It didn't take a deep recession to make Americans improvident when it comes to saving money for their retirement. That behavior is a hardy perennial, evident in good times or bad. But it's clear from survey data and the opinions of people who track such things that Americans' retirement outlook has gone from not so hot to worse. The possible silver lining is that the sharp downturn -- especially in house prices -- may have given a salutary shock to the system of people who'd been neglecting to save.

A report issued last month by the Center for Retirement Research at Boston College (titled "The National Retirement Risk Index: After the Crash") gives a picture of the long-standing problem and its recent worsening. Based on federal data on consumers' finances, the Risk Index "measures the share of American households who are 'at risk' of being unable to maintain their pre-retirement standard of living in retirement." The proportion of households at risk was bad enough in 2004 (43 percent) and 2007 (44 percent), when the stock market and house values were robust. Updating the index with estimates for household wealth in the second quarter of this year, this new report says 51 percent of households are now in the at-risk category.

Moreover, the report suggests that the rise in the index number doesn't fully capture the weakening in Americans' financial readiness for retirement. For one thing, "those already 'at risk' are more 'at risk' because of the financial crisis. Similarly, those 'not at risk' are less 'not at risk' than they had been before the crisis." And the report notes a further recession effect that could put more people in the "at risk" category in the future: The downturn "may potentially hasten the decline of defined-benefit plans in the private sector."  Workers in companies that freeze or terminate such pension plans "could likely experience a reduction in their expected defined-benefit wealth."

AFTER THE CURRENT 'GOLDEN AGE'
Ironically, the positive spectacle of the nation's current retirees -- the majority of whom "are able to afford a decent retirement" -- may give a misleading indication of what lies ahead for younger people. The report says current retirees are "living in a 'golden age' that will fade as baby boomers and Generation Xers reach traditional retirement ages in the coming decades."

The saving grace in all this is that people who've yet to retire often realize they've done an insufficient job so far of saving for it and must do better in their remaining pre-retirement years. "In our own research, we see more than half the people expressing concern that they won't have enough money for retirement, that their savings aren't adequate," says Paul Ballew, senior vice president of customer insights and analytics at Nationwide Mutual Insurance, which was underwriter for the National Retirement Risk Index study.

Along the same lines, a report earlier this fall from AARP (based on polling over the summer) found 49 percent of 45-64-year-olds not confident that they "will have enough money to take care of your medical and living expenses in retirement." The total includes 25 percent who were "not at all confident" on that score.



THEY'LL KEEP ON WORKING, THEY HOPE
Given the shortfall in their retirement savings, many people expect to work past the normal retirement age. A report issued last month by the MetLife Mature Market Institute, based on polling conducted in May among 55-70-year-olds who are working or looking for work, gives an indication of this: 50 percent of respondents said that, within the past two years, they've pushed back the age at which they expect to stop working for pay. Forty-seven percent of respondents now expect to keep working to age 66-70, 12 percent think they'll be working at 71-75 and 10 percent think they'll still be working at age 76 or beyond.

Likewise, a survey this summer by the Center for Retirement Research found about 40 percent of 45-59-year-olds saying they expected to retire later than had been the case before the economy went haywire.

The catch, of course, is that many of these people will find themselves involuntarily pushed out of the labor force, often for reasons of health. A report in April by the Employee Benefit Research Institute noted, "The median retiree actually retired at age 62, and 47 percent of retirees say they retired sooner than planned."

David Certner, legislative policy director for AARP, agrees that older workers' plans to keep toiling may hit one obstacle or another. Among these is age discrimination on the part of employers. "There are plenty of vestiges of age discrimination, even though it's illegal," says Certner. He notes that the recession, with older workers conspicuous among those hit by layoffs, has been accompanied by a surge in age-discrimination suits.

CHANGING THE CALCULATION
While the recession is now pushing many older workers out of their jobs, the long-term prognosis is for people to work past the traditional retirement age -- especially as the decline of defined-benefit pension plans and a later age for getting full Social Security benefits alters the financial calculation for retirement. "Working longer is a very powerful lever for lifting your standard of living in retirement," says Steven Sass, program director of the Center for Financial Literacy at Boston College. He expects it to become the norm for people to work into their later 60s. "We think that's the big labor-force transition we're heading toward." One factor pushing things in this direction is the much-increased presence of women in the workforce. "Women working tends to keep men in the workforce, too," notes Sass.     

Such a transition will not be altogether smooth. It used to be the case that older workers would stick with their employer until it was time to collect the gold watch and retire altogether. As people's work lives extend, the job a person is in at age 50 will be less likely to be the one from which he finally retires. "I think the norm will be changing jobs past age 50," says Sass, "and that's not an easy thing to do."

Of course, working longer (or, at least, intending to work longer) isn't the only change that will be needed to get Americans' retirement finances in order. People will have to save more, too. And they'll have to acknowledge that the mere fact of owning a house (or the part of a house not really owned by the mortgage issuer) is not the same thing as seriously saving. The decline in house and stock values has aggravated what was already a serious deficit in people's accumulation of assets for retirement. AARP's recent survey found 37 percent of 45-64-year-olds agreeing that they "lost a substantial amount of the equity in your home's value that you will need for retirement." And 52 percent reported having "lost a substantial amount of savings in financial markets."

HOME IS WHERE THE HURT IS
Despite all the attention to people's dismal 401(k) reports of the past year, it's the decline in house values that hurts the most. According to the Center for Retirement Research's Risk Index report, "Almost three quarters (73 percent) of the increase in the percent 'at risk' was the result of the decline in house prices, reflecting the fact that housing is most households' largest asset."

"We certainly saw a large segment of the population banking on house values going up and staying up," says Ballew. And he thinks the shock of seeing their house-value "paper profits" disappear will have an effect on people's future behavior. He notes that savings rates have already gone up. And while this may be largely a response to the current recession and fears about job losses, he expects it to be a more lasting change. "We believe savings rates will go up significantly over the next decade," Ballew adds.



SAVING MORE, SAVING LESS
For now, the effects of the recession (including the scary volatility of the stock market) have cut both ways in people's behavior. Certner mentions that some people are saving and investing less, since they're "nervous about the whole system," while others have been saving more in order to make up for declines in the value of their holdings. In its analysis of the Risk Index report, Nationwide noted research of its own on consumer behavior "showing signs that many who were actively preparing before the downturn have now disengaged from the process."

Even among those who are saving more, this may not mean buying more stocks or putting more money into bank accounts, at least so far. Sass mentions the seeming disconnect between government reports of a spike in the savings rate and reports from companies like Fidelity and Vanguard that the rate of investments into funds they manage has been "flat as a pancake." What resolves the seeming contradiction, says Sass, is that people have been improving their finances "by paying down debt. That's how they're saving."

It's certainly not as though people are in the habit of saving in many other ways, apart from contributions to retirement plans at work (if that). As the Risk Index report sternly notes, "Most of the working-age population saves virtually nothing outside of their employer-sponsored pension plan."

A LASTING EFFECT?
Having been badly shaken by the events of the past year or so, will Americans become generally more responsible about saving for retirement? Certner points to the way the Great Depression of the 1930s affected the behavior of those who went through it -- not just at the time, but for the rest of their lives. He says it's "too early to tell" whether our current Great Recession will have a lasting effect. If we emerge soon from the recession, its effect on long-term retirement-savings behavior could be fairly modest. "But if the economy continues to muddle along for some years, we will see a permanent impact," he predicts.

You might think fears about the solvency of Social Security -- a recurring theme of debate in Washington -- would prompt people to save more. But Certner notes that there's nothing at all new about such worries. He mentions a cartoon from the 1930s that displayed this theme, as well as a survey some 30 years ago that showed many young people convinced they'd never get any Social Security payout. "Now, they're about to start getting benefits," he says, "and they're not so skeptical."