Unpacking “The Real Retirement Crisis”

5 minute read time.

We’ve all heard the warnings about America’s “retirement crisis.” But is it possible that we’re looking for trouble in the wrong places? That’s the argument at the core of “The Real Retirement Crisis: How to Fix What’s Wrong with America’s System of Old-Age Security,” Andrew Biggs argues that retirees today are actually faring better than headlines might suggest – and that the real challenges lie elsewhere.

A Senior Fellow at the American Enterprise Institute and a former official with the White House and Social Security Administration, Biggs has spent decades shaping and studying retirement policy. He recently joined us on “Your Money Map” to share his insights on where he believes the real risks exist.

THE RETIREMENT READINESS MYTH 

Take a glance at recent headlines, and if you’re approaching retirement, they’re enough to spark panic. Biggs sees a different picture. He notes that participation in workplace retirement plans is at record highs, automatic enrollment is boosting workplace savings and retirement assets as a share of wages far exceed past levels.

Americans are also working longer. Labor force participation for 55 to 64-year-olds is the highest it’s ever been, enabling people to earn – and save – more. “All of this has resulted in retirees today having the highest incomes on record; in fact, the highest incomes in the developed world,” Biggs says. “The data really tells a story that is very different from what you’ll read in the newspaper, and it’s really a much more encouraging story.”

WHERE THE REAL CRISIS LIES

If Americans are making progress, where’s the crisis? Biggs points to government inaction. “The problem, the real retirement crisis, as it were, is not with Americans not saving much for retirement on their own,” says Biggs. “It’s really with the government failing to fix Social Security, failing to fix Medicare and failing to fix state and local government pensions.”

Social Security is an area of particular concern. The program’s trust fund is projected to run dry in 2033. That’s the year Biggs turns 65, but he’s not panicked – yet. Even in a worst-case scenario, benefits would be cut by about 20%, not eliminated.

As Biggs shares, though, that’s unlikely to happen. “The reality is that Congress isn’t going to allow that kind of cut overnight. It’s probably not gonna allow that kind of cut at all. But it is particularly not going to allow that kind of cut for the people who need Social Security the most,” he says.

MEDICARE: ANOTHER PROBLEMATIC PIECE OF THE PUZZLE

One of the other aspects of the “real” retirement crisis has to do with healthcare. A recent survey from the Alliance for Lifetime Income shows well over half of pre-retirees and retirees are fearful of outliving their savings in retirement, with inflation and healthcare costs being their top concerns.

Much like Social Security, Medicare faces financial challenges, too. As Biggs explains, they’re driven largely by what’s referred to as “healthcare intensity.” “It’s not the cost of your MRI or the cost of your drug; it’s the fact we’re using more and more and more of these things,” he shares. “We do simply use more healthcare than people in other countries do. At some point, we have to decide – do we want to scale that back, or do we want to pay for it?”

THE DECUMULATION DILEMMA 

One of the other difficulties that persists for people in retirement is figuring out how to spend down their nest egg. Research from the Alliance shows that nearly half of retirees say spending in retirement gives them anxiety.

To make the decumulation challenge easier, Biggs suggests solutions like annuities, which provide guaranteed lifetime income payments. “Two fears people have are, what’s going to happen with my investments and how long am I going to live?” says Biggs. “Purchasing an annuity can help solve both those problems.”

Tools that automate the spend-down process – much like automatic enrollment has simplified saving – are also helpful and becoming more common. “It used to be that you had to decide how to allocate all your money, you had to decide how much to contribute,” says Biggs. “You had to change your asset allocations. Then you had to figure out how to spend it down, and that’s becoming automated now.”

BIGGS’ BEST TIPS IF YOU FEEL BEHIND

Even with data on their side, many people still worry they aren’t well enough prepared for retirement. Biggs says that’s understandable and shares these three confidence boosters:

• Run the numbers: “You can get estimates from your retirement plan and from Social Security of the benefits you will get in retirement,” says Biggs. “Something like that can give some people some peace of mind.”
• Consider postponing your plans: “The most efficient thing is simply to delay retirement by a couple of years, because that means you have more time to save for retirement and a few extra years of compounding of your existing savings,” he adds. “And once you get close to retirement, it’s that compounding effect that is doing the legwork.”
• Delay claiming Social Security: As Biggs points out, in most cases, the longer you wait to claim, the higher your monthly payments will be for the rest of your life.

“You have one shot at doing this. It demands all these mathematical calculations,” says Biggs. “But what you find is that most people are pleasantly surprised by how they do in retirement.”

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