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What Retirement Crisis?

Americans face challenges, but thanks to Social Security, most will be OK.

When you hear the word crisis, what comes to mind? The definition of crisis is “a time of intense difficulty, trouble, or danger.” In recent years, it also has crept into usage to describe the state of retirement in America. We don’t think retirement is in a crisis. We might have a retirement savings crisis, though.

The notion of retiring is a recent phenomenon. In 1880, roughly 75% of men 65 years and older were still working. Life expectancy (at birth) was about 45 years. Today only about 25% of men 65 years and older are still working, and life expectancy is 78 and climbing.1 People are actually retiring!

According to the Social Security Administration, about 90% of retired Americans receive Social Security, and the remainder receive some other type of pension benefit. In other words, the vast majority have a solid foundation even if they haven’t saved a dime. Take away Social Security, and we would have a crisis on our hands, but preventing retirees from being destitute was why the Social Security program was created.

Current retirees would appear to agree with us based on survey data. For example, according to the University of Michigan Health and Retirement Study, roughly 90% of retirees describe themselves as satisfied or very satisfied with retirement. The fact that most retirees are pretty happy isn’t suggestive of a crisis situation.

Perception of a Problem
So, why does everyone think we are facing a retirement crisis? It is at least partially driven by perception, most likely fueled by the media.

In a recent Vanguard study,2 researchers polled investors within a decade of retiring and recent retirees in four countries. In the U.S., roughly half of the respondents thought there was a national retirement crisis. But only 10% of those nearing retirement and 4% of retirees described their own situation as a crisis. Perhaps ignorance is bliss, but the fact is that most people don’t consider themselves in a crisis state.

Things could take a turn for the worse, though. Defined-benefit plans are increasingly closed to new workers, especially in the private sector. That means the American worker is increasingly responsibile for saving for retirement, and as a society, we haven’t been up to the task. While many employees have access to a definedcontribution plan through their employer, they generally aren’t saving enough. Those who don’t have employer-sponsored plans must rely on vehicles such as individual retirement accounts to save for retirement—which they overwhelmingly aren’t doing. Nascent state-run plans have a way to go before they can fill in the gap.

A Savings Crisis?
Unless savings rates increase, many people will have to cut back on spending in retirement. We don’t think this qualifies as a retirement crisis, but it isn’t much of a stretch to say we have a retirement savings crisis. This may not lead to a full-on retirement crisis in the future, again because of things like Social Security, but we should work on improving the system. This is especially important because we expect future market returns to be lower than historical averages, which increases the importance of savings when it comes to funding retirement.

While automatic enrollment has improved participation in defined-contribution plans, savings rates haven’t increased all that much because default savings rates have been too low (3% used to be typical, but this is increasing). Other features that can improve savings rates, like automatic savings escalation, aren’t typically a plan default.

Mandatory savings is another option. This could be employee savings (as in the U.K. system) or employer savings (as in the Australian system). These would likely be a tough sell in the U.S., but we probably need to implement something similar to materially improve retirement readiness.

Promising Signs
We do see encouraging developments. Retirement plan fees are decreasing, plan default rates are increasing, and auto-enrollment is more prevalent than ever before. Employees are open to working longer or phasing into retirement, which can have a significant impact on their ability to sustain themselves through retirement. All of this is good news. It suggests that Americans are better positioned for retirement than some might say.

This information is provided for informational purposes only. Morningstar Investment Management LLC is a registered investment adviser, subsidiary of Morningstar, Inc., and shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions or their use. Opinions expressed are as of the current date and are subject to change without notice.

1 Munnell, A.H. 2011. “What Is the Average Retirement Age?” Center for Retirement Research at Boston College. August, No. 1–11.
2 Madamba, A. & Utkus, S.P. 2017. “Retirement Transitions in Four Countries.” Vanguard Research. January. 

This article originally appeared in the Winter 2019 issue of Morningstar magazine. To learn more about Morningstar magazine, please visit our corporate website.