In this interview, Andrew G. Biggs, PhD., Senior Fellow at the American Enterprise Institute, explains why the number of workers without a 401(k) or other formal retirement plan doesn’t tell the whole story. He discusses how age, income, student loans, homeownership, inflation, and other financial priorities influence when people save.
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Transcript:
Jeffrey Snyder, Broadcast Retirement Network
Welcome back. We are joined this morning by Dr. Andrew Biggs. He’s a senior fellow of the American Enterprise Institute.
Dr. Biggs, welcome back to the program.
Andrew G. Biggs, Senior Fellow, American Enterprise Institute
My pleasure. Thank you.
Jeffrey Snyder, Broadcast Retirement Network
Did you see how it feels like deja vu? We were doing this yesterday. And just to recap for our audience, you know, yesterday we talked about, we started getting into the numbers.
I had run some data using Claude 4.8, which I think is one of the higher powered artificial intelligence tools that’s out there. Maybe I’m wrong, but I don’t know. It’s changing every millisecond.
We got as far as coverage. So let’s pick up the conversation now. I’d love to talk to you about the uncovered number, because what I’m trying to get to, I want to be upfront with you in the audience, is that, you know, people say there’s a retirement crisis.
And I’m trying to understand what that means. So let’s talk about those that are uncovered. So based on the data that I pulled, about 47 million people, and this is based on that employed population, about 134 million, 47 million people are uncovered or don’t have a retirement plan account of any type.
Your thoughts?
Andrew G. Biggs, Senior Fellow, American Enterprise Institute
Well, I mean, it’s the question, let’s assume the numbers is accurate. It’s, you know, as I said, in yesterday’s session, a lot of these data on retirement are very soft in terms of quality, but let’s assume it’s accurate. You want to know who those people are.
If you’re a high income person, and you’re reaching retirement age, you have zero retirement savings of any type, okay, that’s probably a problem for you. If let’s say you’re a younger person, just straight out of college, and you know, textbook economics says you shouldn’t be saving much for retirement, you probably aren’t saving much for retirement. If you don’t have a retirement plan, it doesn’t matter very much.
Similarly, think about low income workers, people who are sort of in the 20% of what you call the lifetime earnings distribution. These are people with clearly lower earnings. According to the Congressional Budget Office, Social Security overplays, you know, 75%, sometimes higher of their pre retirement earnings.
So should they be saving at all? The answer probably is no. So it is some people think about these data, and they say, well, 100% of people should be saving for retirement 100% of the time.
And just a moment’s thought says that’s not correct. But then you start thinking, well, what is the correct number? And it’s not super clear.
But my point is that the fact that say half of people are not saving for retirement at any given time is not itself proof that people are under saving for retirement.
Jeffrey Snyder, Broadcast Retirement Network
Okay, so isn’t it true that the some of the lower income workers, maybe younger people that are 18 to 24, just getting started in career, I think this is to your point, they’re going to be contributing to Social Security. Whether it’s around for them, that’s a whole nother debate that we’ll have to have another day in time with your colleagues from different associations. But don’t people move to different strata.
So you start off when you first enter the workforce, unless you’re some kind of genius, you have no experience. So you start off working at a very lower wage until you gain experience, and then you presumably would get more experience, your wages will go up. So isn’t that you’re kind of looking at things in a very staticky way.
So some of these people will move to higher incomes and then be in a position to save. Some will not, but some will.
Andrew G. Biggs, Senior Fellow, American Enterprise Institute
Sure. And this is sort of financial planning people and economists, policy researchers are on the same page more often than not. But one area where they often differ is financial planners will often say something like, you should be enrolled in your company’s 401k from day one, contribute as much as you can, max it out, whatever.
And that’s not what economists think. It’s the sort of workhorse model for economists think that retirement is called the life cycle model. It gets complicated.
But what it basically predicts is that people will want to smooth their consumption, have roughly the same standard of living from one year to the next. You don’t want to have periods of feast and famine, you want something fairly smooth. What that implies for retirement savings is precisely what you just mentioned.
When you start out in your career and you’re young and your earnings are low, you’re not really going to save much for retirement. But as you gain experience and your salary rises, you just save more and more. What that implies for your income after the savings are taken away is it tends to be fairly smooth.
And there’s data that shows us. And so it’s one of those things the simple fact that, you know, a 25 year old is not saving for retiring. He could just be he read his economics textbook.
He’s following what the Nobel Prize winners say you should do. And yet often you’ll hear people sort of scolding them saying, oh, you should be saving. Well, that’s that’s one point of view, but it’s not necessarily the correct one.
So you can’t necessarily infer too much from these sort of raw statistics. You want to know where people end up in retirement and the data on retirement incomes and data on financial security and retirement tell you that however people did it, most people who enter retirement seem to think they did it well in the sense they are financially secure.
Jeffrey Snyder, Broadcast Retirement Network
So don’t you think because there’s obviously there’s a lot of research out there and you see this stuff. It’s not necessarily coming from your organization, but you see this stuff where people aren’t saving enough or they need to buy this product or that product. So.
Where does like things where do things like student loan debt, which is ballooned, people have to pay off their loans, where does that kind of factor into the equation? Because, again, I didn’t you know, I’m a simple guy. So I just as Claude, very, very simple answers.
And we can you know, maybe we’ll circle back at the end of this conversation and you can help me like, what did I miss? But where do things like student loan debt, buying a home, having a family, other things that you you you do during your life, where do those factor into this equation of data?
Andrew G. Biggs, Senior Fellow, American Enterprise Institute
Sure. It’s early in your career. Often people want to pay off their student loans.
They want to build up a down payment for home. Both of those are saving. Reducing your debt is the same as saving, building up that down payment is saving.
So they’re going to focus on those things that are important to them and to the detriment often of participating in their employer’s retirement plan. So it doesn’t mean they’re saving, they’re not saving, doesn’t mean they’re not saving enough. In other words, it just doesn’t it doesn’t tell you all that much, but it does give you an idea why they might not be participating in a 401k.
Once they get say to their mid-30s around age 40, often they’ve they purchased a home so they just have a monthly mortgage payment to make. They paid off their student loans. That’s when the retirement saving really tends to kick in.
So it’s when you look at the data of how saving rates as a percentage of income change over people’s working careers, you know, it all kind of makes sense. It’s pretty much as economics would predict it to be. But it’s just people, you know, get this idea, you’re going to be saving 100% of the time and they’ve got some explanation for it.
And it’s, you know, it’s not going to kill you if you do that. The point is, it’s not a reason to panic if people aren’t doing it.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, well, I mean, if you can afford to do it, and these are obviously very challenging times for many of us in terms of affordability, people are putting more of their money towards gasoline and food and home and all those, you know, their kids expenses, etc. So I think that probably, I guess I’ll ask you, that probably plays a role in decision making as well. It’s not, I guess my question is, it’s not a zero-sum game where either save or you don’t save.
It seems like people know what to do and maybe I’m not reading the room correctly. But maybe they, they’re not stupid. They know they need to save for a rainy day.
Sure.
Andrew G. Biggs, Senior Fellow, American Enterprise Institute
And I mean, something like gas prices or, you know, inflation, the reaction of how that should affect your savings or retirement really depends on whether you think those higher prices are temporary or permanent. If you think high prices are temporary, and they’re going to come down again, well, then you should save less today and save more in the future. If you think those higher prices are permanent, then it shouldn’t affect your retirement saving very much.
It’s, you know, that’s just the environment you’re living in. So it’s, you know, one thing to bear in mind in all this is, you know, we have all this discussion today, Americans aren’t saving enough for retirement. But if you go to Department of Labor data, you can find data on the amount of contributions going into private sector retirement plans, and that includes both employer and employee contributions.
And you can compare them to total wages and salaries in the private sector, meaning not just the wages and salaries that people are enrolled in plans, but everybody. So you get two pretty reliable numbers, and you divide them, you get contributions as percentage of wages and salaries. If you go back to 1970s, when traditional pensions were at their peak, total contributions to retirement plans in 1975, were something like 5.8% of total wages and salaries. Today, there’s somewhere around 8.5% of wages and salaries. And that’s for two reasons. First is a 401k is a much more numerous amount of coverage is higher today than it was in the past.
Second, with a retirement account like 401k, both the employer and the employee pay in, whereas the traditional pensions only the employer paid in. So, you know, just, you know, objectively, we are saving more for retirement today than we did in the past. So often, that’s just against the perception, people will, if pressed, will acknowledge that retirees today are, are doing pretty well, but they’ll say, Oh, but we’re not saving.
And you know, today’s workers are not saving up for retirement, like what we’re saving more as a percentage of our salaries than people did in the past significantly more. So it’s just, you know, that you try to get the idea of where we’ve been and where we’re going. And you know, that this the way of summarizing is, you know, more workers saving more for retirement than any time in history.
And that is true. And not only the history of the United States, but the history of the world, I would imagine, right? I mean, big retirement savers, if you look at sort of OECD data, total retirement plan assets in the US are about 130% of GDP.
There are a couple countries that are higher, essentially, because they have sort of privatized social security programs. I mean, it’s like Australia or the Netherlands. You know, they’re, they’re essentially their, their pay as you go programs are kind of small, their funded programs are high, but compare the US say to France, and retirement savings, they’re about 12% of GDP, somewhere around that.
I mean, we, we save much more than the typical developed country for retirement. So it’s, you know, it’s just something it doesn’t, you don’t want to be Pollyanna-ish about, doesn’t mean everybody’s guaranteed to be happy. But it means we’re, by and large, doing a pretty good job.
Jeffrey Snyder, Broadcast Retirement Network
So are there lessons, let’s, in the last minute and a half, two minutes, are there lessons or takeaways for our friends in the retirement industry, the financial services industry, and also policymakers, people on the Hill?
Andrew G. Biggs, Senior Fellow, American Enterprise Institute
Well, one lesson is people sort of have to chill out. The simple fact you’re not having a retirement plan today, isn’t, isn’t a reason to panic. But even, and this is just an interesting factoid, I use Federal Reserve data, and I looked at retirees who had no retirement plan at all, no pension, no 401k, no IRA, most of them were doing pretty well.
And the reason for that is some of them are very low income, so there’s high replacement rate from Social Security. Others tended to be small businessmen, farmers, they owned assets that were producing income, even in retirement, even if they didn’t have a formal retirement plan. So we need to think broadly about these things.
Often we think retirement income is going to come Social Security to 401k. In the reality, people get income from a lot of different places. And so we just have to be a little bit more nuanced and be willing to dig a little bit deeper.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, really important. You know, I guess TBD, right, because it’s an ongoing exercise. These numbers will change over time.
It’ll be interesting to see Dr. Biggs next year when they do the survey, what the impact of some of the inflation that we’ve experienced. I wonder if anyone’s done like the research, retirement savings and coverage and tied it to, you know, plotted it against inflation. I guess we’ll have to find out.
Dr. Biggs, really appreciate you sticking around for two episodes of the program. Always great to talk to you. And look, when your next article comes out, we’ll bring you on for a third time this month.
Certainly appreciate it. And you’re welcome back on the program anytime, sir.
Andrew G. Biggs, Senior Fellow, American Enterprise Institute
Thank you very much.