Here’s something to keep us up at night. The World Economic Forum predicts an eye-popping $224 trillion global retirement funding shortfall by 2050.
Closer to home, reports routinely surface of the country’s “retirement crisis,” with massive gaps in savings and investments and dire warnings of assets that simply will not last.
Relax—Andrew Biggs is here to help. He’s debunking the sensational headlines and bringing a bit of actuarial sanity to the DC debate. Something of a financial media scold, Biggs is calling out what he sees as increasingly hysterical claims.
It’s pitting him against some of the industry’s best and brightest, and even the leadership of the Social Security Administration, where he was once principal deputy commissioner.
Now a resident scholar at the American Enterprise Institute (AEI), Biggs studies Social Security reform, state and local government pensions, and public sector pay and benefits.
In other words, he’s doing the math, and the hyperbole doesn’t hold.
He’s also well-versed in defending his controversial view, and the expansiveness of his answers gives us a sense he does it often.
“One thing I hear is that 401ks were never designed as a retirement program, which might be one reason it works,” Biggs notes. “When people design a retirement system, whether it’s Social Security or a multi-employer defined benefit pension, they tend to get very cute and somehow think they get something for nothing. That often comes back and bites you.”
He sat with 401(k) Specialist for a blunt discussion of where we are with the current retirement savings system, what he thinks of 401ks, and what can be done better.
Q: Why are you so confident that there is no retirement crisis, at least as currently defined?
A: Look at current retirees and how they’re doing, and how their retirement incomes have changed over time. Today’s retirees are doing very well. Retirement incomes have risen substantially faster than incomes for working-age households, and that’s true across the income distribution. Poverty rates for retirees have dropped considerably. Dependence on Social Security benefits is lower than it was in the past.
If you simply look at surveys, nearly eight in 10 retirees tell Gallup they have enough money—not just to survive—but to live comfortably. Only 4% of current retirees tell the Fed’s survey that they’re having a hard time getting by. So, today’s retirees are actually doing very well. That doesn’t mean there are not isolated problems, but by and large, they are doing very well and better than they did in the past.
Q: Are today’s workers saving as much for retirement today as in the past?
A: The answer is yes. Defined contribution plans like 401ks are much more widespread than defined benefit plans ever were. At their peak, something like 39% of the private sector workforce participated in a DB plan. Many of them didn’t even receive a benefit due to the vesting requirements.
Today, according to Social Security Administration research, 61% of private-sector workers are participating in a retirement plan, so you have more people saving.
If you look at Department of Labor data, they show contributions to retirement plans are much higher as a percentage of wages today than they were in the past. The big reason isn’t just more workers participating in plans, it’s also that 401ks have two contributors, the employer and employee. With traditional pensions, it was just the employer who contributed and, pre-ERISA, they didn’t contribute as much as they should have.
So total retirement savings today, and this is from Federal Reserve data, are six times higher relative to the wage base, than they were in 1975. In 1975, total retirement plan assets equaled about half of total wages and salaries. Today, it’s roughly three 375%.
Q: But what about longevity, and whether the income will last?
A: Projection models done by the Social Security Administration go beyond the stuff you read about in the newspaper about savings gaps.
This is very sophisticated stuff that Social Security has worked on for over two decades. I worked on it when I was there, and they project a whole range of retirement income sources when they look at replacement rates or median retirees going forward.
They don’t show a decline in the future. They don’t show more retirees with very low replacement rates.
So, it’s a very attractive proposition that gets a lot of headlines to claim there is a retirement crisis. But when you pull at the strings, the evidence just isn’t there.
Q: Is there something that we should (or easily could) be doing to improve retirement savings that we’re not?
A: I believe in working incrementally. This is the difference between when people say there’s a crisis and we need to expand Social Security and get rid of the 401k system and have sort of government-run accounts like Teresa Ghilarducci.
Some people claim 90% of Americans aren’t saving enough for retirement, and that’s why you need these huge, sweeping changes. But when you have most people doing pretty well, which is what I think the research tells you, then you want to target your changes and move forward incrementally.
We’re already doing that in the sense of introducing automatic enrollment, and I think that should probably be universal with an exception for truly low-income workers.
I think we want to do more to expand access to retirement plans and there’s various legislation in Congress looking to do that.
Q: How do you feel about a state-sponsored retirement plan?
A: I agree with looking at it. But what’s going on in states like California, Oregon and elsewhere has not been super-encouraging to date for two reasons.
One, the retirement coverage gap is actually much smaller in reality than what they’re claiming. Oregon claimed hundreds of thousands of people don’t have retirement plans, and they have something like less than 50,000 people participating in their IRA now. Coverage usually is better than these guys claim.
Second, when you’re auto-enrolling lower-income people in these plans, a lot of them receive means-tested benefits. Whether it’s Medicaid or SNAP or energy subsidies or whatever, a lot of them have income and asset tests. The states have gone ahead with these plans without really paying much attention to it. I think we want to give opportunities for people to save and I believe in using more auto-enrollment, but we also want to think more holistically about how it plays into people’s other priorities.
Saving more for retirement is not like eating better or exercising more, in the sense that you’re always better off if you do these things. Saving more for retirement means less money for the other things that people want to do; it’s less money to pay for college or buy a home or start a business or just live their lives. When we look at lower-income people, in particular, we want to bear all that in mind.
Q: What do you think of Richard Thaler’s idea for, essentially, an indexed annuity sponsored by the government?
A: The question is, where’s the demand for it? On the one hand, you see folks who say all Americans haven’t saved enough and they’re heavily dependent on Social Security. It turns out not to be true if you look at the data.
But if you’ve got people that are heavily dependent on Social Security, do they need to annuitize further? Probably not. They’re already receiving most of their income from an inflation-protected annuity. For higher-income folks, it’s not that big of a deal, because they’re going to have money to spare.
The issue is for folks in the middle, who want additional longevity protection. Offering it may be okay, but given the problems with Social Security underfunding, and how badly Congress has managed that plan, I’m not sure I’d want to buy an annuity from them.
Q: How is the 401k doing and what can be improved upon?
A: Big picture, 401ks have worked well by getting contributions from both employers and employees. People have a fixation over defined benefit plans. But the reality is retirement planning contributions as a percentage of wages and salaries are about a third higher today than they were back in the 1970s and 1980s, so it’s kind of hard to say this is a failed system.
With the 401k, there’s no magic to it. You put the money in, it accumulates, and you take the money out. Sometimes simple is better.
Q: You went from the Social Security Administration, a liberal pillar of the New Deal, to AEI, which is a pretty conservative, free-market think tank. Were there culture shocks?
A: I’ll say the Social Security Administration is not as overtly liberal, nor AEI as overtly conservative. I worked mostly on policy at Social Security and the folks there are fantastic. They really are professional. They love the issue and they were great to work with.
Similarly, at AEI, certainly it slants right of center, but there’s a lot of diversity of thought and not everybody has to agree on everything. We disagree, we fight with each other and we do it in the open, and yet we do it civilly. It’s a good lesson for how maybe politics and policy should generally work. Have disagreements, but don’t attack each other.