Can Americans Afford to Retire? New Evidence on Retirement Saving Adequacy

Abstract

INTRODUCTION The United States experienced a substantial risk transfer from the individual to the group in the arena over the last half century, with the development of massive government institutions such as social security and employer sponsored defined benefit pension plans, to protect consumption in old age. This pattern has now reversed, with new pension and saving vehicles transferring the responsibility for planning and its associated risks back to individual households. Are ready, and able, to assume this increased responsibility for their financial well being as they age? In this paper we describe, and evaluate, patterns in asset accumulation through review of prior literature, and our own analyses of a national sample of households on the verge of retirement. We offer an assessment of the claim that Americans do a poor job of preparing for retirement and some justification of why this may be the case. Our second goal is to evaluate patterns of asset decumulation, in order to determine whether the available financial (and other) tools are available to achieve satisfactory consumption during retirement. Finally, we outline approaches to assist in improving the targeting and management of accumulation and decumulation paths. How MUCH RETIREMENT WEALTH DO PEOPLE HAVE? Deciding whether people will have enough for requires evidence on saving patterns of workers as they age, as well as on their income needs. In this section we ask whether actual saving patterns are likely to be enough to protect retiree economic security. To this end we examine a nationally representative dataset of on the verge of retirement, the Health and Retirement Study (HRS), covering over 7600 households in 1992, where at least one family member was between the ages of fifty-one and sixty-one.(1) A summary of the evidence on wealth accumulations by type appears in Table 1.(2) Mean values, the average for the median ten percent of households, and averages for those households reporting each wealth source appear, along with the percentages of total wealth each asset class represents. Wealth in the study is divided into three categories:(3) (1) Financial wealth, which includes business assets, financial assets (such as stocks, bonds, and bank accounts less outstanding debt), dedicated assets including IRA and Keogh Accounts, and miscellaneous other financial assets; (2) Net home equity for homeowners equals the market value of owner-occupied housing less outstanding mortgage debt; and (3) Retirement wealth, equal to the actuarial present value of future social security and survivor benefits and pension benefits. The evidence shows that the average HRS household has just under half a million dollars in total wealth. Total wealth for the median ten percent of households (i.e., the group between the 45th and 55th percentile) is approximately $325,000, slightly more than two-thirds of the mean for the entire sample. The fact that the median is below the mean emphasizes the skewness of the wealth distribution. The composition of total wealth also differs for the mean and median household. For the average HRS household, wealth comprises slightly less than half of total wealth (forty-nine percent), financial wealth just over one-third of total wealth (thirty-seven percent), and the value of housing makes up the remaining fraction (fourteen percent). By contrast, for the median household, wealth comprises three-fifths (sixty-one percent) of total assets, housing accounts for one-fifth (nineteen percent), and financial assets the remaining twenty percent of total wealth. Social security wealth alone makes up forty-one percent of total assets for households near the median, with a value of about $134,000 in present value terms. …