Americans Saving an Average of 8% for Retirement

A speaker at PSCA’s 71st Annual National Conference suggests reports of Americans retirement savings inadequacy are overblown and offers data to back that up.

Andrew G. Biggs, resident scholar at American Enterprise Institute, told attendees of the Plan Sponsor Council of America (PSCA) 71st Annual National Conference, that for most of his 20 years in the retirement industry, if someone had asked him if Americans are undersaving for retirement, he would have said they were.

However, he’s been looking at the research and claims that indicate there is a retirement crisis in America and suggests they are understating what Americans will have for retirement income and overstating what they will need. “The outlook is more positive than what the stories tell,” he said.

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Biggs said retirement planning is about maintaining a person’s standard of living from work to retirement, and keeping consumption smooth over time. Total retirement savings in public- and private-sector retirement plans, individual retirement accounts (IRAs), annuities and Social Security income is about $48 trillion. According to Biggs, academic studies report a retirement savings gap of around $1 trillion; the Center for Retirement Research (CRR) estimates it at approximately $6 trillion and the National Institute for Retirement Security (NIRS) says it is $14 trillion.

Biggs argued that the Current Population Survey (CPS), on which many research studies are based, is a “terrible source of information about retirement income.” This is because it counts regular payments, such as monthly Social Security benefits or monthly payments from annuities, or pensions as income, but if someone takes irregular payments, such as withdrawing from a defined contribution (DC) plan only when funds are needed, that is not counted as income. “The CPS only captures 58% of retirement income that Americans actually report to the IRS,” he says.

Data from the Internal Revenue Service (IRS) and the Census Bureau shows that the percentage of households receiving income from private retirement plans doubled from 1984 to 2007. According to IRS data, poverty in retirement is falling. “That is success,” Biggs said.

In addition, the Social Security Administration reports that one-third of retirees depend on Social Security for 90% of their retirement income. However, according to Biggs, research from economists Josh Mitchell and Adam Bee, using IRS data, shows only 18% of Americans are highly dependent on Social Security for retirement income, and only 12% receive 90% of income from Social Security. These economists find that a typical retiree has 114% of replacement income five years before claiming Social Security.

Biggs also noted that some studies say if retirees don’t have annuity payments, they will spend their money down and not have enough to last through retirement; however, government research shows that for people who retired in the 1920s, their net worth increased over time. “This is because people tend to spend less in retirement—they’re not buying houses or expensive cars,” Biggs said. “Most retirees are savers. They’re not drawing down retirement savings, but building up their assets. There are exceptions, but this is the trend.”

There is also the claim that health costs eat up retirees’ savings, but Biggs pointed out that the Consumer Expenditure Survey found health outlays are essentially flat over the years in retirement. Other surveys show the median household spends only $7,000 in long-term care. “Medicare does pay some, and other benefits may pay some,” Biggs said. “If health care costs were going through the roof, we would see more retirees file for bankruptcy, but the data shows more employees than retirees file for bankruptcy.”

According to Biggs, Federal Reserve data shows retirement savings are at record levels. Americans saved an average of 6% in 1975, but in 2013. that was 8%. Biggs said this may seem small, but “if you go through life saving 8% versus 6%, you will have 33% more retirement income.”

He also noted that there are now two parties contributing to Americans’ retirement savings, the employee and the employer, where before it was only the employer. “Everyone talks about the good old days of DB [defined benefit] plans and the retirement crisis is because of the switch from DB to DC,” Biggs said. “But, at the peak, only 39% of Americans participated in a DB plan and a Congressional study found only 10% of those who participated in a DB plan actually received a benefit from it. Whether one gets money from a DB plan depends on vesting and funding.”

Biggs noted that Employee Retirement Income Security Act (ERISA) requirements caused many corporate plan sponsors to move away from DB plans, and that is why there are still so many public-sector DB plans—no ERISA requirements. He also points out that “even the smallest estimates of underfunding of government DB plans are bigger than the largest estimates of undersaving by households.” He adds, “This does not tell me we need to shift retirement savings from households’ hands into the government’s hands.”

Biggs does not say that attempts to overcome the retirement savings “crisis” are necessarily bad, but they need to be considered. For example, a study of Federal employees automatically enrolled in the Thrift Savings Plan showed savings did increase, but debt increased even more. “We try to get the poorest to save for retirement, but do they need to?” he queried.

“We need a better analysis of retirement savings issues and to rely less on interest group studies,” Biggs said. “If today’s workers are saving well and today’s retirees are doing well, then my gut says tomorrow’s retirees will be ok.”

Biggs suggested some things that do need to be done to improve retirement savings adequacy:

Fix the big problems – Social Security, the Pension Benefit Guaranty Corporation (PBGC) and state and local retirement plans are facing insolvency. Biggs suggests Social Security be enhanced for the poor.

Pick the low- hanging fruit – He recommended making auto enrollment universal and raising the default deferral rate, but considering exempting low-income employees from auto enrollment.

Addressing expanding retirement plan coverage for employees – Biggs said multiple employer plans (MEPs) will help, but wonders whether we should embrace state-run auto-IRAs or a federal alternative for employees without DC plans.

“If there’s a case for the auto-IRA, it is for lower-income people to use that in order to delay claiming Social Security,” Biggs said. “Even if you’re in the category of someone whose projected longevity is lower, there is still a lot of uncertainty, so I think there is value in insuring yourself from poverty at the point of life when you have fewer options, so I think that is a case for delaying Social Security claiming.”

Employers Likely to Ramp Up Student Loan Repayment Benefits

While not a traditional topic for retirement specialist advisers to speak about, experts agree that student loan repayment benefits are a powerful boon to financial wellness programming—and a topic that financial advisers should learn more about. 

Student loan education, repayment and refinancing specialist CommonBond on Tuesday hosted a panel discussion about the topic of “the missing benefit,” by which the mean payroll integrated student loan repayment and refinancing support for employees.

Journalists and financial industry professionals were invited in by the firm to hear speakers, including Healther Coughlin, U.S. solutions leader for financial wellness at Mercer, along with Naz Vahid, managing director and law firm group head at Citi Private Bank, and Tara Malone, vice president of employee benefits for Young & Rubicam Group. The panel spoke broadly about the student loan debt challenges facing workers across the United States, and they all agreed that both employers and employees will benefit from greater uptake of student loan repayment benefits.

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According to the panel, the total amount of U.S. student loan debt has topped $1.4 trillion, including nearly $75 billion in “parent PLUS loans” taken out by individuals on behalf of their kids. In terms of workforce percentages, fully 72% of workers say they have outstanding student loans or had successfully finished repaying loans while working. While it’s probably not a surprise to hear that 59% of those ages 22 to 44 currently carry student debt, it is perhaps more startling to see that 21% of workers over the age of 45 currently have student debt. Other stats show 10% of individuals have both their own student debt and that of a friend or family member that they are responsible for, while 21% plan to take out debt in the next five years to help finance somebody else’s education.

“These numbers show that student loan debt repayment is a universal workforce challenge,” Coughlin stressed, citing her own statistics from within the Mercer book of business. “It is not just an issue for Millennials.”

Nor is it only in lower-earning jobs and industries that individuals struggle to repay student debt. From her perspective working with law firm clients, Vahid suggested it is not uncommon to hear about younger married couples with more than $1 million in combined student loan debt. According to Common Bond’s survey data, twice as many people with student debt than without are worried about their personal finances, and across all generations, financial worries drop drastically for those people who do not have student debt.

Sharing her perspective as an active HR corporate professional, Malone suggested the impact of student debt is so pervasive and damaging that workers aren’t opting into traditional financial wellness benefits that highlight saving for the future. Indeed, 61% of survey respondents who say they worry about their finances regularly also say student debt has delayed or prevented them from saving for retirement.

Plugging for its own services, which include helping employers establish payroll integrated student debt repayment benefits, CommonBond experts suggested most financial wellness programs, as they have been rolled out so far, are tailored to workers without student debt. As CommonBond VP of Partnerships Leigh Gross pointed out, approximately four in five HR leaders reached for the survey indicate they are planning to make improvements to their employee benefit offerings within the next three years, but they are failing to take into account those with student debt.

“For workers aged 22 to 34, student debt significantly outranks retirement as the top financial concern,” he noted. “Those without student debt had a much different perspective. Retirement and health care were cited as their biggest financial stresses—as they should be.”

As the experts explained, there is something of a disconnection between what employers view as the most progressive and valued benefits, versus what employees want to see. Employers are proud of their offering of “general financial planning” and of “tuition reimbursement.” Yet employees across all age groups and industries with student debt consistently rank student loan repayment support ahead of tuition reimbursement and financial planning as a preferred benefit.

The speakers all indicated that offering student loan repayment is a tremendous way to improve the loyalty and longevity of Millennial employees—and to attract new talent of all generations in competitive industries. Currently only about 5% of employers in the U.S. offer any type of student loan repayment benefit, but Coughlin suggested Mercer believes this type of benefit “could soon become table stakes.” Tied to proper education and the availability of 529 college savings plans, the offering of student loan repayment support can help individuals as much or more than any other single benefit, she concluded. 

“More than 86% of employees who have student debt for themselves or others, or are planning to take out loans in the next five years, said they would be more inclined to stay at their current company if their employer provided monthly student loan repayment support,” Gross noted. “Additionally, 85% of those said they would commit to staying at least three years or more. Another 41% said they would stay at least until their loans were paid off.”

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