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Close to retirement? Why America’s recovery is working against you

For many, planning for retirement isn't so certain.For many, planning for retirement isn't so certain.
For many, planning for retirement isn't so certain.Boston Globe Boston Globe — Getty Images

When the Federal Reserve Board released data from its 2013 Survey Consumer Finance (SCF), most of the attention focused on the growing gap between rich and poor. This survey of wealth showed that most of the country had seen little or no gain since the last survey in 2010, but the top 1% is doing quite well. The story is that the bounce back of the stock market from its recession trough meant big gains for the wealthy, since they own most shares of outstanding stock.

Meanwhile, home prices are still far below bubble peaks. Since houses are an asset that most families own, this means that the middle class have seen no comparable run-up in their wealth. Furthermore, continuing high rates of unemployment and weak wage growth have prevented most workers from adding to their savings.

This is a bad picture for the country as a whole, but it is especially bad news for those at the edge of retirement. These families do not have time for an economic turnaround to improve their situation. They must rely on the wealth they have accumulated to date to support them in retirement, and that is it. This is not a pretty picture.

The middle quintile of the cohort of workers between the ages of 55 to 65 had an average of just $169,000 in wealth in 2013. This is actually $19,000 below the average wealth for this group as reported in the 2010 SCF. (All numbers are in 2013 dollars). What’s more, it is $150,000 below the peak wealth for this group reported in the 2004 SCF. To give a basis for assessing the $169,000 difference, the median house price for the country as whole was $209,700 as of September.

This means that if a typical family in this 55 to 64 age group took all their wealth (which includes home equity) and used it to pay down their mortgage, they would still owe more than $50,000 on the median house. They would go into retirement with only their Social Security to support them, and a mortgage that is far from paid off.

The SCF supports this picture in its debt data. This middle quintile in the wealth distribution has only 54.6% of their home paid off on average. By comparison, in 1989, this group on average had equity equal to 81% of their house price, meaning that many could look forward to a retirement in which their mortgage was already paid off.

Going down to the second quintile, the situation looks far worse. The average wealth for this group is just $43,400. It had been almost $113,000 at its peak in 2007 and was $74,600 back in 1989, meaning that wealth for this group has declined by more than 40% over the last quarter century. Just over two-thirds of this group owns a house, with an average equity stake that is a bit more than 30% of the house price. This compares with a homeownership rate of more than 85% in 1989 and an average equity stake of more than 70%.

The average wealth for the bottom quintile is -$16,000, meaning that these people will be approaching retirement while still carrying debt. The homeowners from the group on average have negative equity, meaning they owe more than their house is worth.

Even the fourth quintile from this age group is not looking especially prosperous. Their average wealth is $470,000. That is down by almost 40% from the peak hit in 2004. The average equity stake for homeowners is 69.2%, down from 85.2% in 1989.

To put this $470,000 in perspective, if a couple used this money to pay off the mortgage on a median priced house, they would be able to buy an annuity that would pay them roughly $1,200 a month. This money, plus their Social Security, will keep them well above the poverty level, but it would hardly make for a comfortable retirement for households that are well above the median of the income distribution.

The basic story is that the vast majority of near retirees have managed to accumulate very little wealth. The collapse of the housing market bubble and the resulting economic downturn have been major blows from which they will not be able to recover before they retire. As a result they will be overwhelmingly dependent on Social Security and Medicare in their retirement years. Those who envision a population of affluent elderly who can easily get by with cuts in these programs are not looking at the data.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.