The Thinness of Wealth

Are we heading toward a retirement crisis, or not?

It’s a simple question. But when a question has many answers, we should pause. Earlier this year three researchers examined the scope of the estimates. They found an astounding range. On the optimist side, economists William Gale, John Karl Scholz and Ananth Seshadri found only 26 percent of American households were inadequately prepared for retirement. On the pessimist side, the National Institute for Retirement Security found that a whopping 84 percent of us were unprepared for retirement.

How many will be broke?

Think about it. Either 74 percent of us are OK, or 16 percent! Either we’ll have a social issue to discuss over tea, or we’ll be rioting in the streets. Big difference.

Why is the spread so large? It’s all in the measuring sticks. The pessimists use a high standard for the amount of income we need to replace when we retire. They typically say we need to replace about 85 percent of our final income.

The optimists use a lower standard. I’ve been on the optimists’ side, noting that the percentage of retirees living in poverty has been halved over the last half century, from 20 percent to 10 percent. So things are getting better, not worse.

On the side of the optimists

The other reason I’ve been on the optimist side is that we don’t need to replace as much income as the pessimists think, mostly because we’ve never had it to spend. We spend a lot of money during our working lives on temporary commitments. Things like mortgage payments, the cost of raising kids, education, and the employment tax, which we don’t pay if we don’t work. And don’t forget about of our annual saving while working. Even if it’s not enough, as we are so often told, it is something.

But maybe the answer isn’t a calculated percentage. Perhaps we can get a better idea by observing the circumstances of pre-retirees and retirees. What if we look at the distribution of resources that people have when they retire? That should tell us something.

Here’s what I mean. The secure retirees I meet are similar in only one-way: they have multiple sources of income and no liabilities. Recently, for instance, I met a teacher who had retired at 62. His wife, who also worked, retired from an insurance company job at the same time. Both were enjoying their retirement. They were staying at the same condo/timeshare development where my wife and I were staying. They were enjoying a vacation… from their retirement. They were completely at ease.

 What made this possible?

In addition to income from Social Security, each had pension income. Each had some distributions from their savings. And they lived debt-free in a mortgage-free house. They weren’t rich. But they were secure. They maintained a comfortable standard of living.

Unfortunately, few Americans now have that combination of retirement resources.

James M. Poterba, Steven F. Venti and David A. Wise did an examination of our wealth/income sources that provides some clues. It was done in 2011 for the National Bureau of Economic Research. Poterba, a professor at MIT, now heads the NBER. In the study, the researchers examined the distribution of five different kinds of asset: financial assets, retirement account assets, home equity, defined benefit pensions and Social Security. To put them all on the same scale, the annuity incomes from Social Security and pensions were equated to wealth figures so they could be compared to the other assets.

Examining real and virtual wealth

The results make this optimist worry, but not as much as the pessimists. Here are some of the highlights:

— Social Security is the elephant in the room for everyone. The value of pensions never exceeds the value of Social Security, even for the top 10 percent. Social Security is the Big Dog for just about everyone.

— Social Security is the largest single source of wealth/income security for 90 percent of all households.  — Only when your total wealth is in the top 10 percent does housing equity have a slight edge over the value of Social Securiy.

— Home equity is greater than thecombined taxable financial assets and retirement accounts for 80 percent of all households, 70 percent of married households and most single households. This means more can be done through alternative shelter decisions than can be done through financial asset decisions.

— Defined-benefit pensions provide security for only 40 percent of households.

— Married households are in much better financial shape than single households. More have some amount of pension and many have more financial assets than home equity. (Readers who would like to see a graphic display of the data can visit my website, assetbuilder.com.)

The figures suggest that we face a triage:

—One-third of households are well equipped to retire. They have multiple sources of income in greater amounts than most people.

— One-third of households have assets to work with. They can make decisions that will make a major difference in their retirement security and success.

— One-third of households are lost causes. They have Social Security but little, or nothing, else.

Related columns:

Scott Burns, “The Financial Condition of Pre-Retirees: Precarious,” 5/17/2013  http://assetbuilder.com/scott_burns/the_financial_condition_of_pre_retirees_precarious

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On the web:

Keith Miller, David Madland, Christian E. Weller, “The Reality of the Retirement Crisis,” Center for American Progress, 1/26/2015   https://www.americanprogress.org/issues/economy/report/2015/01/26/105394/the-reality-of-the-retirement-crisis/

James M. Poterba, Steven F. Venti, David A. Wise, “The Composition and Draw-Down of Wealth in Retirement,” National Bureau of Economic Research, 10/2011  http://www.nber.org/papers/w17536.pdf

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Photo: Scott Burns: Storm Warnings in Avalon harbor, Catalina Island, 2010

(c) A. M. Universal, 2015