The baleful news on retirement saving is only partly right, but nothing is more frightening in personal finance these days.
The U.S. savings rate remains stuck below 4% of disposable income, according to Commerce Department statistics. The rate was more than 7% for three decades after World War II and 6% in the 1980s.
The oldest baby boomers, the roughly 30% of the population born between 1946 and 1964, are now 48--sigh--and yet they don't seem to be saving heavily for retirement. Surveys by brokerage and investment firms say that many of the 77 million baby boomers underestimate how much money they will need for retirement.
The trend is not encouraging. Most of the 1,400 respondents to a Fidelity Investments poll said they found that trying to save 6% to 8% of pretax income was boring and difficult and that they would not do it.
This is in spite of widespread worries about old-age poverty, which are fed by dire warnings that corporate pensions can no longer be counted on and a common suspicion that Social Security will simply run out of money, condemning people now in their 30s to eventual penury.
Fears of the future hurt the present. America's low savings rates is a big reason why Federal Reserve Board Chairman Alan Greenspan thinks the U.S. economy can't grow without sparking high inflation. So fears about saving indirectly cause higher interest rates, which hobble the economy, making it harder to save. We're in a vicious circle.
Yet most fears are overblown. To begin with, there is more saving than statistics indicate. The Commerce Department's figures are overly simplistic. They take after-tax personal income of all Americans, $4.81 trillion, subtract total personal spending, $4.62 trillion, and call the remainder--$193 billion--savings. No distinctions are made; spending on a college education is classed the same as spending on a candy bar.
But a college education is a form of investment, hence savings, argue many economists. David Bradford of Princeton University says that saving should be defined as adding to the wealth of the nation. A college education is saving because it improves human capital--"a form of wealth that swamps all others in importance," Bradford says.
American education over recent decades is an unappreciated story: In 1960, only 41% of all Americans finished high school. Now 80% do. In 1960, 7.7% of the population completed four years of college. Now the figure is more than 20%. The advances are notable among all races and ethnic groups.
The $40 billion that individuals spend on tuition each year, and the $60 billion that state, local and federal governments spend, is truly investment.
Housing also is a factor of national wealth and therefore saving. But you don't have to be an economist to see that makes sense. The 60 million U.S. homeowners all see their houses as wealth and a nest egg for retirement.
Calculated in the broader perspective of wealth, the real U.S. savings rate is more comparable to the high savings rates of Japan and many countries in Europe, in which higher education and home ownership are not as widespread among the population.
That doesn't mean all is rosy. Years of lagging income gains for U.S. workers and lagging corporate profits have affected American saving, says economist Gary Burtless of the Brookings Institution.
But pensions and Social Security are not the problem, even though they receive a lot of mistaken publicity.
In pensions the trend is back to employer guarantees of retirement income as a percentage of pay, after a decade in which defined-contribution plans grew rapidly. In defined-contribution plans, employees make investment decisions about their own retirement funds, to which employers contribute but make no guarantee.
One problem was that employees often invested too conservatively, choosing fixed-interest guaranteed investment contracts rather than going for higher returns in common stock mutual funds, as professional investors would advise.
The solution, to which some 200 companies are turning, is called a cash balance account. Employers contribute a percentage of the employee's wage and guarantee a return on investment of the funds. The money is managed professionally, explains Mark Maselli, a partner in Kwasha Lipton, a benefits consulting firm in Ft. Lee, N.J., that devised the first cash balance plan for Bank of America in 1984.
Social Security is in good shape after being adjusted in 1983 to allow for Medicare expenditures and the fact that Americans are living longer. The system will need adjustment again early in the next century, says Eugene Steurle, co-author of "Retooling Social Security for the 21st Century." But meanwhile, it will run in surplus until roughly 2020.