“Falling Short: The Coming Retirement Crisis and What to Do About It,” a new book by Charles Ellis, Alicia Munnell and Andrew Eschtruth, paints a picture of a retirement system in crisis. And, in fact, the book and many other publications by the authors use a single chart to illustrate the decline in retirement saving. Munnell calls this figure “The retirement crisis in one chart” while her colleague Anthony Webb states “perhaps the most convincing evidence involves no modeling at all: a simple comparison of wealth-to-income ratios suggests we should be concerned.”
That one chart (see above) uses data from the Federal Reserve’s “Survey of Consumer Finances” to calculate ratios of wealth to income for households of different ages in different years. Across nearly all ages, wealth-to-income ratios are lower in 2010 and 2013 than in previous years, showing, in Munnell’s terms, “a significant decline in the level of retirement preparedness.”
There are a number of issues with this chart, which Syl Schieber and I raised in our recent paper, “Why Americans Don’t Face a Retirement Crisis.” But here’s the most important one: the recent decline in wealth-to-income ratios was almost entirely driven by the bursting of the housing bubble. Housing and retirement are different issues.
The second chart below, pulled from our paper, uses the same SCF data to show the ratio of average assets to earnings for households in the 45-54 age range, but this time broken down by the type of asset. Housing wealth declined precipitously in recent years, while retirement savings actually rose slightly. This looks less like a retirement crisis than a housing bubble being popped.
Wealth is wealth, you might reply, so who cares? There are two reasons to care: First, because a decline in home values doesn’t say much about how our retirement system is working. And second, because housing plays a different role in retirement planning than explicit retirement saving does. Many retirees don’t sell their homes, so the popping of the bubble isn’t that important. What matters to them is the service provided to them by their home, which hasn’t changed. Other retirees do sell their homes, but – again due to the housing decline – could purchase a new one at a lower price, meaning that they’re at least partially hedged. Still others bought their homes at lower, pre-bubble prices. So the effects aren’t clear.
Finally, neither of the charts above cover all retirement saving; they catch only 401(k) and IRA-type plans, without data on corporate defined benefit plans or Social Security.
So let’s show a third chart that tries to wrap them all together. The chart below shows the ratio over time of retirement assets to personal incomes. The oldest series, dating from 1945, shows the total financial assets for employer-sponsored pension funds, including both DB and DC and state and local government plans. These rose from 31% of personal incomes in 1945 to 119% in 2013. Beginning in 1981, the Fed began tracking household retirement savings, which include non-employer saving such as IRA plans and insurance contracts. The second series beginning in 1981 combines these assets with the employer pension assets tracked in the bottom-most series. These combined retirement savings reached 182 percent of personal incomes by 2013. Finally, beginning in 1996 the Social Security Administration began publishing figures on the total value of Social Security benefits that have been accrued but not yet paid out. The top-most series combines accrued Social Security benefits with household retirement savings and employer-run pension funds. This most comprehensive measure has increased from 269 percent of personal incomes in 1996 to 391 percent in 2013.
Does this mean everything is hunky dory? No, for three reasons: First, these are averages, which means that many people could be falling short. Nevertheless, the averages are rising. Second, as life spans increase, the ratio of retirement savings to incomes should also rise. But how much they should rise depends on whether/how much we choose to work longer.
And third, Social Security, state and local pensions and, to a lesser degree, corporate DB plans are all underfunded. So they can’t pay everything they’ve promised. But it’s ironic that many people promoting the retirement crisis viewpoint believe that private retirement plans like 401(k)s have failed and that the share of retirement income coming from government plans should expand. To me, these figures point toward an opposite conclusion.
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