The Finance Of Longevity

Positive News for America's Retirement Deficit

Retirement income shortfalls have shrunk since 2014, with younger workers leading the charge

New research from The Employee Benefit Research Institute (EBRI) reveals a positive trend in retirement readiness. Visit here.

EBRI’s newest study, Retirement Savings Shortfalls: Evidence from EBRI’s 2019 Retirement Security Projection Model®,” projects that the retirement deficit for U.S. households with a head ages 35–64 decreased 13.7 percent, from $4.44 trillion (in current dollars) in 2014 to $3.83 trillion in 2019. The largest improvement was experienced by younger workers, with those ages 35–39 projected to have a 22 percent decrease in their average deficits.

The study also finds the percentage of these households projected to have a “successful” retirement (defined as NOT running short of money in retirement) increased from 57.7 percent in 2014 to 59.4 percent in 2019.

Eligibility for participation in a defined contribution plan was found to have a significant impact. “The average retirement deficit for households with a head ages 35–39 with no future years of eligibility in a defined contribution plan is $78,046 per individual,” said Jack VanDerhei, EBRI research director and author of the study. “This is more than five times the deficit for those fortunate enough to have at least 20 years of future eligibility in a defined contribution plan.” The results illustrate the importance of expanding coverage to those not currently eligible to participate in an employer-sponsored retirement plan.

The summary highlights other takeaways as well:

  • Low wage workers will see bigger deficits than high wage workers;
  • Women face a larger deficit than men;
  • Longevity risk is a critical factor; and reductions in Social Security benefits would have a material impact.

EBRI Retirement Security Projection Model® Summary

Measuring retirement security — or retirement income adequacy — is an extremely important topic. EBRI launched a major project to provide this type of measurement in the late 1990s for several states concerned whether their residents would have sufficient income when they reached retirement age. A national model — the EBRI Retirement Security Projection Model® (RSPM) — was developed in 2003. New versions of the model have been generated periodically to include updates for financial and real estate market performance, employee demographics, and real-world behavior of 401(k) participants (based on a database of 27 million 401(k) participants) and IRA account holders (based on a database of 20 million unique individuals).

Defined contribution plan eligibility has a significant impact: The average retirement deficit for individuals ages 35–39 with no future years of eligibility in a defined contribution plan is $78,046 per individual...

For 2019, RSPM® finds that 40.6 percent of all U.S. households where the head of the household is between 35 and 64, inclusive, are projected to run short of money in retirement. That is down by 1.7 percentage points vs. 2014.
The model finds that the aggregate retirement deficit American households in this age cohort face, taking into account current Social Security retirement benefits, is currently estimated to be $3.83 trillion. The similar figure (adjusted for inflation) from 2014 was $4.44 trillion.

When pro rata reductions to Social Security retirement benefits are assumed to begin in 2034, the aggregate retirement deficit increases by 6 percent to $4.06 trillion.

When looked at on an individual basis, the average Retirement Savings Shortfall for those ages 60–64 ranges from $12,640 per individual for widowers to $15,782 for widows. It increases to $24,905 for single males and $62,127 for single females.

Defined contribution plan eligibility has a significant impact: The average retirement deficit for individuals ages 35–39 with no future years of eligibility in a defined contribution plan is $78,046 per individual. This is more than five times the average retirement deficit for those fortunate enough to have at least 20 years of future eligibility in a defined contribution plan (where the average retirement deficit is $14,638).

The results also demonstrate the extreme importance of longevity risk in simulating Retirement Savings Shortfalls. Overall, the average retirement deficit for those in the longest relative longevity quartile is 10.2 times the average retirement deficit for those in the shortest relative longevity quartile.

A 23 percent pro rata reduction to Social Security retirement benefits beginning in 2034 would increase average retirement deficits by an average of 17 percent for those currently ages 35–39.

Quantifying the retirement readiness of American households in this way provides valuable insight for employers, providers, and policymakers.

 

Read the entire report here.