When You Assume...

The use of assumptions was the focus of a recent report from the Employee Benefit Research Institute (EBRI), which not only highlighted the assumptions used in two separate retirement studies, but illustrated a real problem with their results.

The EBRI report examined two earlier  studies — one by Pew Trusts, the other by the Center for Retirement Research at Boston College — that purported to show that the retirement prospects for Gen Xers were worse than those of the Baby Boomers. The EBRI report not only highlighted the questionable assumptions, but took the time to quantify the impact (see “EBRI Report Calls Out Pew, CRR on Retirement Conclusions”). Such public criticisms are a rarity, as evidenced by the media coverage accompanying the release of the EBRI report.

As recently as a few years ago, I would have assumed that findings published by credentialed individuals associated with a reputable institution of higher learning could be taken at face value, if only because I assumed that if their methodologies were flawed, their findings would be taken to task by other similarly credentialed individuals.
Sadly, that does not seem to be the case.

The Pew report, though it went to some pains to determine appropriate rates of return to project out the future balances of both Boomers and Gen Xers, chose to completely ignore any future contributions.  Not so big a deal for those on the cusp of retirement perhaps, but what about those Gen Xers (defined as those Individuals born between 1965 and 1974) who are (just) 40? That’s at least a quarter century of contributions — and earnings on those contributions — completely disregarded by the Pew assumptions. Think that might tend to produce a lower retirement readiness conclusion about that demographic?

As for the report by CRR, the EBRI report explains how it relies on “wealth-to-income patterns by age group from the 1983–2010 Federal Reserve Surveys of Consumer Finances (SCF).” That certainly sounds like a credible source, but it also happens to be based on self-reported information and a perspective of 401(k)-plan designs and savings trends that pre-date the impact of automatic enrollment plan features that followed the passage of the Pension Protection Act of 2006. Not that you’ll find that acknowledged in the report, even in the footnotes. And yet data from the CRR’s NRRI are routinely cited in industry reports.

Projections about the future inevitably require some assumptions, and the EBRI report does as well. But it not only lays out its assumptions in great detail, it provides a wide range of findings associated with those various assumptions so that readers can draw their own conclusions based on the scenario(s) they think most likely to occur.

There’s an old adage that points out the inherent dangers in relying overly much on assumptions. It cautions that one should “never assume, because when you assume, you make an ‘ass’ of ‘u’ and ‘me.’”

That goes double for those who blindly rely on research findings drawn from assumptions poorly constructed and/or undisclosed.

Nevin E. Adams, JD

• See an earlier analysis of the Pew Trust report here.

• You can find a more comprehensive explanation of some of the issues associated with the CRR’s NRRI here.

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