Measuring Retirement Income Adequacy Not An Exact Science

Researchers have developed diverse approaches for quantifying the adequacy of retirement income, focusing on different groups of retirees and employing different definitions of income and adequacy, a CBO report notes.

The Congressional Budget Office (CBO) has issued a report explaining the various measures and approaches to measuring retirement income adequacy, providing a framework for further analysis of retirement income.

The report explains that researchers have developed diverse approaches for quantifying the adequacy of retirement income, focusing on different groups of retirees and employing different definitions of income and adequacy. For example, some researchers have computed the fraction of current retired workers whose income is below the poverty threshold and found it to be less than one-tenth of retirees. In contrast, others who have examined how income changes upon retirement project that a much larger fraction of current workers would experience a substantial decline in income as they retire.

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Researchers have defined the adequacy of retirement income in two main ways: whether it satisfies basic needs and whether it allows retirees to maintain the standard of living they experienced before retirement. The CBO notes that economists and financial advisers generally use the second definition because large drops in consumption in retirement are typically considered undesirable.

The most widely used measure of the adequacy of retirement income—a threshold based on the standard-of-living definition—is known as the target replacement rate. That rate is broadly defined as the amount of income in retirement, expressed as a percentage of income before retirement, that enables retirees to maintain the standard of living they enjoyed while working. Although a common rule of thumb is that replacing at least 70% of gross preretirement income would avoid a marked decline in retirees’ standard of living, the CBO says that specific goal is not appropriate for all people. To better capture the diversity of people’s circumstances, researchers have developed a range of target rates that vary with individual characteristics, such as marital status, lifetime income, and homeownership.

Without the ability to adjust factors used in replacement rate planning tools, workers may over- or under-estimate how much they need to save for retirement, the Government Accountability Office (GAO) concluded in a report.

NEXT: Different Measures Produce Different Results

Current measures of the adequacy of retirement income provide diverse answers about the state of retirement income security in the United States. That diversity stems from a number of sources. One source is which definition of adequacy is used (meeting basic needs or maintaining the preretirement standard of living). Other sources include which cohorts are analyzed and precisely how income and wealth are counted.

In general, researchers conclude that fewer than one-tenth of retirees will have income below the lowest basic needs threshold—the poverty threshold—while a much larger fraction of people are projected to have income that will fall short of maintaining their preretirement standard of living. For example, in one study, the authors projected that only about 6% of workers in their 40s and 50s would have future retirement income below the poverty threshold. In contrast, recent analysis using the National Retirement Risk Index (NRRI), a measure developed by the Center for Retirement Research at Boston College, indicated that about half of working-age U.S. households were “at risk” of not being able to maintain their living standard in retirement.

Even when the thresholds are based on the same broad definition of adequate income, the CBO says, researchers have made different analytical choices when constructing the adequacy measures, resulting in different findings. For example, in contrast with basic needs studies that rely on the poverty threshold, a recent analysis using the Elder Economic Security Standard Index, or the Elder Index—which is a basic needs threshold based on the larger expenses that are common among households with elderly members—found that about one-quarter of two-person households whose members were age 65 or older and more than half of the elderly people in single-person households would have inadequate income.

Similarly, according to a recent literature review by the Government Accountability Office (GAO), studies that evaluated the extent to which workers were able to maintain their preretirement living standards reached a broad range of conclusions. Overall, across the studies, the share of current workers who were at risk of having inadequate income ranged from about one-third to two-thirds.

Improving the Measurement of Retirement Income Adequacy 

Although a number of factors cause conclusions about the adequacy of retirement income to diverge, the CBO notes that recent research delves further into the role of data quality, examining differences between publicly available survey data and restricted-use administrative data. (Administrative data are collected for administrative purposes by governmental agencies, such as the Internal Revenue Service or the Social Security Administration.) The vast majority of studies on the adequacy of retirement income use self-reported data because that information is widely available. However, income is known to be underreported in surveys, particularly income from employer-sponsored pensions and other retirement accounts.

The report concludes that ongoing research is seeking to improve current understanding of the extent and nature of underreporting and to clarify how underreporting could affect conclusions about retirement adequacy.

Court Rules ERISA Statute of Limitations Can Be Waived

Defendants wanted their agreement to extend negotiations beyond ERISA's six-year statute of limitations to be nulled.

In an appeals case that the Secretary of the Department of Labor (DOL) brought against the TPP Stock Ownership Plan, the defendants argued that a waiver of statute of limitation rights they had agreed on with the DOL while trying to negotiate a settlement should be nulled.

In so doing, the plan’s trustee, Robert Preston, argued, the DOL’s charge that he breached his fiduciary duty and engaged in self-dealing in 2006 by causing the plan to purchase TPP stock at an inflated price, had passed the Employee Retirement Income Security Act (ERISA)’s six-year statute of limitations by the time of the DOL’s filing deadline of December 31, 2014. The DOL filed a second charge as to the self-dealing, in 2008.

The DOL, however, says that the defendants expressly agreed that they would “not assert in any manner the defense of statute of limitations, the doctrine of waiver, laches or estoppel, or any other matter constituting an avoidance of the Secretary’s claims that is based on the time within which the Secretary commenced such action.”

Since the parties failed to reach a settlement, the DOL filed its action against the TPP Stock Ownership Plan on December 30, 2014, one day before the deadline. The defendants moved to dismiss the Secretary’s complaint on the ground that all alleged violations occurred before December 30, 2008—six years prior to the complaint’s filing and, therefore, beyond the statute of limitations.

The district court agreed with the defendants that ERISA Section 1113(1) constitutes a statute of repose, rather than an ordinary statute of limitations, and “is not subject to waiver—even express waiver.” It dismissed all of the Secretary’s claims arising from events that occurred before December 30, 2008.

In reviewing the case, the U.S. 11th Circuit Court of Appeals considered multiple precedents and ultimately decided that ERISA, Part 4, does not “erect a ‘jurisdictional’ bar, so it is presumptively waivable.” The Secretary had argued (among other things) that the district court’s “categorical” rule that statutes of repose cannot be waived contradicts governing precedent, which instead requires a determination whether the applicable time bar is “jurisdictional.”

“In contrast,” the appeals court said, “Congress housed the ‘jurisdiction’ provisions, which delineate state and federal courts’ subject matter jurisdiction over ERISA  claims in an altogether separate part of the statute, namely, Part 5, titled ‘Administration and Enforcement.’ We hold that the provision is non-jurisdictional and, therefore, presumptively waivable. The defendants here executed a series of contracts in which they expressly—and, as they have since acknowledged, knowingly, willingly and voluntarily—renounced their rights under” ERISA Part 4.

While the court agreed that ERISA’s six-year statute of limitations is actually a statute of repose, it did not agree with defendants that such statutes cannot be waived at all. After citing several U.S. and State Supreme Court decisions that supported its decision, the court cited “good ol’ common sense,” noting that people can even waive their rights under the U.S. Constitution. “It would be passing strange—bizarre, in fact—to conclude that while a litigant can renounce his most basic freedoms under the United States Constitution, he is powerless to waive the protection of … ERISA’s statute of repose. No way,” the court wrote.

The 11th Circuit’s opinion can be viewed here.

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