“Almost half of American households will run short of money in retirement if they stop working at 65, new research predicts,” Marketwatch reports regarding a new study released by Morningstar. I’ll give you all a moment to breath into a paper bag.

Now that you’ve recovered, let’s take a closer look at the Morningstar Model of US Retirement Outcomes, created by Jack VanDerhei and Spencer Look. The details show a much more positive picture regarding Americans’ retirement income security.

Using data on Americans’ earnings and retirement plan participation, Morningstar projects the Social Security benefits, pensions and 401(k) balances that American households will have at retirement age. Likewise, using data on retirees’ household expenditures drawn from the Health and Retirement Study (HRS), Morningstar projects how much Americans will want to spend in old age. In combining realistic accumulation and spending patterns, the Morningstar retirement model truly is a leader among efforts to project how well future seniors will fare.

The bad news is that Morningstar projects that 45% of Americans won’t be able to cover their projected retirement spending, which triggers the worrying headlines.

But there’s a key asterisk: Morningstar’s retirement spending goals are based on data on what current retirees actually spend. And what retirees spend is based on their total incomes – not just the Social Security, pensions and retirement accounts that Morningstar models, but welfare benefits such as Supplementary Security Income (SSI), earnings in retirement, and investments held outside of formal retirement plans. As a 2017 Census Bureau analysis shows, seniors receive only about three-quarters of their total incomes from Social Security, pensions and retirement accounts. The lowest-income retirees, who Morningstar finds are particularly underprepared, receive just 61% of their incomes from these three sources. So, while many seniors won’t be able to cover their spending using only income from Social Security, pensions and retirement account withdrawals, they might be able to do so using other income sources that Morningstar doesn’t count.

Fortunately, Morningstar lets readers adjust for this. For instance, if we assumed that seniors needed Social Security, pensions, and retirement accounts to cover 80% of their total spending, then the share of retirees falling shortfalls from 45% to 31%. If we lowered the threshold to 70%, which may better fit the lowest-income seniors, then the share falling short declines to 24%. That’s still not a great outcome, but reasonable assumptions alone reduce the share of seniors at risk of inadequate incomes by half.

But there’s a second aspect of the Morningstar retirement income model that also deserves attention: the fact that Morningstar projects that retirement income adequacy is improving over time, in contrast to many claims that retirement security is getting worse.

For instance, Morningstar projects that 52% of Baby Boomers may run short of money. But that falls to 47% for Gen X, 44% for Millennials, and 37% for Gen Z. If we assume that Social Security, pensions, and retirement accounts must cover only 80% of retirement spending, then the share falling short declines from 31% for Baby Boomers to 26% for Gen Z.

That’s not surprising to me, given data showing that retirement plan coverage, contributions and balances all have increased significantly over the past two decades, while Americans are working longer and claiming Social Security benefits later than in the past.

None of this means there isn’t work to do. If Social Security were to go insolvent, triggering 20% or more in benefit cuts, that truly would be a retirement crisis for low- and even middle-income seniors. Moreover, as the Morningstar report shows in detail, making retirement accounts more widely available and automatically enrolling workers can help close gaps in retirement security.

Modeling retirement income adequacy is an extremely complex task. I’m sure that Morningstar’s model, as good as it currently is, will evolve further in the future. But as of today, we can reasonably say that the retirement income challenge is smaller than many people claim and retirement income security is likely to improve over time.

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