Follow The Facts: Employer-Based Retirement Savings Are Stronger Than Ever – Forbes

Posted: August 23, 2020 at 10:58 pm

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Americans have traditionally saved for retirement through their employers, whether it was via traditional defined benefit pensions or todays more common 401(k) retirement accounts. But how is Americas employer-based retirement savings system faring? Some have grave doubts, but the data show clearly that, via employer-sponsored retirement plans, more Americans are saving more for retirement than ever before.

My friend and fellow Forbes contributor Teresa Ghilarducci, a professor of economics at the New School for Social Research in New York City, argues in a recent Forbes article that this relationship was always miscast. Prof. Ghilarducci writes that Retirement plan coverage situation has been falling for 20 years, even before the COVID 19 recession. Even when the economy was doing well at the end of 2019; only 36% of workers age 25-64 had a retirement plan at work (a fall in coverage rates from 41% in 2015.

Ghilarducci seemingly has the data to back up her claims: figures from the federal governments Current Population Survey indeed indicate that declining shares of U.S. workers are saving for retirement at work. According to CPS data, the share of U.S. workers participating in a retirement plan has dropped by nearly one-third since 1999.

But heres something that ordinary readers wouldnt consider but which retirement policy analysts are familiar with: the Current Population Survey data Prof. Ghilarducci relies on are almost certainly wrong. More reliable data sources tell a very different story on Americans retirement savings.

There are three basic ways to figure out how many Americans participate in a workplace retirement plan. We can simply ask people, as the Current Population Survey does. Or we can ask employers whether they offer their employees a retirement plan. The Bureau of Labor Statistics National Compensation Survey does that. Or, we can use tax data which indicate whether a given taxpayer participates in a retirement plan. The IRSs Statistics of Income data take this approach.

In theory, all these approaches should yield the same answer. But they dont. A 2011 Social Security Administration study compared how Americans answered a survey question asking about retirement plan participation versus what their tax returns showed. The SSA researchers concluded that the participation rate in [defined contribution] plans is about 11 percentage-points higher when using W-2 tax records rather than survey reports. The best explanation is simply that, when asked, people sometimes get the answer wrong.

And we dont need to look far for proof. Consider full-time state and local government employees, where the BLSs National Compensation Survey finds 99 percent retirement plan coverage and 90 percent participation. (Or, if you dont believe the NCS survey, see if you can find a state or local government that doesnt offer full-time employees a retirement plan.)

But only 71 percent of full-time state and local government employees tell the CPS theyre offered a retirement plan at work. And only 64 percent said they actually participate. The same holds for federal employees, 100 percent of whom are automatically enrolled in both a defined benefit and a defined contribution retirement plan. But only 63 percent of full-time federal workers tell the CPS theyre participating in a retirement plan. The Current Population Survey data simply arent credible on this front.

Retirement coverage and participation among full-time state and local government employees, 2019.

On top of these basic reporting errors, in 2014 the federal government redesigned the CPSs retirement plan questions. That survey redesign reduced reported retirement plan participation by about six percentage points in a single year, and since then the CPSs participation rate has fallen even further. The Employee Benefit Research Institute has repeatedly drawn attention to this issue, warning that relying on [the CPS] to understand trends in [retirement plan] coverage is dangerous and misleading at best.

So what do these other data sources show regarding retirement plan participation in the U.S.? Pretty much the opposite of what Prof. Ghilarducci claims. The chart below denotes Ghilarduccis Current Population Survey-based figures in blue, showing, as she notes, a decline in retirement plan participation among workers aged 25 to 64. The rapid decline beginning in 2014, which no one has explained other than by reference to the CPS survey redesign, is evident.

Percent of employees participating in employer-sponsored retirement plan.

The orange line running from 1999 through 2019 shows the employer-based National Compensation Surveys figures for all private sector employees (not, as in Ghilarduccis CPS-based figures, both public and private sector workers aged 25 to 64). The NCS data show a distinctly different pattern from Ghilarduccis figures: rather than a decline in participation from 2014 onward, retirement plan participation actually increases to the highest level on record!

The yellow line beginning in 2010 is NCS data on both public and private sector workers. Even in 2010 the NCS shows a participation rate of 55 percent, eight percentage points higher than Ghilarduccis figures. By 2019 the NCS data again shows record high retirement plan participation, with the NCSs 56 percent participation rate a full 20 percentage points higher than the CPS figures that Ghilarducci touts.

And then theres IRS data, shown in grey, which cover all taxpayers with wage income aged 25 to 64. The IRS data show that in 2017, 58 percent of workers aged 25 to 64 participated in a retirement plan, versus Ghilarduccis claimed rate of only 38 percent.

Even the CPS itself now contradicts Prof. Ghilarduccis argument: the CPS also asks individuals whether they received any income from a retirement account, such as interest on savings. As EBRIs Craig Copeland put it, if workers earned income in a retirement account, it is safe to assume that they had a retirement account, meaning they were participating in a retirement plan. By this approach, Copeland finds that 62 percent of full-time employees in 2018 participated in a retirement plan, a massive increase compared to the levels Ghilarducci reports.

Moreover, the 401(k) contribution limits are high enough that most married couples could save adequately even if only one spouse had access to a workplace plan. IRS data show that in 2017, 81.4 percent of two-earner households had at least one spouse contributing to a workplace retirement plan. If we assume that 90 percent of married couples with access to a plan had one or both spouses participate, this implies that 91 percent of married couples were offered at retirement plan at work. This isnt a massive coverage problem.

None of this is a trade secret. Researchers are well aware of how the CPSs figure are inconsistent with other data sources. Why would a researcher ignore what seems to be better data pointing to better outcomes?

Im not a mind-reader, but a comment in Prof. Ghilarduccis article may provide insights: We should have never expected dynamic, mostly nonunion, American employers to be reliable sponsors of what workers need. Regardless of whether this perspective is correct overall, in a specific case it can lead a person to believe data that supports their prior views and reject data that contradict it.

With open minds we can see a very different retirement landscape. Even as labor unions and traditional defined benefit pensions have declined, Americans are saving more than ever for retirement. Department of Labor data shows that contributions to private sector retirement plans rose from 5.8 percent of employee wages in 1975 when traditional pensions, usually in unionized industries, were at their peak to 9.6 percent of wages in 2017, a two-thirds increase in the amounts Americans are saving for retirement. Retirement savings rose both because 401(k)s are more widespread than traditional pensions ever were and because 401(k)s have two contributors both employer and employee while only employers contributed to defined benefit pensions.

Employer and Employee Contributions to Private Sector Retirement Plans, as Percent of Private ... [+] Industry Wages and Salaries.

Prof. Ghilarducci laments that employers arent contributing enough to their employees retirements: If every worker had an employer that contributed 3% of their salary in a retirement plan at work it would cost employers $192 billion a year. Right now employers spend only $73 billion per year for retirement contributions. In fact, data from the National Income and Product Account figures show that in 2019 private sector employers contributed $291 billion to retirement plans, equal to 3.1 percent of private sector wages and salaries.

The data are clear: Americans are saving more than ever before for retirement, and it came not from government edicts or labor union pressures, but by making retirement plans more readily available, less burdensome on employers and funded by both employers and employees. Americas private sector retirement system has never been stronger than it is today. We should be willing to follow the facts rather than our preconceptions.

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Follow The Facts: Employer-Based Retirement Savings Are Stronger Than Ever - Forbes

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August 23rd, 2020 at 10:58 pm

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