Here’s an important picture and tight argument by Alicia Munnell, a renowned expert on retirement-security, or lack thereof, posted at MarketWatch. Though I assiduously defend Social Security, the broader question of retirement security is one I don’t post enough about here, so I wanted to be sure to call attention to Alicia’s piece.
The figure shows net wealth (net of debt) compared to income for households by age level for a bunch of different years. The upward trajectory is expected but what’s notable is the extent to which the most recent year, 2010, is an outlier, suggesting diminished retirement preparedness.
Moreover, Munnell provides some compelling arguments as to why higher wealth to income ratios are warranted:
- First, life expectancy has increased. Between 1983 and 2010, life expectancy at age 65 rose by 3.8 years for men and 2.3 years for women. As a result, for any given level of income, one would have expected workers to accumulate more wealth in order to support themselves over their longer period in retirement.
- Second, Social Security replacement rates have been declining as the full retirement age moves from 65 to 67 and the actuarial reduction on benefits claimed early increases…
- Third, the nature of retirement plans has shifted from defined benefit to 401(k)…[W]hereas accruals of future benefits under defined benefit plans are not included in wealth, assets in 401(k) plans are included. The shift from unreported to reported retirement assets would have been expected to increase the wealth-to-income ratio.
- Fourth, health-care costs have risen substantially and show signs of further increase. The rising cost of health care should have led to higher wealth-to-income ratios today than in the past. [Though the increase in health care costs has slowed of late, she’s still right about this.]
- Finally, real interest rates have fallen significantly since 1983, so a given amount of wealth now produces less retirement income. If people were interested in generating a given stream of income, the significant decline in interest rates would have been expected to boost wealth accumulations.
One observation that goes a bit in the other direction is that, at least as far as I can tell, the 2007 curve is a an outlier to the upside for older households, suggesting that part of what’s going on here is less structural, long-evolving deficiencies in retirement preparedness, and more the bursting housing wealth bubble. But even if that’s right, we cannot depend on asset bubbles to ensure retirement security. That takes a combination of ample earnings in your working years, savings, private pensions, and solid Social Security. The fact that many of those components are underperforming (earnings) or under attack (Social Security by some budget hawks) is thus particularly worrisome in this context.