There’s a policy debate over how well-prepared
Americans are for retirement. Some analysts see a modest and
manageable problem with retirement saving. Others predict a “retirement crisis”
affecting the majority of the population and creating a multi-trillion dollar
“retirement saving gap.” There are several facets to this debate. But the most important,
yet the least-known, is the assumption that having kids is bad for retirement
security. Arcane as it may sound, if you don’t accept that assumption it’s hard
to conclude that Americans face a true retirement crisis.
Research by University of Wisconsin economists Karl
Scholz and Ananth Seshadri shows that households with kids save less for
retirement than similar households without kids. A married couple without
children has about 10% greater wealth than a similar couple with two kids. If
we compare households’ actual retirement savings to pre-determined target
wealth levels, which is a common practice among retirement researchers,
households who had kids are more likely to fall short. While it’s never
framed this way, the implicit assumption is that having kids causes you to
undersave for your retirement, and the more kids you have the worse off you
are.
Parents give up a lot in order to raise their kids. As a
father of a kindergartener, I can personally attest that my consumption of
peanut butter has risen exponentially while caviar and fine wine have, alas,
fallen off the menu. Parents’ sacrifices translate to a lower material standard
of living in their pre-retirement years. But their compensation, in addition to
the obvious satisfaction of raising a family, is that it takes less wealth
to replicate that lower pre-retirement standard of living once they stop
working.
This isn’t a side-issue in the retirement saving debate. The
Center for Retirement Research at Boston College – which rejects the “peanut
butter theorem” – estimated that adjusting retirement income goals to
account for the effects of having kids would lower their projection that 52
percent of households are undersaving for retirement to just 17 percent. My own
work, which compares retirement incomes to the pre-retirement incomes
that parents can consume after caring for their kids, shows similarly
dramatic effects. No other methodological choice has such a
large effect on how we view retirement saving adequacy.
There’s an academic debate over how children affect saving,
which in recent years has focused on the narrower question of how
households’ retirement saving changes once kids leave home. Some studies find
that households don’t increase their saving, a result that would undermine the
peanut butter theory. Other studies find that households do save more once
kids leave the nest, though it takes about four years – and longer, for parents
with kids in college – for saving levels to adjust.
I don’t personally find this angle dispositive. Some
parents might have a spending splurge to celebrate an empty nest, delaying
changes in their consumption. And, due to the well-documented power of inertia,
many individuals leave their retirement saving on autopilot. It’s not
surprising that household saving doesn’t turn on a dime. What matters more is
how households save over their full careers, not merely the few years before
and after their kids leave home.
But while this academic debate continues, there’s a simpler
way to tell if parents are undersaving for retirement: just ask them. Which is
precisely what the federally-sponsored Health and Retirement Study does. The
HRS asks retirees questions such as:
We know that parent retire with less wealth than
non-parents, all else equal. If those parents truly are undersaving for
retirement, they should be more likely than childless retirees to answer the
HRS’s questions in a negative fashion. But research by RAND
Corporation economist Suzanne Rohwedder shows that they don’t: there is no
statistically significant difference in responses to the HRS questions between
retired parents and similar retirees who don’t have kids. Retired parents are
just as satisfied with their standards of living as households who didn’t have
children.
One explanation is that retired parents are in denial. They should be
unhappy, but they just don’t know better. A better explanation, in my view, is
that many parents are following the peanut butter theory of retirement saving.
If that’s the case, then the retirement crisis we’ve all
come to fear is in fact something much smaller and more manageable. Yes, some
Americans don’t save enough. And Social Security and state and local government
pension plans are still in deep financial trouble. But there’s less reason to
believe that large swaths of the population are systematically undersaving for
retirement. And there’s less cause for panic and greater prospects for
reasoned, targeted steps to expand opportunities to save for retirement saving
and to put entitlement programs back on track.
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