10 minute read

Savings

Are People Saving Enough To Retire?



Another major policy issue is whether current workers are saving enough for their retirement, in particular the post-World War II baby boom generation (those born between 1946 and 1964). The Employee Benefit Research Institute (EBRI) hosted a policy forum on this topic in 1994 (see Salisbury 1994) and subsequently published an issue brief on retirement saving adequacy (see Yakoboski and Silverman, 1994). This section updates that material.



According to the 1999 EBRI Retirement Confidence Survey (RCS), 74 percent of workers say they have established an investment or savings program for their retirement, and 70 percent report they are personally saving money for retirement—an increase from the 63 percent who reported saving for retirement in 1998. However, the amounts accumulated are generally unimpressive. The median amount accumulated for retirement by all households was $29,514. While the median amount saved increased by age (ages 25–39, $20,588; ages 40–49, $45,238; ages 50–59, $71,250), working households of individuals age sixty and older accumulated less ($39,286)—perhaps because they are more likely to expect to rely on Social Security for a major portion of their retirement income. To put these accumulations in perspective, suppose a single male, age 65, purchased a life annuity in 2001. With $71,250, he could have purchased a nominal monthly annuity for life of $631; while with $39,286, he would have gotten a monthly annuity of only $348.

What is clear is that even though most workers and households are saving for retirement, relatively few have a good idea of how much they need to save. In 1999, 52 percent of all households reported in the RCS that they had tried to figure out how much money they will need to have saved by the time they retire so that they can live comfortably in retirement (among households that have saved for retirement the figure was 61 percent). So while most people may be saving for retirement, they appear to be simply assuming (or hoping) that they will accumulate enough. Given the upward trend in life expectancies of individuals once they reach age 65 (and projections of future growth in these life expectancies), hoping and assuming will likely not be good enough in light of retirements that could span decades.

On average, those who have done a needs calculation have saved considerably more than those who have not done the calculation. The 1999 RCS found that the median amount accumulated by households that have tried to figure out how much money they will need in retirement is $66,532, compared with a median of $14,054 accumulated by those who have not done the calculation. Planning, therefore, plays an important role in explaining the saving behavior of many households.

The 1999 Retirement Confidence Survey found that 57 percent of workers who are not currently saving for retirement say it is reasonably possible for them to save $20 per week for retirement. In addition, 69 percent of workers who are already saving report that it is possible for them to save an additional $20 per week (see Ostuw, Pierron, and Yakoboski 1999). Saving $20 per week amounts to more than $1,000 per year, which, over time, can add up to a significant sum of money. The power of compound interest allows a twenty-five-year-old saving $20 a week, assuming a 5 percent annual real rate of return over forty years, to accumulate a retirement nest egg worth nearly $132,000. With a 10 percent annual real rate of return, $20 a week saved over forty years can accumulate to more than $500,000.

Concerns about low levels of aggregate personal saving at the national level appear misplaced. Americans—in the aggregate—are saving. That saving, however, is partially the result of large capital gains that have been experienced in the financial markets over recent years. Since NIPA, the most commonly cited measure of personal saving, does not factor capital gains (neither realized nor unrealized) into income, the saving rate appears to have dropped dramatically over the past decade. Accounting for capital gains changes the picture dramatically, however. By one measure, aggregate personal saving is 33 percent of ‘‘income’’ and has increased dramatically over the past decade. However, while there may not be an aggregate ‘‘saving crisis’’ per se, a note of caution is warranted: To the degree that aggregate personal saving is driven by a bull market in equities, as in the 1990s, a sharp contraction in the equities market could have potentially drastic consequences.

Also, while the rate of aggregate personal saving may be healthy at the national level, this does not mean that fears about inadequate retirement preparations among current workers are misplaced. While sweeping generalizations are to be avoided, and while some workers are on track for adequate retirement savings, the evidence indicates that many groups of American workers appear unlikely to be able to afford a retirement that maintains their current lifestyle (at least not without working more years than currently planned). Consensus does not exist on how many workers are at risk, or on the typical magnitude of their retirement savings shortfall. There is a consensus, however, that a substantial number of individuals are at risk. This is not surprising—despite the fact that the 70 percent of workers are saving for retirement—since relatively few workers know how much it is that they need to accumulate to fund their retirement.

One question yet to be addressed is whether and how retirement assets will be affected by the ever-growing initiatives in Congress to expand tax-deferred savings accounts for nonretirement purposes (such as education, health care, job training, and other costs). As the options grow among tax-deferred savings accounts, or as Congress passes new laws relaxing the tax penalties for using retirement account assets for nonretirement purposes, the competition for retirement savings is certain to grow—and this growth is likely to occur just when the demographic wave of Americans reaching retirement age is starting to crest.

Issues regarding saving levels and the adequacy of retirement preparations will continue to capture the attention of policymakers, the news media, and the public as the baby boom generation moves toward its retirement years. This is most evident with Social Security, as changes needed to ensure the long-term financial viability of the system are debated. Many reform proposals involve elements designed to give workers their own individual retirement savings accounts through the Social Security system.

Education efforts related to saving and financial literacy now abound because the data says that those who get such education begin to save, to increase what they save, and to invest on a more diversified basis.

At one level, success has already been achieved: 70 percent of American workers report that they have begun to save for their retirement. However, this still means that 30 percent (disproportionately younger and lower-earning individuals) are not in the retirement savings game at all. These individuals likely do not appreciate the difference that even seemingly small amounts of money saved on a regular periodic basis can make over time. For the nation, a higher bar to strive for is not merely to create savers, but rather to create planners who can develop a specific dollar goal for their retirement and then save accordingly. On this latter point, there remains plenty of room for improvement, and this goal would seem to be the next crucial step to ensuring individual retirement-income security for American workers.

DALLAS SALISBURY

BIBLIOGRAPHY

ATTANASIO, O., and DE LEIRE, T. ‘‘IRAs and Household Saving Revisited: Some New Evidence.’’ NBER Working Paper 4900. Cambridge, Mass.: National Bureau of Economic Research, 1994.

BERNHEIM, D. B. Is the Baby Boom Generation Preparing Adequately for Retirement? Summary Report. Merrill Lynch & Co., Inc. 1993.

BERNHEIM, D. B. Is the Baby Boom Generation Preparing Adequately for Retirement? Technical Report. Merrill Lynch & Co., Inc. 1992.

COPELAND, C., and VANDERHEI, J. ‘‘Personal Account Retirement Plans: An Analysis of the Survey of Consumer Finances.’’ EBRI Issue Brief 223. Employee Benefit Research Institute, 2000.

DAVIS, J. ‘‘Pensions, Social Security, and Saving.’’ EBRI Issue Brief 97. Employee Benefit Research Institute, 1989.

ENGEN, E. M.; GALE, W. G.; and SCHOLZ, J. K. ‘‘Do Saving Incentives Work?’’ Brookings Papers on Economic Activity, Vol. 1. 1994.

ENGEN, E. M.; GALE, W. G.; and SCHOLZ, J. K. ‘‘The Illusory Effects of Saving Incentives on Saving.’’ The Journal of Economic Perspectives 10, no. 4 (Fall 1996).

Executive Office of the President, Office of Management and Budget. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2000. Washington, D.C.: U.S. Government Printing Office, 1999.

GIST, J. R.; WU, K. B.; and FORD, C. Do Baby Boomers Save and, If So, What For? Washington, D.C.: AARP Public Policy Institute, 1999.

HUBBARD, R. G., and SKINNER, J. S. ‘‘Assessing the Effectiveness of Saving Incentives.’’ The Journal of Economic Perspectives 10, no. 4 (Fall 1996).

IMROHOROGLU, A.; IMROHOROGLU, S.; and JOINES, D. H. ‘‘The Effect of Tax-Favored Retirement Accounts on Capital Accumulation.’’ The American Economic Review 88, no. 4 (September 1998).

MITCHELL, O. S.; MOORE, J.; and PHILLIPS, J. ‘‘Explaining Retirement Saving Shortfalls.’’ In Forecasting Retirement Needs and Retirement Wealth. Edited by Olivia Mitchell, Brett Hammond, and Anna Rappaport. Philadelphia: University of Pennsylvania Press, 2000.

MOORE, J. F., and MITCHELL, O. S. ‘‘Projected Retirement Wealth and Saving Adequacy.’’ In Forecasting Retirement Needs and Retirement Wealth. Edited by Olivia Mitchell, Brett Hammond, and Anna Rappaport. Philadelphia: University of Pennsylvania Press, 2000.

MOULTON, B. R.; PARKER, R. P.; and SESKIN, E. P. ‘‘A Preview of the 1999 Comprehensive Revision of the National Income and Product Accounts.’’ Survey of Current Business 79, no. 8 (August 1999).

OSTUW, P.; PIERRON, B.; and YAKOBOSKI, P. ‘‘The Evolution of Retirement: Results of the 1999 Retirement Confidence Survey.’’ EBRI Issue Brief 216. Washington, D.C.: Employee Benefit Research Institute, 1999.

POTERBA, J. M.; VENTI, S. F.; and WISE, D. A. ‘‘Do 401(k) Contributions Crowd Out Other Personal Saving?’’ Journal of Public Economics 58 (September 1995).

POTERBA, J. M.; VENTI, S. F.; and WISE, D. A. ‘‘401(k) Plans and Tax-Deferred Saving.’’ In Studies in the Economics of Aging. Edited by David Wise. Chicago: University of Chicago Press, 1994.

POTERBA, J. M.; VENTI, S. F.; and WISE, D. A. ‘‘How Retirement Saving Programs Increase Saving.’’ The Journal of Economic Perspectives 10, no. 4 (Fall 1996).

SABELHAUS, J. ‘‘Projecting IRA Balances and Withdrawals.’’ EBRI Notes 5. Washington, D.C.: Employee Benefit Research Institute, 1999.

SALISBURY, D. L. ‘‘Pension Tax Expenditures: Are They Worth the Cost?’’ EBRI Issue Brief 134. Washington, D.C.: Employee Benefit Research Institute, 1993.

SALISBURY, D. L., ed. Retirement in the 21st Century. . . Ready or Not . . . Washington, D.C.: Employee Benefit Research Institute, 1994.

SALISBURY, D. L., ed. Retirement Income and the Economy: Policy Directions for the 80s. Washington, D.C.: Employee Benefit Research Institute, 1981.

SESKIN, E. P. ‘‘Improved Estimates of the National Income and Product Accounts for 1959–98, Results of the Comprehensive Revision.’’ Survey of Current Business 79, no. 12 (December 1999).

U.S. Department of Labor, Pension and Welfare Benefits Administration. Private Pension Plan Bulletin, Abstract of 1995 Form 5500 Annual Report. (Spring 1999).

VANDERHEI, J. ‘‘Pensions, Social Security, and Saving.’’ EBRI Issue Brief 129. Washington, D.C.: Employee Benefit Research Institute, 1992.

VANDERHEI, J.; HOLDEN, S.; and QUICK, C. ‘‘401(k) Plan Asset Allocation, Account Balances and Loan Activity in 1998.’’ EBRI Issue Brief 218. Washington, D.C.: Employee Benefit Research Institute, 2000.

VENTI, S. F., and WISE, D. A. ‘‘Individual Response to a Retirement Saving Program: Results from U.S. Panel Data.’’ Ricerche Economiche 49 (1995).

VENTI, S. F., and WISE, D. A. ‘‘The Wealth of Cohorts: Retirement Saving and the Changing Assets of Older Americans.’’ NBER Working Paper No. 5609. Cambridge, Mass.: National Bureau of Economic Research, 1996.

WARSHAWSKY, M. J., and AMERIKS, J. ‘‘How Prepared Are Americans for Retirement?’’ In Forecasting Retirement Needs and Retirement Wealth. Edited by Olivia Mitchell, Brett Hammond, and Anna Rappaport. Philadelphia: University of Pennsylvania Press, 2000.

YAKOBOSKI, P. ‘‘Large Plan Lump-Sums: Rollovers and Cashouts.’’ EBRI Issue Brief 188. Washington, D.C.: Employee Benefit Research Institute, 1997.

YAKOBOSKI, P. ‘‘Lump-Sum Distributions Total $87.2 Billion in 1995.’’ EBRI Notes 10. Washington, D.C.: Employee Benefit Research Institute, 1999.

YAKOBOSKI, P. ‘‘Retirement Plans, Personal Saving, and Saving Adequacy.’’ EBRI Issue Brief 219. Washington, D.C.: Employee Benefit Research Institute, 2000.

YAKOBOSKI, P., and SILVERMAN, C. ‘‘Baby Boomers in Retirement: What Are Their Prospects.’’ EBRI Issue Brief 151. Washington, D.C.: Employee Benefit Research Institute, 1994.

YUH, Y.; MONTALTO, C. P.; and HANNA, S. ‘‘Are Americans Prepared for Retirement?’’ Financial Counseling and Planning 9, no. 1 (1998).

Additional topics

Medicine EncyclopediaAging Healthy - Part 4Savings - How Is Savings Measured?, Tax Incentives For Savings, Are People Saving Enough To Retire?