Some of the many recent assessments of how much American workers should save and when they should save it underestimate the sufficiency of retirement savings for many households, according to a decidedly contrarian report from Towers Watson.
In “American Workers’ Retirement Income Security Prospects: A Critique of Recent Assessments,” authors Gaobo Pang and Sylvester J. Schieber argue that some these assessments rely on models that don’t adequately reflect changes over a worker’s life cycles.
“They extrapolate younger workers’ observed savings behavior into the future, ignoring workers’ capacity to catch up after children leave home, the mortgage is paid off, and other early-life obligations have been discharged,” Pang and Scheiber said.
“The measurement of preretirement income and its spendable portion as an indicator of living standard in working years is often exaggerated owing to inappropriate indexing. This leads to overestimates of earnings to be replaced in retirement, underestimates of the income replacement capacity of Social Security for various segments of the workforce, and misperceptions about workers’ own responsibility for securing their retirement prospects.”
Pang and Sylvester do not deny that some workers are not adequately saving for retirement, but maintain that the situation is not nearly as dire as so many other studies have suggested.
They also dispute studies that establish a retirement-income target of 85 percent of preretirement, pretax income, saying that this amount will give the retiree more disposable income during retirement than during the years spent in the workforce.
The authors instead recommend replacement income ratios of 65 to 75 percent, although they acknowledged that the optimal amount will vary by household, depending on the number of children each raised.
They concluded by sounding a rare positive note about the retirement situation in America.
“Using measures of preretirement income that significantly exceed workers’ real earnings over their careers reduces the perceived income replacement capacity of Social Security and raises the specter that workers will not be able to maintain their preretirement spendable income when in fact their retirement income prospects are much more optimistic than that,” said the duo.
“If we wish to make our situation look dire, this might make some sense but, if we truly want workers to achieve standards of living in retirement comparable to the way they lived during their working years, it makes no sense at all. … Poorly conceived standards of how much workers will need as they approach retirement, naive models of retirement savings behavior and underestimates of existing retirement annuity and savings programs cannot help us discern how many workers are at risk, who they are and how best to help them.”