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Overall Prospects for Future Retirees


mericans believe they should not have to face drastically reduced living standards during retirement. Indeed, in one recent survey 70 percent of American workers said they expect to live a comfortable lifestyle during retirement.51 One way to measure the amount of retirement income necessary to fulfill these expectations is through the calculation of replacement ratios. These ratios indicate the percentage of preretirement income that will be needed to maintain the same standard of living after retirement. In general, most retired Americans will not have to replace their entire income to maintain their standard of living. Most will pay lower taxes because they will have no, or lower, earnings subject to payroll taxes, and certain work-related expenses will disappear. Georgia State University, in collaboration with Aon Consulting, has done a number of replacement rate studies. According to their most recent study, workers retiring at 65 will need between 67 and 84 percent of their income before retirement to maintain the same living standard. The exact percentage depends upon whether one is single or married, and varies by level of preretirement income. The lower one’s income, the higher the percentage that must be replaced. For example, a two-earner couple with a joint annual income of $20,000 needs to replace 84 percent of its income to maintain its preretirement standard of living. A similar couple with an income of $90,000 needs to replace only 67 percent (fig. 34).

something approaching the goal of preretirement income replacement. Nearly three-quarters of retirees report that they are confident they will have enough money to live comfortably throughout retirement. They also report that they have enough money to live where they want, support their leisure, and pay for their medical expenses. Finally, three-quarters reported that they were able to live as well or better during the previous year as they did in their first year of retirement, and 70 percent expect their lifestyle to be the same or better over the next several years (fig. 35).

Figure 35 Confidence Expressed by Retirees in Specific Aspects of Retirement, 1996 45%



Have Enough Money for Basic Expenses



49% Able to Live Where They Want




Have Enough Money for Medical Expenses




Have Enough Money for Leisure



35% Have Made Good Prep. for Retirement

Figure 34 Percentage of Final Earnings Needed to Maintain a Preretirement Standard of Living During the Early Years of Retirement

0 Very Confident


40 Somewhat Confident



Not Very/Not at All

Source: Annual Retirement Confidence Survey, Matthew Greenwald and Associates, October 1996.

Preretirement Earnings in 1997 Dollars 20,000 25,000 30,000 40,000 50,000 90,000

Married Couples One Two Earner Earners 84% 80 77 72 69 71

84% 80 77 72 67 67

Unmarried Workers

But retirement has not worked out well for everyone. More than one in five said their lifestyle is worse than when they first retired. Similar numbers expect their living standard to worsen soon (fig. 36). Current workers, like current retirees, have a high level of confidence. Three-quarters are confident about their retirement income prospects. Among these, however, 30 percent have nothing saved for retirement. Most workers have not developed a saving plan based on a target, and nearly twothirds have not even tried to calculate how much they will need for retirement. The confidence of current workers may not be fully warranted. As most members of the baby boom generation know, Social Security may not be able to provide the same level of support as it does today. For many, the impact of those reductions would have a dramatic effect on how much they need to save. For Social Security, a worst-case scenario would reduce benefits to levels supportable by current payroll tax rates. Under this assumption, the oldest baby boomers, who are now turning 52, would not be seriously affected. Their benefits would be only 4 to 7 percent lower than otherwise. Those born

79% 77 76 71 68 75

Source: Data presented by Fred Munzenmaier, Aon Consulting, at the Enrolled Actuaries Meeting, March 15, 1997, from a joint Georgia State University and Aon study, publication forthcoming through GSU.

Since there are almost no data that permit comparisons of income levels before and after retirement, there are no objective measures of the extent to which current retirees are, in fact, maintaining their preretirement standard of living. However, there is subjective information gathered through questions asked of retirees in national surveys. The majority of current retirees seem to have achieved 22



The Problem and Options for Change PublicPolicyMonograph 1998 No. 1 A MERICAN A CADEMY of A CTUARIES