You’ve heard from Ross a series of numbers and statistics that demonstrate why there’s a retirement income crisis in this country. But now I’d like to talk about just one number – the one many of you have come today to hear about – the Retirement Income Deficit [1].
The Retirement Income Deficit is the gap between the pensions and retirement savings that American households have today and what they should have today to be on track to maintain their living standards in retirement.
What does this mean? We all know that savings and pensions typically build over the course of a working life. If you’re in a traditional pension plan, your pension benefits build with years of service. If you’re in a 401(k)-type plan or IRA, you and your employer can slowly put more money away over time, invest it in stocks and bonds, and, if you’re lucky, it will increase in value.
So it’s expected that savings and pensions will increase as workers approach retirement. The Retirement Income Deficit takes that into account. It assumes that people will continue to work, save, and accumulate pension and Social Security benefits until they retire at age 65. It also counts the value of their homes.
The Retirement Income Deficit number was produced by the Center for Retirement Research [2] at Boston College for Retirement USA. It is based on the same methodology the Center uses to calculate its National Retirement Risk Index [3].
In a nutshell, this is what the Center did:
- First, the Center calculated what households ages 32 to 65 would have at retirement if they continued to work, save, and accumulate additional pension and Social Security benefits until they retired at age 65.
- Second, the Center came up with a target for each household – what they would need to maintain their standard of living in retirement.
- Finally, for each household that fell short of the target, it estimated how much additional savings or pension benefits each such household would need today to close the retirement income gap, and then added those amounts across households.
Using this formula, the Retirement Income Deficit comes to a whopping $6.6 trillion. $6.6 trillion!
Just to give you a sense of the magnitude of this number, that is about 5 times the projected federal deficit for 2010. Another way of understanding the size of this figure is the often-used trip to the moon analogy. $6.6 trillion is enough dollars that, if lined up end to end, they would stretch to the moon and back 1,000 times and still leave enough left over to pay NASA’s budget for the next 83 years – and you’d still have enough pocket change left over to give every person in this room $100 million each!
That is a lot of money.
It is important to remember that $6.6 trillion is a conservative figure. Using other assumptions, it could be much higher. The number should be a wake-up call. It is a measure of how far behind Americans are in their retirement savings today. Cuts to Social Security, pension freezes, and 401(k) losses on the stock market could easily make the Retirement Income Deficit much, much worse in the future.
Some of you may ask why we’re here today. Well, there’s an old saying that goes: when you’re trying to get out of a hole, the first thing you have to do is to stop digging. I’m going to add to that, the last thing you should do is to buy a bigger shovel. And that’s unfortunately what we see happening with many policymakers here in Washington today.
Instead of exploring ways to strengthen Social Security and improve our private pension system, the only discussion we hear these days are the various ways Congress could cut Social Security – presumably while hoping no one notices.
Many people don’t realize the President has appointed a National Commission on Fiscal Responsibility and Reform. This Commission has been tasked with finding ways of reducing our federal deficit – an admirable goal, we all agree.
The Commission has been meeting largely in secret, so it’s hard to know exactly what they’re discussing, but from what we can tell, the only serious conversation going on behind those closed doors is how best to cut Social Security. This despite the fact that Social Security is the only program that is truly working and has not contributed one thin dime to the deficit.
So by showing today just how deep the retirement hole is, we hope to convince policymakers to move in a different direction. Instead of talking about ways to cut Social Security, we hope they will start thinking about ways Social Security can be strengthened and our private pension system can be improved.
Today is only the beginning of the conversation. [4] We plan to continue it in the days and weeks ahead and hope that more and more policymakers will listen.
Thank you.