Earlier this month, a Wall Street Journal op-ed by Andrew Biggs and Sylvester Schieber ("The Imaginary Retirement-Income Crisis," which reprised their January article, "Retirees Aren't Headed for the Poor House") attempted to debunk the long-held belief that Americans lack adequate retirement savings. Their methodology, which is built around the notion of "career average earnings," is flawed and their conclusions are dangerously misleading.
Financial advisors, money managers and other financial services professionals can uniformly attest to the gap that exists between what individual investors expect to live on in retirement and what they are likely to have, based on what they've accumulated to date.
Indeed, the financial professionals I work with and talk to every day tell me the single biggest fear their clients have -- the single most intensely emotional source of investor anxiety -- is that they will not have the resources to fund the quality of life they want in retirement or, even scarier, that they will outlive their savings.
They are right to worry.
According to a whitepaper authored by BlackRock Vice Chair Barbara Novick, "less than 60 percent of workers are saving for retirement," and the majority of those that are saving have accumulated $25,000 or less. That is nowhere near enough to live on in retirement. Add the burden of financing a child's college education or caring for ailing parents or paying inexorably inflating out-of-pocket health care costs, and the adequacy of the amount of money many Americans have accumulated for retirement is even less.
The problem is getting worse, not better.
An article by Frances Denmark in September's Institutional Investor coins a new phrase: "catastrophic longevity" to describe "the risk that people will live a lot longer than anyone had imagined." It's not news that life expectancy has increased over the past century. What's surprising is how quickly it continues to increase: by more than 2.2 years on average over just the past decade alone, according to Denmark.
I asked CFA luminary Charley Ellis what he thought about Biggs' and Schieber's suggestion that, despite numerous studies that suggest otherwise, Americans will have "enough" money saved to live the life they want in retirement.
Having authored a piece just last spring on retirement savings in the Financial Analysts Journal titled "Hard Choices: Where Are We?," here's what Charley had to say:
"'Enough' has long been defined to suit the conclusion of advocate. As Harry S. Truman explained, 'It's a recession when your neighbor loses his job; it's a depression when you lose your own.'"
Charley suggests we carefully examine that base data behind the conclusions of Biggs and Schieber, who point to a sophisticated computer model that showed, in 2012, the income of the median 67-year-old exceeded his career-average earnings, adjusted for inflation.Ellis frames it this way:
My average lifetime age is 37, but I am 74. My lifetime average earnings peak came at 45, but my peak responsibilities and peak pay (adjusted for inflation) came almost 20 years later. I'm OK with retirement income at 70% or 80% of peak, but not 70-80% of my pay at 45 which would be (inflation adjusted) only 40-50% of my base rate.
The retirement savings crisis is real. Despite what Biggs and Schieber might say. "Most Americans simply will not be able to provide for their own future or their family's future," writes BlackRock's Novick, "The lack of financial preparedness is evident across the United States."
What makes the Biggs-Schieber conclusions so dangerous is that they undermine the advocacy effort required to ensure that policy solutions are put into place to keep this train wreck in slow motion from degrading the future quality of life for millions of individuals.