Retirement security is based on three supports.
Most descriptions of our retirement system include the metaphor of a three-legged stool. Its three legs are Social Security, pensions, and private savings, such as mutual funds, real estate, and savings accounts. However, only Social Security provides a guaranteed, inflation-proof benefit for the majority of Americans. More importantly, the other two legs, pensions and savings, are weakening.
How much retirement income is enough?
One way to think about retirement income is as a share of pre-retirement income. Often, retirees do not require the same income as they did when they were working, because they are no longer saving for retirement and because taxes are lower, work-related expenses disappear, family sizes shrink, and mortgages are paid off. Generally, a replacement rate of 75-80% of pre-retirement income is considered adequate, though rising retiree healthcare costs have led some to question this rule of thumb. Furthermore, replacement rates do not address the question of whether retirement income meets an absolute standard of need. For a worker who had inadequate income during his or her career, even a replacement rate of 80% of pre-retirement income will be inadequate.
With fewer workers covered by traditional pensions, Social Security is more important than ever.
Only half of all workers participate in any workplace retirement plan at all. In 1983, the vast majority (88%) of these workers were covered by defined-benefit pensions. By 2004, only a minority (37%) had traditional pensions, as employers shifted responsibility for retirement saving to workers through 401(k) plans. This leaves Social Security as the only guaranteed source of retirement income for most workers.
Single women and minorities face retirement insecurity.
In 2001, 60% of single women (never-married, divorced, or widowed women) aged 47-64 anticipated retirement incomes below twice the poverty line, compared to 33% for single men and 16% for married couples in that age range. Similarly, 57% of African American and Hispanic households in that age range looked ahead to retirement incomes below twice the poverty line, compared to 23% for non-Hispanic whites (Weller and Wolff 2005). Gaps in private pension coverage explain a large part of these differences.
Many households experience a sharp drop in living standards after retirement.
In 2004, 27% of households approaching retirement were likely to have retirement incomes less than half of their working incomes (Mishel et al. 2006). The share of households anticipating a severe drop in income after retirement is higher for African American and Hispanic households (39%) than for non-Hispanic whites (24%). It is also higher for households headed by workers with less than a high school degree (47%) and those headed by high school graduates (29%) than it is for college graduates (21%).
The post-World War II generation may be better off than their parents in retirement, but later generations are likely to be worse off.
The early baby boomers—people born between 1946 and 1954—have more savings and expected retirement benefits than previous generations at a similar stage in their lives. But in the absence of major policy reforms, they will be the last generation to have more retirement security than their parents. Later baby boomers (born 1955-64) and Generation Xers (born 1965-72) appear less prepared for retirement than were their predecessors, despite the boost to investments from the stock market and housing booms (Weller and Wolff 2005; Gale and Pence 2006; Munnell et al. June 2006). A study by the Center for Retirement Research projects that the typical late boomer and Generation X retiree will be able to replace only 69% and 65% of their pre-retirement incomes, respectively, compared to 77% for early boomers.