“A groundbreaking new study holds troubling news for millions of Americans now nearing retirement age,” pronounces an influential Washington, DC think tank. The study, authored by a prominent economist, finds that “More than 40% of households headed by someone between the ages of 47 and 64 will not be able to replace even half of their pre-retirement income once they stop working. Nearly 20% will have retirement income below the poverty line.”
That study easily could have jumped from today’s headlines, which are filled with dire predictions of retirement poverty, particularly after the Covid-19 economic recession battered financial markets. Only dramatic actions such as expanding Social Security or establishing new government-run retirement savings plans can save ordinary Americans from a catastrophe of inadequate savings in old age, we are told.
But in fact, that study – authored by New York University economist Edward N. Wolff and published by the progressive-leaning Economic Policy Institute – appeared in 2002. Wolff’s study projected how Americans aged 47 to 64 in the year 1999 would fare as they shifted into retirement.
And, with benefit of nearly two decades of hindsight, we can see very few of its dire predictions turned out to be true.
For starters, poverty in old age didn’t increase. As a 2017 Census Bureau study showed, poverty among retirees has fallen significantly. Retirees today have substantially lower poverty rates than working age Americans or children.
Likewise, analysis of tax data by economists at the Internal Revenue Service and the Investment Company Institute found that that fewer than 10% of near-retirees in 1999 ended up with retirement incomes less than half of their pre-retirement earnings, versus Wolff’s projection that over 40% of retirees would have sub-50% replacement rates.
In short, the 2002 study predicted a retirement crisis, but the crisis failed to show up.
All of this should cause healthy skepticism of recent studies making the same claims as the 2002 study that turned out not to be true. For instance, a 2020 Economic Policy Institute study declares “the shift from pensions to account-type savings plans has been a disaster for lower-income, black, Hispanic, non-college-educated, and single workers.” The solutions include, as might be expected, expanding the Social Security program, a once-fringe idea that today has near-universal support among Congressional Democrats.
But in fact, as I show in a new American Enterprise Institute study, Federal Reserve data show the opposite. In that study I calculate total retirement savings, including 401(k) plans, IRA accounts and benefits earned under a traditional pension plan, using data drawn from the Fed’s Distributional Financial Accounts and the Survey of Consumer Finances. Those Fed data show that from 1989 to 2016, average retirement savings for low-income households rose by 28% above inflation; for African-American headed households, 107%; for Hispanic households, 133%; for households with only a high school diploma, 73%. In research currently underway, I find that average retirement savings for unmarried Americans more than doubled from 1989 to 2016. Whether we look at Americans by income, age, education or race, retirement savings in the U.S. reached record levels in 2016, the final year for which I had Fed data. And it is likely that savings continued to increase from 2016 through early 2020, when Covid hit.
This is particularly relevant for Americans approaching retirement, who certainly took a hit as the Covid pandemic struck financial markets. But near-retirees today started off with much higher levels of retirement savings than in the past. In 1989 the average household aged 55 to 69 had just under $200,000 in total retirement savings. By 2016, the last year I was able to analyze for the AEI study, average total retirement savings for 55 to 69-year olds had more than doubled to nearly $450,000.
You wouldn’t know any of this from reading mainstream media coverage of retirement savings issues. For instance, CNBC recently interviewed Teresa Ghilarducci, a progressive economist at the New School for Social Research, who warned that even Americans who earned as much as $170,000 per year while working might nevertheless retire into poverty. No one thought to point out that this is almost a literal impossibility: a person earning $170,000 annually would retire with a Social Security benefit between two and three times the poverty threshold, even if they saved not a penny.
Ghilarducci’s other claims, in a study co-authored with her colleagues, are barely more plausible, concluding that, even prior to the Covid recession, 56% of near-retirees in 2020 would retire into poverty and 69% will fall short of the 70% retirement income replacement rate that financial advisors recommend. These claims are reported uncritically, as if they were science.
And yet, the current poverty rate among Americans over age 65 is between seven and nine percent, depending upon the data source. And the Social Security Administration’s most sophisticated retirement income simulation model, which I cite in my new AEI study, projects that near-retirees will retire with a median replacement rate of 115% of their average pre-retirement earnings and only 23% will have retirement incomes equal to less than 75% of their average pre-retirement earnings. Both of these projections can’t be right, and my money is on the non-partisan agency that’s spent 20 years developing and cross-checking its model.
None of this is to say that some Americans aren’t underprepared for retirement. Nor that we shouldn’t work to expand the ways Americans can save for retirement or to fix Social Security’s troubled finances.
But when it comes to retirement, Americans need facts, not fears. The real threat to retirement security from the Covid recession should be layered onto the fact that Americans of all age, income, education and racial groups entered this recession with the highest levels of retirement savings on record. The facts tell us that the Covid-19 pandemic, while certainly a challenge to retirement savers, will not produce anything like the apocalyptic outcomes that progressive researchers-cum-activities and their enablers in the news media would have you believe. And so we should be wary of letting our nation’s policies on Social Security and retirement savings be hijacked by a retirement crisis that, once again, will likely fail to materialize.
by Andrew Biggs