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Some People Just Shouldn't Save For Retirement

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The New York Times recently editorialized in favor of expanding Social Security, supporting a movement that’s gone from a few progressive activists to becoming a major part of presidential candidate Sen. Bernie Sanders’ agenda. Advocates for Social Security expansion emphasize how poor a job Americans are doing in saving for retirement on their own.

But fact-checking just one prominent talking point shows how tenuous the case for Social Security expansion really is. According to the Times,

The Government Accountability Office [GAO] recently found that 52 percent of American households with someone 55 or older have nothing saved for retirement and that only half of that 52 percent will get anything from a company pension.”

These data come from the Federal Reserve’s Survey of Consumer Finances, a common data source in analyzing retirement saving. But this factoid by itself tells us nearly nothing of any importance regarding the policy debate over Social Security expansion and broader retirement policy.

The 52% headline figure cited by the Times is wholly misleading, as it includes households that have traditional defined benefit pensions – the kinds that progressives have a fetish for promoting, even if they punish mobile employees and pay a meaningful benefit to only about one-in-10 workers who participate in them. So if we’re talking about the number of older households without some form of retirement savings, the number isn’t 52% but 27%.

But even that figure is misleading. The GAO notes, “Perhaps of greatest concern are the 27 percent of all households age 55-64 that have neither retirement savings nor a DB plan.” But there’s very good reason these households aren't saving for retirement: They’re very poor, with per capita incomes of about $11,300. GAO is “concerned,” but doesn’t say how much such households should have saved for retirement. For most of them, the correct answer is probably zero.

The reason is that most of these households will receive Social Security benefits that fully replace their pre-retirement earnings. Accord to a recent Congressional Budget Office report, the bottom 20% of earners – to which most of these these non-savers below – receive Social Security benefits equal to almost 100% of their previous earnings. They also receive Medicaid and/or Medicare in retirement, and may well receive other government transfers such as food stamps.

To expect that very low-income households should have substantial personal savings for retirement is nutty. These are precisely the households Social Security was created for. To scare Americans that the lack of retirement saving by very low-income households somehow constitutes a retirement crisis that warrants a broad-based expansion of the heavily-underfunded Social Security program is irresponsible.

That’s not to say these households aren’t very poor – they are, and that’s the root of the problem. Even in a perfectly-designed retirement system, which enabled every retiree to exactly maintain their pre-retirement standard of living, a person who’s poor during their working years is going to be poor in retirement. Retirement systems don’t create money out of thin air so much as move money from one time period to another. Instead, a whole range of public policies should be employed to help households raise their standard of living, both during their working years and in retirement. I’ve argued for targeted Social Security benefit increases that would lift nearly every one of these households out of poverty in retirement.

But from a traditional financial planning standpoint, which is about maintaining a steady standard of living between work and retirement, this group that the GAO and New York Times highlights is pretty much set. You simply can’t infer very much – much less a sweeping expansion of a Social Security program whose unfunded liabilities have risen by $5.5 trillion over the last eight years – by the fact that people who shouldn’t be saving for retirement aren’t saving for retirement.