Retirement Plan Design Decisions
So, now that we have made excuses for Americans, what do the reduced rates mean. Can Americans save enough money to retire?
The following table shows, as a percentage of retiring pay, the advantage to Americans of the higher rates of return available in America. Background assumptions are that Japanese retire at 60, while Americans retire at 65 - a 5 year advantage in savings as well as a lower cost for life annuities. The annuity is a life annuity payable immediately at retirement. Americans have a 3% real rate of return on their assets, while Japanese get 0.5%. The numbers are even further apart these days, but this is a good starting point . The life annuities are based on somewhat appropriate mortality tables reflecting the mortality characteristics of workers in each country. Differences produced by other appropriate tables would not be significant.
| 59 | 901.8% |
| 58 | 532.6% |
| 57 | 410.9% |
| 56 | 351.0% |
| 55 | 316.0% |
| 54 | 293.3% |
| 53 | 277.8% |
| 52 | 266.7% |
| 51 | 258.6% |
| 50 | 252.6% |
| 49 | 248.1% |
| 48 | 244.8% |
| 47 | 242.5% |
| 46 | 240.8% |
| 45 | 239.7% |
| 44 | 239.1% |
| 43 | 238.9% |
| 42 | 239.1% |
| 41 | 239.6% |
| 40 | 240.3% |
| 39 | 241.3% |
| 38 | 242.5% |
| 37 | 243.9% |
| 36 | 245.4% |
| 35 | 247.1% |
| 34 | 249.0% |
| 33 | 251.0% |
| 32 | 253.1% |
| 31 | 255.4% |
| 30 | 257.8% |
| 29 | 260.3% |
| 28 | 262.9% |
| 27 | 265.6% |
| 26 | 268.4% |
| 25 | 271.3% |
| 24 | 274.4% |
| 23 | 277.5% |
| 22 | 280.7% |
| 21 | 284.1% |
| 20 | 287.5% |
What does this table mean? A 20-year-old American saving slightly more that one third of a similarly placed Japanese 20-year-old would retire with the same lifetime annuity.
Similarly, a 40-year-old American who saves periodically the same amount as a similarly placed 40- year-old Japanese would retire with a lifetime annuity almost 2 and one half times as large.
So, the bottom-line is the greater real rates of return available in the U.S. permit lower rates of savings to achieve the same levels of retirement annuities. Of course, this means workers can spend more in the meantime which means that the real rates advantage in the States is probably sustainable.
This also supports the contention that society's ability to save for retirement is directly related to social wealth during the period when funds are accumulating.
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