Retirement crisis is hyped

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Article Highlights

  • Faulty data and weak analysis lead many policymakers to erroneously conclude that the American system of retirement saving simply isn’t working.

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  • The crisis vendors have no more real evidence supporting their conclusions than a falling acorn shows that the sky is falling.

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  • Average Medicaid spending per elderly beneficiary may be an indicator of how indigent elderly fare in a state but bears little relevance to most retirees’ economic welfare.

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Christian Weller of the Center for American Progress takes us to task in a recent Congress blog entry (Yes, there is a retirement crisis) for disputing claims that Americans face a “crisis” in retirement.  In a July 29 hearing of the Ways and Means Social Security Subcommittee, we highlighted how faulty data and weak analysis have led many policymakers to erroneously conclude that the American system of retirement saving simply isn’t working.  

For instance, Weller references our claim that “retirement income [is] being underreported,” while ignoring the indisputable fact that prominent data publications – such as the Social Security Administration's Income of the Population 55 and Older – understate retirees’ incomes and overstate their reliance on Social Security. These 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.

Weller also references the “well-respected National Retirement Research Index,” which finds that nearly 6-out-of-10 Americans are “at risk” of an insecure retirement. 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.

Weller’s own work with the National Institute for Retirement Security (NIRS) purports to measure workers’ future retirement security prospects on a state-by-state basis. It ranks states across eight variables and then averages the rankings to produces states’ overall scores. Some of the variables make sense in regards to workers generally preparing for retirement—say, retirement plan participation rates and average plan balances. But others seem to have at best a tenuous link to potential retirement security of rank-and-file workers. For instance, the ranking of states’ marginal income tax rates on pension income ignores total tax revenues collected on residents and retirees’ relative shares. Average Medicaid spending per elderly beneficiary may be an indicator of how indigent elderly fare in a state but bears little relevance to most retirees’ economic welfare. Median hourly earnings among older adults may simply reflect general wage rates—and the attendant living costs of the areas—rather than an indicating that older persons who continue to work are at some particular risk. To simply average these disparate rankings has no basis in any sort of economic or risk modeling used in serious scoring of these sorts of risks.

We have elsewhere reviewed NIRS’ other studies, which claim that up to 84 percent of Americans are undersaving for retirement, and found the result is based on a rule-of-thumb saving schedule published by a mutual fund company as a marketing basis for its products and services. 

The better academic research concludes that only around 25 percent of Americans are undersaving for retirement. Of this group, savings fall short of optimal levels by 15 to 20 percent. These results match up well with opinion polls, in which 75 percent of current retirees say they have sufficient income to live comfortably. And the Social Security Administration itself projects that retirement “replacement rates” – retirement income relative to the inflation-adjusted average of lifetime earnings – will be as high for GenXers as for the Depression-era birth cohorts who enjoyed the supposed “Golden Age” of retirement. Helping this smaller group of undersavers prepare for retirement is a challenge, but a very different one than if we conclude that vast majorities of Americans are falling short.

If Weller and his fellow progressives can resort only to name calling and circular references to their own contrived crisis indicators, then it is time that policymakers re-read the tales of Chicken Little. The crisis vendors have no more real evidence supporting their conclusions than a falling acorn shows that the sky is falling.

Biggs, a former principal deputy commissioner of the Social Security Administration, is a resident scholar at the American Enterprise Institute, a conservative think tank. Schieber, a former chairman of the Social Security Advisory Board, is an independent pension consultant and co-author of “Fundamentals of Private Pensions.”

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Andrew G.
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