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Rekenthaler Report

4 Negatives for U.S. Retirements

The pessimist's view.

Cutting Both Ways
Friday's column featured four positive signs for U.S. retirees, taken from a presentation entitled "Retirement: Are Americans Preparing?" by Peter Brady of the Investment Company Institute. (The material is from three years back, but its numbers remain relevant, as retirement trends change only glacially.) Today's installment, also using that presentation's numbers, gives the rebuttal.

The first three rejoinders stand Friday's positives on their head. (The fourth and final item is new, but it largely follows from the previous three points.) The news about the U.S. retirement system is decidedly mixed, such that most data can support opposing viewpoints. Last column took the bright view of the numbers; this one does not.

The Bottom Is Lower
Friday's column pointed out that although Social Security is but a starting point for middle- and high-wage employees, who require considerably more income than is provided by Social Security to have an acceptable income-replacement rate during their retirements, it is close to a finishing point for low-wage workers. Per the Social Security Administration's projections, Social Security payments alone will replace about 80% of the income of very low earners (as the term is defined by the SSA).

That would seem to be a good thing--those who have the least are best served by the existing U.S. retirement structure. However, there is a flip side to the argument that Social Security payments are so generous as to almost match what the lowest-wage workers currently earn. Perhaps the situation is not that Social Security is generous, but instead that the salaries of the lowest-wage employees are markedly ungenerous. If so, then the deed rings hollow; receiving 80% of a substandard income isn't much of an achievement.

Such seems to be the case. In 1968, the U.S. minimum wage was $1.60. Adjusted for inflation, that is $11.30--far above today's federal minimum wage of $7.25. True, many states have implemented higher minimums, but save for the District of Columbia (which is not technically a state anyway, sorry fellas), none of those figures reaches $11.30. Another way to put the matter: 15 million Americans make less than $10 per hour, meaning that 15 million earn less than the lowest-wage worker from half a century ago.

For those employees, Social Security's victory would seem to be Pyrrhic indeed.

The Asset Mix Is Worse
Despite periodic talk of a retirement "crisis," the percentage of Americans with retirement assets is holding steady. That is, in 1989, among those households where the working head was aged 55 to 64, 79% had financial resources in addition to Social Security: a defined benefit plan, a 401(k) plan, an IRA account, or some combination of those three. The current figure is 81%. Of those households approaching retirement, four out of five have something.

The details, however, are less encouraging. In 1989, 55% of those pre-retirement households expected to receive defined-benefit payments, with most of that 55% possessing either 401(k) or IRA assets in addition to their pension plans. That made for pretty good protection--the assurance of guaranteed defined-benefit checks, plus in many instances also supplemental resources from tax-sheltered accounts. Today, the number of pre-retirees who expect to receive some sort of defined-benefit payments has declined to 40%.

What's more, the rise in 401(k)/IRA assets has not fully offset the decline in defined-benefit plans. Expressed in current dollars, the median size of 401(k)/IRA assets for the 1989 households, for those who owned such accounts, was $43,000. Now that amount is $110,000. Assuming a 4% withdrawal rate, that increase of $67,000 translates to an additional $2,700 in 401(k)/IRA income--a modest sum, given how many people have fallen off the defined-benefit lists.

Thus, when viewed from the highest level, the 401(k) system looks to have filled the gap left by the retreat of traditional pension plans, but that picture changes when looking through the details.

The Estimates Are Uncertain
As Brady shows, forecasts of the country's retirement readiness vary widely. For example, the National Retirement Risk Index shows that only 48% of working-age Americans are adequately prepared for retirement, while researchers John Karl Scholz and Ananth Seshadri peg the figure at 84%. That is quite the range! Retirement optimists--as this column was last week--cite these large discrepancies as evidence that the doomsayers have overstated their case. The truth is, there are many ways to measure how many assets Americans seem to have, and how much they will need to fund their retirements. Using a particularly gloomy estimate to predict disaster is irresponsible.

True enough. But so, too, is using a particularly cheerful estimate to assuage those fears. The concerns may indeed be overblown, and the drearier of the prophesies wrong. Or not. We just don't know. The best that we can say is that the existence of the retirement crisis has not been proved--but it has not been disproved, either.

Definitely in Trouble
Even the optimistic Brady--who believes that the U.S. retirement system is healthier than advertised, and who devised his presentation to advance that thesis--admits that certain segments of the population face real danger. He mentions:

  • Those with limited work histories.
  • Those who retire early because of poor health.
  • The unmarried (particularly women).

To which I would add: 1) workers at smaller companies, who are often neither covered by traditional pensions nor have access to a 401(k) plan (as, unlike with large companies, many smaller firms do not offer defined-contribution plans) and 2) the aforementioned lowest earners.

To be sure, these groups have always been the odd (wo)men out. Whether in 1967, or in 2017, those with scattered work histories and/or low incomes fall outside the conventional retirement scheme. If they are bailed out, it is by a family member--usually the spouse. Today's retirement system treats them no worse than usual.

Nonetheless, they cannot be regarded as a success. As Brady points out, even the most enthusiastic defender of the status quo must concede that the U.S. retirement system is not all-embracing. There are some who fall outside its grasp.

Note: This column was promised for Tuesday, but I overestimated my ability to think the day after a flight from Sydney. Sorry about that.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.