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Online Extra: The Debate Over Nest Egg Math


Are American workers saving enough for retirement? For years, the conventional wisdom has been no. But now, just as companies finally are trying to get people to save more, a provocative study is questioning just how bad the problem is.

The conventional view is that far too few U.S. workers are putting aside enough for old age. New York University economics professor Edward N. Wolff has calculated that only about 50% will have enough to maintain their lifestyle after 65. Brookings Institution economist William G. Gale found that only about a third of retirees will have sufficient resources for a comfortable retirement. Another third, he figures, will come close, while the rest are falling far short of what they will need.

Another take on the problem, by Olivia S. Mitchell, director of the Pension Research Council at the University of Pennsylvania's Wharton School, concludes that a typical fiftysomething will have to boost savings by 17% to maintain his or her standard of living after retirement.

"I'M A SKEPTIC." But University of Wisconsin economist John Karl Scholz figures that at least 80% of Americans are squirreling away enough to reach optimal retirement targets. And even many of the 20% who are undersaving are close to reaching their goals. "Finding gloom and doom stories about Americans heading over a cliff is like catching fish in a rainbarrel," says Scholz. "I'm a skeptic."

What accounts for such differences? For starters, economists disagree over what is "enough" savings. For another, they can't settle on what assets ought to be included in their calculations. Finally, they're struggling over huge uncertainties over the cost of health care.

Most analysts use a simple benchmark: Workers who'll be able to collect 70% to 80% of their annual preretirement income will do fine after they get the proverbial gold watch. Save much less than then that, they figure, and you're headed for trouble.

REAL-LIFE MODEL. But what if that target is too high? If the test is 75% of preretirement income, just 48% of households age 47-64 would pass, Wolff figures. But 70% of families could meet a far more modest goal: annual income of at least twice the poverty level -- enough for a decent, if not lavish, retirement, when supplemented with Medicare/Medicaid health benefits and other senior subsidies.

Scholz uses a wholly different technique. Instead of basing his calculations on earnings in the year before retirement as most other economists do, he builds a model based on the lifetime experiences of real people. He uses the actual earnings histories from 6,300 households tracked by the University of Michigan's Health & Retirement Survey. He calculates how much they can expect to save by the time they retire, and what each individual can expect to spend after leaving the workforce.

That allows Scholz to determine the optimal level of saving. But critics say matching average lifetime earnings is too low a target and question whether his assumptions about retirement spending are high enough.

HOME INEQUITY. Another question: What to count when figuring out how much wealth retirees actually have? All economists include 401(k) and IRA accounts, benefits from traditional pensions, and Social Security income, as well as other financial assets. But many exclude the value of owner-occupied homes, arguing that seniors must still pay to live somewhere.

But others say many elderly will sell their homes, move into less costly residences, and cash out hefty capital gains. Or they could take out reverse mortgages -- a technique where seniors sell their ownership in a home to an investor who agrees to pay them a fixed monthly sum for as long as they live in it.

Scholz includes home equity. Wolff doesn't but agrees that at least some home value should be counted. Scholz figures that if only half of home equity is included in wealth, the percentage of people saving enough for retirement falls from 83% to less than 60%.

"NO RIGHT ANSWER." Then, economists confront a huge unanswerable: the future cost of health care in old age. How much will end-of-life acute care and custodial care cost? How much will be paid by Medicaid or long-term-care insurance? Economists can merely guess. "It's a big issue," Scholz concedes. "To the extent we fail to capture major late-in-life expenses, we are too sanguine about how people are doing."

And there's one more problem. Most studies assume that today's workers will receive full promised benefits from both Social Security and Medicare when they retiree. And for many workers, those Social Security benefits will make up a large chunk of their retirement income. But the analysts concede it's extremely unlikely that those promised benefits will be paid in full.

So, the bottom line is economists don't really know how many people are saving enough. And they warn about the huge uncertainties everyone faces in the real world. "There's no right answer," Mitchell says. "Everybody ought to be a little bit cautious." Still, even the pessimists admit Scholz has given them important issues to ponder. By Howard Gleckman in Washington


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