Will we outlive our money?
WASHINGTON — Can America afford to retire? As millions of baby boomers pass their mid-60s, the specter of widespread under-saving has taken hold. Huge numbers of present and future retirees will exhaust their savings before they die. Mass hardship looms, even as the costs of an aging society already weigh on the young and middleaged. It’s a scary vision, but is it likely? Probably not.
Typical retirees are hardly bereft. In 2010, roughly 80 percent of households ages 65 to 74 owned their homes, and half of these had fully repaid their mortgages, says economist Peter Brady of the Investment Company Institute, the trade group for mutual funds. Among those with a mortgage, the median amount was less than half (44 percent) of the house’s value. For all homeowners, median home equity — the amount not owed on the mortgage — was $120,000.
To supplement Social Security, retirees can borrow against their home equity. They can also draw on retiree savings from defined-benefit pensions, individual retirement accounts and 401(k) accounts. In 2010, almost three-quarters of households ages 55 to 64 had some combination of these retirement vehicles. The median value of the IRA and 401(k) accounts
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was $100,000, Brady says.
Retirees, it’s often said, have to achieve a “replacement rate” of 80 percent of their former income to match preretirement living standards. Just where this figure came from isn’t clear, but it is disconnected from financial realities.
Think of all the expenses retirees escape. Not working, they don’t pay Social Security and Medicare payroll taxes, totaling 7.65 percent of wages. Gone are other work expenses: commuting, parking, clothes and (possibly) lunches out. Children should have left home, avoiding their costs for food, school and dress. Even if some have returned, costs should be less. If the mortgage is repaid, retirees effectively live in their houses rentfree. Similarly, their saving should be over. For many, this equals 10 percent or more of income.
Granted, some stiff costs remain: out-of-pocket medical costs, utility bills and property taxes. But a realistic replacement rate is well below 80 percent. Matching preretire- ment living standards can be desirable, but it’s not a proper public-policy goal. Public policy should aim more modestly at protecting against hardship.
Studies vary widely on the adequacy of retirement savings. The Center for Retirement Research at Boston College estimates that half of Americans aren’t saving enough. By contrast, economists John Karl Scholz and Ananth Seshadri of the University of Wisconsin put undersavers at only 10 percent to 15 percent.
The big difference: The Boston College figure assumes retirees’ spending remains constant throughout retirement; the Wisconsin economists think people gradually reduce spending as they age and are less active. Lower retirement spending requires less preretirement saving.
Studies aside, there’s little real-world evidence of pervasive under-saving. Older Americans feel better about their finances than any other age group, report surveys by the University of Chicago. In 2012, 80 percent of those 65 and over were “satisfied” or “more or less satisfied” with their financial situation compared with only 67 percent of those ages 50 to 64. Other age groups also lagged.
Of course, there are serious social problems here. One is that most of the poor don’t save. The poorest quarter of the elderly rely on Social Security for 85 percent of their income, notes economist James Poterba of the Massachusetts Institute of Technology.
Another problem: It’s difficult to plan because people don’t know when they’ll die. Those who live longer than expected or who spend extended time in a nursing home can exhaust sizable savings. Without nursing-home costs, about 90 percent of baby-boom retirees will have adequate incomes, estimates Jack VanDerhei of the Employee Benefit Research Institute. With nursing homes, that drops to about 80 percent.
More Americans are trying to ease the uncertainties by working longer. Labor force participation has increased for 60-somethings, Poterba notes. This creates more years of saving and fewer of postretirement spending. Raising Social Security’s eligibility ages would also be smart.
As l i fe expectancy lengthens, it makes less sense for so many people to spend so many years living off their savings and subsidies from the young and middle-aged. Retirement would be more secure if it were shorter. Robert J. Samuelson is a columnist for the Washington Post Writers Group.