What Does the Future of Retirement Hold?

Some trends, such as reduced pension coverage, low savings rates and longer lifespans, have led many to fear a looming retirement crisis, while others, such as women’s increased employment and earnings, longer working lives and economic growth, point to better retirement outcomes. So how will these conflicting trends play out?

Using its Dynamic Simulation of Income Model 4 (DYNASIM4), the Urban Institute attempts to provide some answers by detailing how various social, economic and demographic shifts may impact older adults’ financial security. In “Nine Charts about the Future of Retirement,” the non-profit research organization suggests that these projections can help policymakers and stakeholders identify and tackle the challenges ahead. 

Retirement Income 

Despite widespread concern that workers are not saving enough for retirement, the organization projects that retirement incomes will continue to rise over the next four decades as long as policymakers do not cut Social Security benefits. The projections show that median per capita after-tax family income at age 70 will be 17% higher for people born from 1966 to 1975 (Gen Xers) than for people born from 1936 to 1945 (pre-Boomers) in inflation-adjusted dollars. 

A typical “Xennial” – defined for these purposes as a “microgeneration” of late Gen Xers and early Millennials born from 1976 to 1985 – will receive 24% more net income than the average retiree born 40 years earlier. This is partly due to women’s increased earnings, which will power retirement income growth, the data indicates. But despite this projected growth in retirement incomes, the Urban Institute predicts that retirement resources will fall short for more Gen Xers and Xennials. Nearly one-third of Xennials will see their living standards fall when they retire, the report notes.  

Women’s Increased Earnings

Meanwhile, as women work more and earn more per hour, their lifetime earnings are increasing rapidly, according to the findings.  

The DYNASIM4 projects that compared with pre-Boomer women, median lifetime earnings will be 88% higher for Gen X women and 129% higher for Xennial women in inflation-adjusted dollars – thus raising the retirement incomes for women as well as for married men. Men’s lifetime earnings, by contrast, are not keeping pace with inflation. Projected median lifetime earnings are 3% lower, in inflation-adjusted dollars, for Xennial men than for pre-Boomer men.

Yet, despite women’s gains, the Urban Institute notes that the gender gap in earnings persists. The organization projects that Xennial median lifetime earnings will be 40% higher for men than for women.

Racial and ethnic disparities in retirement income are also predicted to persist. The model projects that among 70-year-old Xennials, median after-tax income will be 26% lower for African Americans than for whites and 49% lower for Hispanics. African Americans and Hispanics are also less likely than white Americans to have a retirement plan at work or to inherit wealth from earlier generations, the study emphasizes.  

Social Security

Social Security’s financing problems also figure prominently in the organization’s study on the future of retirement. It notes that retirement incomes may fall short for about 4 in 10 Xennials if policymakers ignore Social Security’s financing gap. For example, if benefits are cut across the board beginning in 2035, 38% of Gen Xers and 40% of Xennials will be unable to replace at least 75% of their preretirement earnings at age 70, leaving them worse off than when they were working. Moreover, pre-Boomers and early Boomers would feel these cuts at older ages because they will turn 70 before the Social Security trust funds are projected to run out.Additionally, the study finds that if Social Security benefits are cut about 25% across the board beginning in 2035, such a benefit cut would increase the number of retirees living in poverty about 42% for Gen Xers and 33% for Xennials.

By contrast, if policymakers resolve Social Security’s long-term financing problems by raising system revenues and maintaining existing benefit rules, old-age poverty rates are projected to fall slowly over time. The data shows that the share of 70-year-olds with family income below the federal poverty level would fall from 7.3% for pre-Boomers to 6.1% for the Xennials as earnings growth raises average Social Security benefit payments.