Define ‘Crisis’

The word “crisis” has been linked to the U.S. retirement system off and on for years, but in 2024, it appears to have a stronger-than-usual showing. The Pew Charitable Trusts’ director of retirement kicked off 2024 with an article stating that “America Has a Retirement Crisis,” and just last week, BlackRock Inc. put out yet another survey noting that nine out of 10 Americans feel the country is facing a retirement crisis.

The data in these studies are often stark. No economist interviewed for this story denies that there are Americans who are struggling, or will struggle, in retirement. But they also agree that the word “crisis” can be misused. Some “crisis” prognosticators may have product or service solutions to sell. Others, policy programs to champion.

For Andrew Biggs, an economist and researcher who pushes back against the “sky is falling” retirement headlines, the dire outlook dates back to some of the first retirement risk models that emerged in the early 2000s.

“The crisis seems always to be right around the corner—but they were saying it’s right around the corner years ago,” says the senior fellow at the American Enterprise Institute. “There just isn’t much data to support [a retirement crisis]. Maybe it’s just not going to happen.”

So what data do Biggs and his economist colleagues evaluate to measure the U.S. retirement system?

They often, he says, consider whether a retiree’s income matches, or at least comes close to, their working-age income. Biggs sees these data as showing that the majority of Americans are doing pretty well—but for other economists, it will depend on how much they view as ‘enough’ income replacement.

“Is it 70%? Is it 75? Is it 85%?” he asks rhetorically. “What do we assume about how spending changes in retirement? In reality, spending declines … so that affects your numbers.”

A second approach to the data is to “just ask people.” Here, Biggs believes these personal opinions are important, because the individuals have both outside information that may not be captured in publicly available data and their own goals of how they want to live in retirement. When evaluating these data, he notes that, historically, about 70% to 80% of people say they have enough to live comfortably.

There will be, he admits, some who will fall short due to unexpected circumstances or mismanagement. But when he evaluates the number of people this may happen to, he sees the issue as more of a “challenge,” not a “crisis.”

Risk Index

Economist Alicia Munnell has recently worked with Biggs on a defined contribution project, but she is generally considered to be on the other side of the debate: she often points out shortfalls in the U.S. retirement system in her position as director of the Center for Retirement Research at Boston College.

The center’s National Retirement Risk Index, which Munnell says has evolved over the years, analyzes data such as the federal reserve survey of consumer finances, the assets of working households and Social Security benefits, among others, to create a measure of income replacement for Americans. While the index has, in the past, shown as many as 51% of Americans facing an income shortfall, the most recent finding pegged the shortfall at 39%.

“I have no need to call that a crisis, but that is a non-negligible percentage of American households that are going to find they have less money than they did before retirement,” Munnell says. “That is not to say they can’t accommodate, that is not to say they will be miserable, but it seems like something to be addressed.”

When it comes to the often-rosier views that Americans report in surveys, Munnell is suspect about the responses. That’s because, in part, Americans tend to say they are doing well even as they manage through income shortfalls. She has published research about how people identify “regret” in terms of how they prepared for retiremen, and notes that those statistics are closer to the national retirement risk index findings.

“Whether you are on one side of this issue or another, you can point to something that says that there is no problem,” she says. “I don’t believe there is no problem. I believe there is a problem, but we can do things to help.”

The Rest of Us

Christian Weller, a professor of public policy at the University of Massachusetts Boston’s McCormack Graduate School of Policy and Global Studies, has written about the failures of the U.S. retirement system, including in his 2015 book, “Retirement on the Rocks.” In the nearly 10 years since it was published, Weller believes the retirement situation in the U.S. has not improved, despite attempts in both policy and product evolution.

“It’s frustrating,” he says. “Things have not been on an improving trajectory.”

Weller says he “waffles” on whether to use the term “crisis” when speaking about retirement. But as he details in a recent article in Forbes, he turns to the Federal Reserve’s Survey of Household Economics and Decisionmaking, or SHED, to consider the situation. He does not look as much at the answers about how people feel about retirement, but mostly at statistics showing their ability to pay bills in the recent past, the present and their ability to handle small emergencies in the future. By this measure, he argues, the SHED shows that about half of retirees have struggled with “some aspects of their finances in recent years.”

“These are the people who sort of, kind of have the money to pay their bills, but they struggle—and it’s with this group that Andrew [Biggs] and I part ways,” he says. “What do you do with someone who has medical debt, who may have a tax lien on their house? … Even with relatively high income, there is a fine balance between their income and their costs, especially if something goes wrong.”

As people age, Weller notes, there is a high propensity for financial needs to emerge, particularly around health. When considering the people whose finances are most on edge, they tend to skew toward older African Americans, Latinos and single women, he says.

“These are people who had decent incomes, but maybe they didn’t save enough or take advantage of the benefits enough, and that money can be gone in a snap if something comes up,” he says.

Define ‘Enough’

Check out David Blanchett’s LinkedIn page, and you might, on any given day, find him weighing in on the state of retirement in the U.S.—charts included. He, like Biggs, takes issue with the hand-wringing headlines.

“I’ve been hearing about these echoes of a crisis, of this massive calamity, for a long time,” says Blanchett, managing director, portfolio manager and head of retirement research for PGIM DC Solutions. “The problem is that when you ask retirees how they are doing, you don’t see [a crisis]. To me, it’s become something of a self-fulfilling prophecy.”

Blanchett says part of that prophecy relies on people assuming they need to fully replace their pre-retirement income. In reality, he says, having that level of income is a great goal, but not actually essential for people to live well in retirement.

“It may be true that many people are not saving enough for retirement, but how we talk about those shortfalls is really important,” he says. “I really hate these surveys that say the average American needs to save $2 million. … There is a growing disconnect between what people think they need to actually be happy and what it actually takes to be happy when you eventually retire.”

Blanchett is working on research he believes will better align what people have and what they need. Instead of forecasting retirement outcomes based on working income and spending, it looks to consider levels of “financial well-being.” With that pivot, the modelling shows the country facing a “retirement income challenge,” but not a crisis, he says.

Financial Well-Being by Respondent Age and Household Consumption

Source: Health and Retirement Study, Institute for Social Research, University of Michigan; David Blanchett’s Calculations. Analyzes findings from 2000 to 2020.

Blanchett is clear to point out that this does not mean he thinks people should not be saving more for retirement or that the system should not be improved. Rather, he hopes for acknowledgement that retirement shortfalls from current spending levels are not “as cataclysmic as commonly suggested.”

Both Blanchett and Biggs noted the importance of looking back, as well as forward. For instance, Biggs pushes back against statements about the halcyon days of the workplace defined benefit pension.

“In the private sector, DB pension coverage peaked at 39% in 1975,” he says.

Meanwhile, he notes, in 1992, 62% of seniors said they could at least maintain their pre-retirement standard of living, and by 2022, that rose to 77%.

“If you think about it, it makes sense,” Biggs says. “We’re saving more for retirement, more people have retirement plans and we’re retiring later. We now know [the results of the DC system]. A lot of these questions that get asked are 1975 questions. They’re not the right questions for today.”

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