Tuesday, June 12, 2018

How Ready are Americans for a Successful Retirement

Every weekday morning, one of the first blasts that glamorizes my inbox is the Plan Sponsor News Dash. If you don't subscribe already, you should probably remedy that situation. It's free and it's pretty unobtrusive, and once in a while even features my wisdom or lack thereof. But, this morning, I read an article from the News Dash that struck my mathematical, actuarial, and consulting senses a bit funny.

This article told me that according to a study by the Employee Benefit Research Institute,  57.4% of U.S. households are on track to be able to cover 100% of expenses in retirement, but if long-term care costs are removed from the equation, the percentage jumps to 75.5%. Then it goes on to tell me how much rosier the picture gets if they only have to cover 90% of their household expenses, or even 80%, or finally even 100% if you also remove long-term care costs.

Holy Symmetry, Batman!

What happened to the scenario where expenses go up more than we are anticipating? I've not been able to find the EBRI research, so perhaps the article is explaining everything that the research actually does present.

According to the article, the research goes on to suggest that if we auto-enrolled all workers at 6% in an automatic DC plan that the retirement crisis would virtually disappear. 

From a policy standpoint, this just feels so wrong. If you look at your pay stub today, unless your compensation for the year has already gone above $128,400, you'll see that 6.2% of it is going to the government in the form of FICA tax. For those that don't know the terminology, that's the old age part of Social Security. In addition, regardless of how much you have made thus far this year, an additional 1.45% is going to the Social Security Administration to support the Medicare system. So, what this proposal is telling me is that it wants to, right off the top, direct 13.65% of my pay towards my retirement and the retirements of others. That's almost one dollar in seven of what most Americans earn. We would have no say. In fact, if you add that to federal, state, and local income taxes, it feels like the policymakers are directing more of what I make than I am.

Think about that.

But, returning to the original topic, how ready are Americans for a successful retirement? It doesn't seem likely to me that covering 80% of ones projected expenses is going to be sufficient. But, if we focus on the analysis in which we are supposed to cover 100%, 3 in 7 American households can't do it. Were we to bump that to 110% (inflation increases), we probably get to the point where more than half of those households cannot sustain retirement.


The 401(k) as the cornerstone of American retirement system does not work. Remember, this study was done after some huge run-ups in equity markets. What happens if we have a significant correction? What happens if we are in a bubble?

You want a policy solution? Reinvent the pension plan in ways that offer some degree of lifetime income, longevity protection, and inflation protection. Design it so that costs are stable (that's really easy by the way) while still providing for consistent and responsible funding. Let employees use the 401(k) as it was intended -- as a supplemental savings program.

Households will be ready for a successful retirement.