By Cyril Tuohy
Most news headlines paint a bleak picture of Americans' retirement savings habits, but some experts see an entirely different trend.
Americans can do much better when it comes to retirement savings, most experts agree. Unfortunately, some retirees will see their living standards drop, victims of their own neglect.
But are we in the midst of a full-blown retirement crisis? Not even close, according to the assessment of several retirement experts who testified before a Senate panel on modernizing U.S. savings policy.
Andrew Biggs, a resident scholar at the American Enterprise Institute, said the most advanced modeling research provided by the Social Security Administration shows a more optimistic picture than most news reports would have us believe.
Claims by the Center for Retirement Research at Boston College that 53 percent of Americans are at risk of insufficient retirement income, and the National Institute on Retirement Security’s calculation that we face a $14 trillion retirement savings gap are mistaken, Biggs said.
Such studies “tend to underestimate the incomes that Americans will have in retirement, while overestimating how much Americans will need in order to maintain their pre-retirement standards of living,” he said.
During a hearing titled “Retirement Savings 2.0: Updating Savings Policy for the Modern Economy,” Senate Finance Committee members explored ways to provide incentives for Americans to save.
Critics of the defined-contribution model say it’s designed as a thrift plan, not a retirement funding plan, and that reforms to the model are necessary. They pointed to the fallout from the financial crisis as a means of raising serious questions about the ability of millions of Americans to lead comfortable lives in retirement. When the market collapsed in 2008, account balances disappeared in a blink of an eye.
Those retirement accounts have come back in recent years with the robust performance of the stock market. Still, the Great Recession gave many people pause as to how difficult their lives might be without a steady income stream from their retirement savings, and critics say that investing in stock-market volatility is no way to save for retirement.
Biggs said the negative headlines about retirement account balances ignore “replacement rates,” a measure of retirement security. Replacement rates measure an individual’s retirement income as a percentage of that individual’s pre-retirement earnings, and financial advisors measure replacement rates relative to earnings just before retirement, he said.
Americans on the leading edge of the baby boom — those born between 1946 and 1955 — have an
estimated replacement rate of 116 percent of average pre-retirement earnings. Even members of Generation X, Americans born from 1966 to 1975, have a projected replacement rate of 110 percent, Biggs said.
That level is well beyond the replacement rate of 68 percent of inflation-averaged pre-retirement earnings needed for a household to maintain its standards of living from work into retirement, Biggs said.
Brian Reid, chief economist for the Investment Company Institute, said the retirement system is working for millions of Americans.
As a rule, U.S. households want to preserve the tax advantages and many of the features made available by the defined-contribution system, he said.
The relatively positive views offered by Biggs and Reid stood in sharp contrast to the perspective of one of the nation’s the most revered investment professionals, John C. Bogle, founder of the Vanguard Group. Bogle, a critic of mutual fund fees, said retirement account balances are nowhere near where they need to be in order to fund comfortable retirements.
The failure of the nation’s retirement system was “pervasive,” with Social Security, defined-benefit and defined-contribution plans all underfunded, Bogle said.
“Today’s system constitutes, if you will, a three-legged stool, and all three legs are faltering,” Bogle said.
The good news is that two of those three legs, Social Security and defined-contribution retirement plans, are relatively easy to fix, Bogle said. Changes to public defined-benefit plans, meanwhile, will be “disruptive and painful,” he said — especially with assumptions of 8 percent annual returns on pension assets, which he called “absurd.”
If there are widely differing views about the state of the nation’s retirement system, there is consensus about where the changes would most help.
Bills in Congress designed to make it easier for Americans to save for retirement keep the advantages already contained in the defined-contribution system, and many of the enhancements are targeted toward employer-sponsored plans.
That’s important because middle-class workers are 15 times more likely to save for their retirement through employer-sponsored plans rather than saving on their own, said Scott F. Betts, senior vice president of National Benefits Services. The company, based in West Jordan, Utah, designs employer-sponsored retirement and benefits plans.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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