There are many things to worry about these days, among which your retirement account probably ranks highly. Depending on the day, the market can promise the retirement of your dreams or a dream that feels out of reach. Worries about retirement security have spurred calls by politicians such as Joe Biden and Elizabeth Warren to expand Social Security. But an increase in entitlements would be expensive and unnecessary. Even in a world full of increasing uncertainty, you can take comfort that your retirement is not doomed.
In fact, you are probably better prepared for retirement than previous generations. We often hear that the state of American retirement is precarious, that the days of secure pensions are gone, and that workers have not saved enough. The ensuing logic is that our only hope is a bigger government benefit. It is true that there are risks to your savings, but even so, you are still in better shape than the average American retiring a generation ago. And if they had enough in retirement, odds are you will too.
We tend to romanticize the past; in particular, the days of defined-benefit pension plans, when employers offered a secure income for the duration of retirement. But at the peak of their popularity in 1973, defined-benefit pensions were available to only 39 percent of U.S. employees. That’s because offering these pensions, and assuming so much risk, was very expensive for employers. Once the government beefed up regulations and demanded that employers fully account for the cost of pensions, defined-benefit plans mostly disappeared from the private sector. Even if you were lucky enough to have a generous plan, it only became valuable after many years of tenure at one job, an increasingly uncommon practice. Tying yourself to a single organization can mean forgoing better job opportunities and higher pay.
Defined-contribution plans, like 401(k)s, are cheaper to offer because the employee bears some risk. That is also one reason why they are more popular: More than half of American households today have a retirement plan, most of them defined-contribution plans.
This broader access to retirement plans is a major reason why the average American has more retirement income than in the past. In a recent issue brief, economists measured retirement income from 2000 to 2011. This time period is significant because defined-contribution plans became more popular in the 1980s, so 2010s retirees were the first to retire after utilizing them for most of their career.
The authors estimate that 70-year-olds in 2011 had more income than they did in 2000, no matter their income bracket. From 2000 to 2011, the median 70-year-old’s income increased from $30,710 to $33,908, while those at the 25th percentile saw an increase from $15,341 to $17,225, and those at the 75th percentile saw an increase from $51,360 to $56,522. Odds are if earlier retirees had enough money in retirement, current ones will too.
More workplace benefits and an expansion of the safety net left even the lowest-income retirees better off. During the 1970s poverty rates among Americans older than 65 hovered around 30 percent. In 2018, the elderly had the lowest poverty rate: 9.7 percent. There are many vulnerable Americans who do need support, but retirees aren’t among them. Having the government provide enough risk-free income to finance most Americans’ entire retirement is expensive, unnecessary, and implausible in the current fiscal environment. With limited resources, there are better uses of tax revenue.
This is not to say that our current retirement system is perfect. Social Security is due for a financial shortfall in 15 years, though that day could come sooner thanks to the economic pressures arising from COVID-19. This funding gap creates a large source of uncertainty for retirees, since Social Security is a critical source of income. But the answer is more, credible financing and better accounting, not an expansion of a flawed system.
We also need better options to convert retirement wealth into stable income that lasts a lifetime. Managing income in retirement carries more risk than many individuals can handle. It is impossible to know how long your money needs to last, and retirees are more vulnerable to market risk. But the government need not manage this risk. The private insurance market can offer annuities, expanding their use features in the recent SECURE Act.
Expanding Social Security is expensive and inefficient. Some risk sharing between the government, individuals, and the private sector is more sustainable and is already providing Americans more income in retirement than ever before.