If you want to see the background to Social Security reform, look no further than the latest survey of American retirement plan savings, Vanguard’s 2020 How America Saves.
Over the next decade and a half, the ranks of the elderly in America are expected to swell by more than 20 million. And as the latest survey shows, a horrendous number of us are going to end up old and poor.
Ignore, please, the eye-catching headline number that the “average” balance in a 401(k) retirement plan handled by Vanguard is $129,157. This “average” is merely the one known as the “mean,” found by adding up the totals and dividing by the number of participants. It is nearly useless as an indicator, because it is skewed by a small number of plans with large balances — the way Jeff Bezos, Elon Musk and a guy sleeping on a park bench in Oakland, Calif., have an “average” net worth of $120 billion.
A far more useful “average” in the Vanguard data is the one known as the “median,” which means the account balance of the person who’d end up slap bang in the middle if you lined everyone up from the richest to the poorest. Vanguard points out that the “median” retirement account balance, among the 4.7 million for which it handles the paperwork, is just $33,472. Half of plan participants had a balance below $40,000 and three in 10 had a balance below $10,000.
Good luck with that.
A couple who retires at age 65 with $34,000 in assets and looked to convert that into a pension for the rest of their lives through an annuity would be looking at the princely income of $1,600…a year.
OK, so the median age of the Vanguard plan participant is 44, so many should have another two decades to build up their balances.
And let’s agree that there is also plenty of good news in the Vanguard study. Some 78% of those eligible now participate in their employer’s retirement savings plan, up from 71% just five years ago. More than half of all plans now have automatic enrollment—in other words, you have to choose to “opt out” of saving instead of “opting in.” That one change is helping the American retirement crisis enormously: Some 92% of those with automatic enrollment are participating, compared with just 62% for those who have to opt in.
Three quarters of those participating in a 401(k) have some kind of balanced portfolio of stocks and bonds, and the numbers doing something goofy—like putting too much money into their own employer’s stock, or all their money in bonds, and so on—has collapsed to very small levels. So-called “target date” or one-decision funds have been a popular innovation. About 80% of plan participants who have access to a target-date fund invest in them.
The average participant’s return last year was a terrific 16.5%, following on from 21% in 2019.
But the averages mask wide variations in America’s retirement preparedness. Vanguard’s numbers really show that many middle-class and upper middle-class workers are doing OK on the retirement front. But when incomes drop below $50,000 a year, the numbers change. As you’d expect, fewer contribute to a 401(k) at all — especially if it’s still an “opt-in” plan. And those who participate, on average, contribute a much smaller percentage of their (much smaller) incomes.
And we’re not even counting all those millions who aren’t part of a plan—including those who lost their jobs last year.
So we are moving toward a society where there are around 80 million senior citizens, and large numbers have very little put aside. Which is one argument for costly plans to increase Social Security at the bottom of the scale, even though current payroll taxes won’t pay for what’s already on the books.