A Picture of Fragile Retirement Preparedness

April 30th, 2014 at 4:59 pm

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.


Source: Munnell

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.

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4 comments in reply to "A Picture of Fragile Retirement Preparedness"

  1. wkj says:

    Jared–You blew a chance to refer to Piketty.

    In K21, Figure 5.4 (p 181) shows that in the US for 2010, aggregate private capital represented about 4.3 years of aggregate disposable income. In the Munnell graph, all age groups are below this assets/income level and only the highest age group (62-64) are even close to it. The asset/income ratio for the age 65+ group (not shown) probably levels off or declines as this group would be spending down their savings. I guess this is a data base issue, with data for the richest households captured in Piketty’s aggregate data, but not reflected in Munnell’s data that come from the FRB consumer finance survey, Do you agree?

    Your general comment is that “higher wealth to income ratios are warranted”. That is a common moral sentiment, but I have some questions about the practicality of that idea.

    First, if there were a general shift toward more aggressive personal savings wouldn’t the result be a “paradox of thrift” situation, potentially crashing the economy through lack of consumer demand?

    Second, if there were doubling of the wealth to income ratio–to 8 or 9 years of income (something that the Piketty data suggests would be unprecedented), where would the necessary assets come from? There is no Yas’s law (Says spelled backwards) that dictates the increased savings produces increased investments.

  2. Fred Fnord says:

    I for one have half as much savings as I ‘should’ for my age. Why? Simple: if you get laid off for a year during every recession, when stocks are at their nadir, and you are forced to dip into your retirement savings when it is worth 1/3 what it was the year before, you rapidly find yourself without a retirement savings. Over and over.

    It has made me paranoid. I am now saving well over 1/3 of my income in low-to-no-risk investments (US bonds, ‘high’ yield savings accounts, money market) which means I am losing ground to inflation and doing the economy as a whole active harm. (Taking money out of circulation and not even investing it.)

    There are a lot more people like me, too. We’re scared that when we hit 60 nobody will hire us, and the government will have found it ‘sadly necessary’ to raise the retirement age to 72. In other words, the old worry was working until you die because you can’t afford to retire. The new one is dying because no one will let you work any more and you can’t retire.

  3. John says:

    Nice to see economics backing up the obvious once again…(age 59)

  4. DonB says:

    A big miss on what many consider a minor point, which is why it is missed a lot:

    The increase in expected life expectancy at age 65 has increased by more than the 3.8 and 2.3 FOR THE WEALTHY and barely a year for those below median income.

    This needs to be emphasized when raising the age of eligibility for Social Security and Medicare are talked about. Again, those who most need the social safety net might readily be denied that because of widespread ignorance.

    Sorry I did not see your post until so late when so few will see my response.