The ad from TIAA-CREF, the company that administers university and other retirement plans, which ran alongside my Yahoo inbox was too enticing to ignore. I clicked on the bait: “You could get ninety percent of your income and maintain your lifestyle in retirement.” The click brought me to another eye-catching claim: “On average, participants in TIAA-administered plans are on track to replace over ninety percent of their income in retirement.”
These were eye-catching claims because I had been in TIAA for over thirty-five years and would be replacing nowhere near ninety percent of my preretirement income. Nor would anyone else I knew who was in TIAA. They were also eye-catching because according to Federal Reserve data, the average family approaching retirement in 401(k)-like plans that TIAA and other financial service companies administer has only accumulated $104,000. That amount is only sufficient to generate an annual retirement income of $4,000 to $6,000, depending on how it is distributed—hardly enough to replace ninety percent of their preretirement income, that is, unless they were living on a sub poverty income of $7,000 or less.
How then could TIAA make such a claim? The advertisement included a footnote to its claim, literally in fine print. Being a researcher, I read the footnote.
TIAA based its claim on a study of “641,895 actively contributing participants from 450 TIAA record-kept plans.” (It does not tell us whether those were all participants in all TIAA plans or a sample, and if the latter how it was drawn.)
Besides the usual caveat that individual results may vary, according to the footnote, the study result contained a huge qualification. The ninety percent replacement rate included projected Social Security income. The participant would be on track not to receive ninety percent of preretirement income from the TIAA plan alone but from it combined with Social Security income. How much would come from each component was not stated.
As significant, to arrive at the ninety percent result TIAA changed the meaning of what is commonly taken to be replacement income. In its words, “the projected retirement income stream (including estimated Social Security benefits) [is] in current dollars as a percentage of current salaries.” To use current rather than projected ending salaries, which is the common benchmark for income replacement studies, represents a huge methodological sleight of hand.
Actively contributing participants are at all different ages and stages of their careers. Current salaries are ending salaries for only the oldest. Most others will be able to expect raises in future years to make their ending salaries much higher than their current ones. As written, the footnote indicates that future raises are not factored into calculating the income replacement ratio. The average current salary of this group will thus be far under what projected ending salaries would be. To achieve a ninety percent replacement ratio of the average current salary requires far less savings and investment returns than to achieve a ninety percent replacement ratio for the average ending salary.
If participants range equally in age from twenty-five to sixty-five, then the average current salary would be for a forty-five year old. It is like telling a sixty-five year old retiree that she will have ninety percent of the salary she had twenty years ago—hardly a financially comforting thought.
This is deceptive advertising that replicates what the financial services industry did in the 1980s when it first began replacing traditional pension plans with 401(k)-like plans. It claimed that retirees would gain more retirement income from these new plans than the ones they replaced by using overly optimistic assumptions of investment returns. By 2000, it was clear that precisely the opposite was occurring: 401(k)-type retirement incomes were much lower than traditional pension incomes.
If TIAA really wanted to give potential participants in its plans a realistic idea of what they could expect, it would design a study of the actual rather than projected experiences of participants. After all, it has been in business since 1918, during which time generations of employees have retired under its plans. Why not tell us how much preretirement income was actually replaced by those plans? Better yet would be to allow its results to be independently examined.
There is a simple reason why TIAA would not want to do that even though it easily has the information to do so. The average actual—not projected—replacement income ratio of ending salaries is most likely so low as to question the validity of the whole individual savings and investment approach that it shares with others in the 401(k) industry.
Congress should demand that TIAA and other financial services industry release information on actual replacement income ratios for 401(k)-like plans and stop the deceptive advertising practice of using manipulated projected ratios.
When a similar study was done for Chile’s privatized Social Security system based on the same retirement savings and investment approach as 401(k)s, it revealed that the average replacement ratio was actually thirty-four percent, less than half the seventy percent projected and widely advertised by the privatizers.
Knowing what such a study would reveal for the United States would enable us to grapple more effectively with the growing retirement crisis as opposed to deceptive claims of ninety percent income replacement ratios.
About the Author
James W. Russell is the author of eight books, including Double Standard: Social Policy in Europe and the United States and Social Insecurity: 401(k)s and the Retirement Crisis. An authority on retirement policy in the United States, Europe, and Latin America, Russell led one of the first employee movements to successfully challenge the dominant trend and replace a 401(k)-like plan with a more secure traditional pension plan. He has taught at universities in the United States and as a Fulbright professor in Mexico and the Czech Republic. He lives in Portland, Oregon. Learn more about James W. Russell on his website.