Ours is a complex and complicated business — constantly changing and evolving. And yet, there are key fallacies about today’s retirement system — and how it compares with what used to be — that will not go away.
Back in the good old days being “covered” by a pension plan meant you would actually get a full pension benefit.
We’re routinely told that “once upon a time” individuals used to work for a single employer their entire career, and that most of those workers were “covered by a workplace retirement plan, frequently a defined benefit pension.”
While defined benefit plans were certainly more common a generation ago, they were not as ubiquitous as is often assumed (see here).
Moreover, while some workers did spend their working career at a single employer (and some still do, particularly in the public sector), the data show that for the very most part we have long been a nation of relatively short-tenured workers. How short? Well, the median job tenure in the United States — how long workers stay at one job — has hovered around five years for the past three decades. Indeed, according to the nonpartisan Employee Benefit Research Institute (EBRI), in recent years it has ticked up, to about 5.5 years, but that’s because women are staying in their jobs longer; job tenure for men has actually been dropping.
What that means is that even workers who were “covered” by a pension plan in the private sector weren’t working with that employer long enough to get much — or any — of that promised pension benefit.
Only half of American workers have access to a workplace retirement plan.
Speaking of coverage, this is one of those statements that, while technically accurate, is somewhat misleading. Applied to all workers, that is what the National Compensation Survey (conducted by the U.S. Department of Labor’s Bureau of Labor Statistics) indicates. But it includes all workers, including very young, very low-income, part-time and part-year workers.
If you focus on full-time, full-year wage and salary workers ages 21-64, an analysis by the Employee Benefit Research Institute (EBRI) noted that in 2013, two-thirds of those workers — workers who might reasonably be expected to be covered by a voluntary workplace retirement plan under current law — did, in fact, work for an employer that sponsored a plan.
The average 401(k) balance tells us…anything.
Let’s say I told you that the average 401(k) balance in a survey sampling was $130,000 — would that be good or not?
What if I then told you that our sampling consisted of an individual who is 25 years old and has a 401(k) balance of $5,000, and an individual who is 64 years old and has a 401(k) balance of $255,000? How might that change your response? Would that tell you anything meaningful about the retirement readiness of that group?
Of course not — but surveys and coverage of those surveys routinely purport to glean a sense of retirement readiness from those kind of numbers. Despite the reality that they are comprised of savings totals for workers with a wide range of age, tenure, and savings rates — totals that are simply added together, and then divided by the number of workers in the sample.
The math on 401(k) averages is easy. The conclusions often drawn from that math, iffy. At best.
So, the next time you’re at an industry event and hear someone (who should know better) repeat one (or more) of those statements, or interviewed by a reporter who puts one (or more) of those presumptions forth as “proof” of the current system’s shortfalls, keep in mind that the data tells a different story.
And one that isn’t told often enough.
- Nevin E. Adams, JD