Blowing Smoke at the Retirement Crisis
This blog was written by Teresa Ghilarducci and Joelle Saad-Lessler and originally published by the Huffington Post on December 21, 2012.
The lobbying group for the mutual fund companies surprised Americans with a report that declares all is well with their retirement income security. The Investment Company Institute's (ICI) December report, "The Success of the U.S. Retirement System," asserts that the retirement system adequately prepares Americans for a comfortable retirement.
We know that private groups often bend the truth closer to their interests, and ICI is paid to make 401ks and IRAs look good. But the degree that ICI distorts the truth in this report defies convention and common sense.
So let's take a closer look at the assertions made in ICI's report and figure out how they tortured the data until it gave them the findings they wanted.
First, ICI goes so far as to claim that the switch from defined benefit (DB) type pension plans to defined contribution (DC) type plans leaves workers better prepared for retirement. However, workers are better off if their employer shoulders the risk and guarantees a pension for life in a DB plan, rather than putting their savings in a DC account that is subject to the gyrations of the market. They are also better off if their employer contributes towards their retirement, if they can pay lower fees, and if their money is professionally managed -- all of which are attributes of DB plans and absent in DC plans.
Second, they compare the poverty rate among older Americans in 2011 to what it was in 1966. Notice their choice of time period. Most of the improvements in poverty accrued from 1966 through the early 1980s, before defined contribution plans proliferated. In fact, if the economists at ICI really wanted to prove that defined contribution plans leave retirees better off than defined benefit plans, why not compare the poverty rates for those two types of retirees?
Third, they use survey data that finds that younger households save for priorities such as education and housing, and only start saving for retirement later in life. They claim this is adequate based on simulations where a married couple household earning $87,000 begins saving at age 37 using a 401k-type private account and makes "moderate" contributions. According to their simulations, this household can expect to replace 93 percent of its pre-retirement consumable income in retirement. However, they assume employees will contribute 6 percent of their income (which they sustain until age 65), with a 3 percent employer match rate. With a median employee contribution rate of 2-3 percent, these simulations are unrealistic. This is especially true considering that close to half the workforce does not have access to any type of retirement account at work, and for those that do, more and more of their employers are dropping their match.
Fourth, ICI reports that 81 percent of near-retiree households have pension savings. However, they fail to mention the puny amounts accumulated. According to their numbers, median retirement assets for households earning $30,000-$54,999 were only $4,300, while households earning $55,000-$79,999 had a meager $28,000. It is a heroic overstatement to consider these sums an indication of a success story.
We and other retirement economists have been doing our best to alert Americans to the inadequacies of the U.S. retirement system to avert a retirement crisis. We are trying to fix a broken system while ICI is busy blowing smoke to divert attention from the problem. No one gains from maintaining the current system, except the investment companies that make a profit on the high fees they charge unsuspecting workers trying to save enough to escape the clutches of poverty in retirement.
Shame on you, ICI.