Middle Class Could Face Inadequate Resources

Workers today are less likely than their parents or grandparents to keep up the standard of living from their working years in retirement, research found.

The AARP study, “What Are the Retirement Prospects of Middle-Class Americans?,” gives a snapshot of the retirement prospects of workers age 25 to 54, particularly the middle class, using research from the Urban Institute.

Based on the Urban Institute’s Dynamic Simulation of Income Model, the study’s authors, Barbara Butrica and Mikki Waid, project that workers today are less likely than their parents or grandparents to enjoy the living standards of their working years when they retire. Much of the projected decline is expected because health care costs are rising faster than wages.

Employee contributions to workplace health insurance and retirement plans have reduced take-home pay. Skyrocketing health care costs and college tuitions have further strained family budgets. The recession and ongoing financial crisis, which eliminated millions of jobs and wiped out trillions of dollars in household wealth, have tightened the squeeze on middle-class families and cast a shadow on the future retirement prospects of today’s workers.

The study gives the following statistics about the incomes of future retirees:

  • Future retirees are predicted to have only slightly more retirement income than today’s retirees. Median retirement income is projected to be $34,500 (in 2012 dollars) for future retirees, a 20% increase from current retirees.
  • Medical expenses will wipe out the small retirement income gains for future retirees. When out-of-pocket medical expenses are taken into account, the median retirement income of future retirees (at age 70), net of health expenses, is expected to be about $27,000—the same as that of current retirees.


  • Social Security will be the main source of retirement income for future retirees at all income levels. Social Security will account for 51% of per capita household income for future middle-income retirees—69.2% for low-income workers and 35.4% for high-income workers. Social Security will be especially important as a backstop for the 30% of middle-income workers who are projected to be downwardly mobile as low-income retirees—Social Security will represent 81.6% of retirement income for this group.
  • Continuing to work will be a key way to maintain security in retirement. Among middle-income workers who achieve high-income status in retirement, 64% are projected to be working at age 70, and 38% will have working spouses, adding $29,500 to their incomes (37% of total income) through their earnings.
  • Retirement income gaps are projected to narrow over time among racial and ethnic groups. Compared with the incomes of current retirees, the retirement incomes of the youngest cohort (age 25 to 34) are projected to increase by 95% among non-Hispanic blacks, 202% among Hispanics, and 86% among Asians/Native Americans, compared with only 44% among non-Hispanic whites.
  • The recent recession will negatively affect older cohorts of current workers. Among 45- to 54-year-olds in the middle-income category, college graduates are expected to have 19% less income at age 70 than current retirees, because they have fewer years before retirement to regain their losses from the recession and to benefit from wage growth.

The ability to meet basic needs in retirement was one focus of the study, which projected that declines in the poverty rate among retirees will be wiped out by increased health care costs.


The poverty rate, as measured by this study, is projected to decline, from 9.7% among current retirees, to 3.4% among middle-income workers when they retire. However, after taking medical costs into account, the poverty rate will remain virtually unchanged—16.8% among current retirees and 16.4% among middle-income workers when they retire. (The study defines medical expenses as medical out-of-pocket costs.)

Medical expenses will take an increasing share of retirement incomes. Currently they average $2,800 a year, or 8% of income. The study projects medical costs for future retirees will jump to $5,600 per person, or 15% of income.

The ability to maintain a current standard of living in retirement was examined by the study, which found that future retirees are less likely than current retirees to be able do so. The median replacement rates (the ratio of per capita household income at age 70 to average per capita shared earnings between ages 25 and 70) is 80% for current retirees, compared with 73% for future retirees.

The Urban Institute uses statistical analyses to project various measures of the future retirement prospects of workers ages 25 to 54 in 2012, with a particular focus on middle-class workers. The model compares the retirement prospects of current workers (future retirees) to current retirees and compares the prospects of various subgroups of future retirees by age cohort, income level, educational attainment, race/ethnicity, and gender/marital status.  

“What Are the Retirement Prospects of Middle-Class Americans?” is part of the Middle Class Security Project, an initiative of the AARP Public Policy Institute. The study can be downloaded here.