Which Findings About Retirement Readiness Are Right?

An optimistic view of U.S. retirement preparedness depends crucially on assumptions about behavior that may not reflect real world activity, researchers suggest.

Researchers also make the case in a new paper from the Center for Retirement Research (CRR) at Boston College that optimistic retirement readiness studies often depend on consumption patterns that are unsustainable in the long run. 

The paper, “Are Retirees Falling Short? Reconciling the Conflicting Evidence,” compares studies that found about half of pre-retirees are not on track to maintain their consumption in retirement to studies that found the majority of retirees have adequate resources. Weighing the conflicting studies, the CRR researchers conclude that many retirees can expect to fall increasingly short during their retirement.

Of all the studies considered, the evidence the researchers found the most convincing about retirement preparedness is the simple calculation of wealth-to-income by age, taken from 10 Surveys of Consumer Finances from the Federal Reserve. The surveys show these ratios have remained unchanged over time, despite longer lives, declining Social Security replacement rates, the shift from defined benefit (DB) to defined contribution (DC) retirement plans, rapidly rising health care costs, and low interest rates. In other words, people retiring in the future will have less resources than those in the past.

study by researchers for the National Bureau of Economic Research (NBER), using the Health and Retirement Study (HRS) and a life-cycle model of optimal wealth accumulation and decumulation, concludes that the majority of preretirees do have an optimal level of wealth. Separately, RAND Corporation researchers, using HRS consumption data, found households that retired between 2001 and 2007 experienced only small declines in consumption, suggesting adequate resources.

The CRR researchers note that the optimal saving conclusion that emerges from NBER researchers’ model rests on two key assumptions: households are content with declining levels of consumption in retirement; and households reduce their consumption when children leave home. “These assumptions make it much easier for older households to achieve target levels of wealth,” the CRR researchers wrote.

They also looked at households’ ability to maintain consumption after retirement, questioning whether the households studied by the RAND Corporation researchers possess sufficient resources to maintain their spending for the remainder of their lives, and whether they maintained their spending as they aged.

According to the research report, the key question is whether these assumptions seem plausible, and bits and pieces of evidence exist on both sides of these assumptions, so answers to this question are not yet conclusive. In addition, the researchers say considering that consumption does not decline early in retirement ignores the fact that many people do not have the resources to continue consuming at that pace over their entire retired lives.

The CRR researchers’ report can be downloaded from here following a free registration.