Can those aged 45 to 64 be saved from misery in retirement? How?
May 8, 2013 — “Up until very recently, each generation of retirees did better than the last, not just because incomes were rising in general, but also because they were closing the gap between their pre-retirement and their retirement incomes,” said Monique Morrissey, an economist at the Economic Policy Institute. “Now,” she continued, “we’re at the first time in modern U.S. history where that gap is growing and it’s growing dramatically.”
Morrissey’s assessment that American workers are facing a retirement security crisis has been echoed in recent articles in The Wall Street Journal, Newsday, and Forbes. Strikingly, however, Remapping Debate found that researchers and policy advocates have generally spent little time trying to solve the problem for those already aged 45 to 64.
The evidence we have pieced together through additional probing suggests that for those aged 45 to 54, there is a range of policy options — beyond the fatalistic prescription to “just work longer” — that has the potential to materially enhance retirement security, if adopted quickly. For those aged 55 to 64 the outlook is bleaker, though temporary increases in Social Security payments targeted to that group (or its poorest members), or an expansion of anti-poverty programs such as Supplemental Security Income (SSI), could, if enacted, ameliorate the worst of the anticipated impacts on the poorest retirees.
Despite the availability of a potential solution for the 45- to 54-year-old group and of an improved safety net for the 55- to 64-year-old group, no one we spoke with suggested that the political will to effect such changes exists today.
The numbers and their consequences
According to an analysis by the economist Teresa Ghilarducci and her team at the Schwartz Center for Economic Policy Analysis at the New School, 34.6 percent of workers currently aged 45 to 54, and 31.2 percent of workers aged 55 to 64, are projected to live at or below 200 percent of the poverty level when they retire, if nothing is done to change the picture. Why would it be cause for concern if these workers (about 27 million Americans) were going to live with retirement income up to twice the poverty line? For one thing, Ghilarducci said, such people remain in “a chronic state of want.”
Eric Kingson, a professor of social work and public administration at Syracuse University and founding co-director of Social Security Works, a group that advocates for the protection of the Social Security system, said a retiree with income below 200 percent of the poverty line who faces significant health care costs is often forced to compromise between her health care and other necessities, such as clothing. For some, he said, health care loses out and “people cut their medicine.”
Ghilarducci added, “If we don’t do something, 49 percent of middle-class retirees will be poor or near poor when they reach retirement age.” This would be, by a wide margin, the highest elderly poverty rate since the U.S. Census Bureau began compiling poverty statistics in 1959. The previous high was 35 percent in 1960, and the most recent data reports it as 15.1 percent (according to the newer, and, most believe, more accurate, Supplemental Poverty Measure).
Another snapshot of the problem facing 45- to 64-year-olds as they reach retirement age comes from the Employee Benefit Research Institute (EBRI). Last month, EBRI reported that 57 percent of workers have less than $25,000 in total savings (excluding home value and defined benefit pensions, the latter of which are enjoyed by only 15 percent of private-sector workers). 28 percent of workers report less than $1,000 in savings.
For workers who might expect to live 20 years after retirement, $25,000 in savings would leave them with less than $105 to live on each month beyond their Social Security payments. According to Eric Kingson, this amount of money is insufficient to protect against “just about any unexpected problem.” He cited medical emergencies, car problems, and home repair as events that can deeply cut into such savings.
Do the scary numbers lie?
According to some, “factoids” that suggest a looming retirement security crisis can be misleading. Andrew Biggs, a resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration during the George W. Bush administration, told Remapping Debate, “There’s a huge number of assumptions and calculations embedded in these final product numbers you get. When you say, ‘here’s the retirement index, and it’s X,’ well, there’s a [lot] of stuff that goes into getting to X, and some of those choices are going to be controversial.” For example, he said such studies often set a universal target replacement rate — often 75 percent of one’s pre-retirement income — when in reality, target replacement rates might be “more dispersed” depending on one’s “real” pre-retirement standard of living when adjusted for the presence of children in a household, and on one’s income level.
Biggs’ own conclusion, based on a model which aims to make that adjustment, is that “most Americans, both current retirees and future ones, appear to be reasonably well prepared to support themselves in retirement.” He wrote in a follow-up email, however, that there is “an uptick in the share of people who are under-prepared” and that, “over time, the number falling short may rise.”
Monique Morrissey, an economist at the Economic Policy Institute, agreed that modeling necessarily required the exercise of judgment in making assumptions. She noted, however, that, as a rule, “If you’re low income, your replacement rate should probably be higher, and if you’re higher income, your replacement rate can be lower, because if you’re low income, there’s just less give there.” That is because, compared to high-income retirees, low-income individuals generally save less during their working years, and, upon retirement, come to save less in taxes paid compared to wealthier retirees.
“You certainly don’t want to have a mainstream replacement rate below 70 percent. That’s usually the minimum…To be on the safe side, it should be a lot higher,” she said.
“I do agree on lower-income households requiring higher rates. How much higher? That’s hard to say,” Biggs wrote in an email.
Despite the presence of what Morrissey called “some room for debate” regarding ideal replacement rates, over the course of weeks of research and interviews Remapping Debate found that the vast majority of evidence points toward a serious and growing threat to retirement security.