Retirement 'Deficit' Measured in Trillions

thestreet


The financial gap between what Americans need for retirement and what they have is $4.6 trillion as a national aggregate and an average $48,000 per person, according to congressional testimony by the Employee Benefit Research Institute.

Jack VanDerhei, EBRI's research director, was among those testifying at a hearing Thursday, The Wobbly Stool: Retirement (In)security in America, convened by the Senate Committee on Health, Education and Labor. Testimony and video of the hearing on U.S. retirement income adequacy is available online.

EBRI is a research institute based in Washington, D.C., that focuses on retirement and economic security issues. Its analysis estimates how much money will be needed for "basic" expenses (such as food and shelter) and uninsured health care costs in retirement, and what financial resources retirees are likely to have.

The deficit projection assumes no changes to the current Social Security benefit structure. If Social Security benefits were to be eliminated, the aggregate deficit would jump to $8.5 trillion and the average amount would increase to about $89,000.

The National Retirement Income Adequacy Deficit: $4.6 Trillion

The total aggregate national deficit in U.S. retirement income adequacy is an estimated $4.6 trillion—or about $48,000 per-individual average, according to congressional testimony by the nonpartisan Employee Benefit Research Institute (EBRI).

Reflecting the importance of Social Security, the EBRI analysis finds that if Social Security retirement benefits were eliminated, the aggregate retirement income deficit would almost double, to $8.5 trillion, or an individual average of approximately $89,000.

"These numbers show that the national retirement income deficit—which is already quite large—would almost double without current-level Social Security benefits,” said Jack VanDerhei, EBRI research director, testifying at a hearing Oct. 7 by the Senate Committee on Health, Education, Labor and Pensions.

The Senate HELP Committee’s website for the hearing is online here.

America's $4.6 trillion retirement hole

money.cnn.com

On average, U.S. workers would need to have an additional $48,000 when they retire at 65 to ensure they don't run shy of cash in retirement, the Employee Benefit Research Institute said.

All told, the group estimates that the national retirement deficit is $4.6 trillion.

The research group estimated how much money retirees will need for "basic" expenses such as food, shelter and uninsured health care costs. It compared those expenses to the financial resources workers are likely to have at the typical retirement age, including Social Security, pensions and savings plans such as 401(k)s.

If Social Security benefits are deducted, the group estimates that the national retirement deficit would jump to $8.5 trillion, or about $89,000 for the average worker.

In all cases, low-income workers are most at risk of not having enough savings to retire on, Jack VanDerhei, research director at EBRI, told lawmakers Thursday. EBRI estimates that 41% of low-income Baby Boomers will run short of money within 10 years of retirement.

However, he noted that the number of households that are projected to have inadequate retirement income has declined since the last time EBRI studied the topic in 2003.

VanDerhei said the improvement over the last seven years is largely due to an increase in the number of employers that automatically enroll workers in 401(k) plans.

Automatic enrollment, which allows workers to opt out, can increase participation in retirement savings plans dramatically, he said, particularly among lower-income employees.

Retirement Readiness: Can Employers Do More?

Workforce


EBRI’s Retirement Readiness Rating examined retirement preparedness levels by age and income and found that no group is completely prepared. Nearly half (47 percent) of early boomers, people ages 56 to 62, won’t have enough for regular living expenses and uninsured health care costs. Nearly two-thirds (64 percent) of Americans in the two lowest pre-retirement income levels will likely exhaust retirement savings after 10 years.
     While higher-income workers fare better, 5 percent may run out of cash after 10 years, and 13 percent may run out after 20 years of retirement, the study says.
     “We have to do more than worry about whether people are saving; we have to worry about whether they are saving enough,” says Jack VanDerhei, EBRI’s research director.
     The study, which was last conducted in 2003, took into account new pension funding trends including an increased number of defined-contribution plans (versus defined-benefit plans), automatic enrollment and automatic escalation of employee deferrals. (Under automatic escalation, the employee’s contributions are increased unless the employee specifically intervenes to halt the escalation.) People were considered to be at risk if their projected savings fell below a combination of certain estimated spending levels, including the Bureau of Labor Statistics’ Consumer Expenditure Survey.
     Compared with 2003, Americans are saving more today, lowering risk levels. That year, early boomers had a 59 percent chance of being at risk, versus 47 percent today; late boomers, ages 46 to 55, had a 54 percent change of being classified as at risk in 2003, versus 43 percent now. With the growing trend of plan sponsors moving from defined-benefit plans to defined-contribution plans, the higher savings rate does show that 401(k) plans can work, VanDerhei says.

WSJ: Another Threat to Economy: Boomers Cutting Back

WSJ

Low yields present retirees with a difficult choice: Accept the lower income offered by safer bonds, or take the risk of staying in the stock market. Either way, their predicament could put a long-term damper on the consumer spending that typically drives U.S. growth.

"If these rates stay as low as they are, then a lot more people are going to be hurting," says Jack VanDerhei, research director at the Employee Benefit Research Institute. The non-partisan outfit estimates that if current conditions persist, nearly three in five baby boomers will be at risk of running short of money in retirement. "There are going to be many luxury items that will simply have to be eliminated," for retirees to make ends meet.

...

At the same time, the return people can hope to earn on their assets has fallen, particularly for those who switch into bonds or annuities to guarantee a fixed income. The average yield on U.S. government, corporate and mortgage bonds stands at about 2.4%, while stock-market valuations suggest a long-term return of about 6%. At those levels of return, some 59% of people aged 56 to 62 will be at risk of not having enough money to cover basic living and health-care costs in retirement, estimates Mr. VanDerhei. If market returns are higher—8.9% for stocks and 6.3% for bonds—the picture isn't a lot better: The percentage at risk falls to about 47%.

USAT: Boomers wanting to work past retirement age find limited options

USA Today

Nearly half of Baby Boomers ages 56 to 62 are at risk of not having enough savings for basic expenses and uninsured medical bills, according to Employee Benefit Research Institute's new Retirement Readiness Rating. And 41% of the lowest-income older Boomers .... are likely to run short of money after 10 years of retirement.

Health care, variable payouts factor into retirement puzzle

Rockford Register Star

The EBRI study, last done in 2003, evaluated national retirement income adequacy based on a database of 24 million 401(k) participants. The newest version takes into account many new retirement plan changes, such as auto-enrollment and auto-escalation of contributions in 401(k) plans, as well as updates on the financial market and employee behavior.