Or, at least, what the benefits consulting
companies that are probably advising your employer think, anyway.
Not long ago, the employee benefits consulting company Aon presented its
triennial retirement-adequacy study, "The Real Deal," in which it uses its data on employee
401(k) accounts to estimate to what degree employees at the sort of companies
it consults for are on- or off-track for retirement savings. Their
shocking conclusion: "only 1 out of 3 workers who participate in
their employer's benefit plans over a full-career . . . are expected to be able
to retire with reasonably adequate retirement income." Or, put
another way, the average employee will need to work to age 70 in order to
retire with enough money to meet their needs in retirement.
How do they calculate this? Their approach is simple: they
assume that an employee's 401(k) account plus any pension rights comprises
their entire retirement savings -- that is, they don't try to assume anything
about any additional amounts in a fund from a prior employer or in an IRA --
and they assume that employees will continue contributing at whatever rate
their data says they are contributing now plus any increases they're due for in
an auto-escalation plan. They also assume that workers will seek to
maintain the standard of living they're now accustomed to, with reductions in
spending only for changes in tax rates, the elimination of the need to save for
retirement, and small changes in daily expenses, plus medical costs projected
at actual average medical expenses. They project their calculations with
a standardized investment return assumption, and based on standardized
assumptions regarding pay increases and inflation, and assume for
simplification that everyone dies "on schedule" at their life
expectancy (for which they build in future improvements in longevity), and that
Social Security benefit formulas will remain unchanged, then they measures to
what extent employees' projected savings will match up with their projected
net-of-Social Security needs at retirement.
result of all this math is this: on average, they calculate that an
average employee will have 7.9 times pay saved by the time they reach age-67
retirement. But they'll need 16.4 times pay, and Social Security provides
the equivalent of 5.3 times pay, meaning that they'll need 11.1 times pay, and
there's an average shortfall of 3.2 times pay. Analyzed by gender, women
have an average shortfall of 4.0 and men 2.5 times pay, because of women's
higher longevity and lower savings rates and account balances to-date.
Are these estimates overblown? There's no doubt that in the same
manner as political activists want to pitch their proposals for government
intervention to improve retirement readiness, Aon is pitching their services to
companies to help their employees be more ready for retirement.
there are several noteworthy takeaways, the first of which is this: don't look for your employer to boost their 401(k) contribution .
The report itself presents survey data that shows that employer
contributions to retirement accounts have actually been declining, not
increasing, in the last decade and a half. In 2004, employers provided a "retirement benefit value" of
7.3% of pay. In 2017, that dropped down to 6.3%. And that's taking into account only
employers who provide retirement benefits in the first place! The report
doesn't explain the causes of this drop, though it's likely a combination of
both actual decreases in 401(k) contributions as well as declining numbers of
employees receiving pension plan accruals.
What's more, the entire report is framed as "employees aren't
saving enough." And the advice that Aon gives client-employers who
want to help employees be ready for retirement? It's not about how to best
boost those contributions -- this doesn't particularly seem to be on the table.
It's about how to strategically get employees to contribute more of their own
money, by providing additional information on retirement savings to their
employees, or providing financial wellness programs, and by reducing expenses
on the investment funds. My past pension consulting experience also tells
me that consulting firms like Aon are focused on helping their clients get
their employees to save more with the right type of autoenrollment and
auto-escalation program, or the right plan design for matched contributions,
which is all well and good but doesn't increase the amount of money employers
are kicking into their employees' accounts.
Perhaps this might change if the labor market tightens, in any
industries in which employers are competing for workers. But perhaps not
-- if those employers figure that their employees and prospective employees
will be comparing pay rates above all else.
their report, they break down net-of-Social Security pay replacement needs by
income and age, and the figures don't make all too much sense at first
glance. If you're a typical earner, and you're nearly at retirement (age
60+), they predict that you'll need 6.4 times your pay to fund your retirement
spending in addition to Social Security. If you're young, less than age
30, the figure is dramatically higher: 11.8 times pay for average
earners, and higher at either end -- 13.1 times pay for high earners, and 13.5
times pay for low earners.
What's the reason for this difference?
Young workers, by the time they reach retirement age, are expected to
live much longer than current near-retirees.
Higher earners will need more money because Social Security's benefits
replace less of their pay.
Lower earners will need more money because their medical costs will take
up a higher share of their income.
And all earners will feel the sting of medical inflation significantly
outpacing general inflation.
The 2018 version of the report doesn't include many details on
methodology, but the 2015 report does (and the 2018 edition specifies the
limited changes made). In calculating the savings needed, Aon assumes
that general inflation will be 2.5% per year, pay increases over one's career
will amount to 4% per year on average, but that medical inflation will be 5.5%
each year. While the report doesn't break down the impact of these
different factors, it's plain to see that this makes a huge difference, even
with Medicare covering the lion's share of medical costs.
Finally, here's a third possible take-away:
Aon used a retirement age of
67 to perform its calculations, aligning it with Social Security Full
Retirement Age, and it did so without pairing it with dire warnings to
Does this mean that employers
are becoming more accepting of employees working past traditional retirement
age? Or was this done with a
bit of a wink and a nod, with all parties meant to understand that workers
aren't reallygoing to
inconvenience their employers by working that long, and they'll all be shown
the door one way or another before then, but that an age 67 retirement is just
a handy way to present the data? One hopes that the former is true,
though it's still very much an unknown.
And a fourth data item which I hesitate to call a take-away because it
just confirms what we all pretty much knew already, though it's handy to have
actual numbers: the report includes a chart on benefit prevalence among
their large-employer clients. In 1996, 79% of such employers provided a
Defined Benefit pension plan for their salaried new-hire employees; in 2017,
only 19% still did.
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