The Employee Benefits Research Institute (EBRI) released a report in November on the state of individual retirement plans, based on data from the Federal Reserve’s Survey of Consumer Finances. Most reports on retirement savings these days (or any type of savings for that matter) are doom and gloom, with three overarching themes: 1) People aren’t saving enough to cover the demise of defined-benefit pensions 2) People are not well-informed or smart enough to save 3) Government should do the saving for them.
While it is true that people may not be saving as much as they should, they are saving nonetheless.
- In 2013, Americans accumulated an aggregate total of $6.5 trillion in IRAs, $5 trillion in other defined contribution plans (such as 401(k)s and Keoghs) and $3 trillion in defined benefit plans (pensions). For IRAs and defined contribution plans, these amounts are nearly double what they were in 2000.
- More than two-thirds (66.7%) of all households contributed to a defined contribution plan, up 6 percentage points from 2010.
- Only 15.3% of all households participated in a defined benefit plan, compared to a whopping 40% in 1992, but only slightly lower than 2010 (17.9%).
It is true that employer provided defined benefit pension plans are going away and are only a fraction of what they were several decades ago, but this does not mean that retirement security is not possible. The EBRI report also laments demographic differences in saving, but these findings are not surprising. Of course, higher income and better educated households are always more likely to save, so comparing the bottom 25% with the top 25% is an apples-to-oranges comparison. Instead, consider year-to-year comparisons across the same quintiles:
- Since 1995, families earning less than $10,000 had the highest participation rates for employer-provided defined contribution plans (401(k)) in 2001 (56.7%) and the lowest in 2010 (33%), however, the participation rate jumped over 6 percentage points to 38.9% in 2013.
- Similarly, families earning $10,000 to $24,999 increased their defined contribution plan participation from 38.5% in 2010 to 49.5% in 2013, although still not reaching their peak of 56.8% in 2001.
- In terms of racial demographics, non-white households had lower participation rates (72.9%) than non-Hispanic white households (81.1%), but the participation rates grew 4 percentage points for non-white households since 2010, while falling slightly for white households.
Participation rates for IRA (not employer-provided) and Keogh accounts was much lower for all income groups, indicating that the employer-provided plans, coupled with automatic enrollment, provide a greater push to save than going it alone with an IRA.
For those who are still worried about disparities in savings rates among income groups, it’s worth noting that Social Security provides a greater percentage of replacement income for lower-income individuals than high-income individuals, thus reducing their need to save at the rate required to maintain their current standard of living. This is not at all unusual. For decades, economist Martin Feldstein and many others have studied the effect of expected Social Security benefits on saving behavior. This is known as crowd-out and it is quite common with government entitlement programs.
Thus, in light of a still-stagnant economy and the lowest labor force participation rate in more than 30 years, saving behavior isn’t all bad.