CRR Weighs Conflicting Retirement Readiness Evidence

A new paper suggests that favorable assessments of aggregate retirement readiness in the United States often rely on untested assumptions.

Simple and assumption-free calculations of wealth-to-income ratios, broken down by age, “clearly indicate that households retiring in the future will be less prepared than those in the past,” according to a report from the Center for Retirement Research at Boston College (CRR).

This unequivocal finding conflicts with other industry research revealing more favorable retirement readiness trends. According to CRR researchers Alicia Munnell, Matthew Rutledge and Anthony Webb, such research usually factors in questionable behavioral assumptions about how household consumption patterns will change when children leave home and when households retire.

A key limitation to this thinking is that the behavioral assumptions in different studies are based on incomplete knowledge of actual household behavior, the CRR paper finds. Looking closely at Federal Reserve data shows that retirement preparedness has been declining over time. This hasn’t resulted in uniformity of opinion, however, and studies on the level of preparedness continue to offer conflicting assessments.

The CRR cites its own National Retirement Risk Index (NRRI), which finds half of households are “at risk” of running short of required income in retirement. More optimistic studies suggest less than one in 10 will fall short. 

The CRR researchers argue more favorable research results usually depend on two shaky assumptions: First, households will spend less when their kids leave home, and second, households plan for declining consumption in retirement. The NRRI model, on the other hand, assumes steady consumption and spending across these broad categories for U.S. retirees, resulting in a significantly less-favorable readiness outlook.

“While the issue remains unsettled, the Federal Reserve data are consistent with the NRRI finding that retirement shortfalls are a growing problem,” the researchers find.

For example, the Federal Reserve’s triennial Survey of Consumer Finances (SCF) shows that the ratio of net wealth-to-income at each age has remained virtually unchanged from 1983 to 2013. This is despite substantial increases in longevity, decreases in Social Security benefits, widespread loss of defined benefit pension coverage, higher health care costs and lower interest rates faced by retirees today.

Another critical takeaway from the stagnant net wealth levels identified by the SCF is that defined benefit accruals of future benefits are not included in SCF wealth figures, whereas current 401(k) assets are included. “This shift from unreported to reported retirement assets would have been expected to increase the wealth-to-income ratio,” researchers note.

The paper finds the stability of wealth-to-income ratios over the 1983 to 2013 period clearly indicates that people are less well-prepared than in the past. “If they were over-prepared in the past, they could be fine today. But if they were not over-prepared in 1983, then they are falling short today.

Similar findings can be gleaned from the Health and Retirement Study (HRS), and the HRS supplement Consumption and Activities Mail Survey (CAMS), the paper says.

“Households are more likely than not to be falling short in their retirement preparedness,” the paper concludes. “Such shortfalls should be taken into consideration as policymakers discuss options for reforming Social Security. To bolster retirement preparedness, policymakers may want to consider ways to encourage more private saving, such as requiring 401(k)s to adopt auto-enrollment and auto-escalation policies, and to apply these policies to current workers as well as new hires.”

The full paper can be downloaded here.