Concerned About Retirement? It's Not as Bad as It Looks

Reading the papers, one might think many future retirees face a serious risk of becoming bag ladies and bums. But it isn't so grim.

The financial position of Americans on the verge of retirement is not nearly as bad as often pictured in the media, says Alan Gustman, an economist at Dartmouth College in Hanover, N.H.

In fact, each household of this group has on average about a half million dollars in assets. That includes the value of private and Social Security pensions, as well as homes and other assets.

The wealth number comes from a detailed survey of 7,600 families with at least one member born from 1931 to 1941.

Professor Gustman figures this wealth estimate is conservative. That's because the survey was done in 1992 and some calculations are based on that year. Since then stock prices have soared, lifting the wealth of many of those nearing retirement.

Gustman's study, done with another economist, Thomas Steinmeier of Texas Tech University in Lubbock, doesn't look specifically at retirement prospects for baby boomers. But Gustman suspects this numerous group has a somewhat different asset mix. They may have more 401(k) annuities that many firms offer employees nowadays and fewer traditional "defined benefit" corporate pensions. But any difference in asset levels should be "modest," he says.

With the campaign to privatize Social Security, economists have been looking more closely at retirement finances.

For example, another Dartmouth professor, Andrew Samwick, has found that as much as one-fourth of the trend toward earlier retirement in the post-World War II years can be attributed to the spread of employer-provided pensions for workers.

Between 1950 and 1989, the proportion of men aged 65 and over still working in jobs decreased from 46 percent to 17 percent, and for those aged 55 to 64, from 87 percent to 67 percent. Over the same period, labor force participation rates for women 65 and over fell slightly from 9.7 to 8.4 percent, and the rapid increase in participation for women 55 to 64 essentially stopped.

Better pensions make early retirement more feasible.

In the last decade, 401(k) plans have become highly important to retirement welfare. More than 40 percent of workers are eligible, and 70 percent of those eligible join the plans. If a 37-year-old participant puts half his or her plan money in stocks and half in bonds, the average balance projected to retirement age would be $91,600, reckon three other economists in a study published by the National Bureau of Economic Research (NBER) in Cambridge, Mass. The average 26-year-old would have $125,000.

The Gustman/Steinmeier study, also done for the NBER, has several other findings.

One is that although only half of individuals in the 1931-41 group are already getting or entitled to a private pension, two-thirds of households in this group are covered. So most spouses get the benefits of their mate's pension. Thus a large proportion of families will get private pensions as well as Social Security.

That's contrary to popular views.

Second, Social Security is highly important to those with a history of low earnings. Their retirement benefits are much higher than their Social Security taxes paid would justify on a purely actuarial basis. This is a form of income redistribution. Any privatization of Social Security would have to consider this factor.

Private pensions are most important to middle class households and many families with high earners.

But, on average, the rate of return on Social Security for the 1931-41 group has already turned negative. Their cumulative Social Security pension payments will be about 10 percent less than what they would have got if the money deducted from their pay had been invested in Treasury securities. The 10 percent primarily helps pay the pensions of earlier retirees - who may be the parents of those grumbling about negative returns.

Many supposed a negative return would only hit boomers.

Are family resources for the 1931-41 group adequate to support a reasonable standard of living in retirement?

At the median (half better off, half worse off), yes, the two economists conclude. The wealth of these median families in 1992 would finance a pension of 79 percent of their last year's earnings. And most have seven more years to pile up their assets.

* David R. Francis is the Monitor's senior economics correspondent.