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The U.S. ‘Retirement Crisis’ Is a Media Myth

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What You Need to Know

  • Seemingly every day, we are inundated with bad news regarding retirement.
  • But when we simply look at the data, a very different story emerges.
  • Never before have so many Americans saved so much for retirement, nor had stronger incomes in old age or a lower risk of poverty.

The holidays are a time when we express gratitude for making it through another year, and for the family, friends and co-workers who helped us do it.

But with each passing year, we also come closer to retirement. And for that we may want to show thanks for something that is seldom mentioned: a retirement system that has grown significantly stronger over time, and which today helps the vast majority of Americans live well in old age.

That our country’s retirement system is working well is so counterintuitive that even many experts have a difficult time processing the idea. We are inundated, seemingly every day, with bad news regarding retirement:

Americans Entering Old Age the Least Prepared in Decades,” The Wall Street Journal says.

Bankruptcy booms among older Americans,” The New York Times tells us.

Retirees will outlive their savings by a decade,” says The World Economic Forum.

Half of older Americans have no retirement savings, the Government Accountability Office says.

Social Security benefits have lost one-third of their buying power since 2000,” The Washington Post tells us.

“Retirees’ reliance on Social Security nears an all-time high,” warns USA Today.

All of these proclamations, I might add, are provably false. Not just technically false or false in some minor way, but often expressing the opposite of what has actually happened.

And yet, this sort of media coverage leads many Americans to despair that, in the words of Jane Bryant Quinn, our nation’s “retirement system is broken.”

Pension Realities

But when we skip the media articles and simply look at the data, a very different story emerges in nearly every area of retirement savings. This story is far more encouraging and gives us hope for our own retirement and those of people we care for.

Many retirement advocates pine for the days of the traditional “defined benefit” pension. Yet rose-colored glasses prevent them from recalling that less than 40% of private-sector workers participated in a DB pension, even at their peak in 1975.

Or that, according to a 1972 congressional report, 9 in 10 workers who formally participated in a traditional pension failed to vest in their benefits. In a 1981 Social Security Administration survey of new retirees, only 27% reported receiving any private pension benefit. Among the bottom half of the income distribution, it was just 9%. 

Today, it’s a dramatically different story. In a 2015 analysis of IRS data, the Social Security Administration found 61% of private-sector workers participating in a retirement plan, with an additional 14% offered a plan but not enrolled. Similarly, a 2017 Census Bureau analysis found 61% of Americans 65 and older receiving benefits from a private retirement plan.

401(k) Advantages

Whatever their shortcomings, the introduction of 401(k) retirement accounts in 1978 marked an inflection point in Americans’ retirement savings. Federal Reserve figures show that in 1978, total retirement plan balances were equal to half of employees’ total wages and salaries, with savings-to-salary ratios rising about 1 percentage point per year.

But from 1978 through 2020, the ratio of retirement savings to the employee wages they must eventually replace increased by nearly 8 percentage points per year, with total savings rising sevenfold and currently sitting at 375% of employee wages and salaries. Other data, from the Federal Reserve’s Survey of Consumer Finances, show retirement savings increasing in every age, income, educational and racial/ethnic group. 

We all know that 401(k)s aren’t perfect, but they have two key advantages over traditional pensions. First, employers are willing to offer them. The passage of the Employee Retirement Income Security Act in 1974 loosened vesting requirements for DB pension benefits and tightened funding standards, which was good. But these steps also led to an immediate and continuing decline in the share of employees offered a pension.

It turns out that when employers actually had to pay the benefits they promised, and were required to put up money to back it up, traditional pensions weren’t as attractive an employee benefit. While 401(k)s face challenges with administrative burdens and, increasingly, liabilities to employee lawsuits, employers are simply more willing to offer them. 

Second, while private-sector pensions were funded almost exclusively through employer contributions, 401(k)s receive contributions from both employers and employees. Bureau of Labor Statistics data shows that employers have largely maintained their contributions to retirement plans, while the addition of employee contributions has boosted savings to much higher levels.

In 1975, private-sector retirement plans received total contributions equal to 5.8% of employee wages; in 2020, contributions reached 8.6% of pay, fully 48% higher.

Rising Retirement Security

The result of broader retirement plan participation and higher contributions has been rising retirement incomes. Congressional Budget Office data show that, since 1979, the inflation-adjusted average household income of Americans 65 and older has risen by 119%, more than doubling.

By contrast, incomes for working-age households increased by only 75%. Census Bureau research shows that retirement incomes have risen not just for the rich but across income distribution and have brought old-age poverty to record lows.

Every media story on the nation’s supposed “retirement crisis” can find someone for whom things have gone poorly, which isn’t a challenge in a country of 330 million people. But surveys that ask large numbers of actual Americans tell a story that mimics the hard data.

Eight in 10 retirees tell Gallup they have sufficient money, not merely to survive, but to “live comfortably.” Less than 5% of retirees tell a Federal Reserve survey they are “finding it hard to get by.” Likewise, in a survey from Vanguard, only 5% of U.S. retirees describe their own financial situation as a retirement crisis.

Seventy-six percent of Americans over 65 report in the Federal Reserve’s Survey of Consumer Finances that their retirement income is “At least enough to maintain your standard of living,” versus only 61% in 1992. The share describing their retirement income as “totally inadequate” has fallen by almost half, while the share of retirees calling their incomes “very satisfactory” nearly tripled. 

Americans are also are working longer, which is one of the most effective ways to boost retirement incomes. A longer work life means more savings, higher Social Security benefits, and a shorter retirement in which savings will be drawn down.

While for decades following World War II the labor force participation of older Americans had been declining, beginning around 1990, things turned around. By 2019, just before COVID, the share of Americans aged 55 to 64 who were working was the highest on record.

Americans are also delaying claiming Social Security benefits, retiring nearly a year and a half later today than in the mid-1990s. Higher earnings and delayed claiming led to Social Security benefits for new retirees in 2020 being fully 32% higher after inflation than benefits received by new retirees in 2000.

These may not be the only relevant facts to inform discussions of retirement income security. But they are facts nonetheless that provide much-needed context to discussions of how well the U.S. retirement system is working. 

Better Data, Better Story

The most interesting question is why so little of this story is known. Part of the story is technical. For instance, for years we have heard statistics claiming that one-third or more of retirees receive nearly all their income from Social Security. As it turns out, however, that figure is an error.

The household survey the government draws that figure from has been shown to dramatically understate the income that retirees derive from IRAs, 401(k)s and private pensions, coming in far short of what those same retirees report on their tax returns.

Subsequent research using IRS data has found that the median retiree’s income is nearly one-third larger than is claimed in household survey data, the poverty rate is lower by almost 2 percentage points, and the share of retirees receiving 90% or more of their income from Social Security is only 12% to 14%. 

The same data issues cause us to underestimate the share of Americans who participate in retirement plans at work.

In 2015, the Social Security Administration examined Americans’ responses to a survey asking about retirement savings at work. In the survey, 65% of private sector employees said they were offered a plan at work, and 45% said they participated.

But the SSA then matched each employee’s survey responses up to their IRS tax records. The SSA analysts found that 72% of private-sector employees were actually offered a retirement plan, and 58% were participating. IRS data show that, among married couples filing jointly, 81% have at least one spouse participating in a retirement plan.

Better data really do tell a better story.

But there’s more to it than that. The “retirement crisis” narrative is helped along by the fact that nearly no one has an incentive to deny it. Financial firms unsurprisingly want you to save more for retirement, so they’re not going to tell you that you’re over-saving. Political progressives distrust private markets and want Social Security to play a stronger role, so they downplay any progress.

The news media like frightening stories. No one clicks on an article with the headline, “U.S. retirement savings doing well.” But “Americans Entering Old Age the Least Prepared in Decades”? That Wall Street Journal article won a journalism award while getting key facts wrong about Americans’ savings and retirement incomes.

Congressional Republicans, still shell-shocked from George W. Bush’s unsuccessful 2005 effort to reform Social Security, have yet to find a new narrative.

But there’s a cost to excessive pessimism. As important as we all consider saving for retirement, households have other priorities — such as buying a home or sending their children to college, both of which have only become more expensive over time.

Expanding Social Security, as many congressional Democrats advocate to tackle our so-called retirement crisis, would leave less money for the government to tackle our other national priorities, including health care, education and infrastructure. 

The simple fact, as the data show, is that never before have so many Americans saved so much for retirement, nor had stronger incomes in old age or a lower risk of poverty. That doesn’t mean the U.S. retirement system doesn’t face challenges. But it does make those challenges easier to address.

Andrew G. Biggs is a senior fellow at the American Enterprise Institute.