Crisis? What Retirement Crisis?

You wouldn't know it from recent headlines screaming impending doom, but some people believe the forecast for retirement savings looks fine. Writing for Slate Magazine, Tim Harford argues that most Americans--about 80%--are probably saving enough for retirement. This flies in the face of the conventional wisdom that our national saving rate may have to triple for most Americans to have enough for retirement.

So what gives? Harford bases his argument on a study published two years ago in the Journal of Political Economy that examined the savings of a group of Americans from the Health and Retirement Study. The argument goes like this: after retirement most Americans naturally cut back on their spending (less money spent on commuting, meals out, clothes and the like), and figuring out how much one actually needs to save for life after work is a crap shoot, anyways. Sure, there are guidelines and charts that estimate how much you'll need to have sacked away based on your life expectancy and whether you want to dine on caviar every night or cook your own meals, but in the end there's no sure-fire formula for making sure you don't save too much-or too little-for your retirement years. Hence, most Americans have probably saved enough.

Still, I found it hard to believe that in an era when the personal savings rate has dipped below the zero mark that most Americans are in the clear when it comes to their retirement savings. Which Americans are we talking about here? Baby boomers? Those who have already retired? Is the hysteria about the imminent retirement crisis mere political posturing?

A look at the study's fine print reveals the key to authors' assertions: they focus on households whose family members were between the ages of 51-61 in 1992. Not only is that age group an exceedingly narrow cohort, but it is also a generation of Americans who could presumably count on what is these days the equivalent of the last unicorn-fully funded employer-based pension plans. If I were to conjecture further, these Americans, who are currently between the ages of 67-77, were probably not subjected to the same methodical stripping away of the social safety net, income volatility and rising health care costs that are today so impacting younger Americans' ability to save.

Furthermore, says Pamela Perun of the Aspen Institute's Initiative on Financial Security,

"While I agree we don't need to take a Chicken Little approach, the fact of the matter is that no one knows how much saving for retirement is the right amount. There are legitimate concerns about the cost of health care in retirement, the effect of inflation, increased longevity, low accumulations in 401(k) plans, lower Social Security benefits, losses due to market turndowns etc. Given all these unknowns, taking saving for retirement seriously is a wise decision. Saving too much never hurts anyone but saving too little sure does."

Sad to say, but it looks like we're not in the clear yet when it comes to retirement savings. To say otherwise is misguided at best and irresponsible at worst.