Here’s the dirty little secret of the retirement industry: Experts know that their widespread, dire warnings of a “retirement savings gap” may be exaggerated.
Retirement experts now say there’s no way to calculate the true number. Nevertheless, everyone assumes there is a significant gap. After all, Americans generally are lousy at saving, with a rate approaching zero today. The financial crisis undoubtedly made their situation worse. And the risks of assuming that people are saving enough are much worse than the risks of overplaying the problem.
“There is a danger we’re overstating what I instinctively believe is a shortfall,” says Alan Glickstein, a senior retirement consultant at the New York City–based consulting firm Towers Watson. “But I wouldn’t overstate this to the point where I’d say everything is fine.”
One problem in trying to define the gap is that “no one is aggregating all the current accounts,” explains Martin Schmidt, a benefits consultant and an adviser with the Institutional Retirement Income Council, a trade group for plan sponsors whose mission is to morph defined contribution plans into sources of retirement income security.
Consultants like Schmidt and Glickstein, along with recordkeepers like Vanguard Group — key sources of data — usually report only the dollars in their clients’ existing retirement plans. But with workers changing jobs multiple times, and companies themselves merging and reorganizing their benefits programs, these reports don’t capture the 401(k) account balances that may have been left behind in a previous plan. Nor do they include nonworkplace portfolios, such as Individual Retirement Accounts. Schmidt thinks that only 5 to 10 percent of participants include such outside accounts when filling out their benefits information at work. That means that millions of dollars are probably not included in the periodic surveys from these firms.
Glickstein says that Towers Watson and other firms have created computer algorithms to estimate the missing dollars. “If you know the employee’s work history and you know what they currently have with their employer, you can make an assumption that they have something similar for the years they weren’t with the employer,” he says. Still, he admits this is hardly ideal. “What uncertainty do you create by making assumptions?” he asks.
The Federal Reserve and other government agencies are better at finding complete data on all account balances, says Stephen Utkus, director of Vanguard’s Center for Retirement Research (who doesn’t dispute the limits of Vanguard’s database). But the Fed’s respected Survey of Consumer Finances is updated only every three years.
Another widely cited government report, the Census Bureau’s Current Population Survey (CPS), has the opposite problem when it looks at income, according to Utkus and others. In a recent paper, three officials at the Social Security Administration warn that the report understates IRA and 401(k) withdrawals, and totally ignores the portfolios themselves, because it measures only “regular,” annuity-type distributions. However, “most IRA distributions are irregular,” the authors say, and “very few DC plan participants take their retirement distributions as annuities.” They add, “As retirees increasingly rely on periodic distributions from DC plans and IRAs, the problem of under-reporting pension income in the CPS could become increasingly serious.”
Moreover, says Glickstein, many government databases rely on self-reporting by employees, which is notoriously haphazard.
In any case, even when the numbers are relatively accurate they are interpreted too negatively, according to Utkus. For instance, he says that gloom-mongers pounce on studies that say only half of Americans have saved enough for retirement. However, “it’s not that the other half of Americans are completely unprepared,” he continues. “There’s 30 or 35 percent of them that are doing something. Maybe they’ve saved almost enough.”
Yet if the pension world is too pessimistic on the savings side, it is too optimistic regarding expenses, warns Jack VanDerhei, research director of the Employee Benefit Research Institute. Most important, he says, most models ignore nursing-home costs, which average nearly $75,000 a year. About 69 percent of people who live past 65 will need nursing homes or other long-term care, according to VanDerhei, yet only 10 percent have private long-term care insurance.
“There is nothing that is more likely to take a family that seems to have enough money for retirement, and end up destroying their possibility for having adequate income, than a prolonged stay in a nursing home,” he says.
So what’s the net result? Does the under-reporting of expenses balance out the under-reporting of assets? “It’s hard to know, because they mess up both sides of the equation,” VanDerhei shrugs.
In the face of such uncertainty, exaggerating the gap might seem like the safest course. At worst, people would save too much, and what’s the harm in that? Plenty, as it turns out. “People may take on more risk than they need in their asset allocation, exposing themselves to volatility,” Schmidt says. They might also put too much into retirement accounts, shortchanging other needs, or work longer than necessary, thus blocking the career path for younger workers.
Still, the industry consensus is that overoptimism is even worse. “You don’t want to be Pollyannaish,” Utkus says. “We still need to give guidance to the people who need to take some important action to save more.”