Taking the optimistic view.
I have been working with two Morningstar colleagues on a white paper about the U.S. retirement system (scheduled for November release). Part of that task requires reviewing the existing research. One of the best overviews is Retirement: Are Americans Preparing? by Peter Brady of the Investment Company Institute.
Unlike many retirement researchers, Brady finds the glass to be half full. This column summarizes those arguments. They are not points that you have necessarily heard, because most discussions of the U.S. retirement system are unrelievedly gloomy, describing a “crisis” that seemingly cannot be averted. The news, as we shall see, is not that bad.
That said, Brady takes a decidedly upbeat view of the matter--as is to be expected from somebody who represents mutual funds, which occupy the center of the current retirement structure. The glass is indeed half full, but that does leave the other half empty. Tuesday’s upcoming column, “4 Negative Signs for U.S. Retirements,” will take the other side of the debate.
Declining Poverty Rates
Overall, U.S. poverty rates have been roughly stable since 1970, even as overall wealth (as measured by per-capita gross domestic product) has doubled. That is a disappointing outcome and has justifiably stimulated much discussion. One would hope and expect that a rising economic tide would lift more boats, rather than the same number of boats that it had previously supported.
The elderly have been a happy exception. As the '70s began, the elderly had the highest poverty rate among the three major age cohorts. Per U.S. Census Bureau estimates, their rate was at 20%, with children at 15%, and those of a working age just under 10%. Today, those positions have reversed. The elderly are now best off, at 10%, with the rate for workers having risen to 15%, and that of children to 20%.
Current poverty rates are but one way to gauge wealth, and they don’t measure the prospects of those who have yet to retire--which is, after all, the topic at hand. Nevertheless, this statistic should give pause to those who predict retirement doom. For almost half a century, according to a basic and important measure, the demographic that gives those researchers the most concern has fared the best.
Social Security’s Strength
Yes, I know. It’s a fair question whether the Social Security Administration can sustain its payment schedule. (This being a highly politicized subject, it’s also fair to question the questioners.) Let’s assume for this discussion that it can, at least for the upcoming generation of retirees.
That does a pretty good job of addressing the very neediest Americans, those placing in bottom of the SSA’s five income buckets: very low earners. The SSA estimates that for such workers, Social Security payments will cover from 77% to 87% of their income replacement rates (the estimates vary according to the assumptions). Those percentages drop precipitously for higher earners--but almost all of them have at least some defined-contribution and/or IRA assets by the time of retirement.