The Sky Isn’t Always Blue — or, Saving Rates May Not Be THAT Bad

Americans aren’t saving enough for retirement. It’s orthodoxy, almost akin to the sky being blue. But we know that the sometimes the sky isn’t blue — and in like manner, a recent blog post by a resident scholar suggests that maybe saving rate gospel is more nuanced than it may appear at first blush.

In “What Do Academic Studies Have to Say About Americans’ Retirement Saving?” American Enterprise Institute Resident Scholar Andrew Biggs notes that some researchers paint a Dorian Gray-like picture of retirement readiness, while others’ works are gentler on the eyes.

For instance, Biggs cites the dire statistics from the Center for Retirement Research that say that more than half of us are not saving adequately for retirement, and the even more sobering data from the National Institute for Retirement Security which warns that up to 80% of U.S. households will not be prepared and that there is a retirement savings gap of more than $14 trillion. 14. Trillion.

“But there’s a second world of research on retirement saving,” says Biggs. He notes that the studies this data comes from are published in academic journals that lack a wide circulation. They are more rigorous, Biggs says, than most assessments that are better known, and they call the conventional wisdom into question. “These more academically-oriented studies of retirement saving tell a very different story on how well Americans are saving for retirement,” he writes, noting that they “find a more encouraging picture” than popular studies and the media usually present.

Studies Biggs cites include the following:

• Two studies by Ananth Seshadri and John Karl Scholz, economists from the University of Wisconsin, who with their co-authors apply the life cycle model, which says that a household’s consumption at any given time is determined not so much by its current income as by the total income available to the household over its lifetime. They apply this model to information gleaned from a study of health and retirement; among their findings is a projection that 75% to 85% of U.S. households are saving sufficiently for retirement and that shortfalls that occur generally are “pretty modest.”

• A study by Rand Corporation’s Michael Hurd and Suzanne Rohwedder in which they looked at the spending habits of those who are near retirement and calculated whether they would have sufficient income to maintain their lifestyle when they are retired. They found that approximately 75% would be able to do so, with the exception of single women who do not have high school diplomas.

• A study in which the Brookings’ Institution’s William Gale, the Federal Reserve’s Eric Engen and the Urban Institute’s Cori Uccello apply life cycle methodology to earnings histories and found that aside from those in the group that has the lowest 25% of household income, retirement income appears to be at least adequate.

• Studies by the Investment Company Institute’s Peter Brady and by Scholz and Seshadri in which they find that for many, an income replacement rate of approximately 60% would allow most households to replace 90% to 100% of their pre-retirement consumption, rather than the 70% replacement rate commonly recommended.

Biggs does note that the academic life cycle models don’t calculate aggregated saving gaps in the same way as the studies more commonly referenced. And he adds that he estimates that the studies he cites still find a total retirement savings gap of $1 trillion or less. But that’s still better than conventional wisdom, Biggs says, noting, “$1 trillion isn’t nothing. But it’s a lot less than $14 trillion.”