According to the study “Are Americans Saving ‘Optimally’ for Retirement?” by John Scholz, Anath Seshadri and Surachai Khitatrakun, some are even saving more than they need to. The study pegs the percentage of households saving enough for retirement at 81%, well over the commonly accepted figure.
Taking a look at the finances of 6,300 individuals born between 1931 and 1941, the economists conducted a life-cycle analysis of household wealth accumulation, taking into account Social Security, earnings, and home equity. The median net wealth for 2004 was $95,000, according to the study.
For the study, the economists used a 1992 Health and Retirement Survey which interviewed people in their homes regarding their personal finance (For more information on the HRS Data, see http://hrsonline.isr.umich.edu/ ). The authors then calculated net wealth by adjusting the median income to the present year.
Some assumptions are made in the study – many pointed out by the authors themselves – that could have an affect on the central proposition that a large majority of Americans are saving enough for retirement. On one side, the authors note that “our primary data come from 1992, well before the exceptionally strong stock market performance of the 1990s.”
On the other hand, however, the authors assume in their model that Social Security benefits will remain at current levels. That may not turn out to be the case since President Bush and some Republican legislators are looking to partly privatize the Social Security system.
Other assumptions include, at least for their most basic model, a standard 6.9% savings rate across the board. The authors admit that this may not be true for younger generations but assert that savings patterns are likely to change as future retirees draw nearer to retirement age. Another factor that may affect the validity of the study is the sample, which includes only people between 51 and 61 as of 1992.
The study report also points out a number of other assumptions worth noting including that:
- the data “oversamples” blacks, Hispanics and Florida residents
- mean earnings for the sample were $35,263 in 1991 while median earning were $28,298
- present discounted value of lifetime household earnings is $1,691,104 (discounted at 4%)
- “optimal” wealth targets are $69,777 for the median household
- there are as many in the sampling with no high school diploma as with a college degree or post-graduate degree combined
- that retirement consumption will be financed from pension wealth (mean = $105,919. median = $17,371), Social Security wealth (mean = $106,714, median = $97,150) and nonpension net worth (mean = $250,513, median = $107,000) including housing.
The authors were open about the possibility for an incorrect analysis. “We cannot definitely answer the question posed in the paper title,” they concluded. “Of course, we still admit the possibility that Americans are preparing poorly for retirement, our underlying behavioral model is poor, or the errors, coincidentally, offset.”
“On balance, Americans seem to be doing a pretty good job,” said Scholz, who served in the Treasury Department during the Clinton administration, according to a news report in the Green Bay Press-Gazette. He also downplayed the significance of the 19% who are not saving enough, calling the shortfall “trivial.” He recently presented the findings to the American Enterprise Institute.
A copy of the study report can be purchased for $5 at http://www.nber.org/papers/w10260 .