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Is There Really a Retirement Crisis?

Morningstar director of policy research Aron Szapiro digs into the numbers.

Christine Benz: Hi, I'm Christine Benz for What's the state of retirement preparedness in the U.S.? Joining me to discuss that topic is Aron Szapiro. He is director of policy research for Morningstar.

Aron, thank you so much for being here.

Aron Szapiro: Thanks for having me. It's a really important topic.

Benz: It is an important topic. And that's what I want to start with. Let's talk about why it's important to have that conversation about whether there is a retirement crisis, how bad is it, why should we be caring about that?

Szapiro: Well, I think the stakes for this conversation are huge. Policymakers can't solve a problem if they haven't defined it properly. And so, figuring out who is saving enough, who is not, which groups need help, what kinds of employers are offering plans, which kinds aren't, is critical if we want to address a problem that I think is a real one, which is that many people do not have enough saved for retirement and it's going to lead to a real problem as that group of folks gets to retirement age.

Benz: So, one statistic that really, I think, jumps out at anyone even casually looking at this area is that you've got roughly half of Americans with no retirement savings at all. And, to me, that indicates very clearly that we have a retirement crisis. Why do people even debate whether or not there's a retirement crisis?

Szapiro: So, I think, this is a statistic that is probably not quite right. I mean, it's true in a very literal sense. But in a broader sense, it's a little misleading. And I think it's given some fodder for those who would argue, hey, there's no problem here. Because when you dig under this--only half of people have any savings--you find that it's a little misleading. First of all, some number of those people are going to have 90% income replacement rates or close to it from Social Security. So, we are probably not too concerned about them, at least in terms of their income replacement in retirement.

Benz: So, maybe a low level of income but nonetheless consistent with what perhaps they are earning when they are working?

Szapiro: Right. And sort of assuming that the goal of retirement security policy is to help people sustain their standard of living in retirement, Social Security does a very good job at that because it's progressively structured at the lower end. And you've got a lot of people, and it is a fairly big chunk of people, who have access to a defined-benefit plan, that they are participating in it for their whole career and they may not have anything saved for retirement or they may have a little and they forgot to tell the surveyor. And so, those people are fine. They don't literally have any retirement savings, but the present value of the future payments of their defined benefit plan are going to be fine. And that's going to be mostly in the public sector, but that's still a pretty big slice of the workforce.

Then you have the fact that it's a little difficult to tell if this statistic is even accurate on its face. Because different surveys, different data sources give you somewhat different answers. So, I think it's probably closer to one third of Americans have no retirement savings. That's still a really big problem. There's a lot of people who have retirement savings, but it's not nearly enough. So, I'm not trying to minimize the problem, but critics of the "there's a retirement crisis" narrative have latched on to the statistic because, well, it's a sort of misleading one.

Benz: So, let's talk about the groups that are particularly at risk, given what we know, and you mentioned that there are some limitations to the data. But the groups that, when you look at the data that we have, seem particularly at risk of having problems of maintaining their standards of living in retirement.

Szapiro: So, one big group is going to be people who work and work for most of their career for small employers. Small employers are much less likely to offer retirement plans than large employers. And so, a lot of these people have sort of slipped through the cracks of the system. Another large group of people who will be affected are people who have defined-benefit plans that were hard-frozen sort of halfway through their career, right, because they have a benefit that's maybe based on the first 10 or 15 years of service. It's not adjusted for inflation. Had they been in a defined-contribution plan, that money would be growing, but now they have to sort of start from scratch and try to fill this big gap that is left from that freeze. That's a fair number of people.

And if you look at the demographics, what you see is, you know, women who are certainly in the past--so, the generation hitting retirement--much more likely to have dropped out of the workforce and not had enough quarters to fully qualify for the maximum Social Security benefit. They are going to be at risk, especially if their partners don't make good claiming decisions for the survivor benefit.

Benz: And they have longer life expectancy.

Szapiro: And they have longer life expectancy as well, exactly. So, you have women who are saving less and living longer and probably have a lower Social Security benefit. So, that's a very large group of people, of course. And then, we dig in further into the data, you find minorities are much less likely to have the kind of retirement savings that Caucasians are.

Benz: So, you focus on policy and let's talk about what you think are some key policy prescriptions to try to address these real problem spots.

Szapiro: I think if I were king and I could just wave a wand, I would say one word--maybe two, it's a hyphen--auto-enrollment. We really need to get to a place where everybody is automatically enrolled in a quality retirement plan so that the savings are just more automatic. That's the only model that we've seen that really works internationally. And I think even if you allow people to opt out--and I would support that ... I don't think as a society we want to be told, as they do in some countries, "you have to save and this is the amount you must save"--the opt-out rates would be pretty low. We actually have experiments going on right now. States are the laboratory of democracy. Oregon is the furthest along. They've really rolled this out. The opt-out rates are pretty low. And we'll see what happens as that continues to ramp up and we have multiyear experience. But I think that would be very helpful. So, that would be the number-one thing I would do.

Other smaller-ball policy proposals, I think, will also be very helpful. So, for example, there's a bill that we expect to come up for a house vote fairly soon--we've talked about before--that would allow small employers to--people always say "band together"--it's not quite right--anyway, they'd be allowed to join a common retirement plan. It should reduce some of the administrative burden, make it easier for them to offer plans. That's a real weak point in our system. Large sophisticated employers have very good retirement plans. They've been good innovators, it's worked well. But anything we can do to make it easier for smaller employers to offer that kind of plan to their worker is going to be important as well. But again, I think a system where, if you go to work, you have an opportunity that's as seamless, easy, automatic as possible to save for retirement is really going to be the only way to address this problem.

Benz: Aron, always great to get your insights. Thank you so much for being here.

Szapiro: Thanks so much for having me.

Benz: Thanks for watching. I'm Christine Benz for