According to economist Teresa Ghilarducci, one of the nation’s leading experts on retirement policy, “(i)t looks like most middle-class Americans will become poor or near-poor retirees,” adding that “(t)he baby boomers will be the first generation that will do worse in retirement than their parents.”
Ghilarducci’s comments appear in The Week, a weekly news magazine, as part of an informative piece (“The not-so-golden years,” April 27 edition) spotlighting a largely neglected Boomer retirement savings crisis that has grave implications for America’s social and economic well-being.
401(k)s vs. pensions
While the economic meltdown is one reason for this crisis, the more systemic cause is the disappearance of the traditional pension plan. The Week reports that from 1980 to 2006, the percentage of private-sector workers with employer-funded pension plans dropped from 60 percent to 10 percent. The 401(k) plan — voluntary and largely employee-funded — would replace the pension as the primary retirement savings vehicle.
Unfortunately, most workers have not built 401(k) accounts sufficient to fund a comfortable retirement; the average 401(k) balance “is just over $60,000,” according to The Week. Even worse, “(m)ore than half of U.S. workers have no retirement plan at all.” Social Security payments “averaging $14,780 a year for individuals and $22,000 for couples” won’t bridge the gaps.
Consequently, it appears that many Boomers will find themselves working much later into their lives, seeking cheaper housing, and cutting back sharply on spending.
From a policy standpoint, there are no easy choices. Below are two possibilities; the first is something of a pipe dream for now, the second is more politically viable.
Public pensions for all?
In an earlier New York Times op-ed piece in response to cutbacks in New York State’s pension plan for public workers, Ghilarducci calls upon the states to create public pension plans for all workers:
Rather than curtailing public and private pensions, New York and other states could save millions of workers from impending poverty by creating public pensions for everyone.
While the recession bears some blame for the looming retirement crisis, experts agree that the primary cause is more fundamental: Most workers do not have retirement accounts at work.
Shoring up Social Security
At the very least, we need to ensure the viability of Social Security for generations to come. The anticipated shortfalls in the Social Security fund can be addressed by raising the current cap on payroll taxes that fund the system.
Currently workers pay a flat 6.2 percent in payroll taxes, but that tax caps out on the first $106,800 of income. Eliminating or raising the cap would go a long way toward keeping the Social Security fund in decent shape in terms of paying out promised benefits.
The other option for Social Security is means testing, which would reduce or eliminate benefits for the most economically fortunate. The politics of this possibility will certainly push the “class warfare” buttons, but it wouldn’t surprise me to see proposals enter the picture as the crisis becomes more evident.
Generations at war?
In addition, there’s a potential political war looming in the not-so-far distance, one between the Boomers now facing a bleak retirement and younger generations trying to get their starts in life.
It is fair, for example, to ask people entering the workforce and starting a career to bail out their elders, while facing a brutal job market and carrying enormous amounts of student debt? As I wrote in this short article two years ago, generational battles over taxation and public spending may become ugly and divisive.
No quick fixes
Also, this won’t be solved by older Boomers suddenly deciding to save more, even assuming they are in a position to do so. Retirement funds are built by accruing returns on principal over time, and five or even ten years isn’t a sufficient period to do so, especially at a time of declining rates.
In addition to the individual burdens, the economic ripple effects of so many Boomers going into spending lock-down mode will be significant. What happens when a generation that built an economy based on credit and consumption suddenly puts on the brakes by sheer necessity? We may be about a decade away from finding out.
Folks, it’s not a pretty picture, but I won’t apologize for sounding like a broken record about it in the pages of this blog. It’s a crisis we’d better face earlier than later.
The full print version of The Week article is not available online, but a shorter version along with other pieces on the retirement crisis can be accessed here.
For more articles from this blog related to retirement readiness, Social Security, public pensions, and the economy, go here.