No Matter How We Measure It, There’s No Retirement Crisis

Seemingly everyone agrees there’s a retirement crisis – everyone, that is, except for retirees themselves. In an April Wall Street Journal article, I noted that 86% of seniors in a Federal Reserve survey described their financial situation as either “doing okay” or “living comfortably.” Just 3% said they were “finding it difficult to get by.” That sure doesn’t look like a retirement crisis.

But two well-regarded economists take issue with how to interpret these figures. In the process, they started what I think is a useful discussion about retirement security – a topic that is front of mind for millions of Americans.

Christian Weller, an economist at the University of Massachusetts, argues that seniors’ responses to more specific questions regarding their financial habits reveal that only around half of seniors are financially secure. Alicia Munnell of Boston College believes that retirees exaggerate their financial security, being unwilling to admit they’re struggling.

Both Weller’s and Munnell’s objections are reasonable. But a closer examination of the data makes me confident my more optimistic view of America’s retirement landscape holds up.

The Fed’s Survey of Household Economics and Decisionmaking (SHED) asks households to describe their financial security using one of four labels: Finding it difficult to get by; Just getting by; Doing okay; and Living Comfortably. Among 65- to 74-year-olds, 86% reported either doing okay or living comfortably.

But Weller rightly points out that these labels are subjective, potentially meaning different things to different people.

Weller proposes that a financially secure retirement can be defined through responses to six specific questions. He says, “A financially secure retiree can be defined as a person who has no credit card balances, no medical debt and no recent use of predatory financing [meaning, pawn shops or payday loans], and can pay all bills and manage a $400 emergency.” Only 51% of seniors satisfy all six of Weller’s conditions.

But Weller’s definition of financial security also is subjective: Weller selected certain financial fitness questions among many the Fed survey offers, and he decided that a retiree must satisfy all six to count as financially secure. Instead of each person deciding for themselves whether they’re financially secure, one analyst decides for everyone. And those choices matter.

For instance, under Weller’s standards, 39% of households with incomes topping $150,000 and 19% with savings of $1 million-plus would be, in his terms, “scraping by.” Intuitively, that doesn’t make sense. On the other hand, if we simply required that seniors satisfy at least five of Weller’s six criteria, 77% of 65- to 74-year-olds and 84% of those aged 75+ would qualify – similar to the share who tell the Fed they’re doing at least okay financially.

Moreover, there’s a basic conceptual problem with Weller’s argument. Under either Weller’s approach or my own, seniors are the most financially secure segment of the population. For instance, only 58% of 25- to 34-year-olds tell the Fed they could easily cover a $400 emergency expense. That share rises continuously with age, reaching 77% for those aged 65 to 74 and 82% for individuals 75 and older. The same pattern holds for nearly every financial question the Fed survey asks. When applying Weller’s exact criteria for financial security to the working-age population, only 37% of 18- to 64-year-olds are “financially secure,” compared to 51% of seniors aged 65 to 74. It’s hard to conclude that seniors should have saved more for old age if they’re already more financially secure than any younger age group.

Knowing that seniors report more positive outcomes on the Fed survey’s specific financial security questions helps address Alicia Munnell’s concern that retirees overstate their financial security. My colleague Giorgi Bokhua and I statistically compared whether households described their finances as okay or better to those households’ income and wealth and their responses to specific financial habits questions similar to those used by Weller. We found that, after controlling for these objective measures of financial health, self-reported financial security didn’t differ by age or retirement status.

In other words, retirees aren’t exaggerating: they say they’re doing well financially because, as best we can measure, they are doing well financially. That conclusion should make us think twice about the constant refrain that the U.S. retirement system is failing.