Are We Saving Enough for Retirement?

Thanks to aging boomers, the word retirement seems synonymous with disaster. Almost every week some survey or another crosses my desk (usually paid for by a financial services company) demonstrating yet once again that boomers aren't saving enough for their old age. They're spendthrifts, unable to resist the lure of the shopping mall and the latest high-tech gadget, satiating their desires with heaps of debt.

I don't buy it. Over the years, an impressive and underappreciated body of scholarly research has shown that the typical boomer has accumulated more wealth and earns more income than their parents did at a comparable age; that boomers are saving at roughly the same rate as their parents; and that working even a few years past the traditional retirement age does wonders for boosting the personal bottom line. And we can always cut back on spending.

And then there is the issue that I think is underappreciated: inheritance. No, not the receiving of an inheritance but leaving one to your kids. I'm struck that in many cases where money is tight the parents are setting aside money for their children. But why? You've educated them. You've given them values. A leg up in the world. They're fine without your money.

This is another example why it is so hard to figure out if people are saving enough for their old age.

Nevertheless, we all worry if we're saving enough. It's not just the financial side of the equation. There are also measures of psychological well-being. What if we are forced to move to a smaller home, and shop at cheaper stores? We still own a home and decent clothes, but it isn't what we're used to.

Jonathan Skinner, economist at Dartmouth College, has written a thoughtful paper on retirement savings. It's at the website of the National Bureau of Economic Research (paid subscription). He uses a classic economist's point of view, which assumes that consumption spending remains flat or the same throughout a lifetime. For instance, we save while working so that our standard of living stays the same when we're retired. So, we smooth out our consumption. He makes a number of other assumptions, and comes up with some numbers that we may be doing okay, certainly better than the doomsayers suggest. Yet life intervenes: divorce, a disabling disease, a stock market crash. For example, in a ten year period, he notes that seven out of 10 adults aged 51 to 61 developed health problems, lost their jobs, or lost their partner from death or divorce. Among couples, a new medical condition caused a 17% decline in wealth; divorce a 44%.

But the real worry is growing out-of-pocket health care costs in retirement. Here's just one of many ominous figures: One study suggests that median out-of-pocket health care expenditures for retiree couples will rise from $5,760 in 2000 to $16,400 in 2030. That's 35% their future after tax income in 2030.

This is yet just another example why health care reform is coming. The pressure for universal coverage will only grow with time.