Can Americans Retire?
by Tim Williams
In a recent speech on the economy by President Obama, the only reference to the state of retirement in the U.S. was “401(k)s are growing.” That is the current talking point among the retirement industry.
Some types of accounts have average balances of about $92,000 — a “record high,” but rosy numbers apply only to people who are actually saving. About a third of Americans ages 55–64 have no retirement savings. In addition, $92,000, though not insignificant, is not nearly enough money to retire on.
The elderly are losing their ability to retire. According to a cover story by Jessica Bruder for Harper’s magazine this month, “Nearly 7.7 million Americans 65 and older were still employed last year, up 60 percent from a decade earlier.”
We have gone through a decade-long series of hot air debates about how to squeeze/protect Social Security, with few discussions on how to effectively protect Americans’ overall retirement income.
Is it time for those debates? I was surprised to find that there are a few signs of hope.
Some states are already in good shape; some are looking at ways to expand retirement plan options and participation, and despite the speech omission, executive actions on retirement are in place: A Treasury-backed myRA with no minimum for investment is planned to debut later this year, and the president has endorsed a broader employer mandate to offer a savings plan with automatic enrollment.
Notably, conservative enthusiasm for these initiatives is mostly nonexistent. Republicans don’t trust these plans, even if the government is not really running them. What’s the alternative? For most non-government employees, a defined-benefit retirement plan — basically, a pension — is a dream long past.
The National Institute on Retirement Security does research on retirement and generally advocates on behalf of pension groups for expansion of defined benefit plans and savings initiatives. They are frequently cited in the press, with recent reports highlighting the large differences in participation in any kind of retirement plan by race and between states.
Union support for pensions is broad, but defined benefit plans don’t have a lot of other organizational defenders. I wanted to learn more on the organization’s perspective, so I chatted with Diane Oakley, NIRS’ executive director.
This is the first part of this interview, where I chat with Oakley about the state of Americans’ retirement, disparities among different demographics and why pensions may be an effective way to increase retirement incomes broadly.
Part two will get into federal initiatives, the “miracle” of compound interest, the dangers of tying wealth to people’s homes and the politics of retirement policy. And Oakley’s mother’s experience trying to secure her retirement.
How about we start with some basic questions about the organization, how was it founded, etc.?
The National Institute on Retirement Security was founded about six years ago. We were founded to do research on retirement security and the value that having retirement savings and [specifically] defined benefit plans bring to workers, employers, the economy as a whole. The organization is, at this point, a membership organization.
We have a number of organizations that offer pension plans; we also have a number of financial firms that work in the pension plan space. We have actuaries, representatives of employee unions, the AARP, and then just some general members.
What would you say your main goals are for the short- and for the long-term?
I think our main goal is to try to find ways so that every American can have better retirements going forward. How do retirement plans today help keep seniors out of poverty? What can we do to make that better? To make sure we don’t lose some of the positive things we’ve developed over the last half of the last century.
For example, recently, we just did a report that does an analysis on a state-by-state basis about retirement, separation and what type of challenges are out there for individuals, not only just by race or gender or age but also geographically.
What did you find in that study?
We actually found that there’s a pretty wide disparity. There are some states where many of their employees may not have retirement savings. Some of those states have retirees facing high costs for health care and housing.
We look at people’s savings. For example, we found that states like California and Florida and South Carolina really had some challenges that some of those states might not have been aware of.
California, to a certain extent, has been aware of it. They have taken some actions and looked down the path to see if there’s some way that they can, through the state, offer an opportunity for every worker to save for retirement. And other states are looking at that as well.
We also then look at, there are some states for example like Wyoming and North Dakota, Minnesota and a lot of states in that sort of heartland area of the United States where people have some retirement savings that may be better than others, and more participants. And at the same time, their cost might not be as high for health care and housing, and the opportunities for work can be pretty attractive. We’re not looking at weather or culture or anything like that, just finances.
Connecticut passed a bill, and then Maryland recently appointed a task force to [move toward universal coverage] too. There’s a lot of action, I think, starting to happen in that regard.
In your findings, did it seem like the wide variation in preparation for retirement was mostly due to underlying economic factors, or retirement policy?
When you ask individuals, a lot of it does come down to economics. In other words, the [threats] to the middle class over the last 30 years, where their salaries with regard to inflation have been fairly stagnant.
Policy changes have also occurred over the last 30 years, with defined benefit plans being more and more challenged by changes in federal regulations. So in the private sector especially, fewer employers are willing to deal with the uncertainty that those governmental changes have brought.
This has created this push towards more defined-contribution plans. I think that level of risk then turns over to the employees: No. 1: having to choose to be in the plan, and then No. 2: having to save.
If you look at the data across all employees who are 55 to 64, we identified the median savings in that category was $12,000. That’s the middle household in that category, is $12,000.
There’s now about a third of the people between ages 55 and 64 that actually have nothing to saved for retirement at all. They may only have Social Security when they retire. Is that going to be enough to take care of them in any type of special circumstance that would occur? I think most Americans would probably say no.
There’s a lot of differing views, of course. But if you restrict to only those participating in plans, what do people have in their 401(k) accounts, that’s a different equation, because you already take out half or 40 percent of the population.
In reality, we all have to be concerned about all of the households, and not just those who save.
One of the hallmarks of the last century is what Social Security did, with traditional pensions. We took a senior poverty rate of about 75 percent as a country, and we got the poverty level for seniors down to about 10 percent or so.
Are we moving in a direction where we’re going to have more and more seniors in poverty?
Have we been seeing the effects of insufficient savings for retirement already? Who is taking care of these people? Are their children trying to pitch in, or how does that work?
It’s hard to see some of that stuff directly. Clearly in the recession, one of the fastest growing areas for using food stamps were seniors. [They] saw their 401(k) account balances had declined. They no longer had those resources. They had to cut back on what they were taking out, or maybe they had nothing, so they were turning to assistance from food stamps.
I think we’re seeing some of that in different places. We did not see any increase among people who had defined benefit plans. We’ve been looking at data before and after the last recession; we really didn’t see any decline.
In fact, what we really saw was that individuals who have a defined benefit plan, they were nine times less likely to be in poverty than those people who didn’t have the defined benefit plan. We did an economic analysis that said people who get benefits from defined benefit pension plans go out and spend that money. They generate about a trillion dollars in economic activity in our economy. They support about 6 million jobs across the country.
We’re actually just in the midst of updating a report on that, but that’s a figure from two years ago. I think especially if you look at certain populations, like women, or in single-income households, we do see big differences in terms of people being able to save, and saving.
If you’re in the lowest income quartile, typically, you don’t end up working for an employer who offers you a pension plan or a retirement savings plan.
In fact, three-quarters of individuals who are in the lowest income quartile have no retirement plan, whereas people in the top income quartile, nine out of 10 of them have a [retirement] plan. It’s probably dollars that’s one of the biggest differences. Then the other difference really occurs [with] race.
In particular, in the Latino community, jobs tend to be for smaller employers, tend to be employers that don’t offer retirement plans.
In fact, only 38 percent of Latino employees between 25 and 64, work for an employer that sponsors a pension plan [or some retirement savings]. When you look at white Americans, that goes up to 62 percent. African-Americans are a little closer to whites; about 54 percent of African-American and Asian employees work for an employer that offers pension or some retirement plan savings. [Ed: But average savings among people of color in general near retirement is about a quarter that of whites.]
With the decline in pensions, have employees been able to get back any of those employer savings, any increase in salaries or has that mostly just gone to profits?
Really, what goes on in corporate balance sheets is hard to tell you. One of the things that I think people don’t talk about is [what happens] when people switch from defined benefit to defined contribution plans. We’ve done research that clearly shows that a defined benefit plan can deliver the same level of benefit at about half the cost of providing that benefit in a defined contribution setting.
Some of it is because [pensions] are professionally managed. Some of it is because it automatically provides a lifetime income, and some because [pensions] stay as a diversified portfolio. Unlike an individual, who has to gradually move from more risky investments when they’re younger to less risky investments, to give them balance and stability when they get older. A pension plan itself doesn’t have to do that, it can stay invested in an optimal portfolio throughout someone’s career.
This interview has been edited and condensed for clarity.
Tim Williams is a community moderator for the New York Times.
Photo: Helen Pejam