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Are Kids Causing A Retirement Crisis?

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If you think Americans face a retirement crisis, you also think kids are what's causing it.

There’s a policy debate over how well-prepared Americans are for retirement. Some analysts see a modest and manageable problem with retirement saving. Others predict a “retirement crisis” affecting the majority of the population and creating a multi-trillion dollar "retirement saving gap." There are several facets to this debate. But the most important, yet the least-known, is the assumption that having kids is bad for retirement security. Arcane as it may sound, if you don't accept that assumption it's hard to conclude that Americans face a true retirement crisis.

Research by University of Wisconsin economists Karl Scholz and Ananth Seshadri shows that households with kids save less for retirement than similar households without kids. A married couple without children has about 10% greater wealth than a similar couple with two kids. If we compare households’ actual retirement savings to pre-determined target wealth levels, which is a common practice among retirement researchers, households who had kids are more likely to fall short. While it’s never framed this way, the implicit assumption is that having kids causes you to undersave for your retirement, and the more kids you have the worse off you are.

But another interpretation is that parents are saving rationally. Call it the “peanut butter theory,” after Dartmouth College economist Jonathan Skinner’s humorous summary of the logic:

“Parents are already used to getting by on peanut butter, given that a large fraction of their pre-retirement budget has been devoted to supporting children, so it’s not difficult to set aside enough money to keep them in peanut butter through retirement. By contrast, childless households with the same income accustomed to caviar and fine wine must set aside more assets to maintain themselves in the style to which they have become accustomed.”

Parents give up a lot in order to raise their kids. As a father of a kindergartener, I can personally attest that my consumption of peanut butter has risen exponentially while caviar and fine wine have, alas, fallen off the menu. Parents’ sacrifices translate to a lower material standard of living in their pre-retirement years. But their compensation, in addition to the obvious satisfaction of raising a family, is that it takes less wealth to replicate that lower pre-retirement standard of living once they stop working.

This isn’t a side-issue in the retirement saving debate. The Center for Retirement Research at Boston College – which rejects the “peanut butter theorem” – estimated that adjusting retirement income goals to account for the effects of having kids would lower their projection that 52 percent of households are undersaving for retirement to just 17 percent. My own work, which compares retirement incomes to the pre-retirement incomes that parents can consume after caring for their kids, shows similarly dramatic effects. No other methodological choice has such a large effect on how we view retirement saving adequacy.

There’s an academic debate over how children affect saving, which in recent years has focused on the narrower question of how households’ retirement saving changes once kids leave home.  Some studies find that households don’t increase their saving, a result that would undermine the peanut butter theory. Other studies find that households do save more once kids leave the nest, though it takes about four years – and longer, for parents with kids in college – for saving levels to adjust.

I don’t personally find this angle dispositive. Some parents might have a spending splurge to celebrate an empty nest, delaying changes in their consumption. And, due to the well-documented power of inertia, many individuals leave their retirement saving on autopilot. It’s not surprising that household saving doesn’t turn on a dime. What matters more is how households save over their full careers, not merely the few years before and after their kids leave home.

But while this academic debate continues, there’s a simpler way to tell if parents are undersaving for retirement: just ask them. Which is precisely what the federally-sponsored Health and Retirement Study does. The HRS asks retirees questions such as:

  • “All in all, would you say that your retirement has turned out to be very satisfying, moderately satisfying, or not at all satisfying?”
  • “Thinking about your retirement years compared to the years just before you retired. Would you say the retirement years have been better, about the same, or not as good?”
  • “Please tell me if you worry a lot, somewhat, a little, or not at all [about] not having enough income to get by.”

We know that parent retire with less wealth than non-parents, all else equal. If those parents truly are undersaving for retirement, they should be more likely than childless retirees to answer the HRS’s questions in a negative fashion.

But research by RAND Corporation economist Suzanne Rohwedder shows that they don’t: there is no statistically significant difference in responses to the HRS questions between retired parents and similar retirees who don’t have kids. Retired parents are just as satisfied with their standards of living as households who didn’t have children.

One explanation is that retired parents are in denial. They should be unhappy, but they just don’t know better. A better explanation, in my view, is that many parents are following the peanut butter theory of retirement saving.

If that’s the case, then the retirement crisis we’ve all come to fear is in fact something much smaller and more manageable. Yes, some Americans don’t save enough. And Social Security and state and local government pension plans are still in deep financial trouble. But there’s less reason to believe that large swaths of the population are systematically undersaving for retirement. And there’s less cause for panic and greater prospects for reasoned, targeted steps to expand opportunities to save for retirement saving and to put entitlement programs back on track.