Did Retirees Save Enough to Compensate for the Increase in Individual Risk Exposure?

Abstract

The United States experienced an unprecedented financial crisis after 2007. This paper analyzes whether retirees had enough wealth built up to weather the financial risks that materialized in the crisis. Financial risks associated with saving for retirement had increasingly shifted onto individuals and away from the public and employers during the decades before the crisis. This growing personal responsibility should have brought about more saving and less risk taking. I use data from the Federal Reserve's triennial Survey of Consumer Finances first to define an income threshold for retirees, specifically whether annuity income is greater than twice the poverty line: a common proxy for basic income needs. I then calculate the potential retirement income that retirees could expect if they translated all of their wealth into income and if the income is adjusted for market, idiosyncratic, and longevity risks. I compare the potential risk-adjusted income for retirees with annuity income above twice the poverty line to those retirees with annuity income below twice the poverty line. Both groups of retirees should have at least the same level of risk-adjusted potential retirement income. This comparison shows, however, that retirees with annuity income below twice the poverty line did not build up sufficient wealth to compensate for the rising financial risk exposure. Public policy thus should maintain existing sources of annuity income, promote greater annuitization of financial wealth, and encourage additional savings.

KEYWORDS:

• financial risks
• personal saving
• retirement income adequacy

Notes

¹The differences are robust with averages, with all non-retirement wealth, and with non-housing wealth.

²My analysis sets earnings and personal saving to zero, which is common to retirement income adequacy studies.

³See Garner and Verbrugge (2007) for a discussion of the relevant literature, the methodology, and the data.

⁴I assume that annuities and transfer payments will grow with inflation.

⁵This conclusion also holds when total risk-adjusted potential income is related to permanent income.

⁶The results are robust when I use non-housing wealth to income as the dependent variable.