Is There a Retirement Crisis? 

Examining Retirement Planning in the 

Household and Government Sectors

Andrew G. Biggs

MERCATUS RESEARCH
© 2017 by Andrew G. Biggs

and the Mercatus Center at George Mason University

This paper can be accessed at https://www.mercatus.org/publications

/retirement-crisis-planning-household-government-sectors

The views expressed in Mercatus Research are the authors’ and do not represent 

official positions of the Mercatus Center or George Mason University.

ABSTRACT

In response to a widespread perception that households are undersaving for 

retirement, policymakers have proposed expanding Social Security and establishing supplementary retirement saving plans run by state governments. But 

these proposals take place against a background of record-high unfunded liabilities for government-run retirement programs. If government entities have either 

financial or political difficulty funding their existing obligations to retirees, shifting greater retirement provision from households to government could potentially worsen existing shortfalls in broad retirement saving. This paper reviews a 

range of studies of the adequacy of household saving, comparing estimated dollar 

savings shortfalls with unfunded liabilities in Social Security, in federal employee 

and uniformed military pensions, and in state and local government retirement 

plans. Even the most pessimistic forecasts of household undersaving fall short 

of the most optimistic estimates of government retirement plan underfunding. It 

appears that, on average, households are doing at least as well in saving for retirement as governments are in funding retirement plans on households’ behalf.

JEL codes: H55, H75, J26, J32

Keywords: retirement, public pensions, Social Security, entitlements, state and 

local government finance, federal government finance

Andrew G. Biggs. “Is There a Retirement Crisis? Examining Retirement Planning in the 

Household and Government Sectors.” Mercatus Working Paper, Mercatus Center at 

George Mason University, Arlington, VA, 2017.
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Both households and policymakers in the United States are concerned 

about the adequacy of saving for retirement. Although the phrase 

“retirement crisis” has no precise meaning, one might reasonably 

define it to mean that a large proportion of households will fall short 

by a substantial margin of the savings they require to maintain their preretirement standard of living once they stop working. The highest estimates find up 

to 85 percent of US households falling short and aggregate undersaving possibly 

totaling $14 trillion, which, if accurate, would foretell severe financial problems 

for future retirees.

Fears of a retirement crisis have prompted a number of potential policy 

responses. These range from expanding Social Security benefits to designing 

state policies that encourage households to save more for retirement. Although 

spending more tax revenue to finance Social Security benefits can complement 

policies to promote more household saving, evidence on governments’ failure to 

follow prudential fiscal policies raises questions about whether efforts to expand 

government benefits make sense. Instead, the best way to encourage greater 

retirement security is to improve saving incentives for households.

Expanding Social Security benefits, an idea once promoted solely by a progressive fringe, is now firmly within the mainstream of recommendations by the 

Democratic Party. Unlike traditional Republicans, whose focus on fiscal issues 

often caused them to favor reductions in promised Social Security benefits for 

future retirees, Trump has pledged not to cut Social Security benefits. The baseline of potential actions on Social Security policy has shifted considerably to the 

left in recent years, with policy solutions to Social Security’s future financing 

shortfalls likely to focus more heavily on revenue injections than on reductions 

in benefit outlays.

A revenue-heavy approach to Social Security is potentially problematic. 

Dedicating greater tax revenue to Social Security financing would necessarily 

either divert limited available funds from other government priorities or, via tax 

increases, reduce households’ after-tax incomes, out of which households must 
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generate their own savings for retirement. Higher taxes 

discourage labor supply. Moreover, the higher benefits that 

those taxes finance discourage personal retirement saving 

by middle- and high-income households, which are more 

responsive to benefit changes than are the poor. Because 

in all existing benefit expansion proposals higher benefits 

are funded with taxes on a pay-as-you-go basis, there would 

be no increase in government saving to match reductions 

in household saving. Lower saving will tend to reduce productivity growth and economic output at least over several 

decades. Expanding Social Security, or even addressing its 

finances via tax increases rather than benefit reductions, 

would almost surely lead to a smaller economy in the future 

and lower retirement saving in the household sector.

Although action on Social Security reform may not 

be imminent, many states are enacting policies designed 

to address perceived shortfalls in household retirement 

saving. More than half of states either have passed or are 

considering legislation that would establish retirement 

plans for individuals who are not covered by an employersponsored retirement plan.

State and local governments also provide pensions to 

public employees; these pensions are, on average, substantially more generous than the defined contribution 401(k)-

type plans offered to employees of private-sector firms. 

While comparisons are not straightforward, one might simply note that the average state and local plan in 2015 had an 

Actuarially Required Contribution of about 18 percent of 

employee payroll, versus a median employer contribution 

to 401(k)-type plans—among those employers who made 

contributions—of only about 3 percent of pay. However, 

in fiscal year 2014 only 36 percent of state and local plans 

received their full Actuarially Required Contribution payment, indicating that the affordability of pensions for state 

and local governments is in question.1

 One might expect 

1. Author’s calculations here are based on plan data from the Public Plans 

Database, available online at http://publicplansdata.org/.

“More than half 

of states either 

have passed or 

are considering 

legislation that 

would establish 

retirement plans 

for individuals 

who are not 

covered by 

an employersponsored 

retirement plan.”
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that, in a competitive labor market, more generous pensions for public-sector 

employees would cause wages or other benefits to bid down by a commensurate 

amount. However, public-sector labor markets lack the profit motives and strict 

budget constraints that would require excessive compensation through pensions 

to be offset by offering lower wages or fewer other fringe benefits.2

 In most states, 

total salaries and benefits for state government employees exceed those paid to 

private-sector workers with similar levels of education, experience, and other 

attributes, sometimes by a very substantial margin.3

Some policymakers propose reducing public employee pensions or shifting 

employees to 401(k)-style retirement plans. However, public pension advocates 

push back by citing claims that private-sector households—which for the most 

part are not covered by traditional pensions—are not saving enough for retirement. For instance, the National Public Pensions Coalition, a union-affiliated 

group that seeks to promote defined benefit pensions for public employees, states,

It’s increasingly obvious that there is a retirement savings crisis 

in the United States. At any given time, half of working Americans don’t have access to a retirement savings plan through their 

employer. Even workers who do have an employer sponsored 

plan are mostly in risky and inadequate 401(k) plans. . . . This just 

goes to show what we at NPPC have known all along: pensions 

are the solution to the retirement savings crisis.4

Both the budgetary costs and financial risks of state and local government 

pensions have increased substantially over the years. Pensions are much larger 

relative to the budgets of their sponsoring governments than they were in prior 

decades, and pensions take substantially greater investment risk, because their 

portfolios have gradually shifted from bonds to stocks and then from stocks to 

alternative investments such as private equity and hedge funds. One useful measure of the changing budgetary risk of pensions to their sponsors is the value of 

a one-standard-deviation decline in plan assets as a percentage of the sponsor’s 

annual budget. This figure, which represents the impact on the sponsor’s budget 

from a uniform and predictably occurring change in plan assets, rose from 1.8 

2. Josefa Ramoni and Don Bellante, “The Relative Pay of Public Employees in the US: An Assessment 

of Empirical Research,” International Business & Economics Research Journal (IBER) 3, no. 11 (2011).

3. Andrew G. Biggs and Jason Richwine, “Overpaid or Underpaid? A State-by-State Ranking of 

Public-Employee Compensation” (American Enterprise Institute Working Paper No. 415891, 

American Enterprise Institute, Washington, DC, 2014).

4. National Public Pension Coalition, “Pensions Are the Solution to the Retirement Crisis,” November 

21, 2016.
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percent of state and local budgets in 1975 to 19.8 percent in 2012.5 Maintaining 

state and local pension benefit levels for fear of triggering a retirement crisis 

among public employees would almost certainly lead to higher budgetary costs 

and greater financial risk-taking in the future.

In all three areas—Social Security, state-run supplementary retirement 

plans for private-sector employees, and state and local government employee 

pensions—the perception of widespread and significant retirement savings deficits in the household sector has generated actual or potential policy responses 

on the government side. Yet any policy response must be formulated in light of 

retirement funding shortfalls among the government-run plans. Social Security 

and public employee plans at the federal, state, and local levels are themselves 

highly underfunded. While the details of government plan funding will be discussed in following sections, of the hundreds of retirement plans offered at all 

levels of government, almost none would be considered fully or even adequately 

funded by reasonable funding standards. Social Security’s funding shortfalls 

have been a perennial policy concern. State and local pension funding is dramatically understated by these plans’ use of a practically unique accounting 

structure that differs significantly from rules applied to corporate pensions or 

used by public employee plans overseas. Finally, public employee plans at the 

federal level—both for civilian and uniformed military employees—also face 

large unfunded liabilities.

If government retirement plans are underfunded because of policymakers’ inability or unwillingness to address funding shortfalls, the shifting of 

greater responsibility for retirement income provision from the household to 

the public sector may not in practice address retirement savings shortfalls. If, 

for instance, promised Social Security benefits were increased but federal policymakers did not find realistic ways to fund those promises, existing retirement 

savings shortfalls might simply be shifted from the household to the public sector instead of being filled. Indeed, aggregate retirement savings shortfalls might 

increase if households reduced saving in response to higher promised government retirement benefits but then governments did not increase saving to fully 

fund those promises.

Alternately, household retirement savings shortfalls that are lower than 

those in government may reflect the ability of households to act more rationally 

or responsibly than government in funding future retirement incomes. Such an 

5. Andrew G. Biggs, “The Multiplying Risks of Public Employee Pensions to State and Local 

Government Budgets,” AEI Economic Perspectives (December 19, 2013).
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outcome is imaginable because working-age households generally save to fund 

their own future retirement incomes while government programs often allow 

costs to be shifted from one group or one generation to another. Thus, incentives for responsible retirement saving may be greater for the household than for 

the public sector. If so, it might make sense to enact policies that would address 

household retirement saving more directly rather than counting on government 

programs to fill savings gaps.

The next section reviews the literature on household retirement saving, 

showing the range of estimates of how many households fall short of optimal 

retirement saving levels and of how large aggregate retirement savings shortfalls 

may be in dollar terms. The following section reviews the funding of government retirement programs, including Social Security, federal employee pensions, and state and local government pensions. As with household retirement 

saving, a range of plausible estimates is presented. The final section compares 

estimates of aggregate household retirement savings shortfalls with retirement 

plan unfunded liabilities in the government sector, discusses the differing ways 

in which retirement savings and funding shortfalls may arise, and explains the 

implications of these differences for public policy.

STUDIES OF HOUSEHOLD RETIREMENT SAVING

Concerns about retirement saving adequacy have led to a number of studies of 

retirement saving in recent years. These studies range from academic analyses 

published in peer-reviewed journals—that few Americans read or can understand—to “pop” studies using simpler, more understandable methods that often 

receive secondary reporting in newspapers and magazines. The academic studies tend to rely on the life cycle model favored by academic economists, while the 

popular studies rely more heavily on financial planning rules of thumb. Almost 

as a rule, the popular studies find larger retirement savings shortfalls than do the 

academic analyses. The studies do not project household retirement preparedness in a uniform way, meaning that to generate comparable figures I must in 

several cases rely on rough estimates. However, the differences even in these 

rough estimates are often quite large, providing an intuitive feel for the range of 

opinions on the current state of household retirement saving.

The studies selected here represent a variety of well-known analyses of 

retirement saving. Several of the studies are commonly cited in media reports on 

retirement saving, while others are commonly cited in academic studies. Other 

academic studies, not included, tend to rely on similar data sources and come 
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to similar conclusions to the academic studies discussed here. Distinguishing 

between “pop” and “academic” studies of retirement saving is not straightforward. Nearly all the authors of such studies have an academic background or 

affiliation. In general, however, the academic studies provide sufficient detail 

to make their methodology replicable for peer review, and such peer review has 

taken place.

The National Institute for Retirement Security

The National Institute for Retirement Security (NIRS) is the research arm of the 

defined benefit pensions industry, with a particular emphasis on public employee 

pensions. The NIRS is supported by a number of public pension stakeholders, 

including retirement plans themselves, public employee unions, and actuarial 

and financial advisers who consult with retirement plans. The NIRS has published a series of studies concluding that Americans are vastly undersaving for 

retirement. The basic framework was outlined in a 2013 report, which concluded 

that 84 percent of US households are falling short of reasonable retirement saving targets and that, even when total net worth is considered, two-thirds are at 

risk of an inadequate retirement income.6

 The total “retirement savings gap,” the 

report concludes, may reach $14 trillion. According to New York Times writer 

Nancy Folbre, “The report lends weight to the longstanding criticisms of the 

increased reliance on individual savings in the United States retirement system.”7

The NIRS study begins with retirement saving guidelines outlined in a 

2012 Fidelity Investments report. Fidelity’s guidelines assume that individuals 

will work until age 67 and that their retirement incomes should replace 85 percent of their preretirement earnings. To reach this goal, Fidelity’s hypothetical 

workers start saving at age 25, putting away 6 percent of pay, with their saving rate rising to 12 percent by age 31 and remaining constant at that level until 

retirement. Savings are assumed to compound at a 5.5 percent real rate of return, 

producing target wealth levels at given ages. The NIRS then uses data from the 

Federal Reserve’s Survey of Consumer Finances to compare Americans’ actual 

savings with Fidelity’s suggested contribution rates and savings. A household 

whose actual savings fall short of the Fidelity guidelines is considered at risk, and 

the shortfall is logged toward the “retirement savings gap.”

6. Nari Rhee, The Retirement Savings Crisis: Is It Worse than We Think? (Washington, DC: National 

Institute on Retirement Security, 2013). 

7. Nancy Folbre, “Rowboats for Retirement,” New York Times, June 24, 2013.
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“There are 

a number of 

reasons why 

the NIRS study 

may overstate 

Americans’ 

retirement 

savings 

shortfalls.”

The $14 trillion retirement savings shortfall found by 

the NIRS is by far the largest estimate of undersaving by US 

households. However, there are a number of reasons why 

the NIRS study may overstate Americans’ retirement savings shortfalls.

First, the NIRS likely sets retirement saving goals too 

high for a typical person. Fidelity’s benchmark recommends 

that individuals reach retirement age with retirement savings 

equal to eight times their final annual earnings. Although this 

goal might be appropriate for higher earners—who are more 

likely to be Fidelity’s customers—for an average or belowaverage earner, these figures are almost certainly too high. 

Table 1 illustrates retirement incomes for workers at different 

earnings levels incorporating Social Security benefits and the 

NIRS benchmark that individuals retire with savings equal 

to eight times their final earnings. Actuaries from the Social 

Security Administration (SSA) created the stylized earners 

to illustrate benefit levels, and the benefits for each worker 

are taken from the annual Social Security Trustees report. In 

addition to their Social Security benefit, I assume that each 

retiree purchases an inflation-adjusted annuity with an interest rate based on projected yields on government bonds in the 

Social Security trust fund.8

The results show that most workers who followed 

the NIRS “8×” final earnings rule would end up with a 

retirement income that substantially exceeded their final 

working-age earnings. For a medium wage earner, estimated by the Social Security Administration’s Office of the 

Chief Actuary (OACT) to most closely match the earnings 

of about 29.8 percent of the workforce, combined Social 

Security benefits and personal savings would replace 120 

percent of age 65 earnings. For very low earners, who compose about 19 percent of the workforce, following the NIRS 

8× rule would generate a total retirement income equal to 

172 percent of final earnings. Even for an individual who 

8. Although few individuals actually purchase annuities, converting wealth 

to an annuity is a standard practice among researchers on retirement 

income.
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earned Social Security’s maximum taxable wage every year of his life, following the NIRS 8× rule would generate a retirement income replacement rate of 

86 percent of final earnings, which is 16 percentage points higher than the 70 

percent replacement rate commonly recommended by financial advisers.9

 Were 

individuals to target more reasonable replacement rates, as they tend to do in 

the real world, their required saving levels would be far smaller than the NIRS 

assumes. However, the NIRS analysis would report these more reasonable saving 

levels as undersaving.

Second, the NIRS’s savings benchmark assumes that individuals begin 

saving for retirement at age 25. Although this might be desirable for some, 

under the standard life cycle model of retirement saving, most individuals 

don’t start saving at young ages when their incomes are low but instead wait 

until their incomes have risen. It is easily possible that retirement saving would 

not begin until age 30 or later. However, if individuals began saving later in 

life, the NIRS methodology would count them as undersaving in every year of 

their working career even if they achieved the NIRS’s recommended goals for 

income in retirement. The reason is simply that delaying the start of retirement 

saving lowers the level of retirement wealth in every year up until retirement 

age. Replicated over the full population, the NIRS’s approach would find that 

every working individual of every age was undersaving for retirement, even if 

we assumed that every individual reached the NIRS 8× final earnings target 

wealth at retirement age. Given that delaying retirement saving past age 25 

9. See Andrew G. Biggs and Glenn R. Springstead, “Alternate Measures of Replacement Rates for 

Social Security Benefits and Retirement Income,” Social Security Bulletin 68, no. 2 (2008).

TABLE 1. RETIREMENT INCOME REPLACEMENT RATES FOR SOCIAL SECURITY ADMINISTRATION 

STYLIZED EARNERS USING FIDELITY RETIREMENT SAVING RULE

Income level of SSA stylized earner, retiring at age 66 in 2016

Very low Low Medium High Max

Percentage of workers whose earnings 

most closely match the SSA stylized 

earnings level

19.0% 22.5% 29.8% 20.1% 8.5%

Annual earnings at age 65 $8,095 $14,562 $32,370 $51,732 $117,500

Social Security benefit at age 66 $9,902 $12,962 $21,354 $28,310 $34,491

Target retirement savings $64,757 $116,498 $258,963 $413,858 $940,000

Annual payment from savings $4,800 $8,636 $19,197 $30,679 $69,682

Total retirement income $14,703 $21,598 $40,551 $58,989 $104,173

Replacement rate 172% 141% 120% 110% 86%

Note: SSA = Social Security Administration.
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may be fully rational, the NIRS approach incorrectly biases the model toward 

finding retirement savings shortfalls.

Third, the NIRS treats Social Security as if it pays a uniform replacement 

rate to all beneficiaries when, in fact, Social Security’s progressive benefit formula provides higher replacement rates to lower earners. The NIRS justifies 

this treatment of Social Security benefits by pointing to the broadly accepted 

view that low earners require higher replacement rates than do higher earners. However, this treatment implicitly assumes that target replacement rates 

by earnings level run roughly in parallel with the replacement rates provided by 

Social Security, such that the need for additional retirement income on top of 

Social Security is the same (relative to preretirement earnings) across earnings 

levels. Put another way, the NIRS assumes that low earners should save the same 

percentage of their earnings for retirement as higher earners.

Robert J. Myers, the Social Security Administration’s chief actuary from 

1947 through 1970, calculates target replacement rates by earnings level, estimating that a total replacement rate of 70 to 75 percent of final earnings would be 

appropriate for an average wageworker, with recommended replacement rates 

of 85 to 90 percent of final earnings for the lowest-earning workers and 55 to 60 

percent for workers earning the maximum taxable wage.10 Figure 1 assigns these 

replacement rates to the SSA OACT stylized earners, choosing the higher target where Myers presents a range of options. Figure 1 also displays Social Security replacement rates calculated relative to final earnings for the same stylized 

earners. Social Security replacement rates decline much faster with earnings 

than do Myers’s target total income replacement rates, indicating that personal 

saving rates necessary to reach Myers’s targets will differ substantially by earnings levels. As a result, lower earners whose savings would be sufficient to reach 

Myers’s target replacement rates would be judged by the NIRS methodology to 

have inadequate retirement savings.

Fourth, the NIRS assigns the assets held in corporate and state and local 

government defined benefit pensions to households according to their age, 

earnings, and whether the household reports being entitled to a benefit on the 

basis of current or past employment. Defined benefit pensions are significantly 

underfunded, particularly in the public sector. However, the NIRS methodology 

implicitly assumes that the entire funding shortfall will be addressed by reducing benefits, when in reality only a very small part is likely to be. Among corporate pensions passed to the Pension Benefit Guaranty Corporation because of 

10. Robert J. Myers, Social Security, 4th ed. (Philadelphia: University of Pennsylvania Press, 1993).
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the sponsor’s inability to maintain the plan, roughly 85 percent of beneficiaries 

continue to receive their full promised benefit. In the public sector, accrued benefits are generally guaranteed under law or constitutional provisions, and it is 

extremely difficult for a government to renege on these promises.

A more accurate approach would instead credit households with the 

accrued benefits under defined benefit plans. This would be consistent with 

crediting households with scheduled Social Security benefits even if these benefits may not be fully funded. Various measures of defined benefit pension liabilities exist, particularly on the public-sector side. As of 2010, the year in which the 

NIRS measured retirement saving, total accrued defined benefit pensions in the 

public and private sectors equaled $7.1 trillion.11 These accrued benefits exceeded 

pension assets by roughly $2 trillion. By itself, crediting households with the 

defined benefit pensions they have earned and are very likely to receive reduces 

NIRS’s total retirement savings gap of $14 trillion by about 14 percent.

Taking these points together, there is little reason to believe that true retirement saving shortfalls among US households are anything close to the $14 trillion 

claimed by the NIRS. For context, the total stock of assets in employer-sponsored 

11. See Federal Reserve, “Financial Accounts of the United States,” Series L. 118 and L. 120.

FIGURE 1. TARGET REPLACEMENT RATES VS. SOCIAL SECURITY REPLACEMENT RATES BY 

EARNINGS LEVEL

0%

20%

40%

60%

80%

100%

Social Security replacement rate

target replacement rate

medium high maximum

lifetime earnings level

very low low

replacement rate, calculated relative to final earnings

Source: Robert J. Myers, Social Security, 4th ed. (Philadelphia: University of Pennsylvania Press, 1993).
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defined benefit and defined contribution pension funds as of 2015 was about 

$18 trillion, implying that households are saving at little over half the required 

levels. The NIRS’s results are even more astounding when one considers that 

its figures arise from an aggregated methodology, in which savings surpluses by 

some households cancel out savings shortfalls by others. If the NIRS’s figures are 

to be believed, Americans are falling dramatically short of the amounts they need 

to be saving for retirement.

The National Retirement Risk Index

The National Retirement Risk Index (NRRI) was generated and is periodically 

updated by researchers at the Center for Retirement Research at Boston College.12 The NRRI begins with the Federal Reserve’s Survey of Consumer Finances 

to develop a model of the working-age population. The NRRI projects forward 

each household’s earnings and the evolution of its household wealth. At retirement age, the NRRI compares the annuity income that can be derived from a 

household’s wealth and Social Security benefits to its preretirement earnings. If 

the household’s projected replacement rate falls short of a target level by more 

than 10 percent, that household is considered “at risk” of an inadequate income 

in retirement. Using this approach, the NRRI finds 44 percent of “early boomers” 

(ages 50 to 59), 55 percent of “late boomers” (ages 40 to 49), and 62 percent of 

“generation Xers” (ages 30 to 39) at risk. Overall, the NRRI finds that 53 percent 

of all working Americans are saving inadequately for retirement and that the 

total retirement savings shortfall is $6.6 trillion.

However, a number of facets of the NRRI model bias it toward finding 

larger retirement savings shortfalls. First, the NRRI sets replacement rate targets relative to a worker’s “wage-indexed” earnings, a figure that overstates 

real, inflation-adjusted career-average earnings by about 20 percent.13 Although 

wage-indexed earnings are used in the Social Security benefit formula, households seeking to maintain their preretirement standard of living will target something close to their real, inflation-adjusted average earnings. By raising the bar 

for what counts as an adequate retirement income, the NRRI overstates the number of households whose savings are falling short.

12. See Alicia H. Munnell, Anthony Webb, and Francesca Golub-Sass, “The National Retirement 

Index: An Update” (Issue Brief No. 12–20, Center for Retirement Research at Boston College, 2012).

13. Author’s calculations using SSA’s medium-scaled worker, with annual earnings discounted 

using the Average Wage Index and the Consumer Price Index for Urban Wage Earners and Clerical 

Workers.
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Second, the NRRI defines preretirement income to 

include interest on retirement accounts such as 401(k)s and 

other savings. But working-age households don’t consume 

the interest on their retirement savings, so there is no reason 

for them to seek to replace income they did not consume in 

the first place. Including capital income in the definition of 

preretirement income again raises the bar on what counts 

as an adequate replacement income in retirement.

Third, the NRRI relies on 401(k) data dating back to 

the years when 401(k)s served principally as supplements to 

traditional pensions rather than as primary retirement saving vehicles. For each household, the NRRI projects 401(k) 

assets on the basis of wealth-to-income ratios found in the 

Survey of Consumer Finances dating back to 1983. Because 

401(k)s did not become truly widespread until the 1990s, 

relying on this older data may bias downward the NRRI’s 

projections of future retirement savings.14

Finally, the documentation of the NRRI is insufficient 

for outside researchers to recreate its findings. This omission 

makes it more difficult to discern which methodological or 

data choice plays the largest role in the results it generates.

The NRRI is a more rigorous model than the NIRS 

approach. The NRRI simulates household saving and 

Social Security benefits in significantly greater detail than 

the NIRS does, and the NRRI considers more deeply what 

level of retirement income is adequate for different types 

of households. Nevertheless, for the reasons outlined here, 

it appears likely that the $6.6 trillion in retirement savings 

shortfalls projected by the NRRI is an overstatement.

The Employee Benefit Research Institute’s 

Retirement Readiness Rating

The Employee Benefit Research Institute (EBRI) maintains the Retirement Security Projection Model, which 

14. See Jack VanDerhei, “Contributory ‘Negligence?’ The Impact of Future 

Contributions to Defined Contribution Plans on Retirement Income 

Adequacy for Gen Xers,” Employee Benefit Research Institute (2014).

“Whether a 

retiree receives 

Medicaid is a 

different question 

from whether 

that retiree 

has resources 

inadequate to 

allow him to 

maintain his 

preretirement 

standard of 

living.”
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projects a variety of retirement income sources including Social Security 

benefits, 401(k) and individual retirement account balances, defined benefit 

pensions, and housing equity. The EBRI model projects that 43 percent of 

Americans are currently at risk of falling short of income in retirement. The 

total projected retirement savings shortfall under the EBRI’s model is $4.4 

trillion. The EBRI’s model is one of the most highly developed retirement 

income projection models inside or outside government. For instance, rather 

than being built on stylized workers, as are the NIRS model and the NRRI, the 

EBRI’s Retirement Security Projection Model is built on a database of more 

than 24 million participants in hundreds of employer-sponsored retirement 

plans. Thus, one should take the model’s projections seriously.

However, what is less clear to casual observers is precisely what the 

EBRI’s researchers set out to measure. The Retirement Security Projection 

Model grew out of an effort in the late 1990s to assist governments of several 

states in projecting how many retirees would become reliant on Medicaid, 

including coverage for long-term care. Whether a retiree receives Medicaid 

is a different question from whether that retiree has resources inadequate to 

allow him to maintain his preretirement standard of living. Although the EBRI 

results have clear importance for governors and federal policymakers, they do 

not allow clear estimates of retirement savings shortfalls from a household 

financial planning perspective.

The EBRI model’s criteria for retirement income adequacy are not established on a traditional income-replacement or consumption-smoothing basis. 

Thus, regardless of the quality of the model’s underlying data or the accuracy 

of its future projections, it is difficult to interpret the model’s outputs in a traditional retirement planning context. For each household, the EBRI model establishes a target level of retirement spending based on data from the Consumer 

Expenditure Survey (CE). The model then simulates whether the household will 

be able to maintain that level of spending throughout retirement, given uncertainties with regard to longevity and healthcare costs.

The target level of retirement spending is based on the household’s broad 

income class, in which income is established on the basis of Social Security and 

traditional pension benefits along with the spend-down of individual retirement 

account and 401(k) assets over the expected life span plus a buffer period of five 

years. The broad income classes include retirees with incomes less than $20,000; 

those with incomes between $20,000 and $40,000; and those with incomes 

above $40,000. The target spending level for households in each income category is based on the average spending of households in these income ranges 
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according to data from the CE. For future cohorts of retirees, healthcare spending is increased along with historical rates of increase in the health component 

of the Consumer Price Index, while non-healthcare spending is increased along 

with the nonhealth Consumer Price Index.

Having established a target expenditure level on the basis of household 

income categories, the EBRI model then establishes a more realistic spending path for each household, incorporating patterns of retirement spending as 

households age and adding varying healthcare costs and investment returns. The 

model then tests whether each household’s retirement benefits and financial 

assets will be sufficient to allow it to maintain its target spending level throughout retirement, resulting in the EBRI’s retirement readiness rating.

What is difficult to determine is what such tests mean in the context of the 

desires of households to maintain their preretirement levels of consumption. 

For instance, imagine that retiree households represented in the CE are already 

unable to maintain their preretirement standard of living (or, alternately, that 

they were overprepared and were able to increase their consumption). If so, that 

deviation from a consumption-smoothing approach would be built into the target levels of spending that future retirees are judged against.

Likewise, households within a given income range could have very different levels of spending. For instance, imagine three retiree households with 

incomes between $20,000 and $40,000: the lower-income household has an 

income of $20,000, the middle-income household has an income of $30,000, and 

the higher-income household has an income of $40,000. All three households are 

judged in the EBRI model on whether their resources in retirement will allow 

them to maintain the spending level exhibited by the average household in the 

$20,000 to $40,000 income bracket. That average household is probably very 

similar to the household with a retirement income of $30,000.

Now imagine that each of the three households has retirement resources 

precisely sufficient for that household to maintain its preretirement standard of 

living. If we assume that household incomes in retirement are proportional to 

preretirement incomes, then one would expect the middle-income household 

with an income of $30,000 to consume roughly 50 percent more than the lowerincome household with a $20,000 income. The higher-income household with 

an income of $40,000 would consume roughly 33 percent more than the middleincome household.

Again, we are assuming that—by construction—each household is perfectly 

prepared for retirement. Even so, in the EBRI model roughly half of these households would be judged to have inadequate retirement savings. Households with 
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incomes below $30,000 would not have sufficient savings to maintain the spending habits of the household with a $30,000 income, because they did not save 

with the intention of doing so. Rather, they saved with the intention of replacing 

their own preretirement earnings, which could be substantially lower than those 

of the average household in their income class.

This points to the need for a model to set household retirement saving 

targets on the basis of the preretirement earnings and other characteristics of 

the household in question, not of a broader range of households that might have 

very different retirement income needs.

Thus, even if the EBRI model perfectly projects future outcomes—that is, 

if it is able to accurately project how much income and savings households will 

have in retirement—the criteria applied by the model don’t provide an intuitive answer to whether households will have enough income and savings when 

they retire. The EBRI model is capable of performing broader types of analysis, 

including replacement-rate and consumption-smoothing approaches. It would 

be useful for researchers to see the results of those types of analysis, which are 

easier to interpret as measures of retirement saving adequacy.

Scholz, Seshadri, Khitatrakun, and Gale

Two influential studies on retirement saving have been coauthored by University of Wisconsin economists John Karl Scholz and Ananth Seshadri, with their 

original 2006 paper coauthored by Surachai Khitatrakun of the Urban Institute 

and their 2009 extension study coauthored by William G. Gale of the Brookings 

Institution.15 For the 2006 paper Scholz, Seshadri, and Khitatrakun won TIAACREF’s Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security. The announcement for the award stated, “The research 

offers at least two important contributions: First, the innovative methodology 

provides a substantially improved technique for predicting how household 

wealth is related to lifetime income. Second, the results indicate most households plan reasonably and in a rational way for retirement.”16 In the 2009 extension, Gale, Scholz, and Seshadri refined the methodology and added additional 

birth cohorts to the original study.

15. See John Karl Scholz, Ananth Seshadri, and Surachai Khitatrakun, “Are Americans Saving 

‘Optimally’ for Retirement?,” Journal of Political Economy 114, no. 4 (2006): 607–43; and William G. 

Gale, John Karl Scholz, and Ananth Seshadri, “Are All Americans Saving ‘Optimally’ for Retirement?” 

(Michigan Retirement Research Center Working Paper 189, University of Michigan, 2009).

16. TIAA-CREF, “2007 TIAA Paul A. Samuelson Award Winners,” press release, January 2007.
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The basic framework of the Scholz and Seshadri studies is to apply a life 

cycle model of saving and spending to household data from the Health and 

Retirement Study. In the life cycle model, households seek to maximize the 

utility they derive from consumption over their lifetime by shifting resources 

from one period to another via saving and borrowing. The studies examined the 

adequacy of households’ own saving in light of the retirement income they are 

entitled to receive from Social Security, traditional pensions, and home equity.

The Scholz and Seshadri studies gained some prominence in light of 

their more optimistic assessment of the adequacy of household retirement saving. Their 2006 study concluded that about 84 percent of US households had 

enough savings to maintain their standard of living in retirement, whereas the 

2009 update concluded that about 75 percent of households did.

The Scholz and Sesahdri studies do not calculate an aggregated retirement 

savings shortfall as in the NIRS study, the NRRI, and the EBRI’s work. Were 

they to do so on the same terms as the NIRS study, in which oversaving by some 

households cancels out undersaving by others, Scholz and Seshadri would report 

an overall retirement savings surplus because they find that on average household retirement wealth exceeds optimal levels. However, an aggregated dollar 

figure can hide significant undersaving by certain households.

Generating the dollar value of retirement savings shortfalls for households 

that are undersaving is not straightforward, and any approximation will be rough. 

However, it is possible to generate a broad estimate. Gale, Scholz, and Seshadri 

find that 25.9 percent of households have below-optimal levels of saving. For those 

falling short, the median shortfall is $32,260 (in 2004 dollars). Unfortunately, the 

authors do not compare savings shortfalls for undersaving households with the 

wealth of those specific households, making it difficult to determine by what percentage those households’ wealth falls short. However, Gale, Scholz, and Seshadri 

do conclude that the probability of undersaving is not strongly correlated with 

household earnings. This implies that the median target saving amount for all 

households is likely to be a reasonable approximation of target saving amounts 

for households that fail to meet their targets. Thus, comparing the median savings 

deficit for undersaving households with the median optimal wealth for the whole 

population may provide a reasonable, if admittedly crude, approximation of the 

extent of undersaving. In Gale, Scholz, and Seshadri’s sample, the median optimal 

wealth for all households studied was $188,835. While it is important to reiterate the above caveats, this implies that the wealth of the typical household that 

is underprepared for retirement falls about 17 percent short of its optimal wealth 

level. Other households have retirement savings at or above optimal levels.
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However, this does not imply that undersaving households face a retirement income that is 17 percent below their optimal level. The reason is that 

Gale, Scholz, and Seshadri’s optimal wealth targets include only the financial 

wealth directly held and managed by the household, not the implicit wealth 

provided through Social Security and defined benefit pensions. Gale, Scholz, 

and Seshadri do not provide a detailed breakdown of the components of total 

household retirement saving. However, Scholz, Seshadri, and Khitatrakun 

provide median values for Social Security, defined benefit pensions, and total 

financial assets for a variety of income and education levels, albeit for a slightly 

older sample of households. All values are calculated on a present value basis. 

With the exception of the poorest tenth of the population, the sum of median 

Social Security wealth and defined benefit pension wealth comes to between 

46 and 66 percent of total household wealth. Likewise, a separate study finds 

that, for all retirees ages 64 to 66 in 2005, combined Social Security and defined 

benefit pension benefits made up 49 percent of household incomes.17 While 

again noting the limitations of these figures, if we assume that Social Security and defined benefit pensions together provide these households with half 

their overall retirement wealth, this implies households that are undersaving 

in Gale, Scholz, and Seshadri’s study face total retirement incomes that fall 

short of optimal levels by approximately 8 to 9 percent.18 As a gross simplification to put this figure in more understandable terms, if we assumed that the 

typical household required a retirement income equal to 70 percent of its preretirement earnings, these figures would imply that the typical household that 

has undersaved for retirement would retire with a replacement rate of about 

64 percent.19 If Social Security and defined benefit pension wealth are assumed 

to be larger relative to households’ savings via financial assets, then any given 

percentage shortfall in financial assets would imply a smaller shortfall in total 

retirement wealth relative to target levels.

Obviously, the figures presented in Gale, Scholz, and Seshadri’s analysis 

are not what one would wish for in attempting to calculate aggregate undersaving. But they do not appear to be unreasonable or to be biased in terms 

of generating a broad estimate of the dollar amount by which Americans are 

17. Biggs and Springstead, “Alternate Measures of Replacement Rates.”

18. The relative contributions of Social Security and defined benefit pensions may vary over the 

course of retirement. 

19. One of the findings of the broad life cycle research on retirement saving is that optimal retirement 

wealth can vary considerably from household to household, meaning that a one-size-fits-all threshold 

such as a 70 percent replacement rate will not provide a solid basis of analysis. 
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undersaving for retirement. The current total value of 401(k) plans, individual 

retirement account plans, and insurance contracts is about $14 trillion, according to the Federal Reserve’s Financial Accounts of the United States.20 Assuming that undersaving is evenly distributed through the population, that 25.9 

percent of current households are undersaving, and that the median shortfall 

contingent upon undersaving is 17 percent of retirement savings, this implies 

a total retirement savings shortfall on the order of $615 billion. Given the 

approximations necessary to produce this figure, the actual retirement savings shortfall under Gale, Scholz, and Seshadri’s methodology could possibly 

be larger or smaller than $615 billion. But, even if the true figure were twice 

that amount, it is a far, far smaller retirement savings shortfall than is found in 

other, more pessimistic studies.

Hurd and Rohwedder

The RAND Corporation’s Michael D. Hurd and Susann Rohwedder, two of the 

nation’s leading researchers on retirement income security, have generated a 

number of studies examining various aspects of retirement saving. In a 2011 study 

(and a 2014 write-up aimed at a nontechnical audience) Hurd and Rohwedder 

use data from the Health and Retirement Study to examine the ability of recent 

retirees to maintain desired levels of consumption as they age.21

Hurd and Rohwedder begin with Health and Retirement Study data on the 

spending and wealth of households as they near retirement. The authors then estimate whether each household can maintain a typical path of spending as it proceeds through retirement, including 100 simulations for each household of varying longevity, investment returns, and healthcare costs. If a household has a 95 

percent chance of dying with positive wealth, Hurd and Rohwedder judge it to be 

adequately prepared for retirement. Hurd and Rohwedder find that 71 percent of 

households are likely to be able to maintain their standard of living in retirement.

Although their results are similar to the 75 percent prepared figure found 

in Gale, Scholz, and Seshadri, Hurd and Rohwedder find differences in the dis20. Board of Governors of the Federal Reserve System, “Financial Accounts of the United States,” 

March 2017, https://www.federalreserve.gov/releases/z1/. Values are measured as of the fourth 

quarter of 2016.

21. See Michael D. Hurd and Susann Rohwedder, “Economic Preparation for Retirement” (NBER 

Working Paper No. 17203, National Bureau of Economic Research, Cambridge, MA, July 2011); 

and Michael D. Hurd and Susann Rohwedder, “More Americans May Be Adequately Prepared for 

Retirement Than Previously Thought” (RAND Research Brief, RAND Corporation, Santa Monica, 

CA, 2014).
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“In most cases, 

defined benefit 

pensions do 

not have assets 

currently on 

hand sufficient 

to fund all the 

benefits they 

have promised. 

In Social 

Security’s case, 

neither current 

nor scheduled 

payroll tax rates 

will allow for the 

full payment of 

benefits past the 

early 2030s.”

tribution of preparedness. While Gale, Scholz, and Seshadri 

do not find strong patterns of preparedness among different subgroups of the population, Hurd and Rohwedder find 

that married couples are substantially better prepared than 

are singles and that in one group—single, less-educated 

women—only 27 percent will be able to maintain their preretirement standard of living once they stop working. Single 

individuals who self-report being in only fair or poor health 

are also disproportionately at risk, with only 38 percent of 

that group being able to maintain their standard of living 

throughout retirement with 95 percent or greater certainty.

Hurd and Rohwedder’s finding that underpreparedness for retirement is most common among lower-income 

households implies that the total retirement savings shortfall in dollar terms is likely to be somewhat lower than in 

Gale, Scholz, and Seshadri’s study. That is to say, it is less 

expensive to top up the savings of a low earner than of a high 

earner. However, Hurd and Rohwedder find that, among 

those who are underprepared for retirement, savings shortfalls can often be substantial, implying that underprepared 

households must significantly reduce their consumption in 

order to avoid running out of money in retirement.

Any quantification of the dollar value of retirement 

savings shortfalls in the Hurd and Rohwedder study would 

be little more than a guess. But as a guess, a figure similar to 

the $615 billion I estimated for Gale, Scholz, and Seshadri’s 

study is probably not unreasonable.

FUNDING SHORTFALLS IN GOVERNMENTRUN RETIREMENT PLANS

Federal, state, and local governments run a variety of plans 

that provide income in retirement. Some, such as Supplemental Security Income, are means-tested safety net programs not designed to play a role in providing income for 

typical households that save for retirement in a reasonable 

way. Others, however, are designed to, and in practice do, 

play crucial roles in providing retirement income even for 
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many upper-income households. Social Security is a near-universal program that 

replaces preretirement earnings on a progressive basis. Thus, although it provides higher replacement rates—that is, benefits relative to preretirement earnings—to lower-earning households, the dollar value of Social Security retirement 

benefits rises with households’ career-average preretirement earnings. Other 

government programs provide benefits to supplement Social Security. Federal 

employees, the uniformed military, and state and local government employees 

all participate in retirement plans, generally defined benefit pensions, which 

together with Social Security should allow most workers to maintain their preretirement standard of living once they retire. Some state and local government 

employees do not participate in Social Security. Their pension plans provide total 

benefits that are designed to account for the lack of Social Security coverage.

However, all of these government-run retirement plans require adequate 

funding. In most cases, defined benefit pensions do not have assets currently on 

hand sufficient to fund all the benefits they have promised. In Social Security’s 

case, neither current nor scheduled payroll tax rates will allow for the full payment of benefits past the early 2030s.22

Thus, the “retirement crisis” is not merely a problem of insufficient household preparation. Indeed, it is possible that funding shortfalls in the government sector exceed retirement savings shortfalls by households. If so, we might 

conclude that the retirement saving problem could be considerably larger than 

is currently understood. But it also may cast doubt on whether the government 

sector can be counted on to properly administer and fund programs designed to 

increase retirement benefits in light of perceived undersaving by households. 

Government programs have often focused on delivering near-term benefits while 

falling short on making benefit funding adequate over the long term. Although 

Social Security and state and local pensions are financed in very different ways, 

they share this common shortcoming.

Social Security 

The Social Security program offers retirement, survivor, and disability benefits 

to individuals who become eligible via participation in covered employment, 

as well as to their spouse and dependents. Social Security’s funding shortfalls 

22. Social Security relies on assets held in its trust funds to pay full benefits through the early 2030s. 

These assets are special-issue US Treasury bonds, the redemption of which by Social Security creates 

a cost for the rest of the federal budget. For the purposes of this discussion, however, I treat Social 

Security as a freestanding program.
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have been a matter of public attention, and sporadic legislative efforts, since the 

late 1980s; but no meaningful reforms have been enacted since 1983. Moreover, 

a movement has begun recently to expand Social Security benefits, a policy that 

would at the least make the program’s deficits more difficult to address.

Many retirees, particularly those with low incomes, are heavily dependent 

on Social Security benefits for their retirement income. Thus, the depletion of 

the Social Security trust fund, which would trigger automatic across-the-board 

benefit reductions of 25 percent or more, would have a dramatic negative effect 

on Americans’ retirement income security.23 That said, placing Social Security’s 

funding shortfalls in terms that are comparable to the personal retirement savings shortfalls reported in the preceding section is difficult because of the way 

Social Security benefits are financed. Most retirement plans are intended to be 

prefunded, such that a plan’s assets are sufficient to pay all the future benefits 

currently owed by the plan. On that basis, Social Security’s trust fund assets of 

roughly $2.8 trillion are far outstripped by the approximately $30 trillion in benefits that have been earned but not yet paid out by the program. However, Social 

Security is financed mostly on a pay-as-you-go basis in which current taxes are 

used to pay current benefits. Thus, policymakers have no intention of building 

Social Security assets to a level sufficient to pay full accrued benefits.

An alternate approach is to look at the plan’s 75-year funding shortfall inclusive of future payroll tax revenues. This is the current dollar amount that, together 

with future taxes, would be sufficient for Social Security to pay full scheduled benefits over the next 75 years. The 75-year period is designed to encompass the projected lifespans of nearly all employees currently covered by Social Security. Thus, 

the 75-year unfunded obligation in dollar terms is roughly equivalent to a personal 

retirement savings shortfall applied to the full working and retired population.

There are different projections of Social Security’s long-term funding 

shortfall. The best-known figures are those calculated by SSA’s actuaries on 

the basis of demographic and economic assumptions made by Social Security’s 

Board of Trustees. As of early 2016, the SSA actuaries/Trustees projection of 

Social Security’s 75-year funding shortfall was $11.4 trillion.24 Later in 2016, an 

expert panel appointed by the Social Security Advisory Board produced its own 

23. Jason Schultz and Daniel Nickerson, “Unfunded Obligation and Transition Cost for the OASDI 

Program” (Actuarial Note 2013.1, Social Security Administration, Office of the Chief Actuary, 

Baltimore, MD, 2014). 

24. Social Security Administration, The 2016 Annual Report of the Board of Trustees of the Federal 

Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (Washington, DC: US 

Government Printing Office, 2016). 
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estimates of the long-term Social Security shortfall. The 2015 Technical Panel 

on Assumptions and Methods generated its own economic and demographic 

assumptions for Social Security, which the SSA actuaries used to recalculate 

the program’s finances. Under the technical panel’s assumptions, the long-term 

Social Security deficit as a percentage of the wage base is about 26 percent larger 

than under the Trustees projections.25 This would lead to a present value funding 

gap of about $14.4 trillion.26 Likewise, the Congressional Budget Office (CBO) 

projects a 75-year funding shortfall equal to 4.4 percent of taxable payroll, versus 2.66 percent projected by Social Security’s Trustees.27 If the CBO projections turn out to be accurate, the 75-year Social Security shortfall in dollar terms 

would be roughly $18.9 trillion.

These projections are, by their authors’ own admission, imprecise. They 

are based on projections of myriad demographic and economic variables extending decades into the future. Nevertheless, there is little reason to believe that 

these are biased projections, such that the inevitable errors will tend to reduce 

Social Security’s funding shortfall rather than increase it.

Federal Employee Pensions

Federal government employees participate in three retirement plans. Employees 

hired before 1987 participate in the Civil Service Retirement System (CSRS), 

a defined benefit pension plan. These employees do not participate in Social 

Security and receive their full retirement benefit via the CSRS. CSRS employees 

may participate in the defined contribution Thrift Savings Plan (TSP), a 401(k)-

style defined contribution plan, on a voluntary basis, but they do not receive an 

employer match.

The Federal Employees Retirement System (FERS) is a smaller defined 

benefit plan that enrolls federal employees hired since 1987. In addition, FERScovered employees participate in the TSP. The federal government contributes 

25. Social Security Advisory Board, Technical Panel on Assumptions and Methods, A Report to the 

Board (Washington, DC, September 2015).

26. With both the technical panel’s projections and the CBO’s projections, the dollar value of the 

Social Security unfunded obligation may not be precisely equal to figures derived by comparing the 

actuarial deficits calculated by the different parties as a percentage of payroll, because of ways in 

which different demographic and economic assumptions can alter the present value of taxable payroll over the long run. However, multiplying the Trustees’ $11.4 trillion unfunded obligation by the 

ratio of the technical panel or CBO actuarial deficit to the Trustees’ actuarial deficit is a reasonable 

way of approximating the dollar values consistent with the technical panel and CBO calculations.

27. Congressional Budget Office, CBO’s 2015 Long-Term Projections for Social Security: Additional 

Information (Washington, DC, December 16, 2015).
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an amount equal to 1 percent of employee pay to the TSP for all employees. 

Employees who choose to make their own contributions may receive a federal 

matching contribution equal to up to 4 percent more of their salaries.

As a defined contribution plan, the TSP is always “fully funded” in the sense 

that it cannot have obligations in excess of its assets. However, as defined benefit 

plans the CSRS and FERS must match assets to liabilities to ensure that the plans 

can pay full benefits as scheduled. As of their most recent actuarial valuation for 

the fiscal year 2014, the CSRS is 31 percent funded and has an unfunded liability of $754 billion. FERS is 91 percent funded and has an unfunded liability of 

$50 billion.28 In both cases, the plans’ assets consist of special-issue government 

bonds similar to those issued to the Social Security trust funds. These bonds 

are assets to the CSRS and FERS programs, though they are equal and opposite 

liabilities to the US government and, by extension, the taxpayer. For these purposes, however, we ignore such distinctions. In total, civilian federal employee 

defined benefit pensions face a funding shortfall of approximately $800 billion. 

This shortfall is by itself comparable to the lowest estimates of household retirement savings shortfalls for the full US population inferred by the author from 

Gale, Scholz, and Seshadri.

Military Retirements

The Military Retirement System (MRS) pays pension benefits to uniformed 

members of the US military who satisfy certain criteria, in particular a vesting 

period of 20 years of service before retirement. In addition, the MRS pays disability and survivor benefits to eligible military members and their families.

The MRS is a funded defined benefit pension plan. However, like FERS 

and the CSRS, the MRS is funded with special-issue government bonds, which 

means that from a budgetwide perspective the plan is essentially funded on 

a pay-as-you-go basis. For these purposes, however, I analyze the plan on a 

freestanding basis and consider its fund’s government bonds only as an asset 

to the plan. As of the end of fiscal year 2015, the MRS was 39 percent funded 

and had an unfunded liability of $868 billion, based on a valuation interest rate 

of 5.5 percent.29

28. United States Office of Personnel Management, Civil Service Retirement and Disability Fund 

Annual Report, Fiscal Year Ended September 30, 2015 (Washington, DC, January 2016).

29. US Department of Defense Office of the Actuary, “Valuation of the Military Retirement System,” 

valuation as of September 30, 2014 (Alexandria, VA, June 2016).
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26

State and Local Government Employee 

Pensions

Although 401(k)-type defined contribution plans have 

taken over the private sector, state and local governments 

still generally provide defined benefit pensions for their 

employees. Unlike federal employee pensions, state and 

local government plans invest in nongovernmental assets 

such as stocks, corporate bonds, and alternative investments like hedge funds and private equity. However, state 

and local plans have, by their own admission, amassed far 

fewer of these assets than is needed to pay the benefits they 

have promised.

How much state and local plans have fallen short is 

a matter of debate. Using the figures that plans themselves 

generate using accounting guidelines from the Governmental Accounting Standards Board, state and local plans have 

unfunded liabilities of about $1.2 trillion.30 However, these 

figures are calculated using a very high discount rate—generally in the range of 7 to 8 percent—that understates the 

plans’ benefit liabilities and thus improves their funded 

ratios and lowers their measured unfunded liabilities. These 

7 to 8 percent discount rates are based on the annual returns 

that pension plans assume on their investment portfolios. 

However, economists almost universally agree that, when a 

benefit liability is guaranteed, as public pension benefits are 

intended to be and as many legal rulings have found them 

to be, a lower discount rate that matches the low risk of the 

liability is warranted. If state and local pensions promise to 

pay their benefits under all circumstances, come what may, 

then the cost of keeping that promise is best measured by 

discounting benefit liabilities using the yield on riskless US 

Treasury securities.

The Society of Actuaries Blue Ribbon Panel on Public 

Pension Underfunding, of which I was a member, recom30. Alicia H. Munnell and Jean-Pierre Aubry, “The Funding of State and 

Local Pensions: 2015–2020” (State and Local Pension Plans Brief No. 50, 

Center for Retirement Research at Boston College, 2016).

“How much state 

and local plans 

have fallen short 

is a matter of 

debate.”
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27

mended that state and local pensions measure their liabilities using the yield on 

10-year US Treasury securities. As of November 2016, this yield averaged about 

2.2 percent. Discounting on the basis of the Treasury yield, unfunded liabilities 

on state and local pension rise to about $5.5 trillion.31 Using a middle ground of 

the corporate bond yield—which is how private sector pensions are required to 

measure their liabilities—state and local plans would be underfunded by about 

$3.4 trillion. This figure is produced by discounting pension liabilities at the 

3.8 percent corporate bond yield listed in the Citibank pension yield curve for 

mature pension plans with benefit liabilities of relatively short duration.

Thus, although there remains disagreement about the precise size of state 

and local government pension underfunding, the $1 trillion figure acknowledged 

by public plans is very much on the low end of the scale, with plausible figures 

rising as high as $5.5 trillion. At the low end, state and local pension underfunding approximately matches the personal savings shortfalls in studies such as 

Gale, Scholz, and Seshadri and Hurd and Rohwedder. At the high end, public 

pension shortfalls are closer, though not equal, to the personal retirement savings shortfalls found in the NRRI.

TOTALING UP AND DISCUSSION

Neither the estimates of personal retirement undersaving nor those of government retirement plan funding shortfalls are precise. The most pessimistic estimates of personal savings shortfalls total $14 trillion, with the more optimistic 

figures likely falling under $1 trillion. Likewise, it is possible that unfunded liabilities in Social Security, federal government employee, and state and local government employee retirement plans range from as low as $14.3 trillion to as high 

as $26.1 trillion in present value. Although estimation error and methodological 

disagreement are possible on nearly all the estimates included here, it is noteworthy that the lowest estimates for governmental retirement underfunding exceed 

the highest estimates of personal retirement savings shortfalls. In other words, 

given the plausible range of estimates—and it is questionable whether the NIRS 

study’s $14 trillion figure can be considered plausible, given the methodological 

weaknesses of the study—government underfunding exceeds personal retirement 

savings shortfalls even when government funding is at its highest and personal 

savings shortfalls are at their largest.

31. Author’s calculations here are based on interest rate sensitivity analysis found in Munnell and 

Aubry, “Funding of State and Local Pensions.”
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If one takes a more pessimistic view of government funding and a more 

optimistic view of personal saving, the differences are huge. In my admittedly 

imprecise judgment, a best guess for government plan underfunding would lie 

around $21.5 trillion, combining the baseline estimates for federal employee 

pensions with the midline estimates of Social Security underfunding produced 

by the Social Security Advisory Board’s technical panel and the high estimates of 

state and local pension underfunding produced by discounting liabilities using 

a Treasury bond yield. With regard to personal retirement savings shortfalls, 

my guess is that the truth lies closer to the Gale, Scholz, and Seshadri and Hurd 

and Rohwedder figures in the $1 trillion range than to the NRRI’s $6 trillion to 

$7 trillion figure, for reasons discussed in the text. Personal retirement savings 

shortfalls may be somewhat higher than calculated in the more optimistic set 

of studies, because of rising longevity and difficulties in saving during the Great 

Recession, but it also is not difficult to imagine those declines being offset by 

rising individual retirement ages and increased retirement saving via the use 

of automatic enrollment in 401(k)s and other employer-sponsored retirement 

accounts.

An obvious but important point is that the household retirement savings 

shortfalls do not offset government underfunding of retirement plans. The total 

problem facing future retirees is the sum of the shortfalls, meaning that the 

financial challenges facing future retirees remain potent. If undersaving households are confronted with underfunded government plans, a true retirement 

crisis could occur. The goal of retirement saving policy, reasonably, is not merely 

to forestall a retirement crisis but to allow households to retire with dignity and 

to maintain their standard of living as they shift from work into retirement. This 

requires efforts to improve retirement saving and funding in both the household 

and the government sectors. Put another way, households’ apparent superiority 

over government programs in funding their retirement needs is an advantage 

at the margin and does not imply that the government’s role in the provision of 

retirement income should be eliminated.

However, households’ advantage at the margin should inform policymakers’ choices regarding marginal changes in the sector from which retirement 

income is generated. The relative sizes of household and governmental undersaving should give pause to those who believe that government must and can 

take on a greater role in retirement income security. There is nothing improper 

about increasing government support for retirement incomes at the margin; it is 

difficult to conceive that private-sector retirement plans could easily fill shortfalls in retirement savings, such as for unmarried, low-income women. But on a 
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29

populationwide basis it is hard to imagine why responsibility should be shifted 

from the household sector, which is doing a better job of saving for retirement, 

to the government sector, which is doing a poorer job.

This is particularly so when one considers the potential causes of undersaving. No one suggests that households wish to impoverish themselves in retirement. Rather, household saving tends to fall short for practical reasons: some 

households lack the opportunity to save because they are not offered a retirement plan at work; others that might wish to save lack the financial sophistication, such that they are scared off from saving or choose inappropriate or costly 

investments; and still others have such low incomes that they cannot afford to 

reduce current spending. Most of the problems facing households are a matter 

either of plan design or of basic economic constraints. The former issues can and 

are being addressed through policies such as automatic retirement plan enrollment, which overcomes inertia or reluctance to participate in a plan; life cycle 

funds, which automatically reallocate investment portfolios over time; and index 

funds, which simplify investment choices and dramatically reduce administrative costs. Likewise, a better-designed safety net for public plans such as Social 

Security could help low-income households for whom personal saving will never 

be a primary source of retirement income.32 But again, these are practical issues 

that in most cases have practical solutions via improved plan design.

In the public sector, by contrast, the principal problem is not plan design. 

Presidents and Congress have known since the late 1980s that Social Security 

requires another round of reforms as baby boomers retire and life spans increase. 

The menu of reform options has similarly been well understood for more than 

a quarter-century. Current readers reviewing media coverage regarding Social 

Security reform from the late 1980s would find almost nothing that is unfamiliar to them. Yet in those three decades precisely nothing has been enacted to 

fix Social Security because taking those difficult steps would require informing Americans that the terms of the deal they have been offered—for such-andsuch a tax rate you will receive such-and-such benefits—must be changed for the 

worse. As everyone in government knows, and constantly tells everyone else in 

government, delay only makes the problems larger. But, importantly, not larger 

for the elected officials in question: by delaying, they shift the problems from 

their own docket to that of the legislators who follow them in office.

Things are little different at the state- and local-government levels. Elected 

officials have seen the worldwide shift from traditional defined benefit pensions 

32. See Andrew G. Biggs, “A New Vision for Social Security,” National Affairs 16 (2013). 
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to defined contribution plans that offer plan sponsors lower costs and greater 

funding certainty. The principal reason state and local governments have not 

sought more far-reaching reforms is the desire to avoid offending a politically 

powerful interest group: public employee labor unions. Avoiding that fight, 

however, means being faced with ever-increasing costs for public employee pensions—costs that state and local governments are unable to pay. Since 2001 the 

annual required contribution for the average state and local pension plan has 

more than tripled as a percentage of employee payroll. Today, fewer than 60 percent of state and local pensions receive their full annual contributions, despite 

operating under accounting rules that allow annual contributions that are only 

about one-fourth of those required for corporate pensions.33

The core problem with retirement plan underfunding at the government 

level isn’t plan design but human nature: individuals wish to promise things 

without paying for them, and individuals who seek public office seem to have 

a greater-than-average desire to do so. These intractable human failings join 

hands with defined benefit pensions that, because of their complexity, are perfectly suited for allowing sponsors to avoid making timely contributions to fund 

the benefits they have promised. Traditional pension funding requires myriad 

assumptions regarding interest rates, mortality tables, future employee wage 

growth, employee separation rates, and other factors. Each of these assumptions 

can be tweaked ever so slightly—or not so slightly, in the case of state and local 

plans’ treatment of pension discount rates—to reduce current costs to the plan 

sponsor. But, if promised benefits are to be paid, reducing current contributions 

invariably increases future costs.

Individual saving decisions are about how one person decides to consume 

his own resources over his own lifetime. He may decide unwisely, but the fact 

that he largely bears the costs of his own decisions tempers the temptations to 

undersave for retirement. At the government level, however, retirement plan 

funding decisions shift costs from one person to another and from one generation 

to the next. Both the temptations to shift costs and the practical means of doing 

so are much greater at the government level than at the household level. And the 

amount of retirement plan underfunding, at every level of government in the 

United States, makes it difficult to deny that these forces are at work. There are 

practically no retirement plans at any level of government in the United States 

33. Andrew G. Biggs, “How Much Would It Cost for State and Local Governments to Actually Fully 

Fund Their Pensions?,” Forbes.com, April 1, 2016.
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that have fully funded accrued benefits and that will not pass on substantial costs 

to future generations of taxpayers.

None of this is to say that government has no role to play in enhancing 

retirement saving. Governments should seek to fully fund their retirement plan 

benefit obligations. If doing so is impossible, governments should seek to honor 

all benefits that have already been earned while altering the rate at which future 

benefits are accrued in order to make the plans more affordable. On top of that, 

government policies can facilitate household retirement saving, such as by making it easier for employers to offer retirement plans and requiring employers, as 

a condition of the federal tax preference for retirement plan contributions, to 

automatically enroll employees, a step that leaves employee choice on the table 

but also can dramatically enhance retirement saving. A possible exception to 

automatic enrollment may be lower-wage employees, who may receive Social 

Security benefits sufficient to maintain their preretirement standard of living.34

But government policy with regard to retirement saving cannot be blind 

to government’s manifest failures to fully fund the benefits it has already promised. Adding new benefit promises on top of the trillions of dollars in existing 

unfunded retirement plan liabilities is, as Samuel Johnson said of second marriages, the triumph of hope over experience.

34. See Andrew G. Biggs, “How Hard Should We Push the Poor to Save for Retirement” (Economics 

Working Paper 2017-13, American Enterprise Institute, Washington, DC, 2017).
ABOUT THE AUTHOR

Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), 

where he studies Social Security reform, state and local government pensions, 

and public-sector pay and benefits. Before joining AEI, Biggs was the principal 

deputy commissioner of the Social Security Administration (SSA) and associate 

director of the White House National Economic Council. In 2013, the Society 

of Actuaries appointed Biggs co-vice-chair of a blue ribbon panel tasked with 

analyzing the causes of underfunding in public pension plans and determining 

how governments can securely fund plans in the future. In 2014, Institutional 

Investor Magazine named him one of the 40 most influential people in the retirement world. In 2016, President Obama appointed him a member of the Financial Oversight and Management Board for Puerto Rico. Biggs holds a bachelor’s 

degree from Queen’s University Belfast in Northern Ireland, master’s degrees 

from Cambridge University and the University of London, and a PhD from the 

London School of Economics.
ABOUT THE MERCATUS CENTER AT GEORGE MASON UNIVERSITY

The Mercatus Center at George Mason University is the world’s premier 

university source for market-oriented ideas—bridging the gap between academic 

ideas and real-world problems.

A university-based research center, Mercatus advances knowledge about 

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Our mission is to generate knowledge and understanding of the institutions that affect the freedom to prosper and to find sustainable solutions that 

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Founded in 1980, the Mercatus Center is located on George Mason University’s Arlington and Fairfax campuses.