NOT TO DIMINISH the severity of recent coronavirus-fueled market events, but it’s not exactly news to note the confusion caused by sensational claims made by the mass media. A lack of accountability and desire for clicks is fueling a frenzy of irresponsible narratives.
It doesn’t matter if it’s pandemics or pensions, they’ll find a way to crank the anxiety.
Andrew Biggs is pushing back (hard) against the latter, attempting to bring economic sanity to what he sees as increasingly hysterical claims of a “retirement crisis” that will grip millions of seniors in despondency and despair. He provides specific examples:
- “Retirees Might Run Out of Money 10 Years Before They Die” – Bloomberg
- “Americans Entering Old Age the Least Prepared in Decades” – The Wall Street Journal
- “Bankruptcy Booms Among Older Americans” – The New York Times
- “Reliance on Social Security Near Record High” – USA Today
Biggs, former principal deputy commissioner of the Social Security Administration, current resident scholar at the American Enterprise Institute (AEI) and Forbes columnist, calmly recites stats and facts to counter the shrill shouts. His admittedly “impish” personality includes a healthy dose of humor, and he adds one more supermarket tabloid headline to the pile: “Bigfoot: I’m Afraid to Retire!”
Humor aside, his argument is often met with skepticism, so we challenged him straight away. With dismally low savings rates and millions of workers without access to employer-based plans, how is this not a retirement crisis?
“If you’d asked me 10 or 15 years ago whether we faced retirement crisis, I might’ve said yes,” he explained. “Conventional wisdom is that Americans don’t save enough for retirement, 401ks don’t work, people don’t participate, fees are too high—the whole story. Part of that is correct, but when you start pulling at the threads of the retirement crisis narrative, it tends to fall apart.”
‘Crisis’ Collapse
“Pulling at the threads” means an examination of current retirees versus workers.
“Since 1979, the average retiree household income has risen by close to 90% above inflation, which is twice the growth of salaries for working-age households. So, retirees have gone from being a disproportionately poor segment of the population to a disproportionately rich segment.”
Gallup found that eight out of 10 retirees have enough money not just to survive, but to live comfortably. In the Federal Reserve’s Survey of Household Economics and Decision-making, only 4% of retirees said they are finding it hard to get by.
“Poverty rates among retirees are lower than among working-age households, and they’ve dropped considerably over the past 20 to 30 years,” he claimed. “So, there’s no retirement crisis for today’s retirees.”
What about workers? How is their preparation for retirement compared to past generations?
“If you went back to the peak of defined benefit plans in the mid-1970s, 39% of workers participated in a defined benefit plan, and many of those wouldn’t collect a benefit due to strict vesting requirements. Today, Social Security Administration re-search finds around 62% of workers are participating in a retirement plan. You’ve had an over 50% relative increase,” Biggs said.
Additionally, Department of Labor data show that average retirement plan contributions rose from 5.8% of private-sector wages in 1975 to 9.6% in 2017, a two-thirds relative increase, “versus back in the day of traditional pensions.”
The reasons for the success are two-fold; No. 1, two parties contribute to 401k plans, the employee and employer, rather than just the employer. No. 2, many employers traditionally failed to fully fund their pensions.
“Federal Reserve data on total retirement assets, even accounting for wage growth, finds total retiree plan assets are six times higher than they were back in the mid1970s. These are not trivial differences.
Americans are living longer, but they’re not living six times longer in retirement,” Biggs said. “Sure, we’ll have isolated problems in the future as we have today, but if participation, contribution rates, and assets all improve significantly versus the past, is there a crisis? No, there just isn’t a solid argument to be made for that.”
Dramatic Change
Okay, so it doesn’t rise to the level of a crisis, but is that good enough? Are we doing all that we should as an industry to get enough people covered and benefiting from successful outcomes?
“We should always strive to do better,” Biggs acknowledged. “The question is, if you’re somebody like [New School for Social Research professor] Teresa Ghilarducci who thinks we need to expand Social Security and establish government-run retirement accounts to take over for 401ks, are the problems large enough to justify dramatic changes in how we conduct the business of retirement savings? I think the answer is no.”
While conceding 401ks have their shortcomings, he pointed to progress made with target date funds, automatic enrollment, fee reduction and in-plan annuities as a result of the SECURE Act.
“We’ve had more improvements in 401ks in the past 10 years than we have had with Social Security in the past 30 years. To be frank, there’s scarcely a government-run retirement program at any level in the United States that’s well-funded. If these were private-sector pensions, run by stricter accounting standards, they’d be shut down.
This is happening at the same time we see rising retirement savings on the private plan side, particularly in 401ks. The retirement crisis narrative is very risky because it encourages reliance on programs that are underfunded rather than the plans that are boosting savings. That could backfire.”
Tax Math Mistake
One criticism of 401ks is that they were never designed to be a retirement vehicle.
They were a mistake, a glitch in the tax code that makes them ill-suited to the task, something we asked Biggs to address.
“The fact that they were not designed as a retirement vehicle might be what makes them work,” he said with a chuckle. “If you think about programs that were explicitly designed as retirement vehicles, people think there’s some sort of magic that lets them generate retirement incomes without fully paying for them. Social Security relied on rapid population growth. State and local pensions rely on high investment returns. But those have turned out to be false promises.”
Noting Social Security is a pay-as-you go program, we’re passing a big unfunded liability to future generations, he added.
“And with defined benefit pensions, look at the state local plans. They think they have a magic formula where they can take loads of investment risk while offering people guaranteed benefits, but that’s all backfired.
When you think you have a ‘system’ versus simply a savings plan, it tempts people to take shortcuts that can come back to bite them.”
He, therefore, likes the simplicity of 401ks. Money is contributed and invested, interest is earned, and distributions are taken. And a worker can tell whether an employer has done their part.
“If my employer says, ‘I’m going to match 3% of your wages,’ at the end of the year you can see if he’s done it,” Biggs said. “If you’re participating in a defined benefit plan, you have no idea if he’s done the right thing. And quite often, they haven’t. Social Security is promising a benefit 20% higher than what it can currently afford to pay, and you don’t know how it will be resolved. So, sometimes having a simple program is better because it’s more transparent and it’s harder to kick the can down the road.”
Unintended Consequences
We asked Biggs to name some of those “poor policy prescriptions” he claimed would backfire. Surprisingly, he mentions state-sponsored IRAs.
“Some people say this is just a no-brainer and why wouldn’t we do it. There are two reasons why you would at least think twice.”
First, he said there isn’t much evidence that low-income Americans are under-saving for retirement.
“If you look at Congressional Budget Office figures, the bottom 20% of the earnings distribution gets a replacement rate from Social Security equal to 85% and 90% of their average pre-retirement earnings.
It’s not clear, therefore, that they need to save more for retirement. If you push them into saving more, that money is no longer available to put food on the table, pay their mortgage, put their kids through college and all the things they want for a better life. The poverty rate is substantially lower for retirees than for working-age Americans. That by itself hints that low-income workers probably won’t be made better off by saving more.”
The second reason is that many low-income Americans receive some sort of means-tested government benefit—Medicaid, SNAP, TANF, housing subsidies, etc.
“Once they build assets in an auto-IRA, they may be disqualified from some of these benefits. And the states know this,” he argued. “They’ve run numbers calculating how much they’ll save once auto-IRA balances disqualify retirees from Medicaid coverage. The problem is that states have told workers they need auto-IRAs and saving will make them better off. In fact, the main beneficiary might be the government itself.”
Giving everybody access to a retirement plan makes sense, but state IRAs were “rushed through and not fully thought out” in terms of need and the potential downsides.
“I’m fine with having a substantially stronger safety net for low-income retirees,” he concluded. “However, given the rapid growth of incomes for middle- and high-income retirees, do we need to stick younger people with higher payroll taxes to pay higher benefits to retirees who—to be frank—don’t need the extra money? There are a lot of other pressing needs for taxpayer money, especially today. Retirement, whether it’s private savings or Social Security, involves massive amounts of money, so changes made to these programs really matter.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
