Falling Short:

The Coming Retirement Challenge

and What to Do About It
Andrew D. Eschtruth
Associate Director for External Relations
Center for Retirement Research at Boston College

Reporting on Aging Issues

National Press Foundation
Washington, DC
October 18, 2017
The challenge: about half of U.S. workers
may be underprepared for retirement.
The National Retirement Risk Index, 1989-2013

60%
53% 52%

45% 44%
40%
40% 37% 38% 38%

30%

20%

0%
1989 1992 1995 1998 2001 2004 2007 2010 2013

Source: Alicia H. Munnell, Wenliang Hou, and Anthony Webb. 2014. NRRI Update Shows Half Still Falling Short. Issue in Brief 14-20.
Center for Retirement Research at Boston College.

1
The retirement shortfall is driven by a
growing gap between:

the need for retirement income; and

the availability of retirement resources.

2
2
One reason people need more retirement
income is that they are living a lot longer.
Life Expectancy at Age 65, 1960-2020

25
Men 21.8
Women 20.2 19.4
20 18.8
17.4 17.5
14.7
15
13.2

10

0
1960 1980 2000 2020

Source: U.S. Social Security Administration. 2017. Social Security Trustees Report.

3
3
But they are only working a bit longer, so
the retirement span is growing.
Average Years in Retirement for Men, 1960-2050
95
Average retirement age
90 Life expectancy
85
80
22 years
75 20 years
18 years
70 13 years
65
60

Note: Average retirement defined as when 50 percent of individuals are not participating in the labor force.
Sources: Center for Retirement Research at Boston College estimates from U.S. Census Bureau. Current Population Survey, 1962-2015;
and U.S. Social Security Administration. 2015. Social Security Trustees Report.

4
4
In addition, people need more because
retiree health care costs are high and rising.
Medicare Part B Premium and Out-of-Pocket Payments as
Percentage of Average Social Security Benefits, 1980-2030

20%
17.2%
16%
13.9%

12%

8% 6.8%

4%

0%
1980 2015 2030
Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 2016. SMI Out-of-Pocket Expenses as a Percent of Illustrative
Social Security Benefit.

5
5
And interest rates are low, which reduces
what people get from their nest egg.
Real Interest Rate, 1990 - June 2017

6%

4%

2%

0%

-2%
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Sources: U.S. Board of Governors of the Federal Reserve System. 2017. Selected Interest Rates (Daily) H.15; and Joseph G. Haubrich,
George Pennacchi, and Peter Ritchken. 2012. Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps.

6
6
At the same time, the U.S. retirement system
is contracting.

Retirement Income

Employer-Sponsored
Social Security Individual Saving
Pensions

Defined Contribution
Defined Benefit Plans
- 401(k) - Plans

7
7
Social Security will replace a shrinking share
of pre-retirement earnings.
Social Security Replacement Rates for Average Earner Retiring at Age 65, 1995, 2015, and 2035

60%
Reported replacement rate (retirement at age 65)
After Part B SMI deduction
After personal income taxation
43%
41%41% 39%
40% 37% 37% 36%
33%
31%

20%

0%
1995 2015 2035

Note: Replacement rates for 2035 are based on scheduled benefits, not payable benefits.
Sources: Centers for Medicare and Medicaid Services. 2016. Unpublished data from Medicare Trustees Report; and U.S. Social Security
Administration. 2016. Social Security Trustees Report.

8
8
And employer plans have shifted from
defined benefit to 401(k).
Workers with Pension Coverage by Type of Plan, 1983, 1998, and 2016

80%
73% 1983
1998
62% 60% 2016
60%

40%

24% 26%
20% 17% 16%
12%
10%

0%
Defined benefit Defined contribution Both
only only

Source: Alicia H. Munnell and Anqi Chen. 2017. 401(k)/IRA Holdings in 2016: An Update from the SCF. Issue in Brief 17-18. Center
for Retirement Research at Boston College.

9
9
401(k)s could work well, but people make
mistakes at every step along the way.
Prevalence of 401(k) Mistakes

100%

80%

59% 55%
60%

40%
25%
21%
20%

0%
Individuals not Individuals Assets in high- Loss of assets
participating in contributing 6 fee funds due to leakages
401(k) percent or less

Sources: Authors calculations based on Survey of Consumer Finances, 2013; Vanguard. 2017. How America Saves 2017; Investment
Company Institute. 2016. ICI Research Perspective. 22(4); and Alicia H. Munnell and Anthony Webb. 2015. The Impact of Leakages
from 401(k)s and IRAs. Working Paper 2015-2. Center for Retirement Research at Boston College.

10
10
And these mistakes erode their balances.

Impact of Fees, Leakages, and Contributions on 401(k)/IRA Balances, 2016

$400,000
$364,000
Fees
$304,000
Leakages
$228,000 Intermittent
contributions
$200,000
$160,000 Immature
system
$104,000

$0
Hypothetical Observed*

Source: Alicia H. Munnell and Anqi Chen. 2017. 401(k)/IRA Holdings in 2016: An Update from the SCF. Issue in Brief 17-18. Center for
Retirement Research at Boston College.

11
11
Still, having a plan is very important because
people do not save on their own.
Wealth of Typical Household with Head Ages 55-64, 2016

$400,000

$301,300
$300,000

$200,000
$153,700

$93,659
$100,000
$40,417
$16,797 $16,212
$0
Social Defined Primary Defined Financial Other assets
Security benefit house contribution assets
Source: Alicia H. Munnell and Anqi Chen. 2017. 401(k)/IRA Holdings in 2016: An Update from the SCF. Issue in Brief 17-18. Center for
Retirement Research at Boston College.

12
12
So we should be very concerned that only
half of private sector workers have a plan.
Percentage of Private Sector Workers Ages 25-64
Participating in an Employer-Sponsored Pension, 1979-2014

100%

80%

60%

40%

20%

0%
1979 1984 1989 1994 1999 2004 2009 2014

Source: U.S. Census Bureau. Current Population Survey, 1980-2015.

13
13
What to do? Solutions are straightforward.

Work longer to build assets & shrink retirement period;

Save more via Social Security and employer plans;

Cover uncovered workers; and

Consider the house as a retirement asset.

14
14
Working longer is feasible for most, and they
can still enjoy a lengthy retirement.
Retirement Age Equal to Age-65 Retirement in 1940,
Based on Rising Life Expectancy (In Years: Months)

Age at which ratio of expected retirement

Year
to working years remains constant
1940 65
1950 65
1960 66
1970 67
1980 68
1990 68
2000 69
2010 69
2020 70

Note: For the ratio of expected retirement to working years, people are assumed to start work at 20.
Source: Authors calculations using U.S. Social Security Administration. 2004. Life Table Functions Based on the Alternative 2 Mortality
Probabilities in the 2004 Trustees Report (unpublished).

15
15
And it improves security in three ways.

Increased Ratio of Working

Social Security Benefits Up 76% 401(k) Assets Nearly Double
to Retirement Years

160% $200 $186 5

132% 4:1
$160 4
120% Thousands
$120 3
75% $100
80% 2:1
$80 2
40%
$40 1

0% $0 0
62 70 62 70 62 70
Age Age Age

Sources: Authors calculations; and Charles D. Ellis, Alicia H. Munnell, and Andrew D. Eschtruth. 2014. Falling Short: The Coming
Retirement Crisis and What to Do About It. Oxford University Press.

16
16
By itself, working until age 70 would do the
trick for most people.
Cumulative Readiness by Retirement Age

100%

80%
SS benefits
available at age 62
60%

40%
DB plans
available at age 55
20%

0%
50 55 60 65 70 75 80 85 90

Source: Alicia H. Munnell, Anthony Webb, Luke Delorme, and Francesca Golub-Sass. 2012. National Retirement Risk Index: How Much
Longer Do We Need to Work? Issue in Brief 12-12. Center for Retirement Research at Boston College.

17
17
On the saving side, the first step is to shore
up Social Security.
Projected Social Security Income and Cost Rates, as a Percentage of Taxable Payroll, 1990-2091

20%

16%

12%

8%

4% Income rate
Cost rate

0%
1990 2010 2030 2050 2070 2090

Source: U.S. Social Security Administration. 2017. Social Security Trustees Report.

18
18
In 401(k)s, we need to get more money into
plans by making them fully automatic
Percentage of 401(k) Plans with Automatic Enrollment and Automatic Escalation

Percentage of Plans with Percentage of Automatic Enrollment Plans that

Automatic Enrollment, 2016 Increase Default Deferrals over Time, 2013

30% 35%
45%

55%

35%
With Without With Without Voluntary
Sources: Vanguard. 2017. How America Saves 2017; and Plan Sponsor Council of America. 2014. 57th Annual Survey of Profit
Sharing and 401(k) Plans.

19
19
reduce money leaking out

Annual Leakages Out of 401(k)/IRAs as a Percentage of Assets, 2016

2%

1.5%

1%

0.6%

0.3% 0.3% 0.3%

0%
Total Cashouts Hardship Post 59 Loan
withdrawals withdrawals defaults

Source: Authors estimates. Allocations to specific leakage channels are based on Vanguard. 2017. How America Saves 2017: A Report
on Vanguard 2016 Defined Contribution Plan Data. The total level of leakages is based on Alicia H. Munnell and Anthony Webb. 2015.
The Impact of Leakages from 401(k)s and IRAs. Working Paper 2015-2. Center for Retirement Research at Boston College.

20
and keep an eye on investment fees.

Fees as a Percentage of Assets for Actively Managed and Index Funds, 2016

1.0%
Actively managed
0.82% Index
Percentage of assets

0.58%

0.5%

0.09% 0.07%
0.0%
Equity Bond

Source: Investment Company Institute. 2017. 2017 Investment Company Fact Book.

21
21
Fees are a particular problem for small plans.

Total Cost of 401(k) Plans, in Millions of Dollars

5%

4%
Total plan cost

3%

2%

1%

0%
$1
1990 1993$10 1997 $100
2001 $1,000 2008$10,000
2005 2012 $100,000
2016
Plan net assets

Source: Alfred, Ryan. 2015. The One Chart that Explains 401(k) Fees. BrightScope.

22
22
Fees are also a concern for participants in
large plans, as they shift money to IRAs.
Total U.S. Private Retirement Assets by Type of Plan, Trillions, 2017 Q1

$10
$8.2
$8

$5.8
$6

$4 $3.2

$2

$0
Defined benefit Defined contribution IRA

Source: U.S. Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, 2017.

23
23
A final issue with 401(k)s is how people will
draw down their assets in retirement.

People Build Up Assets While Workingand Draw Them Down While Retired

24
24
Covering uncovered workers: some states are
taking the lead.
State Retirement Security Activity, as of August 2016

No activity
Failed legislation
2015 or later legislation
Auto-IRA enacted
Marketplace enacted

Source: CRR analysis.

25
25
Auto-IRAs, the dominant program, include
three key requirements.

Employer mandate: employers are required to offer a plan or

allow their workers to be in the state program.

Auto-enrollment: all workers are automatically enrolled, with

ability to opt out.

No taxpayer burden: participants (or donors) must bear all

program costs, including start-up costs.

26
Finally, we need to convince retirees to view
their house as a potential source of income.

27
27
People can get money from their house in two
ways: downsize or take a reverse mortgage.

Source: Steven A. Sass, Alicia H. Munnell, and Andrew D. Eschtruth. 2014. Using Your House for Income in Retirement. Center for
Retirement Research at Boston College.

28
28
Today, virtually no one plans to tap their
home equity.
Survey Responses for How Interested Are You in
Tapping Your Home Equity in Retirement?
100%

80%
75%

50%

25%
10%
4% 2%
0%
Not at all Not very Somewhat Very
interested interested interested interested

Note: Survey respondents were from households ages 55 and over.

Source: Fannie Mae. 2016. National Housing Survey.

29
An easier approach would be a state property
tax deferral program.

Homeowners 65+ could defer their property taxes until they die.

Simple sign-up: just check a box on the property tax bill.

State would transfer funds to municipalities to cover full cost.

Interest rate would equal states borrowing cost plus a buffer.

State would be repaid when homeowner sells house or dies.

30
Conclusion
The current retirement income system will deliver less when
people need more.

As a result, half are at risk of having insufficient income.

We can solve the problem by:

o working longer;

o fixing Social Security and 401(k)s;

o expanding coverage; and
o considering use of home equity.

All solutions are possible with existing financial infrastructure.

31
31
http://crr.bc.edu

@RetirementRsrch

crr@bc.edu

(617) 552-1762

32
32
Some argue that the NRRI overstates the
problem, but raw data tell the same story.
Ratio of Wealth to Income by Age from the Survey of Consumer Finances, 1983-2013

6
1983
5 1989
1992
1995
4 1998
2001
3 2004
2007
2 2010
2013
1

0
20-22 26-28 32-34 38-40 44-46 50-52 56-58 62-64

Source: Center for Retirement Research at Boston College calculations based on U.S. Board of Governors of the Federal Reserve System,
Survey of Consumer Finances, 1983-2013.

33
33