Do I have it completely wrong, or is most of America ignoring the coming economic and social train wreck that will occur when millions of Baby Boomers realize they do not have sufficient resources to fund a relatively comfortable retirement?
I’ve been trying to connect the dots, and the emerging picture of the Boomer retirement crisis frightens me:
Reality 1: A cool million may not be enough
What’s your number?
This question is bandied about often among those who are within imagining distance of retirement age. In essence, it refers to the nest egg that one should have in order to live a relatively comfortable retirement.
Conventional wisdom has been that one million dollars should be a target goal, but today’s investment advisers are saying that isn’t enough. As reported in March by Joe Mont for TheStreet (link here):
That target may be easy to remember, but it falls short of the true cost of what’s required for post-career comfort. Longer life spans, the threat of inflation and the uncertain future of Social Security benefits make this long-touted savings advice inadequate for most, advisers say.
Reality 2: Most folks aren’t even close to saving a million anyway
Most Americans are neither close to saving a million dollars nor on a reasonable track toward doing so.
Even before the Great Recession, researchers were voicing grave concerns about the financial readiness of the Baby Boomer generation for retirement. When the bottom fell out of the economy, retirement accounts of millions of Americans took a savage beating, with many workers losing a quarter, half, or even more of their savings. Those who bailed out of the market at that point lost out on the partial recovery that followed.
Google phrases such as “retirement savings statistics” and “Boomer retirement savings” and you’ll get a blizzard of facts and figures from multiple sources documenting the crisis. Here’s a very random sampling:
From Money 101:
Most Americans think that they’ll be able to retire comfortably, but most aren’t saving nearly enough to meet that goal. Sixty-eight percent of workers are confident that they will have adequate funds for a comfortable retirement. And yet, more than half of those workers have saved less than $25,000 for retirement. Only 20% of Americans have saved $100,000 or more. Only 10% of Americans have amassed retirement savings of $200,000.
According to the Employee Benefits Research Institute’s 2009 Retirement Confidence Survey, 53% of workers in the U.S. have less than $25,000 in total savings and investments. The typical American household (headed by a 43 year old) has just over $18,000 in savings! That’s a scary number.
Okay, for households headed by persons between the ages of 55 and 64, the median value of all retirement accounts was just $100,000. [Financial analyst Patrick] Purcell noted that for a 65-year-old man retiring last month, that $100,000 would buy an annuity that would pay a paltry $700 a month for life, based on current interest rates.
Don’t stop there. Look at dozens of other sources and you’ll see the litany of alarming facts and figures goes on and on.
Reality 3: Many public sector workers are sitting on a crumbling foundation
Public sector pension funds — the main source of retirement funding for public sector workers in education, social services, and public safety — are in bad to terrible shape in many states. For example, Gus Lubin, writing for The Business Insider, identifies 11 state pension funds that are projected to run out of money within the next decade or so (link here):
Here’s a shocker: The most immediate state pension crises aren’t in New York or California. They’re in Middle America.
When it comes to state pensions in the most trouble, do places like New Hampshire come to mind? Probably not, unless you live there, and maybe not even then.
Once those funds run dry, the public may be on the hook to fulfill those obligations. Lubin’s article includes the projected percentage of annual state revenues that will be required to make the pension payments once the funds are empty. The numbers are stunning, running from 17 to 54 percent.
Reality 4: Compared to pensions and retirement savings, the Social Security system looks pretty viable
As I discussed in a previous article, the crush of Baby Boomers hurdling towards retirement means that considerable strain will be put on America’s Social Security system. Two years ago, the Social Security Administration advised that by 2019 it will be “paying more in benefits than we collect in taxes,” and by 2041 it will have sufficient funds “to pay only about 78 cents for each dollar of scheduled benefits.”
Even with this anticipated shortfall, however, Social Security remains one of America’s most stable benefit programs — despite the rush of misleading, apocalyptic claims that the system is on the brink of going under. As Jane Slaughter of Labor Notes observed, the projected funding gap can be addressed fairly and cleanly by raising the income cap on payroll taxes. Currently the top 6 percent of income earners pay FICA only on the first $106,800 of their income. By removing the cap, the Social Security fund will be able to pay full benefits for everyone and rebuild its surplus.
It must be emphasized that Social Security alone does not meet the normal retirement income needs of most Americans. However, with a relatively modest fix it will continue to be the safety net that saves many from sinking into poverty.
Reality 5: It’s not just about the retiree wannabes
If older workers cannot afford to retire, then entry-level work opportunities for younger workers are likely to be curtailed. When a bad economy and/or lack of retirement readiness forces older workers to remain in or return to the workforce, the result may be a “face-off” between the young and the old for precious employment opportunities. In addition, during the coming decades, it is a demographic reality that fewer workers will be paying taxes to support public programs and retirement benefits.
(For more on this topic, see my short article, The Looming 21st Century Generation Gap: Economic Challenges Facing Younger Workers, which can be downloaded without charge, here.)
Reality 6: We must start acting now, before panic ensues
It appears we have about 10 to 15 years to respond pro-actively to the coming retirement disaster. After that, panic will ensue, thus increasing the risk that bad personal and public policy decisions will become the norm.
The landscape of responses is littered with landmines. Take, for example, the seemingly no-brainer goal of getting Americans to save more money for retirement. Great idea, right?! But here’s the potentially huge catch: If most Americans begin stashing away dramatically larger shares of their income for retirement, then less money will be fueling the retail market economy, contributing to tax revenues (remember, a lot of retirement plan options are tax-exempt), and donated to charitable causes.
I don’t claim to have all the answers, but at least two points are clear. First, ensuring Social Security’s long-term viability is a bedrock necessity. Second, providing quality, affordable healthcare for all will be even more important as the population ages.
Beyond that, there is no quick fix, perhaps only a loose-parts approach of partial measures that will cushion, but not wholly prevent, the coming pain. Regardless, the sooner we begin acknowledging the crisis, the more likely it is that millions of people will be spared abject poverty and lonely struggle in their later years.
For more links to useful articles, see my January 2011 post, “The press discovers the coming Boomer retirement crisis.”