While economic debates can often get into complex questions of theory or statistical methods, many hang on more simple issues, like the right adjective. We got a great example of one such debate in a Wall Street journal column by Andrew Biggs, an economist at the American Enterprise Institute and former Deputy Commissioner of the Social Security Administration under President George W. Bush.
Biggs looks at some recent evidence, most notably a new study from the Congressional Budget Office (CBO), and dismisses the idea that there is a retirement crisis. At the center of this assertion is the CBO projection that a typical household in the middle quintile, born in 1960, can expect to get $19,000 a year from Social Security. Biggs sees this $19,000 as replacing 56 percent of pre-retirement income and says this is not far from the 70-80 percent usually viewed as adequate. He then touts data on total retirement savings and pronounces everything as okay.
If we step back from replacement rates, we can ask a rhetorical question, is $19,000 a year a middle class income? Odds are that most people would not consider $19,000 a reasonable income for a middle class household, hence the basis for the claim about a retirement crisis. Biggs does point to the record amount of retirement savings. This is indeed good news for those who have these savings, but unfortunately most middle class households don't fall into this category.
According to the Federal Reserve Board's 2013 Survey of Consumer Finance, the average net worth outside of housing equity for the middle quintile of households between the ages of 55 and 64 was less than $55,000. This includes all IRAs, 401(k)s and other retirement accounts. This will translate into roughly $3,000 a year in additional retirement income, bringing this middle income household's income up to $22,000 a year.
Biggs looks at this and says everything is just fine and we should be looking to cut Social Security. Those raising concerns about a retirement crisis do not see $22,000 a year as a middle class income. We are just arguing about adjectives here, there is not much disagreement on the situation.