Retirement Incomes are Falling for Many Americans, Despite What AEI Wants You to Think

Acknowledgement: I thank Andrew Biggs for his assistance in replicating his numbers.

In a new paper from the American Enterprise Institute, Andrew Biggs and Sylvester Schieber argue that workers retirements are more secure financially than some suggest. In part, they point to the ratio of household assets to wage earnings for those with heads aged 45-54. While their criticisms may have some validity, there are some significant omissions that cut the other way. On balance, it is likely that most households will rely more heavily on Social Security to support their retirements than in prior years.

According to the Survey of Consumer Finances, on average household wealth for the 45-54 age group fell from 5.8 years of wages in 2007 to 4.7 in 2013. Household wealth here— consistent with Biggs and Schieber—includes the value of a home and any other real estate, plus financial wealth. Mortgages and other debt are subtracted to get this number, as seen in Figure 1.

Figure 1: Biggs and Schieber’s mean assets relative to household wage income: all 45-54 year old householders

Source: Survey of Consumer Finances and author’s calculations

At 5 percent interest, this wealth could replace only 23.4 percent of current wage income compared to 28.8 percent in 2007.¹

Trends in the Labor Force 1999-2014: Seniors Increase Participation, Younger Workers Withdraw

In early 2000, the civilian labor force participation rate peaked at a post-war high of 67.3 percent of the population aged 16 and over. Despite flattening out in the latter part of the decade at about 66 percent, participation rates never recovered and have steadily fallen since the onset of the Great Recession. At 62.8 percent as of November 2014, labor force participation is now at its lowest level since 1978.

Some of this fall is clearly demographic. Workers are much less likely to have or search for a job once near or past retirement age, as seen in Figure 1.

Figure 1:

Thus, the aging of the baby boom generation has reduced the size of the labor force. On the other hand, retirement-age workers are participating at a much higher rate than before. In small part, this is because baby-boomers have reduced the average age of those 65 and over. However, labor force participation in the older population has been rising for some time, as seen in Figure 2.

Figure 2: