Despite Higher Savings Rates, Americans Have Much More to Do to Afford Retirement
March 24, 2010
Statistically, savings rates in the US improved in 2009. How much did that help the retirement outlook of most Americans? Not much, according to a new survey from the Employee Benefit Research Institute (EBRI).
The latest EBRI Retirement Confidence Survey shows that, despite higher savings rates and stronger stock market performance in 2009, Americans are not significantly more optimistic about their prospects for being able to afford retirement now than they were last year. Worse, there may be good reasons for pessimism about the retirement prospects of most workers.
Higher Savings Rates Have Yet to Bolster Confidence
Personal savings rates rose in 2009 to well over 4% of disposable income, as more and more households made an effort to control spending. According to data from the US Bureau of Economic Analysis, this savings rate was the highest in more than a decade. However, these additional savings have not yet had enough of an impact to make Americans more optimistic about retirement.
According to the EBRI survey, the percentage of workers very confident about having enough money for a comfortable retirement is now 16%, which the EBRI considers statistically equivalent to the 13% who were very confident last year. Among people already retired, 19% are very confident in having enough money for a comfortable retirement, which the EBRI considers statistically equivalent to the 20% of retirees who were very confident last year.
Even if you lower the bar from confidence in a comfortable retirement to confidence in being able to pay for basic expenses, you don't see much optimism reflected in the survey results. Only 29% of workers are now very confident they'll be able to afford basic expenses in retirement, up just slightly from 25% last year.
Even Pessimism May Be Overconfidence
Though the EBRI tries to look on the bright side by characterizing the confidence numbers as having stabilized, the sad fact is that they were at such low levels they probably could not have gotten much worse. But when you look at what the EBRI found about the actual preparations people are making for retirement--not just perceptions--it becomes apparent that the lack of confidence is justified. In fact, even the pessimism captured by the survey might not fully reflect how unprepared the average American is for financing retirement.
Only 69% of workers report having done any retirement saving, down from 75% in 2009. Only 60% report that they are currently saving for retirement, down from 65% in 2009. Moreover, the percentage of workers who report having less than $1,000 in savings is up from 20% last year to 27% this year.
Low Bank Rates and Other Obstacles
Why have higher savings rates failed to improve either the perception or reality of retirement preparedness? For one thing, savings rates are a percentage of personal income, and aggregate income dropped in 2009. Saving a larger portion of a smaller amount may not add much to a worker's retirement security. For another, a single year of higher savings rates can only help so much--retirement preparation, after all, is a decades-long process of saving and investment. Plus, even the recent higher savings rates have generally been below 5%, which may not be adequate to fund a nest egg; in contrast, the average savings rate from 1952 (the first year available from the Bureau of Economic Analysis) through the 1980s was 8.65%.
Meanwhile, retirement savers have faced a series of obstacles, from a lost decade for stock market returns to nearly invisible bank rates today. The surest way out of this is sharply higher personal savings rates--a little sacrifice in standard of living now to avoid a drastic drop in standard of living upon retirement.
