Sen. Maria Cantwell claimed at a recent congressional
hearing that 92% of Americans are unprepared for retirement. Other senators
noted studies claiming that 53% to 84% of Americans will have inadequate income
in old age. Progressives cite these statistics as grounds for increasing Social
Security benefits, and the New America Foundation wants to curtail tax incentives
for private retirement plans because it says these plans have failed.
These statistics are vast overstatements, generated by
methods that range from flawed to bogus. Changing policy based on these
fanciful claims would threaten government budgets, not to mention the income
security of future American retirees.
In a 2013 study the Organization for Economic
Cooperation and Development compared the incomes of a country's retirees with
the average income in that country. The results show despite a supposedly
stingy Social Security program and ineffective retirement-savings vehicles, the
average U.S. retiree has an income equal to 92% of the average American income.
The OECD's figures actually understate the adequacy of Americans' retirement incomes.
The more accurate measure of a retiree's ability to maintain his standard of
living is to compare retirement income to that same individual's work earnings.
The Social Security Administration's Office of Retirement
and Disability Policy has done that with a sophisticated computer model that
simulates individuals' earnings, savings, pensions and Social Security
benefits. The model shows that in 2012 the income of the median 67-year-old
exceeded his career-average earnings, adjusted for inflation. Since the cost of
living generally is lower in retirement, today's retirees typically have a real
standard of living higher than during their working years.
SSA estimates that the typical Gen-X household will have a
retirement income equal to 110% of its real average earnings during its working
years. More retirees will depend on IRAs and 401(k) plans while fewer will have
traditional pensions. But retirees care most about how much money they have;
interest groups care about where that money comes from.
OECD data also tell us higher government pension benefits
don't necessarily mean greater retirement income. U.S. Social Security is less
generous than the average public pension plan. But the OECD data show a strong
negative relationship between the generosity of public pensions and the income
that retirees collect from work and private saving.
The statistics claiming that vast majorities of Americans
are unprepared for retirement suffer from myriad methodological flaws. Some errors
are simple, such as assuming that every individual should follow a precise but
arbitrary schedule in determining how much to save for retirement each year.
Others are more technical, such as how to project future earnings for
individuals working today. Together, these factors cause studies to overstate
how much income Americans will need in retirement and understate how much
income they will have.
If U.S. Social Security benefits are increased, the country
will very likely experience lower employment and saving. This in turn will
undercut the economic strength upon which government entitlements depend.
Social Security does need reform, both to ensure solvency and to better serve
low-income retirees. And we should improve access to and the use of private
saving plans. But the retirement crisis narrative will lead the country down
the wrong policy path.
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