There is ample disagreement about whether Americans are
sufficient savers. Some researchers find that American retirement saving is
woefully inadequate: the Boston College Center for Retirement Research estimates that
in 2010, 53% were on a path to having insufficient assets to comfortably retire
at age 65 and puts the total under-saving gap as high as $14 trillion. But
this evidence contrasts sharply with some academic studies by prominent
economists who found that the share of under-savers was just 15.6 percent in
1992 and had only risen to 25.9 percent by 2004, with small average
deficiencies among inadequate savers.
The ongoing debate about Americans' saving behavior during
their working years, however, misses the equally important question of whether
retirees will spend their nest egg in the right way. For millions of older
Americans, securing a sound retirement means both accumulating wealth while
working and, importantly, transforming that wealth into lifetime security through
vehicles such as annuities, long-term care insurance, and even reverse
mortgages.
Insurance markets are important for some retirees, but not
all. For example, Social Security and Medicare are often sufficient, or nearly
sufficient, to enable workers with low lifetime earnings to achieve a standard
of living in retirement that comes close to matching their pre-retirement
income. On the other end of the spectrum, workers with high lifetime incomes
can often "self insure" by effectively over-saving during their
working years then bequeathing any unspent wealth to their heirs at death.
For everyone else, markets for insurance-like products can
be a critical tool for achieving retirement security. Without these markets,
households either under-save and hence risk retirement security or over-save to
protect against various retirement risks-not the least of which is living
longer than expected-and consequently enjoy less consumption and happiness over
the course of a lifetime. The problem for many retirees is that they simply
don't have access to or knowledge of insurance products that can help to
provide security.
Annuities are frequently eschewed by American households,
with fixed annuity contracts amounting to just over 1 percent of
retirement account wealth among 66 year olds in 2008. There are lots of
reasons-collectively referred to as the "retirement puzzle"-for why
workers on the cusp of retirement don't purchase these products. Low-interest
rates are one key factor; another important barrier is the high potential for
soaring out-of-pocket health spending.
Long-term care risk
is a very real threat to older Americans, but few households carry private
insurance. In recent years, only one-in-ten elderly people carried long-term
care insurance, and the annual growth rate of new premiums has been stagnant
for at least a decade. One notable concern with long-term care insurance is the
low expected benefit relative to the cost.
Lastly, reverse mortgages potentially offer seniors a
vehicle for turning housing equity into cash without forfeiting a spot in their
homes. While reverse mortgages showed signs of life through the Home Equity
Conversion Mortgage program, which originated 400,000 reverse mortgages between
the inception of the program in 1989 and 2007, the market remains plagued by
reports of improper lending behavior and misunderstanding among borrowers
The Treasury Department released a smart set of regulations
last month that would make it easier for savers to purchase longevity annuities
- annuities that feature a gap between purchase and onset of benefits - in their
retirement accounts by relaxing rules on minimum distribution requirements. In
2013, Congress passed a reverse mortgage reform bill that would provide elderly
borrowers with better protections and more education.
Americans are not perfect savers, but retirement security
requires much more than just a high personal saving rate. Contrary to public
sentiment, America has a retirement spending problem, not just a saving one.
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