Trends in Retirement Security

Mr. Chairman and other members of the Committee, thank you for the invitation to testify to you today regarding retirement security. I currently serve as Director of The Hamilton Project at The Brookings Institution, an initiative dedicated to developing policies that promote broad-based growth and opportunity. Enhancing retirement security is an important part of our efforts.

Preparing for retirement is substantially more complicated for today’s workforce than it was for yesterday’s workers. Old mechanisms to secure retirement income, such as defined benefit pension plans, are being displaced by new savings vehicles such as defined contribution plans. This change offers major opportunities but leaves many families at risk of falling behind. As this change continues many families risk being left behind. Social Security benefits, meanwhile, provide an increasingly important bedrock for retirement security.

The challenge could not be more stark. The personal saving rate has been negative for six straight quarters, the first time it has gone negative since the 1930s. A negative personal saving rate not only threatens the economic wellbeing of working families, it also endangers our entire economy. Low national saving leads the United States to borrow nearly 7 percent of GDP annually from foreign countries. This high current account deficit increases the chances of an economic crisis that could adversely affect the economic security of all Americans. And it requires that a fraction of our future national output be devoted to repaying foreign lenders, rather than raising the living standards of future generations of workers and retirees.

At the individual level, many families are approaching retirement with very little in the way of savings. According to Survey of Consumer Finances data, two-third of families headed by a worker between the ages of 55 and 64 had under $88,000 in their retirement savings accounts in 2004. To put this in perspective, $88,000 would be enough to purchase an annuity paying just $653 per month.

There is wide variation in retirement savings and many families are accumulating substantial assets that will be enough to ensure a comfortable retirement. But is safe to say that at least one-third of families are not adequately preparing for retirement, according to a number of studies by economists. And it is this latter group which most needs – and can most benefit from – supportive public policy initiatives.

Financial planners generally recommend that retirement income replace about 70 percent of pre-retirement income. Social Security gets the typical family about halfway to this goal. For a typical worker retiring at age 65, Social Security replaces 40 percent of pre-retirement income. As the normal retirement age rises to 67, the replacement rate for workers retiring at 65 will fall to 36 percent. For the plurality of families that claim benefits starting at age 62, the replacement rates are even lower.