Myths vs. Facts
There are several widely held misconceptions about America’s retirement system—myths that are cited to call for radical changes in our retirement system altogether. Although it’s true that the retirement system can be strengthened, the best approach is to build on its successes.
To help promote real solutions and provide a better understanding of how our retirement system works for most Americans, let’s address some of the most commonly repeated myths.
In this section
- America faces a retirement crisis
- Today’s retirees are worse off than previous generations
- The decline of traditional “defined benefit” pensions has made it harder to retire
- Most of today’s workers are not covered by a retirement plan at work and have no way to save
- People simply cannot accumulate enough in defined contribution plans to sustain themselves in retirement
- The retirement system is regressive—its benefits are tilted heavily toward the upper reaches of the income scale
America’s retirement system is a lot stronger than many people think. Although there is room for improvement, our retirement system provides benefits to workers across the earnings distribution and has helped millions of retirees maintain their standard of living in retirement. Americans rely on a combination of resources in retirement, and the role each resource plays varies across households. Social Security acts as the foundation of the US retirement system, providing substantial retirement resources throughout the income distribution and serving as the primary means of support for lower-income retirees. In addition, about eight in 10 near-retiree households have retirement accumulations that they’ve amassed over the course of their careers by working for employers that sponsored retirement plans or by opening individual retirement accounts (IRAs).
In fact, the evidence demonstrates that retirement outcomes have improved over time. For example, assets earmarked for retirement—including savings in employer-sponsored retirement plans and IRAs—have grown dramatically. In 1975, total retirement assets stood at $469 billion. Today, Americans have accumulated more than $32 trillion—meaning that the average retirement accumulation per household has increased by seven times over the last four decades, after accounting for inflation.
Policymakers may be led astray by the belief that we face a retirement crisis. Crisis rhetoric often obscures the fact that the US retirement system works well for most Americans. It also deflects attention from those groups who are most at risk in retirement—such as those retiring early because of poor health and those with limited work histories. The best path forward would be to build on the success of the current system with a focus on helping those who appear to be most at risk.
Near-retirees’ pension wealth has increased with each successive generation. And the majority of those who retired in recent years have either maintained or increased their spendable income as they transitioned to retirement, according to an analysis of IRS data. These findings are in line with a separate study by economists at the Census Bureau, which concluded that income for those 65 or older is 30 percent higher than commonly cited government data suggests.
The share of near-retiree households with retirement resources is virtually unchanged since 1989, despite the decline in private-sector defined benefit plans. Comprehensive studies have concluded that defined contribution plans, such as 401(k) plans, can increase retirement resources for households across the income spectrum.
One reason why is that American workers are mobile, moving from job to job or even from career to career. Indeed, mobility puts a premium on retirement benefits that are “portable”—benefits that can travel with a worker and continue to grow throughout his or her lifetime. Defined contribution plans, such as 401(k) plans, provide this portability.
Although many people have worked for employers that sponsored defined benefit plans, few have been able to fully reap the benefits. To receive a substantial benefit from a defined benefit plan, an employee generally needed to stay with the same employer for an extended time and leave employment at (or close to) retirement age. A combination of factors—such as vesting rules, back-loaded benefit accrual rules that reward longevity with the firm, and labor mobility that reduced the occurrence of this longevity—together resulted in previous retirees receiving less income, on average, from private-sector pensions than today’s retirees.
More than three-quarters—78 percent—of working individual filers aged 25 to 64 with incomes of $20,000 or more, and working joint filers aged 25 to 64 with incomes of $40,000 or more, participate in retirement plans directly or through a spouse.
People simply cannot accumulate enough in defined contribution plans to support themselves in retirement.
Americans who consistently save through defined contribution plans over the long run can accumulate significant nest eggs that, in combination with other resources such as Social Security, will provide the resources they need in retirement.
News stories that point to 401(k) accumulations often make the mistake of averaging the balances of twentysomethings who have just started saving for retirement with older workers who are nearing retirement. Some of these reported average account balances don’t take into account the fact that an individual could have retirement savings spread across multiple plans or individual retirement accounts (IRAs).
The better way to analyze America’s retirement system is to consider all the assets US households will have at their disposal as they near retirement. When ICI looked at retirement accumulations of near-retirees, we found that that eight in 10 near-retiree households had some form of retirement savings in an employer-sponsored retirement plan or IRA.
The retirement system is regressive—its benefits are tilted heavily toward the upper reaches of the income scale.
The benefits of the retirement system are progressive. When benefits are measured as a percentage of lifetime earnings, lower earners benefit more from Social Security and higher earners benefit more from tax deferral. The combined benefits of the two programs, however, are proportionately higher for lower-earning workers.
Workers with lower lifetime earnings benefit more from Social Security by design. Social Security has a progressive benefit formula that replaces a much higher percentage of pre-retirement earnings for lower-paid workers.
The design of the Social Security system is also the reason workers with higher lifetime earnings benefit more from tax deferral. Higher earners rely more on employer-sponsored retirement plans because Social Security replaces a smaller share of their pre-retirement income. As a result, they benefit far more from tax deferral—not because they benefit more on every dollar they contribute to a retirement plan, but because they contribute more dollars.