Despite the 2018 market downturn, the projected retirement deficit for U.S. households has improved somewhat, though some remain at greater risk than others, according to new data from the Employee Benefit Research Institute.
“Retirement Savings Shortfalls: Evidence from EBRI’s 2019 Retirement Security Projection Model” shows that the projected retirement deficit for U.S. households headed by individuals ages 35–64 decreased by nearly 14% over the past half-decade; from $4.44 trillion (in current dollars) in 2014 to $3.83 trillion in 2019.
Since there are various models that purport to track the cumulative retirement deficit, with varying degrees of precision (see Rely Able?), it’s important to note that for public policy purposes, EBRI has long defined adequate retirement income as having the financial resources to cover basic expenses plus uninsured medical costs in retirement. That’s more than a measure based on mere replacement rates, which is the foundation of some models, and it considers uninsured medical costs in retirement which many models completely ignore.
Developed in 2003 to provide an assessment of national retirement income adequacy, the model is able to project retirement deficits by age, income, gender and marital status cohorts, with flexibility to examine potential changes to the system, such as the impact of policy proposals and plan design changes.
The largest improvement was found among by younger workers, with those ages 35–39 projected to have a 22% decrease in their average deficits.
The study also finds that the percentage of these households projected to have a “successful” retirement – defined as not running short of money in retirement as noted above – crept higher to 59.4% in 2019 from 57.7% in 2014.
Not surprisingly, eligibility for participation in a DC plan was found to have a significant impact, illustrating the importance of expanding coverage to those not currently eligible to participate in an employer-sponsored retirement plan.
The deficit values for those in the youngest cohort (ages 35–39) assumed to have no future years of eligibility (as if they were not employed in the future by an organization that provides access to a DC plan) is $78,046 per individual. “This is more than five times the deficit for those fortunate enough to have at least 20 years of future eligibility in a defined contribution plan,” notes Jack VanDerhei, EBRI research director and author of the study.
That shortfall decreases substantially to $44,546 for those with 1 to 9 years of future eligibility and even further to $27,830 for those with 10–19 years of future eligibility, the report shows.
The Not So Positive
Low-wage workers, not surprisingly, will see larger deficits than high-wage workers, according to the report. EBRI notes that the average deficit projected for those in the youngest cohort (ages 35–39) ranges from $13,852 for households in the highest pre-retirement income quartile to $104,805 for those in the lowest quartile.
Women also continue to face a larger deficit than men, due to differences in longevity and wage growth. For those ages 60–64, the average retirement deficit ranges from $12,640 per individual for households married at retirement where the wife dies first (widowers) to $15,782 for households married at retirement where the husband dies first (widows). Even more glaring is that the retirement deficit for those who are single ranges from $24,905 for males to $62,127 for females.
Meanwhile, longevity risk was also found to be a critical factor. EBRI’s study shows that the retirement deficit for those in the longest relative longevity quartile averages slightly more than 10 times those in the shortest relative longevity quartile.
Reductions in Social Security benefits also would have a material impact, according to the study. A 23% pro rata reduction in Social Security benefits starting in 2034 – as suggested by current projections, if no legislative fix emerges – would increase deficits by an average of 17% for those currently ages 35–39.