Monday marks the sixth anniversary of the bankruptcy filing of Lehman Brothers, a key event in the Wall Street meltdown that led to the Great Recession. The recession wreaked havoc on the retirement plans of millions of Americans, and two studies released last week suggest that most of us haven't recovered well.
To be more precise: Middle- and lower-income Americans haven't recovered at all, while the wealthiest households have done fine.
The Joint Center for Housing Studies of Harvard University (JCHS) issued its findings on the challenges we face meeting the housing needs of an aging population in the years ahead. Meanwhile, the Federal Reserve Board released its triennial Survey of Consumer Finances (SCF), a highly regarded resource for understanding American households' finances.
The Harvard study found that our existing housing stock is ill-suited to meet seniors' needs, including affordability, accessibility, social connectivity and support services. And high housing costs are eating into the ability of low-income older adults to pay for necessities like food and healthcare.
Housing is the largest expenditure in most household budgets, and so is a linchpin of financial security and well-being. "It's really at the nexus of your financial health, physical health and healthcare," says Jennifer Molinsky, research associate at the JCHS and principal author of the study.
Harvard found that a third of adults over age 50 pay more than 30% of their income for housing—including 37% of people over age 80. Harvard defines that group as "housing cost burdened." Another group of "severely burdened" older Americans spend more than 50% of income on housing. That group spends 43% less on food, and 59% less on healthcare, compared with households that can afford their housing.
Homeowners are much less likely to be cost-burdened than renters, the study found. But more homeowners are carrying mortgages well into retirement. More than 70% of homeowners aged 50 to 64 were still paying off mortgages in 2010.
The Federal Reserve findings on middle-class retirement prospects are equally troubling. Despite the economy's gradual mending, the SCF found a widening gap in income and net worth. The top 10% of households was the only income band registering rising income (up 2% since 2010). Households between the 40th and 90th percentiles of income saw little change in average real incomes from 2010 to 2013. And the rate of homeownership was 65%, down from 69% in 2004 and 67% in 2010.
Ownership of retirement plan accounts also fell sharply. In the bottom half of income distribution, just 40% of households owned any type of account—IRA, 401(k) or traditional pension—in 2013, down from 48% in the 2007 survey. The Fed attributes the drop mainly to declining IRA and 401(k) coverage, since defined benefit coverage remained flat. Meanwhile, coverage in the top half of income distribution was much higher. In the top 10%, 95% of families are covered.
Overall, the average value of retirement accounts jumped a substantial 10% from 2010 to 2013, to $201,300. The Fed attributed that to the strong stock market and larger contributions. But for the lowest-income group that owned accounts, the average combined IRA and 401(k) value was just $39,100—and that is down more than 20% from 2007.
Considering the stock market's strong performance in the intervening years, that suggests many of these households either sold while the market was depressed, drew down savings—or both. Meanwhile, upper-middle-income households saw a gain of 20% since 2007.
In Washington, lobbyists and policymakers have been debating about whether a retirement crisis really is looming. The various sides typically filter the data to support their viewpoints and agendas. But it's difficult to think of two sources aligned than the Federal Reserve Board and Harvard. The SCF, in particular, is widely viewed as a gold standard survey that will be relied on for many economic reports in the months ahead. It includes information on the household balance sheets, pensions, income and demographic characteristics of about 6,500 families.
The JCHS study was funded by the AARP Foundation and The Hartford insurance company, so there's a possible agenda there, if you doubt Harvard's independence as researchers. (I don't.)
Taken together, the studies paint the portrait of a widening divide in the retirement prospects of working Americans. No matter how the data is sliced, we've got problems that need to be addressed.