There’s no cliche more beloved by the financial press than the “changing American retirement model.”
The beauty of the changing American retirement model is that you can use it to prove any point you want:
- if you want to cut Social Security old age benefits by raising the full retirement age, the changing American retirement model is that people are living and working longer;
- if, on the contrary, you want to increase Social Security benefits, the changing American retirement model is that fewer employers offer defined benefit pension plans so the government needs to step in to supplement retirees’ income;
- if you want to increase the contribution limits to tax-sheltered retirement accounts, the changing American retirement model is that retiree health care and housing expenses are increasing faster than consumer price inflation.
The problem with these arguments, some of which I’m sympathetic to and some of which I detest with every fiber of my being, is that there is no American retirement model, and there never has been. There are at least 3 different ways to illustrate this, and I think each one has value.
People who die young don’t get to retire
In the 2015 United States life table, you can see that of 99,065 infants surviving to age 18, only 86,915 survive to age 62, the earliest age they’d be eligible for Social Security old age benefits, a survival rate of 87.7%. The American retirement model for the other 12.3% of the population is to die.
The reason I bring this up is that arguments based on life expectancy only apply to people who survive to retirement. There are two moving pieces here. First, the number of mortalities per age rises steadily, which means for each year you raise the retirement age by, you exclude an increasingly number of people from ever being able to retire. Second, increasing longevity is concentrated in high-income, low-impact white collar professions — people who have other resources to draw on in order to meet their retirement needs in the case of a higher retirement age.
No wonder higher retirement ages are so popular among the wealthy.
No one saves anything for retirement, and no one ever has
Vanguard reported in 2017 (page 45) that their average 2016 401(k) account balance was $178,963 for participants between the ages of 55 and 64, while the median balance for those participants was $66,643. I don’t want to argue about whether Vanguard assets are “representative” or not, so apply as wide a margin of error to that figure as you like; maybe Vanguard participants are particularly savvy, and maybe they’re particular slouches.
The point is, using a primitive 4% withdrawal rule, $67,000 can produce about $2,680 in safe withdrawals per year in retirement. While the average is pulled up by what Vanguard calls “a small number of very large accounts that significantly raises the average above the median,” even the average account balance can only produce $7,160 in “safe” withdrawals per year.
Defined benefit pension coverage has not changed
The third piece of the “American retirement model” puzzle is defined benefit pension plans, which have been said to be steadily shrinking for at least as long as I’ve been alive.
In a 2018 Bureau of Labor Statistics report, 26% of civilian workers had access to defined benefit pension plans. Sounds low, right? The third leg of the American retirement model has been plucked from its fitting!
The trouble is, most workers never had access to defined benefit pension plans. There are two reasons this is so confusing to people. First, defined benefit pensions are typically reported as a percentage of total retirement plans, as in this Vox.com article: “as of 1983, defined-benefit plans were the majority of retirement plans in the US. By 2004, most were defined-contribution.”
You can find an even more extreme claim in this report: “At one time, 88 percent of private sector workers, who had a workplace retirement plan, had a pension” (emphasis mine).
But that doesn’t tell you anything about the number of defined benefit pensions in existence in 1983 or at any other time — the entire effect could have been (and indeed was) created by increasing the number of defined contribution plans at employers that never offered defined benefit plans!
Second, the decline in defined benefit plans is concentrated almost entirely in the private sector. According to a 2017 Congressional Research Service report, 85% of state and local government workers still have access to defined-benefit pensions today.
Have I kept you in suspense long enough? Today’s 26% access rate to defined benefits pension plans has fallen from a 1989 access rate of…32%. That’s it. 30 years — almost my entire lifetime! — of being lectured by neoliberal think tanks about the collapse of the American retirement model, about the need to work longer, harder, re-skill, up-skill, trans-skill, and the defined benefit pension access rate has fallen, in total, by a little under 19%. Another way of thinking about it is that the total number of workers covered by defined benefit plans has risen, from 32% of the 1989 workforce to 26% of the much larger 2018 workforce.
Stop over-thinking: the suffering of the elderly is the problem and Social Security is the solution
There is no problem under our young sun that the neoliberal mainstream of our politics doesn’t think can be solved with three-legged stools, with success sequences, with means-testing, and with personal responsibility.
But it’s not true. Elder poverty is a problem with a single cause: under our version of market capitalism, people who work get paid, and people who don’t work don’t get paid. If people insist on living longer than they’re able to work, then they either starve or receive money from those who are still able to work. This has nothing to do with life expectancy, it has nothing to do with retirement savings, and it has nothing to do with defined benefit pension coverage.
Either we transfer money from workers to retirees, or retirees die hungry and helpless. Fortunately, we already have a solution in place: monthly cash transfers to retirees through Social Security’s old age benefit. Unfortunately, rather than finding a consensus to expand that system to ensure none of our elders are left in poverty, that system is under attack by people who want to reduce those benefits.
We have an economy that’s more than capable of providing for children, workers, retirees, and those unable to work. All we need is a politics that’s up to the task.