GAO factoids purporting retirement crisis are highly misleading

Writing in The Hill, Robert Stammers of the CFA Institute warned that “a real retirement crisis is still impending” that could create “a generation of retired poor.”

In support of his view, Stammer points to recent work by the Government Accountability Office which, Stammer stated, “paints a very bleak picture” of the U.S. retirement saving system. But the GAO claim that Stammer thinks illustrates America’s coming retirement crisis is in fact one of several misleading arguments in GAO’s recent work on retirement saving.

While despairing over the recent policy discussion on retirement savings, Robert Stammers states:

{mosads}“Some hope comes from one government agency that is very aware of the retirement situation and the weaknesses in the system: the U.S. Government Accountability Office. A 2015 report found, ‘About half of households age 55 and older have no retirement savings,’ such as in a 401(k) plan or an IRA.”

Stammers wasn’t the only one to pick up this message. “Half of people near retirement have no savings,” a Chicago Tribune report read, based on the GAO report. “The GAO reports that maybe half of near-retirees have no money put aside,” reported Plan Sponsor, a trade magazine.

Then-presidential candidate Bernie Sanders cited the GAO, saying “Right now, 50 percent of older workers, 55 to 64, you know how much money they have in the bank as they enter retirement? Who wants to guess? Zero!”

Indeed that’s what the GAO claims and the message that the media, Congress and the American people receive. Just recently, a GAO conference presentation included a chart showing that, as of 2013, only 56 percent of near-retirees had any retirement savings, with 44 percent going without.

But the GAO’s headline-friendly factoid is totally misleading. To start, the GAO’s “half aren’t saving” factoid ignores the 40 percent of near-retirees who are entitled to a traditional pension benefit in retirement.

The vast majority of federal, state and local government employees participate in a defined benefit retirement plan, with only a few of that group having a 401(k)-type account. Even 13 percent of private sector employees still have a traditional pension. Are traditional pensions not “retirement savings”?

If you believed the headlines generated by the GAO’s reports, it seems not.

Overall, 73 percent of near-retirees in 2013 had either a retirement account, a traditional pension or both. If we’re thinking about how many Americans have retirement savings, isn’t that the more relevant headline figure?

But even then, it’s not clear that the remaining 23 percent of “non-saving” Americans face a retirement crisis. In fact, the best available data say that even supposed “non-savers” are doing well in retirement.

One way to check is to compare how “non-savers” incomes compare before and after retirement. We can do that by looking at households aged 55 to 61 in the 2007 Survey of Consumer Finances (SCF) compared to that same age group nine years later in 2016. 

In 2007, near-retirees without a retirement account or traditional pension had average earnings of $22,290 — not per person, mind you, but per household. These households’ total incomes including all income sources except capital gains (which typically aren’t spent at the time) was $42,962.

That’s less than one-third the incomes of similar-age households that had formal retirement savings. So, by and large, “non-savers” are lower-income.

Come 2016, when this “non-saving” group was aged 64 through 70, their total average income was $39,703, equal to 92 percent of their pre-retirement incomes. Net of taxes, their retirement and pre-retirement incomes are close to equal.

Most financial advisors say that a retirement income “replacement rate” of 70 percent of pre-retirement earnings is sufficient. In other words, not only is the group of “non-savers” smaller than the GAO claims, but most of them seem to be doing fine in retirement.

Second, even supposed “non-savers” have significant retirement incomes apart from Social Security. According to the SCF, the average “non-saver” retiree household received a Social Security benefit of $13,951 in 2016.

But an additional $15,953 comes from business or farm income, interest, dividends and capital gains. These income sources, which in total pay more than Social Security does, show that many Americans who don’t have an employer-sponsored retirement plan nevertheless are setting themselves up with income in retirement.

In addition, the average retiree without a retirement plan has annual earned income of $7,459. Transfer income – from various means-tested government programs plus alimony and child support totals only $1,965, belying the claim that Americans who aren’t saving in a formal retirement plan will necessarily become charges of the taxpayer.

But how can that be? There are a couple of answers. First, Social Security’s benefit formula is progressive, meaning that low-earners receive higher benefits relative to their pre-retirement earnings than do the rich. As a result, low-earners have less need to save on top of the 12.4 percent of their earnings that already flow to the program.

It’s also worth noting that even these income figures may be conservative. Research from Joshua Mitchell and Adam Bee, two Census Bureau economists, finds that retiree households report substantially higher incomes on their IRS tax returns than is shown by household surveys such as the SCF.

The median retiree’s total income as reported to the IRS is about 15-percent higher than in the SCF. Unless we think that retirees are over-reporting their income to the IRS, we must conclude that real retirement incomes are even higher than the SCF data show. All of this strengthens the view that the U.S. retirement system, while obviously not perfect, is in many ways doing very well.

I’ve gone in-depth on this one factoid generated by the GAO because that factoid has spawned and slanted press coverage on retirement savings. But, as I’ve noted in a recent article, much of GAO’s recent work on retirement saving has been similarly slanted.

The GAO’s retirement work contains too many factoids that don’t stand up to scrutiny and leaves out too much data that are contrary to the GAO’s stated view that the U.S. retirement system needs a “comprehensive re-evaluation.”

Retirement saving is complicated — there are many ways to save and different households need to save different amounts. As a result, analyzing the adequacy of Americans’ retirement saving is also complicated.

There’s enough one-sided “research” out there coming from progressives who wish to expand Social Security and investment firms that want you to buy more of their products. Government agencies need to handle that complexity so that Congress and the public get a rounded view of how the U.S. retirement system is working.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration. In 2014, Institutional Investor Magazine named him one of the 40 most influential people in the retirement world.