Is There Really a Retirement Crisis? Examining Social Security

This episode is brought to you by the New Retirement Planner. Create a Financial Plan for free@newretirement.com. Welcome to today's episode of our podcast. We're thrilled to have Andrew Biggs, an expert in retirement economics, join us to discuss whether there is a retirement crisis at all. We're going to dive into his background and his point of view on Social Security, Medicare, the state of the household balance sheet across America. I've been a follow of Andrew's on Twitter for a long time, and we actually originally talked about doing this podcast five years ago. Originally, I was going to have you and Teresa Gucci and different folks on at one time, but I'm glad we're going to get to do this one on one. Andrew, welcome to our show. Appreciate the time.

Well, thank you very much for having me. I really enjoy doing this.

Andrew is joining us from Klamath Falls, Oregon, just north of the California border. Could you give us just kind of a few minutes on your background, your education, how you got into retirement economics? Becoming a talking head on retirement.

I'm a New Yorker originally. I grew up about 10 miles north of New York City. So I'm the city boy living in rural Oregon now. Despite that, I did most of my education once I went to college in the UK Undergrad at Queen's University of Belfast, then my master's at Cambridge, and then went to London School of economics for my Ph.D. then, you know, moved to Washington, D.C. just thinking, hey, I'll kind of get involved in government. Or, you know, it was one of those things with zero game plan. When I look back, I probably should have been smarter about it, but it just led, you know, a little bit of time working Capital Hill doing banking stuff. But then I kind of wanted to get back into research. I spent time in a couple of of think tanks in D.C. the Cato Institute, and I've been at the American Enterprise Institute now for about 12, 13 years. In between, I spent about five years in government. I ran the Office of Policy at the Social Security Administration. We did a lot of research work on Social Security, spent a year in the White House National Economic Council back when George W. Bush was working on Social Security reform then kind of doing number crunching and things like that. So originally it was a focus very much on Social Security. Since leaving the Social Security Administration, going to aei, it's broadened. I still do a lot of Social Security work, but I really became interested in the broader state of retirement savings because the Social Security and the private retirement savings system aren't separate things. Even if Congress acts like they're separate things, they work hand in hand. And what you might do to fix Social Security depends on what you think is going on in the household sector. So it's both useful to know it, but it's also just a fascinating area to do research in.

Well, we're definitely going to dive into both. And I think one of the big things about you, just to frame this up, is you're kind of like a voice with a different perspective than we hear from the mainstream media about the state of retirement, health, if you will, and readiness for America.

Overall.

I'm sure you have a strong perspective on Social Security and how to fix it or whether it needs fixing. Before we get into that, what drew you to the government sector? And also just curious what it was like to work inside of these organizations. I've never worked inside the government, but I've met some folks that have and would love your take on it.

It's not something where my personal inclination is, hey, I want to get a government job. I mean, it's there are a lot of downsides of working in government. It moves slowly. But at the same time, I picked well, in the sense of if you're a researcher and you say, I'm going to work in the policy department, the Social Security Administration, you have amazing access to data and modeling, and the people there are fantastic. I was a Republican political appointee. I never found anybody there less than professional. So it was really a fascinating thing. And it was partly. My views on the retirement system today are shaped by my time at Social Security. We had very sophisticated models there projecting future retirement income resources for people, and we weren't finding anything like the stuff you read about in the newspaper. So partly I sort of act as kind of a Greek English translator. I mean, I'm good enough in the technical end to read the equations and the technical papers, but I think the real value added is translating that to English, that ordinary people and policymakers can understand what the best researchers are saying about the retirement system in the U.S. got it.

By the way, just one color commentary. I met someone who was an appointee, a young man. And his take. I remember we went mountain biking in Tahoe, and he was like, there's appointees and then there's career people in the government, and there's almost like two types of people. But a lot of the appointees are outside experts. You know, they bring a high level of talent. Not that people in the government aren't talented either. But do you have any Color on like what you saw. It sounds like you were seeing great people up and down.

Sure. And I was a little bit atypical for government appointee in the sense that I wasn't just sort of put in there to kind of manage an office. I started out managing an office about 15 people, then moved up managing an office about 125 people. Then for some reason they bumped me up to the number two in the agency which is at that point I don't know, 60,000 people. And it's that point. That's the point we discover, okay, my management skills aren't what they should be. But the reason for that is, you know, I really went in almost as an analyst in the sense of I was in there working, you know, just side by side with the career people doing, doing the data work. So for me it was very satisfying. I never felt like it was me against the career people or you know, deep state or whatever people say. It just, that wasn't my experience at all.

Yeah, it's super interesting that perspective. I mean, how old were you when that was happening?

Oh, maybe 30, I guess.

So you went from 15 people to 120 people to co leading 60,000 people.

That was the time I decided I need to get out. I mean you would get, you would find in your calendar some meeting with an acronym that you've never seen before. And then your system said oh yeah, and you're running the meeting. And it would be stuff I had no idea what's going on. I mean it's because the Social Security administration, you'd think, they sit around thinking about how do we fix Social Security. They spend zero time thinking about that is really an administrative agency where, you know, it's the right check to the right person at the right time. It's not like they want Social Security to go insolvent. But that's just not a focus at all. They really are an administrative agency.

Why don't we talk about Social Security first since we're on the topic? You know, what's your perspective? I mean there's obviously we see every X number of years there's a bunch of headlines, hey, Social Security trust fund is going to run out of money and huge. Not just a future. And at that point benefits will get cut by 25%. What's your take on how this plays out?

Well, there's this sort of the familiar story of Social Security which is purely demographics. It's a pay as you go system. Workers pay money in and retirees and disable take money out. And so all you care about is the ratio of workers to retirees. And that would say 5 to 1 in 1960. Then it's probably little under 3 to 1. Now it'll drop to 2 to 1. That significantly increases the costs of paying benefits because you're just dividing the burden among fewer people. I mean, if you had six people to carry one person, that's easy. You got two people carry one person, that's a lot harder. But there's a second angle that doesn't really get touched on, which I think is actually really important, which is if you look at how Social Security worked from 1935 when it was started, it started paying benefits 1940, 40, up until the mid-1970s, you didn't automatically increase benefits, which meant that Congress would increase benefits sort of as needed and as affordable. And they, between 1940 and 1970, they increased benefits something like 10 times. So it's not like the benefits were never increased, but it was a discretionary move. Then in 1977, Congress passed, and there was always technical mumbo jumbo going on at the time, but they passed amendments to Social Security act which got rid of the discretionary benefit increases and said we're going to increase benefits automatically. What it says is each new generation or cohort of retirees is going to get benefits that are higher than the previous one by the rate of economy wide wage growth. So if the economy grows 1% faster than inflation each year, a new retiree next year is going to get the average benefit will be 1% higher in real terms than today. And it just keeps going on. And it was that moment in time when the sort of solvency problem was sealed into place. Because as you are paying higher and higher benefits in addition to having fewer workers to support them, you know, in a sense that good news for retirees just it's kind of a factoid off the top of my head is if you look at people retiring in 2022, that's the latest data we have, the average benefit they received, the average monthly benefit was 39% higher in real inflation adjusted terms than people retiring in the year 2000. Over the course of 20 years, you get a close on 40% increase in the real value of benefits. So if you have a typical couple retiring, they're getting something like $48,000 per year. This shapes how you view Social Security reform because people view it very much, oh, this is a safety net program. Look, the elderly poverty threshold for two people is around $22,000. So the typical couple would be more than twice that before touching a penny of their own savings. So it's gone well beyond what really is a safety net program. People say middle class entitlement or whatever, but you're essentially running a pension plan for middle class people because that's where the costs are. And you're doing it as a pay as you go basis, which means you're very vulnerable to demographics. So probably not what Congress was thinking about when they started the program.

So what do you think happens here? I know that. I was just looking it up. So it looks like the old age survivor insurance and disability insurance funds are scheduled or slated to be depleted in 2035. And the mainstream media is like, okay, if that happens, at that point, we can pay 75% of benefits as, as a pay as you go model. Obviously a lot of people listening to this, just to frame it up, I think a lot of boomers in Gen X are like, Social Security, fine. It can't go anywhere. A lot of millennials and Gen Zs are like, I'm not counting on this thing. I'd love your perspective on it.

Again, as I said before, Social Security is a pay as you go program. The vast majority of money going out each year is paid in in that year. And so for Social Security benefits to be eliminated, you know, what people think of as bankrupt means you have to eliminate the payroll tax too. As long as you're collecting 12.4% of people's wages, which is a trillion or so a year, you got a lot of money to pay out. So the idea you're getting nothing is just wrong. I mean, there's a New York Times magazine article a couple weeks ago about the 401k and whether it's a bad idea, blah, blah, blah. But they start out with example of a woman who's like, I don't think I'm going to be able. My 401k is not going to support me. And she's assuming she's going to get zero money from Social Security. I'm like, well, sure, if you assume you get zero, but even if you assume you got 75%, you're going to be okay. The reality is that the political spectrum on Social Security has shifted significantly to the left since I worked in the Bush White House at that time. George W. Bush is willing to compromise. He was clear on that. He understood he'd have to. But his preference would be to fix the solvency problem, the funding problem, as much as you could by reducing the growth of future benefits rather than by raising taxes that's where he was. Now you have essentially Donald Trump and Joe Biden have basically the same positions on Social Security, which is we shouldn't cut benefits by a penny for anybody at any time. And you know what they also have in common is neither of them proposed the tax increases necessary to do that. If you get to your Social Security insolvency situation, I mean, let's say the trust fund runs out at that point, you're annual cash shortfall, say go to 2035, is somewhere around $400 billion in today's money. Now that's real money. If Congress says we're going to borrow that money and that's going to be our plan, that's your fiscal crisis, your dollar crisis right there. Because you can't say we're going to borrow that kind of money every year without any idea how to pay it back. You know, this is serious business. The political spectrum has shifted to the left in the sense people are less in favor of benefit costs today. At the same time, there aren't really any solutions on the table that could get through Congress. It's that level of tax increases even liberal Democrats, I think, understand they're not going to get. So it's not an easy problem to solve right now.

Yeah, I mean, when people talk about it, I think there's three levers, right. Limit benefit increases like you're describing. So don't auto escalate it and cola delay the claiming age. Right. I think the last time we did a big Social Security reform, they basically pushed up. We have this range of like earliest claiming age, the full retirement age, and then the maximum age, it goes from 62 to 70. And then the last option would be raise taxes or remove the cap on the Social Security wage tax. Right. So I think right now you're taxed up to 150,000 or something like that of your wages and after that you're not taxed on it anymore. What do you think happens? One of those things has to happen, right.

In a sense, I understand you're kind of giving the menu of options as commonly understood. What I find interesting is if you look at countries that are like us, I mean, the interesting thing about Social Security pensions is that every developed country has the same issues of demographics and every country has something resembling a Social Security program. So you get to take a look at. It's sort of what might Social Security look like in some alternate universe. You know, in a sense, I don't particularly care what's going on in France or Belgium or whatever, because they just have a kind of different idea of how you do the stuff than we do. What I find interesting is if you look at Canada or the UK or Australia or New Zealand, and these are countries that are pretty much like us, and yet they do Social Security very differently than we do, their safety net element for their programs is much more robust, stronger kind of guaranteed minimum benefits, stronger protections against poverty. At the same time, their maximum benefits are much lower than in the U.S. if you're two high wage workers, say the maximum taxable salary this year is 168,000. So let's say you earned that amount. You know, you and your wife or high flyers earn that amount over your career. You would retire this year on a benefit about $96,000 a year. Now let's say you were that same couple and instead you were north of the border in Canada. You would get something like $31,000 a year from the Canada pension plan. And what is interesting is that you don't see rich people living in the frozen tundra of Canada. They simply save more, which is what economics would tell you they do. But that's in fact what they do. We are unusual in that our Social Security system pays relatively low minimum benefit or no minimum benefit. So it's not very strong as a safety net. And yet the maximum benefits are very high. And so I think unduly restricting ourselves to just this menu of options hurts us. I mean, it's. You know, a lot of people talked about the investors letter that Larry Fink did, you know, a month or so ago, and people comment a variety of things there, a lot of which I disagreed with. But one thing he said which I thought was spot on, was we should think about moving to a system closer to what Australia has. We have a, a flat benefit that guarantees you're not going to be in poverty, but then you sign everybody up for a retirement plan on top of that. So government does the poverty protection part, the redistribution part, the part that government is good at and that only it can do. But the income provision part for middle and upper income people, that's done by the private sector. And again, that's what the private sector does in the sense of, you know, if you find any government pension plan anywhere in the universe, they are all underfunded because government has poor incentives on that part. Private sector doesn't. I mean, you know, if you don't put money in your 401k, you're not gonna have any money in the future. You might make mistakes. You know, the behavioral, economic stuff. But the incentives are in the right direction. So I think something like that is doable in the US it's not a policy problem in the slightest. You know, it could eliminate poverty in old age while making Social Security solvent and affordable. It is purely an issue of not even partisan politics, but of the ability of Congress to do public policy. Right now on most things, they can't do public policy. They can't decide what they want to do, implement policies, follow up. They just don't do that. But we need to do that if we want to have a well functioning sort of welfare state for people.

Yeah. So let me just play this back to you. So right now, if you have a couple and they're each making $168,000, they're at the highest income rate for 35 years. Because it's a 35 year test. I think they will then be able to claim $48,000 of real income today, right? Yeah, because it's inflation adjustment.

At the normal retirement age of 67. Yeah, they would get about 48,000 each. So 96 all told.

I mean, that's a material amount of money. You know, you could go live in big parts of this country for 96 grand a year and be kind of largely okay.

I wrote a piece in the Wall Street Journal, I don't know, maybe six months or nine months ago. And my argument there was it was a very simple proposal. Simply cap that maximum benefit. Say if the maximum benefit a Single person gets $48,000 per year, don't increase it in the future. Because the way the current benefit formula works is by 2050, it won't be 48,000 maximum, it'll be 60,000 or so. And my argument was just cap it. Just say at some point, we say, enough is enough. You don't need more than that. And that would fix the whole problem. But honestly, the impetus for that was I was sitting down, doing some of my own financial plan, and I calculated how much my wife and I are gonna get at retirement. I was like, this is insane. You know, I'm happy to get my money back, I guess, but as an ongoing basis, it's just we don't need this. It's just very weird. It's one thing if you bankrupt your government over, you know, costs, over programs you really, really need, but to essentially bankrupt yourself over paying high benefits, to me, it just seems not kind of worth it.

Did you build your plan on new retirement?

Sadly, I didn't. I was pencil and papering it at that point.

Come on, you got to try it out. All right, that's super interesting. I guess this goes to your argument for privatization. I mean essentially the other angle is the US government's not necessarily great at investing the money. Like in my 401k, the best practice is, you know, save money, put it into kind of low fee index funds and just ride the market and capture the 4 to 6% real rate of return over long periods of time and you're going to do better. I think what the government has right is like it's already getting the money. Is there an argument, sorry, a solution here? Real time to say, okay fine, let's use a chunk of the money in super safe, you know, treasury, whatever to guarantee the floor safety net income and then take the rest of it and the government actually just like puts the money into the market for everybody. I don't know, I guess maybe it doesn't work because we're in a pay as you go, largely. Pay as.

I mean back when I worked in the Bush White House, the argument for personal accounts then what people call privatization was you would let people invest part of your payroll tax in a sort of 401k type account rather than paying it a Social Security security. The main argument for it then was not really a rate of return argument, oh, I'm going to get more money on stocks versus bonds. It was at that point Social Security was running surpluses. You know, you had an extra say we're collecting 12% of wages and benefits only cost 10% of wages. We had like 2% of payroll extra which is quite a bit of money. And effectively yes, it's credited to the Social Security, trust funds, special issue non tradable bonds, blah blah, blah. The reality is the government spent the money money and they put kind of an IOU in the trust fund. The personal account would have saved that money. So the difference there was not the interest, the difference was the principal. Whether people invested that money in stocks or bonds didn't make so much of a difference. What mattered was in fact you would have money set aside for the future. Today that surplus is gone. So the idea of investing part of your payroll tax, it just doesn't work. There's no money. But and plus it's politically very, very problematic. So I think the idea of something like Australia where you have a base benefit set by the government, then the government sets up a system where if you're not offered a 401k or a retirement plan at work, we provide one, you're automatically enrolled. The UK set up a system like that 12 years ago, they, over that period, their private sector retirement plan participation rate went 42% to 86%. That solves your problem. You don't need all this other stuff. It's just if you sign people up at some decent contribution rate, they're going to be okay. And so I think sometimes there's too many, you know, people, oh, we got to tweak this, that and the other. It's like, if your concern is that people are not saving for retirement, give them retirement account, sign them up and don't worry too much about it. That gets you 90% of the way. There's.

What do you think happens here? I mean, do you think that we get to a private sector solution and people are like, I mean, obviously, I guess, Larry Fink, we'll get into this in a second. But like, hey, private sector, like, great, let's have the government mandate this. And like, that'll drive savings rates, which drives my business. Or do you think, you know, and, or do we reach those kind of prices point? We're like, hey, that, you know, it's, it's 20, 30, 2033, we're two years from now, Social Security, trust funds out of money, People are freaking out. And then we finally get something done.

I think it's probably the latter. But my fear is that what we get done is not going to be sort of good, blank slate public policy. It's going to be, what can we do to patch this thing together? The way I tended to look at Social Security over the past decade or so is try to think if you were inventing this system from scratch. You say you've got some kid who's 17 years old, he's never paid a dollar into the Social Security. He's not owed a dollar from Social Security. In the theory, you can give him any program you want to. What would that program look like? Now? My argument is, okay, minimum benefit from the government, plus automatic enrollment, retirement accounts on top. It can be whatever you want. The point is to think about it in that sense of how do we get to what we really consider to be good public policy. But if you're faced, you're looking down the barrel of $400 billion annual deficit from Social Security. You're just thinking, how do we patch this thing together? It really is a failure of stewardship for the program, a failure of governmental capacity to do things. I mean, it's. Every country, as I said before, faces these demographic issues of population aging. Not every country goes 40 years without fixing their pension system, which is what in fact we've done. So it is a political problem we face ultimately it's not. There's no solutions to this. It's a political problem.

Yeah, it's going to be interesting to see what happens here.

I mean I will turn 65 right in the middle of 2000 and 30s when this thing goes belly up. I have zero fear that I'm have some huge cut to my benefits. That's just, that's not something I'm worried about. What I am worried about is, you mean to be honest, I spent much of my career arguing that we can scale down benefits for middle and high income people without harming retirement security and none of that is happening. So it's the, the ultimate thing is it's what's good for me financially. In fact reflects poorly on, on Social Security policy for the country.

Yeah, well, maybe we'll get more people that are thinking more broadly about what's sustainable versus what's in it for them.

I hope so.

What's the threshold for real money in the government? You said $400 billion is a real. Half a trillion is a real number. Like gets people's attention.

You hear people say, oh well, Education Department's a billion a year. I'm like go work in entitlements. And it's basically you have entitlements and everything else and entitlements, Social Security, Medicare are such massive amounts of money. Everything else, I mean I guess the Pentagon is important, but all the other things, they're important as policy. Education matters a lot to people, but it's just not that much money. If you fix entitlements, you fix our long term budget problem. If you don't fix entitlements, we're going to go broke. So entitlements are kind of important.

I mean I know Medicare is even bigger. Right. Medicare is like even more money that goes out and comes in and that goes out, I think.

So the Medicare is interesting in the sense of, you know, with Social Security I said you got two things going on where you have, you know, this demographic issue saying more retirees getting higher benefits. With Medicare you have three things going on. I mean we have more retirees and we have. What people think about is medical cost, inflation, higher prices for Medicare for procedures, drugs or whatever. If you just had more retirees and higher prices for procedures, Medicare would be solvent. The third element with Medicare, which is the problem is what the trustees call intensity of usage, which is meaning it's not a rising price for your MRI or for your drug it's we're using more MRIs, taking more drugs, doing more procedures, the intensity of how much we're consuming, consuming. If you roll that back and say, look, people are just going to get the same sort of health care treatment in the future as they got today. That's perfectly affordable. It's this idea they're in more and more and more that's not affordable. And if people want more and more and more, they should pay for it, but nobody wants to pay for it. A lot of these issues, I mean, there's some complicated actuarial stuff and math, but the real problems come down to things that have been problems of human nature since Adam and Eve. People don't want to take difficult decisions. They want to benefit themselves. They don't care very much about other people. They want to procrastinate. All of that's just human nature writ large through the entitlement system.

How do we incent people to make good choices that they get a reward for delaying gratification? I think that for what it's worth, the 401k and savings model has done some of that. It's like, hey, you get tax savings today by putting money to a 401k. I think the Roth is kind of interesting mechanics. So some of the stuff seems like it's working.

I think by and large, if you look at the data, it is working. Something doesn't have to be perfect to be better than what came before. And 401s, in fact better than what came before.

I think it'll be interesting to look at the cohort data. So unlike you, my parents had pensions, my dad has a pension. I've only known 401 s. I know people that have pensions and it's pretty incredible for them. And because I kind of came up in a time when there wasn't a lot of financial literacy, like I didn't make optimal choices. And it's like, I mean, I'm doing fine, I'm doing better than 95% of the country, but whatever. But it feels like future generations are doing better because they're better educated. We have better default rates, higher savings rates, higher default savings rates, higher or better default investment rates or investment selections and escalations. Those kinds of things are making the program better. But those things didn't exist for earlier cohorts.

401 s replaced DB pensions. And that's not really true. It gets at some of these design features. I mean, defined benefit pensions peaked in 1975 at 39% of the private sector.

Workforce.

And at that time, you had these very strict vesting rules. So, I mean, there's a congressional study in the 70s that found literally nine out of 10 people who are participating with the quoting fingers in a DB plan never received a penny from it because you had these very strict vesting rules. But once ERISA happened, it was 1974. They said, look, you can't have these insane investing rules. And in fact, you got to try to fund your pension. So literally the following year, DB pension coverage started to decline. Now, the 401k wasn't even sort of invented until 1978. It really did, didn't kick in until, say, 10 years later or so. So you did have this dip. They were pensions declining and 401ks hadn't really caught up yet. And moreover, it's the. The product was just not as good back then. But it's a lot of people, when they talk about 401ks today, they are referring to what happened back then. They said, oh, high administrative costs or fees. And, you know, we had all these issues of. I'll say people have a tough time rebalancing their portfolios. Okay, look, everybody's in a target date now. Or we had behavioral econ stuff of people are not signing up. Okay, we have automatic enrollment now. You know, the fees are drawn down by index funds. You know, now there's some talk of putting annuities in, which is fine by me, but it's. I think it's probably less important overall. But the thing is, your 401k has become pensionized. It's much more of an automatic thing now. So it really is a much more competitive product. You know, if you want to know why retirement savings have increased so much, hint, retirement savings have increased a lot. But if you want to know why, it's the shift From DBS to 401ks, I mean, it's. Lawyers didn't want to offer DB plans because there's this huge implicit liability and all that stuff. Plus, you had the issue of only the employer paid in. There was no employee contribution. Now we have 401ks, which are much more widespread. I mean, say 70% of private sector workers are offered a retirement plan. If you look in BLS data, and about 53 or 55% are participating. But you also have, in most cases, you have both the employer and the employee paying in. So if you look at contributions to plans, percentage of wages, there's 1975 was like 5.8%. Now it's like 9.3%. That's a huge increase in the amount of money we're actually putting away for retirement. And the assets have reflected. The assets are through the roof compared to the past. It's this weird sort of story that you hear all these factoids, oh, blah, blah, blah. And I'm sure we can talk about them. But if you want to know, is our retirement system working? One way of checking is how many people are participating, how much they contribute and what kind of assets they have. And all of those are very, very encouraging numbers. I mean, the common sense way to look at this is in fact the correct way to look at it. You just hear bugaboo about what are called retirement factoids, which are things that sound like they're really important and meaningful, but in fact don't mean anything. Something like how much retirement savings we have, that in fact kind of matters. And that's a very good number.

Yeah, it's an interesting perspective. So it's great to get your. So I think, yeah, the common narrative is we were way better off when everyone had pensions because the assumption is everyone had pensions and now it sucks because we all have to save for ourselves. Right. There's some truth for it in that. I do think like back the generational thing we said, hey, everybody has to become their own CFO and learn how to invest. But when I hear you describe it, it's like, hey, back in the day, 39% of people had pensions, so 61% of people didn't have them. And they probably didn't save that much money. And if you look at the average household, the savings, because you blended that rate, the savings rate was. I'd love to look at this data. Like what was the. Do you know what the average household retirement savings equivalent rate was back in the 1970s?

You can get it from Department of Labor. And basically what you do is you take total contributions to private sector plans as a percentage of total wages and salaries. So including the wages, salaries and people who are not participating in a plan. So that captures both your participation rate and your contribution rate. That number 1975 was 5.8% of wages and salaries. Now it's 9.3% or something like that. And that reflects more people participating in plans today and they're paying more in and they're contributing more out of their own paychecks. So that catches this sort of economy wide or population wide level of retirement saving. You would think from what you read in the newspaper, we're saving less for retirement today than we did in the past, when in fact the Opposite is true.

Okay, so back in the day, say that the average household income in the 1970s was $25,000 a year. Well, let's do it on real dollars. It was like say it was $100,000 in real dollars. For a wealthier family, they would have way less in retirement savings. I don't know after the fact. We should run these numbers and look at it.

The problem is it's really late 80s, early 90s, you start to get good data on this. I mean the survey finance from the fed started in 89. Before then the data are no good. Say Social Security Administration where I work did surveys and I'll just. This is for 1980. So you're at this point is right after when participation in traditional pensions peaked in 1975. But they looked at new retirees, people retiring in 1980 and they asked about their sources of income. At that time, only 27% of new retirees had any income from coming from a private sector pension plan. You know, from a traditional pension. Maybe there was, you know, some profit sharing, whatever. If you looked at the bottom half of the income distribution, only 9% of people had any sort of income from a private pension. If you look at retirees today, if the whole 65 and up population, it's basically about 65% of people are getting income from private retirement plan. So you go from 27% in 1980 into 65% today and people like oh wow, it would have been great to be like in 1980. Like you got to be crazy to think this stuff, all these rose colored glasses. Oh, my dad had this. Well, you know, your dad might not have been typical.

Yeah, no, it's interesting actually. My father has like a couple pensions from like GE, but I think the total pension amount is like $1,000 a month or something.

Yeah. In the public sector where nobody leaves, it's still, it's extremely good deal. In the public sector if you're going to stick with the same employer all your life. A pension works if you move around. If you have two or three or four employers over your life and each of them offered a pension, you'd be screwed because it's dividing, you know, into your career into four parts still produces much less if you spent all your career on one pension plan. So you don't. You lacked portability. These plans are underfunded, your Bethlehem Steel and all that kind of stuff. A lot of people didn't invest in their benefits. It's just very strange. People look back on this. But part of my point on this is, you know, if you read a report about retirement security, always have something like as we transition from traditional pensions to 401 s, like, look, participation in traditional pensions peaked at 39% of the workforce in 1975. We're kind of past that. We are in a 401k IRA world now. And that's by and large has worked out well.

I would love to look at the data for like, yeah, the average household in like the 80s, the 90s, 2000, 2000s, 2020, you know, what does their balance sheet look like? Where's the income coming from? How secure are they? So I guess your take is makes sense. The reality is we're saving a lot more money and households are better off. I think that's probably true. I mean, I know like, hey, our real income is growing, right? If you look at how often the 1970s versus, you know, 50 years later, right. As we go into deep into 2000 and 20s, it's like, hey, generally we have a better quality of life and real incomes are higher. But yeah, and hopefully our balance sheets are growing. But yeah, it'd be great to kind of like, has anyone kind of written that up?

If you look at the full balance sheet, I mean, it's possible to do. I've done some work using Fed data where I focus really on retirement savings. So I could look at retirement account balances plus the sort of present value of benefits accrued under traditional pensions. These Data started in 1989, but you know, that's going back a fair bit. And what I found is that retirement savings have increased. You know, some people say, oh, it's just the super rich, the mean versus median thing. But it's not. It's retirement savings are at record highs in every age group, every income group, every educational group and every racial or ethnic group. That's true whether you look at retirement savings in real inflation adjusted dollar terms. It's true whether you look at retirement savings as a percentage of households wages and salaries, which is a way of doing it in the sense of if your wages rise, you're going to need more savings to replace those wages once you retire. So the data are there and you can look at. CBO has some nice data that go back to 1970s. And at that point seniors were a disproportionately poor group. I mean, the eating cat food thing was always overstated. But they were more likely to be in the bottom income quintile the overall population today. They're more likely to be in the top top income Quintile, their incomes rose much faster since the 70s than did the incomes of working age people. So the relative economic status or financial status of seniors simply just reversed.

Okay, in prepping for this, I was actually looking at retirement savings balances by generation and I'm going to read it out to you. Hopefully this is correct. It's from perplexity, but Basically Gen Z 1997 to 2012, the average balance is $7100. The median balance was 2,500. Millennials, it's 45,000 to 60,000 is the average. And the median is 15,000. Gen X, it says 145 to 180 average. So weld concentration and median is 44 seems pretty low. Baby boomers, 215 to 241 average balance, 61,000 median balances. Does that sound right? That seems pretty low.

Those figures are very difficult to interpret for a couple reasons. And first is you need to include not just 401ks but IRAs. IRAs. Almost nobody saves in IRAs, but they're just depositories, rollovers, so you want to lump those two together. But if you want to compare the generations, you need to compare them at different time or the same time in life. Looking at cross sections, people say, well, baby boomers own most of the wealth. The baby boomers are old, they're rich. I mean, when they die off, other people own most of the wealth. So it's those numbers. To be honest, this gets my thing of retirement factoids where somebody read a number and you're supposed to draw a conclusion from it. But in a lot of cases it's not at all clear whether some number indicates the retirement system is or is not working. Well, it's consistent with either. And so those numbers, I don't even, to be honest, I don't even know if those numbers are true. They may be, but it's just. The question is how do you interpret it? But what I will say is in general, when you hear some factoid, oh, the average 401k balance is only X. What I can assure you is if you went back in time, the average 401k balance was something less than X because retirement savings gone up. And so part of the way that I look at this is if we don't have a retirement crisis today, which we don't, and if today's workers are saving more than we did in the past, why are we going to have a retirement crisis in the future? I could concoct some sort of mathematical improbable thing to Produce it, I guess. But just common sense tells you if we're not in a crisis today and we're saving more, we're not going to have one in the future.

Yeah, I mean, I think that's so interesting. Like there is this narrative of Larry Fink, the BlackRock CEO comes out with his letter few weeks ago and he's like, you know, what are we gonna do about the retirement crisis? Right. So is that narrative put forth by the financial services private sector because they want people to save more money because that's how they make more money?

Well, I think in this case, no. But I will say that, you know, what is the chance that Fidelity slash Vanguard slash Schwab is going to tell you you're saving too much retirement? I mean, you know, it's, you know, I'm not accusing anybody of dishonesty. I think they believe in their product, but people are very sort of non skeptical about things. The Larry Fink letter I thought was good in the sense of, I mean, it was good to raise these issues. But people will think, okay, this Larry Fink, he's running blackrock, he must know. Or to be honest, I see like videos from like, I hate to say, financial planners online on YouTube and people like, oh, they must know. The reality is most of what they're telling you they got from the newspaper. It's not like Larry Finko's there crunching the numbers and he's like, oh, here's what we got. I'll give you the main factoid he repeated is he says something like, you know, half of Americans approaching retirement have no retirement savings. And then people are shocked to hear this. And that is not something he found himself. That's a favorite talking point. I had to tell you. Bernie Sanders, who loves to repeat it even though he's been fact checked on it a million times. Well, by me, I guess this is a good example to talk about though just to repeat, the fact of it is half of Americans nearing retirement have no retirement savings. And when you think about, you're like, what does that mean? The reality is, what that actually measures is half of Americans approaching retirement, you have a retirement account count. And what they're not counting there is, well, think of every public sector employee in America who has a defined benefit plan. Most of them don't have retirement accounts. They don't have 401ks. Do they have no retirement savings? Well, according to that factoid, they don't. If you add them in, I think it's around a third of people approaching retirement have Some entitlement to DB plan. You know, you add them together, there's overlap, and you're up to 75%. The federal. The Fed in one of its surveys asks people specifically about savings for retirement outside of traditional plans. They say, do you have like a small business or a farm or real estate or a taxable retirement account that you have set up to provide income in retirement? And they also ask about 401 s and traditional pensions. I ran the numbers this afternoon and if you look at the. For 2022 in this Fed survey, it's a survey of household economic economics decision making for people 55 to 64 in 2022, 90% had retirement savings.

So that's private sector. 401k is half of it, 25% of public sector employees with a DB plan and the remaining 15% are like small business owners. Whatever. They have other sources of wealth.

You could think of it that way. The reality is a lot of people have a lot of things, you know, this sort of idea that, okay, retirement is okay, Social Security plus a 401k. Well, kind of. But you find people have a ton of income in retirement from different sources that people don't think about. My point in that factor is, let's say you've got 90% who do a retirement savings, say, okay, what about the other 10%? Surely they're doomed. Of that other 10%, the vast majority, 80%, have household incomes under $50,000, which means they're the people who get redistributed to from Social Security. This factoid which people use all the time, Larry Fink used, in fact means nothing about the state of the US Retirement system. It tells you nothing about you. And I could just, I could give you all sorts of factoids like that. People like, oh, that's so convincing. Like, no, it's either wrong or it means nothing. So you really are better off. Just ignore all that stuff and just say, if I were trying to figure out whether the U.S. retirement savings system were working, what would I look at? How many people have retirement plans, how much they're contributing? What do assets look like? What does labor supply look like at older ages? When are we claiming Social Security? Those are common sense ways of answering that kind of question. And those tell you something completely different from what the Larry Fink factoid. I mean, the absolute opposite of it.

So what you're saying, Andrew, is we're going to be okay, you're going to be fine.

Everybody working on in public policy thinks their issue is the most important one. But Arguing contrary to interest here in the sense that compared to problems like healthcare, education, infrastructure, retirement is a second tier issue. Clearly it's first tier in the sense that if we don't fix Social Security, we're all going to go bankrupt. So I'm still important. Don't fire me. American Enterprise Institute. But the idea that we face a retirement crisis when you look at the data is so absurd.

Why don't you think people. So you've been out there proposing, you know, saying this for years. Do you think it's just human nature that we want to hear the bad news? It's not just that financial services wants you to like save money and, but it's as people, we're just warriors. And it's like I want to hear the bad news, like how I'm in trouble and be super secure.

Is that in the sense you can look in, you know, people will say, you know, my friend Teresa Gillard Duchy will say, well, you know, if you look at surveys, people are worried about retirement. You know, I mean, that is true. Although I went to Google News and I googled the phrase retirement crisis. Over the last year alone, you had 7900 media hits with the phrase retirement crisis. So it's not surprising why people think that. But even before all that nonsense started going on, you could look at people approaching retirement in the 1980s and like, say Health and Retirement Study would ask them, you know, what do you think? You know, do you think your standard living is going to decline when you retire? And a lot of people say, yes, it is. But then you revisit those same cohorts of people, you know, 10 years later, after they've retired, they would ask them, okay, what happened to your standard of living when you retired? Very few people say it declined. A lot of people said increase. So part of it is just a worry. Retirement plane is really complicated. I mean, you know, think about what is involved in figuring out how much you need to save for retirement. You got to say, what's going to happen to my earnings over time? What rate of return can I get on my investments? How long am I going to live? You know, it's a complicated thing and so you can expect people to be worried about it. But I'll be honest, on top of it is they are told this stuff. And part of the problem is nobody's got an incentive to tell them a different story. Story.

I mean, it's.

If you're in the news media, you know, if it bleeds, it leads. So you get these headlines that people Click on, you know, you're doomed, etc. Etc. Financial industry, I don't think they're nefarious, but they don't really have the incentive to tell you, hey, maybe you've saved enough. A lot of people, you know, your experts on it, who are widely cited in the media are they have a certain say political philosophy that is very much more trustful of government solutions, or they like very structured systems like traditional pensions, just philosophically or temperamentally distrustful of decentralized systems, distrustful of household discretion and choice. They just don't think it works. And that's, you know, fine. But they're out saying all these things. And so it's, you have say me, I guess. And what I will say is it's not just me voice in the wilderness. I, I thought it's kind of nice to be that if you look at like actual academic studies, retirement savings done, you know, by like legit economists in peer reviewed journals, they are much, much more optimistic than this nonsense you'll get from different organizations. But partly it's just there's an incentive to worry or there's a natural thing to worry and there's not an incentive to tell people the good news. You put that together and everybody's freaking out. I mean, just to give you a factoid, several years ago Vanguard did a survey of the people, new retires, younger retires, and they asked them, do you think the country faces a retirement Crisis? Not like 55% or 60% said yes. Then they said, would you describe your own situation as a financial situation, as a retirement crisis? And it was like 3% said yes. So it's this idea that there's retirement crisis everywhere except where we actually look. Because you can ask everybody else. It, I mean, the Fed's got various surveys, you know, I mean, they ask people, are you finding it difficult to get by? Which, you know, it's okay. That's a, you don't want to be in that situation. It's like 3% of retirees, 4% of retirees say this. So it's a very strange thing in that at some point, I mean, there's survey after survey where you ask retirees how they're doing. You think at some point we take them at their word. If they say no, I'm okay, they and say, look, you're in fact okay. But we refuse to believe it.

I think that's a really interesting and probably accurate take. I mean, I would say, you know, like Michael Kitces, there's a, a thing they did where they looked at people with money when they retire, when they pass away, they have even more money. I'd actually be curious of how low that number goes because people, they won. Your real rate of spending declines like 1% a year in retirement. And I mean, you look at your parents, right? My parents who are alive are spending way less money in their 70s and 80s. You know, it's like, what are you doing? You're, you're not, you're definitely spending more as, like, as a younger person and you kind of decline. So I think that's one thing, that's true. And so you end up not using all your money, which is kind of suboptimal. Right. It depends on how you want to use it. And the other thing is that's in the news, okay, yeah, there's retirement crisis or, but also there's going to be this $80 trillion wealth transfer. Where's all that money coming from? That's like our savings that's going down to generation to generation.

The path of retirement spending is an important factor. Let's, it's, you know, your listeners may have heard of what's called the National Retirement Risk Index. It's done by the center for Retirement Research at Boston College. Alicia Mannell is their head. I have written stuff with her. You know, we, so I like her very much, but we disagree about the retirement crisis stuff. But, you know, they say 55 or whatever of Americans are going to have inadequate retirement incomes. And obviously there's a lot of technical stuff that goes into a model like that, but it's really two things which determine that result. One of them is the path of spending in retirement. They assume you want to have the same expenditures in inflation adjusted terms from age 65 through death. Now, if you look at actual data, the best work on this is from Michael Hurd and Suzanne Rohwetter, who are rand. And they use the Health and Retirement Study where they can track people over time. And they basically find for typical household spending, including health care costs, drops by about 40% from age 65 to age 90. So if you do that, okay, that eliminates a huge chunk of the people who are, you know, going to not have enough money. The second issue is how do you think about children with retirement savings? That what say this retirement risk index and a lot of standard planning assumes is, well, you want to be able to spend, let's say they say you want a 75% replacement rate, you want to be able to spend 75% of what you had when you were age 50 or something. But when you're at that age and you can look at expenditure data, huge amounts of people's money is going to raise their kids. And what you find is once kids leave home, spending drops significantly for households in a precise, precisely the categories where they would be spending on kids. So what you find is people don't need nearly as much money. They don't need to be able to replicate what they had during their prime working years because they weren't spending a lot of that. Their kids were taking it. So if you take those two things alone and you just adjust, say, the Boston College model to account for them, the retirement crisis completely disappears. When people are making these projections, it's not about what rate of return are we going to have or anything like that, that it's all about these very fundamental things of how you think about it. But you're right, a lot of people just, they don't spend everything they have. If we didn't have enough money in retirement. You see a lot of retirees declaring bankruptcy. Strangely, they declare bankruptcy much lower rates than working age people. Why? Because they got a lot of money. So it's almost like this philosophical thing. Can we see the reality of it? I don't know, but there's a whole bunch of different angles by which you can view it, and almost all of angles don't tell you the story they're giving you.

You need to build a Newark Retirement Competence Index. Yes, the feel good button. You're going to be good, you're going to be fine.

Well, it's one of these things. I mean, I wrote a piece in the Wall Street Journal a couple months ago and it was the motivation we used this survey that came out by, I can't remember who, saying, oh, the average American thinks they need a million and a half dollars for retirement. We don't have that, so of course we're doomed. You know, I mean, just roll the rest of the story there. And what I did is I used Federal Reserve data. I said, let's just do it back. Let's start with retirees who tell you I am financially secure so we know they're doing okay, and then see how much money they have. And the answer is they have far less than a million and a half dollars.

What's the number?

Oh, boy, I have to go find the op ed for people who said they were living comfortably, which is the highest of four ratings of financial security. The Fed offers, I think somewhere around $200,000 for people who say I'm doing okay, which is One notch below that, you're 100, 150 maybe.

I mean, this depends on where you live though. My mom lives in upstate New York. Relatively lower cost legal than climate falls. I live in like the Bay Area. I would never feel comfortable at that level.

No, and if you live in the Bay Area, you shouldn't. I did testimony a few months ago before the Senate Finance Committee and I was questioned that I've argued, you know, we've got to reduce benefits, reduce Social Security benefits for high income people. I said, like, we've got this maximum benefit of a couple for 96,000. That's too much. You know, one of the responses I got from senators, well, San Francisco is real expensive. I'm like, that's San Francisco's problem. It's not Social Security's problem. You know, if you live in San Francisco, you make a lot more money and you need to save more or you got to move out of San Francisco when you retire. Like those numbers I gave you from the Fed, that reflects the reality in America overall. And I get it. I grew up in New York. Very expensive Bay Area, very expensive. Most of America, not nearly as expensive as that. So people, they transfer their views of what they might need to have to the population at large and it's just a very different story.

Okay, well, it's great. Look, I know we're at time. I have one more question for you. What is the net present value of the $48,000 Social Security benefit? Roughly, like if you were to buy that, I mean, you cannot buy an annuity that has a cost of living adjustment in it. But what do you think it is? I mean, it's hundreds of thousands of dollars.

I'd say about a million dollars.

Okay.

If you're converting, this is why people hate annuities, because you take it and you divide it by, take some lump sum, divide it by 20, and that's your income stream. You go from being a millionaire to making 50 grand a year or whatever. As a guess. I mean, I'd have to run actual calculations. But say if you're making, if you're getting $48,000, call it a million in present value. I mean, one way of thinking about it is people talk about Americans don't have any retirement savings. And total retirement plan assets now are somewhere at $35 trillion. And yeah, they're tilted towards the rich. Total accrued Social Security benefits, meaning the Social Security benefits that people earned but not yet received, that's somewhere on $45 trillion. And that's tilted towards the poor. And if you look at a time series, I can go back to 90s maybe and you have values for both of them. The combined value of our accrued Social Security benefits plus retirement plan assets on top have skyrocketed. You know, Social Security benefits, people, if you're in the, in the game, the term you use is Social Security wealth is the present value of your accrued benefits and those are substantial for people. But in addition, when people talk about wealth inequality, they're only talking about, you know, financial assets. When you include the value of Social Security benefits in it, A, your wealth inequality is a lot lower, but, but B, it has not increased over time. The accrual of Social Security benefits has been disproportionately in the lower end. So even most low income retirees don't tell you they're living miserably.

That's a super interesting perspective. That 35 trillion private sector savings makes sense. 45 trillion in accrued benefits, that also makes sense. It's interesting that it's in the point of view about how it's oriented towards each one.

To get a true picture, you got to think about them both.

Right? I think it's so interesting for people to think about their wealth. They discount Social Security because it's paid as a stream of income like an annuity is. But the fact that it's cost living adjustment, the fact that like, okay, if you're at the top end of Social Security, you're walking around with a million dollars of value, that's pretty material. I mean if you're like their family is a teacher. I think he retired is like, I think his benefits like 90 grand a year. Right. So that would be a couple million dollar annuity value that he's getting in the public sector. And I think he might have a little Social Security on top of that. So, so he might be walking around with two and a half million dollars of equivalent wealth to get that benefit.

Sure, they're financially secure. They may not feel great because again, people feel good if they have that lump sum, but maybe they should just convert it to a 401k just so people stop complaining. Just they see the number or even you could, yeah, you could print it on their benefit statement. Okay, your monthly benefits could be this. Here is the present value of it. And that's actually, it's actually a useful number. Gives some people an idea of what in fact is being devoted to them. And that's good on retirement security, but it's also good for thinking about, you know, you're asking your grandkids to pay this. That million dollars is not coming out of nowhere. It's coming from your kids and grandkids.

Well, I think that's so interesting. I think it's like we should show this like one thing about our users is they feel way more confident about their situation situation because they understand the numbers better. But we could show them, we're not even showing them the present value of their Social Security. It's like, oh, you've saved a million dollars. Like the average user on our platform, three years are saved a million dollars. The average paid customer is two million dollars. So it's much higher mass out for one people. But those two million dollar people also have another million dollars of Social Security value. So it's three plus. They probably have another $500,000 of home equity. So they're walking around three and a half million dollars of net present value wealth that they're going to use over the rest of their lives.

You know it's, I mean some of the work we did when it's a Social Security we would count obviously we include your Social Security, pensions, earnings in retirement, which is like 25% of the incomes of 65 and over. So people are really working a lot retirement now. But we'd also include like implicit rent from, from home equity. And the idea was that you know, if you, to the degree you own your home, you're not having to pay rent on it. And so that gets it that homeowners are in fact better off than renters. And again it's a, it's a lot of money.

Yeah, it's a lot of money living.

You know, once you pay off your mortgage, that helps your cash flow a lot.

Yeah, well there's a whole other discussion with topic we can have about like reverse mortgages using home equity for less wealthy people. But they tap into it because they do use it. But we'll have to say that for the next one. All right, well look, hey Andrew, you're going a long way to convince me that we have a lot less to worry about. And in fact I think that's probably borne out in the data. I think we will look at some of these ideas like a competence index showing the present value of these assets for people. I think that would help them a lot and maybe get them engaged in like hey, let's fix Social Security. Right. Because it's really partly for you, but it's partly for future generations.

This is like the matrix. Once you start looking at it differently, you'll never see the same way again.

Take the blue pill. That's right. You know, Andrew, appreciate your time and this has been a fascinating conversation. For anyone who's interested, we'll link to, to Andrew Biggs. He's on Twitter, American Enterprise Institute. You can see his writing there. He's definitely been out, published in many places. We'll link to some of that stuff. Do you have a. Do you have a book coming out or do you have some books published right now? We can link to that stuff.

I do. I have a book coming out. It will be called the Real Retirement Crisis, which is Social Security and things like that. It is essentially done, but it probably won't come out until the end of this year, early next year, but. But I'd be happy to come back on and talk about that and pedal my wares when I get a chance.

Yes, let's do it. We will sell some books. We have a few thousand people listening to this at least. And then for anyone else, you know, if all reviews and likes of this podcast are welcome and you can check out our platform@newretirement.com our Facebook community. There's 20,000 people out there talking about these issues and trying to figure it out. And, you know, obviously our platform, we want as many people as possible. Andrew, hopefully you check it out. Build a financial plan. Let me know and let me know what you think with that. Thank you very much, folks.