How many times do we have to be told we aren't saving enough for retirement? By now, everyone should know that there's something wrong with working-age Americans for not biting the bullet to ensure adequate retirement savings.
Something's wrong with this picture.The facts behind retirement savings show that today's pre-retirees, a demographic segment fast filling with the supposedly spendthrift baby-boom generation, are in fact pioneers. They are going where no generation has gone before. It isn't fair to fault them for not being fully prepared for the journey. How could they be?
Most of the grandparents of today's pre-retirees did not retire-at least not in the way people retire today. As a rule, the grandmothers were not employed outside the home, and the grandfathers never stopped working. In 1950, the labor force participation rate of men aged 60 to 64 was 79 percent, and 60 percent of men aged 65 to 69 were also at work. At that time, male life expectancy at birth was just 66 years.
Now let's look at the parents of today's pre-retirees. Over the years, that generation has led everyone to believe they are paragons of virtue, scrupulously saving for retirement. Yet the parents of pre-retirees never saved much money: it just looks like they did. They lucked out because, as they approached their retirement years, both government and business experienced a rare burst of generosity. Medicare was created for older Americans in 1966. Social Security was indexed to inflation in the early 1970s. Employers sweetened pensions and extended health benefits to retirees. If that wasn't enough, housing values shot up as baby boomers entered the housing market. It felt as if workers were saving lots of money in the 1970s and 1980s, but most of their wealth is in government and corporate promises. A study published in the journal Demography shows Americans aged 65 to 69 in 1991 had saved a median of just $7,482.
Now on to all those workers approaching retirement who, we are told, lack the foresight of their parents and grandparents. Thanks to a motherlode of data emerging from the nationally representative Health and Retirement Study (HRS), researchers have been able to track, for the first time, people's behavior in the years leading up to retirement. The HRS is a longitudinal study of people aged 51 to 61, begun in the early 1990s. By collecting data on the saving behavior of pre-retirees, the HRS is revealing that all those nasty rumors are true. People really are not saving enough.
Today's pre-retirees will have accumulated a median of $380,000 in wealth by age 62, including home equity, savings, and the future value of pensions and Social Security, according to an analysis of the HRS data by James F. Moore and Olivia S. Mitchell of the National Bureau of Economic Research. This amount is not enough for the majority of older households to "maintain current levels of consumption into retirement without additional saving." Assuming retirees need to replace 69 percent of their income, today's pre- retirees need to save 16 percent of their earnings each year until they retire if they want to retire without sharply cutting spending.
But a sharp cutback is the norm, say B. Douglas Bernheim, Jonathan Skinner, and Steven Weinberg, the authors of another National Bureau of Economic Research Study. After analyzing data from the Panel Study of Income Dynamics and the Consumer Expenditure Survey, the researchers find that many of today's retirees were forced to cut their spending sharply when they left the work force. The smaller their retirement savings, the greater the reduction in spending.
RETIREMENT ISN'T RATIONAL These results contradict the theory that consumers make rational plans for retirement, smoothing the economic transition from work to leisure to avoid an abrupt downsizing in lifestyle. After controlling for income, the researchers found that household spending levels in people's pre-retirement years are unrelated to how much they have saved for retirement. In other words, those with little wealth do not try to save more. Instead, they spend just as much as those who have more retirement wealth. "On average," the researchers report, "individuals who arrive at retirement with few resources experience a 'surprise'-they discover that their resources are insufficient to maintain their accustomed standards of living...and they revise their expectations downward in light of this realization."
Boomers say their financial perspectives have been shaped most by their parents, according to a survey of baby boomers with household incomes of $30,000 or more by Scudder Kemper Investments. That's a problem, because the parents of boomers had little need for financial savvy. Most had their retirement savings socked away for them by employers and the federal government.
The lack of financial sophistication among today's older Americans may explain why 49 percent of boomers consider themselves financial novices. Another 37 percent say they are only "somewhat" experienced. Just 14 percent consider themselves experienced or very experienced with regard to money.
Sixty-seven percent of boomers worry about their financial future, and 68 percent say they haven't spent enough time planning for retirement. No doubt, many will find themselves reaching retirement with little or no savings. Millions will be "surprised" to discover how meager their resources are. Fortunately, a large share expect to continue working after retiring from their primary career. Out of necessity, others will embrace the simple life.
It is unfortunate that those approaching retirement today are not better prepared for a life of leisure. But it is also understandable. Blaming these pioneers for their lack of foresight is like faulting Lewis and Clark, in the midst of their pioneering westward journey, for their failure to realize the Rocky Mountains lay between them and the Pacific Ocean.
Taking It Further For more information about retirement wealth, see "Projected Retirement Wealth and Savings Adequacy in the Health and Retirement Study," NBER Working Paper 6240, and "What Accounts for the Variation in Retirement Wealth Among U.S. Households?" NBER Working Paper 6277; available from the National Bureau of Economic Research; telephone (617) 868-3900; Internet Web site, http://www.nber.org/papers. For more information about the Scudder Kemper Investments Baby Boom Generation Poll, contact Meg Pier; telephone (617) 295-2175.