Institute doesn’t think the situation is so dire. In fact, the EBRI has gone so far as to rebuff the findings of those latter two studies. From ThinkAdvisor:

EBRI recently challenged a pair of studies that concluded Gen Xers’ retirement prospects were in worse shape than boomers’ prospects, pointing out also that the oldest Gen Xers are only 49, with many earnings years left before they reach traditional retirement age.

EBRI charges that some studies used flawed assumptions or bad methodologies to reach their conclusion that investors born between 1965 and 1974 had a smaller likelihood of saving enough for retirement than older investors born between 1948 and 1964.

“Calculating retirement income adequacy is very complex, and it’s important to use reasonable assumptions and current data if you want credible results,” Jack VanDerhei, EBRI research director and author of the report, said in a statement.

More on the “flawed assumptions” used in the Pew and CRR studies:

EBRI took issue with a 2013 study by Pew Charitable Trusts that found the median replacement rate for Gen Xers who retire at 65 would be 32 percentage points lower than early boomers’ and nine points lower than later boomers’.

However, that finding “explicitly ignores future contributions,” EBRI argued. “EBRI’s analysis concludes that ignoring decades of potential future contributions (as the Pew study does) exaggerates the percentage of Gen X workers simulated to run short of money in retirement by roughly 10 to 12 percentage points among all but the lowest-income group,” according to the report.

An earlier study, conducted in 2012 by the Center for Retirement Research (CRR) at Boston College, found 44% of households in their 50s were “at risk,” compared with 55% of those in their 40s and 62% of those in their 30s.

In that report, CRR failed to consider the effect of automatic enrollment and escalation features, which were widely adopted following the Pension Protection Act of 2006. Gen X is the first generation to have a full working career in a defined contribution environment, EBRI noted.

EBRI says all its recent research points to very different conclusions than other studies: Generation Xers are facing approximately the same retirement prospects as the Boomers’.

EBRI concludes that 60 percent of Generation X won’t run out of money in retirement.

Is the Retirement Savings Crisis Too “Hyped”? These Researchers Think So.


A seemingly routine Capitol Hill hearing got very interesting very fast late last month. The hearing was held by the Ways and Means Social Security Subcommittee and focused on the state of retirement savings in the U.S.

Why was it so interesting? Two of the witnesses, Sylvester J. Schieber and Andrew G. Biggs, insisted that the retirement savings “crisis” in the U.S. is over-hyped. (They were referencing, among other things, the recent government statistics claiming that 20 percent of Americans aged 55-64 had zero retirement savings).

An outpouring of criticism followed, led by Christian Weller, who wrote:

Launched by Chairman Sam Johnson (R-TX), the hearing announcement made reference to retirement income being underreported, implying that families are better off than the data show. Moreover, the witness list included crisis deniers, such as the American Enterprise Institute’s Andrew Biggs, making claims that the number of households inadequately prepared for retirement is largely overstated. Some testimony turned to calls for Social Security benefit cuts. Because, after all, cutting Social Security would theoretically inflict little harm if families are already well prepared for retirement. In reality, families would suffer tremendously from Social Security cuts. Why? Because as a long-standing body of economic research has repeatedly shown, there is indeed a growing crisis.

Schieber and Biggs (who, by the way, are no slouches–you can read their bios at the bottom of this post) quickly took to the blogosphere to explain their position.

First, they tackled why they disputed the government data, released last week, that suggested one in five Americans nearing retirement had no money at all saved for retirement. From Sheiber and Biggs (S + B):

These [Social Security Administration] publications rely on data from the Current Population Survey, which omits the vast majority of income that seniors receive from IRA and 401(k) accounts and thus makes seniors appear significantly poorer and less prepared for retirement than they actually are.

IRS tax data, which include all forms of pension withdrawals, show that true incomes for middle class retirees receiving Social Security benefits are substantially higher than is believed. The fact that these faulty SSA statistics were cited by the Social Security Subcommittee’s ranking member, apparently without knowledge of the limitations of these data, is evidence that even policymakers’ understanding of retirement security can be improved.

What about National Retirement Research Index’s findings that 6 in 10 Americans are at risk of an insecure retirement? S + B write:

With due respect to the NRRI’s authors, we have already detailed how the NRRI sets a higher bar for retirement income adequacy than most financial advisors and how it ignores the ways that family size and structure play into retirement saving patterns. In addition, the NRRI projects current workers’ future incomes using a one-size-fits-all pattern that ignores the dispersion in earnings that takes place from middle age onward.

This assumption erroneously reduces the “replacement rates” that low earners will receive from Social Security. The NRRI also predicts that traditional defined benefit pension plans will continue to contract, but assumes that future retirees will have no larger IRA or 401(k)s accumulations than those of people who retired prior to 2010. Together, these factors substantially – but erroneously, in our view – increase the share of workers considered to be “at risk” of an insecure retirement.

So who are these people anyway?

Sylvester J. Schieber:

Sylvester J. Schieber is Chairman of the Social Security Advisory Board (SSAB) and a private consultant on retirement and health issues. He retired from Watson Wyatt Worldwide in September 2006 where had served as Vice President/U.S. Director of Benefit Consulting and Director of Research and Information. He holds a Ph.D. in economics from the University of Notre Dame in 1974. He has served on the Board of Directors of the Pension Research Council at the Wharton School, University of Pennsylvania since 1985. Dr. Schieber was a member of the 1994-1996 Social Security Advisory Council. In January 1998 he was appointed to a six-year term on the Social Security Advisory Board.

Andrew Biggs:

Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.

Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President’s Commission to Strengthen Social Security.

You can read their entire blog post here.

You can also read the initial blog post, “Yes, There Is A Retirement Crisis”.

It’s a fascinating discussion, although at this moment, it seems to be two men standing alone against a world of data.


Federal Reserve: One In Five People Nearing Retirement Have No Retirement Savings

4882451716_79e3857261_oThe Federal Reserve released its Report on the Economic Well-Being of U.S. Households last week, and one statistic stood out starkly from the rest: 19 percent of people between the ages of 55 and 64 have no retirement savings and don’t have a pension lined up.

The Federal Reserve surveyed 4,100 people last year and retirement savings were one of the major topics. The report shed light on the dire state of retirement savings in the United States.

Across all age groups, 31 percent said they had zero retirement savings. When asked how they planned to get by after retirement, 45 percent said they would have to rely on social security. Eighteen percent plan to get a part-time job during “retirement”, and 25 percent of respondents said they “don’t know” how they will pay the bills during retirement.

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Source: The Federal Reserve

Pension360 has previously covered how income inequality rears its head when retirement approaches, and this report provided further evidence: 54% of people with incomes under $25,000 reported having zero retirement savings and no pension. Meanwhile, only 90% of those earning $100,000 or more had either retirement savings or a pension, or both.

As 24/7 Wall St. points out, these trends could have a broader affect on the economy. What’s certain, however, is that retirement is no longer a certainty for many people:

This is no simple report to ignore, and this can affect the future of many things in America. It can affect Social Security, it can affect the financial markets via contributions and withdrawals of retirement funds, and it can affect the future workforce demographics in that older workers may simply not be removing themselves from the workforce, making it impossible for younger workers to graduate or move up.

Another retirement scare is a tale you have heard, but this quantifies it. The Fed showed that although the long-term shift from defined-benefit to defined-contribution (from pension to 401(K) and IRA) plans places significant responsibilities on individuals to plan for their own retirement, only about one-fourth appear to be actively doing so.

The researched that conducted the survey noted that the lack of retirement savings is due partially to poor planning. But many of those surveyed said they “simply have few or no financial resources available for retirement”.

Photo by RambergMediaImages via Flickr CC License

Top White House Economic Advisor Wants to Reform Tax Incentives for Retirement Income


Pension360 covered yesterday the new study examining the ways income inequality manifests itself in retirement benefits.

Gene Sperling, Director of the National Economic Council, presented his own ideas recently on the topic of inequality and retirement, and described what he labeled the “upside-down” tax incentive system that applies to retirement savings in the United States.

Sperling describes the way the U.S. tax system helps the wealthy but “shuns” low-income earners:

First, the federal government’s use of tax deductibility to encourage savings turns our progressive structure for taxing income into a regressive one: While earners in the highest income bracket get a 39.6 percent deduction for savings, the hardest-pressed workers, those in the lowest tax bracket, get only a 10 percent deduction for every dollar they manage to put away.

Second, while less than 1 percent of lower- and moderate-income Americans can put aside enough to fully “max out” their benefits on I.R.A. contributions, higher-income Americans can maximize their return on savings by sampling from a menu of tax-preferred savings options. A business owner could theoretically benefit from a 401(k), a SEP I.R.A. of up to $52,000 and a state-based 529 program that allows tax-free savings for college education.

Finally, a far larger share of upper-income Americans get matching incentives for savings from their employers. Members of Congress and the White House staff, for example, get an 80 percent match for saving 5 percent of their income. But while half of Americans earning more than $100,000 get an employer match, only 4 percent of those earning under $30,000 and less than 2 percent of those making under $20,000 get any employer match for saving.

The result of those incentives, according to Sperling: low-income workers are “triple losers” and wealthy individuals are “triple winners”.

That’s problematic, says Sperling, because low-income workers are precisely the people who should have incentives to save more for retirement.

Sperling proposes two specific policies towards that end: A flat tax credit on retirement income, and a universal 401(k) available to every worker.


One intermediate step would be to replace our regressive system of relying on tax deductibility with a flat tax credit that would give every American a 28 percent tax credit for savings, regardless of income. But why should we stop there? If we know that 401(k)’s with automatic payroll deductions and matching incentives work beautifully for those with access to them, why would we not institute a 401(k) for everyone?

A government-funded universal 401(k) would give lower- and moderate-income Americans a dollar-for-dollar matching credit for up to $4,000 saved annually per household. Upper-middle-class Americans could get at least a 60 percent match — doubling the incentive they get today. The match would be open to workers even if their employers were already matching, which would encourage employers to keep contributing to savings. The match would also be available through I.R.A. contributions for those who were self-employed or who wanted to keep saving even while they were temporarily not working.

As for the costs, Sperling proposes a reform to the estate tax that would raise the revenue needed to implement the 401(k) program.