Future of Retirement Dimming

I was talking to a man of about 40 the other day and he told me he expected to work until he died.  This notion was mostly driven by his desire to keep busy and keep contributing, but it also rested on his lack of faith in Social Security and other retirement systems.  Coincidentally, several new reports on all phases of that subject have been in the news lately.

Preparation for retirement has traditionally been described as a three-legged stool consisting of Social Security, pension and personal savings.  All three are in peril.

This recent NBC article gives a good description of Social Security.  It begins with the story of how the first person to collect paid in a total of $24.77 and collected more than $22,000 over the rest of her lifetime.  As incredible as it may seem, the system works exactly the same way now.  Just as her Social Security checks were funded not by some magical formula applied to her contribution but on the contribution of others, retired people today rely on those who are still working and still paying FICA taxes.  It seemed like a good idea at the time when the average life expectancy was 61 and full retirement age was set at 65.  Many people paid in and never collected.  There were far more workers than retirees.  The extra money could go into a “trust fund” giving the impression that we were saving for our own retirement instead of funding others.

Today the full retirement age has been pushed to 67, but with the life expectancy near 80 and fewer people working to support each retiree, we have reached a point where total benefits exceed income and that trust fund must be tapped.  The latest estimates predict that unless Washington makes some changes, by 2033 the extra money will run out and the income will cover only 75% of promised benefits.  (That 40-year-old will be only 58.)

The second leg of the retirement stool is the pension.  CNBC reports that between 1975 and 2011 the number of private sector workers with a pension-paying job dropped from 88 percent to about 20 percent.  (This trend continues with the latest talk of dissolving traditional defined-benefit pensions in favor of a 401(k)-type plan comes from the military as the Defense Secretary finds, “Personnel costs, such as pay, health care and retirement, have consumed an unsustainable share of the Pentagon's budget.”)  Those lucky enough to retain the promise of a pension, which includes most government workers, face the reality that not enough money is being set aside to meet those obligations.  If you are a politician, corporate officer or union negotiator, it’s easy to make promises that someone in the future will have to keep.  How many retirees will soon be forced to take less than expected as those in Detroit experienced when the city declared bankruptcy?  Cries of “you promised” and “you can’t take it away” are trumped by the economic reality that there is no magic money tree. 

What is left and what is the only thing individuals can really control is personal savings.  Again the news is not good.  The idea of an IRA or 401(k) with tax deferrals and sometimes a company match to encourage people to save is being characterized as a failed experiment.  Workers were encouraged to save but they didn’t.  As an example, the average 401(k) plan has less than $19,000 and “the median amount for savers in Vanguard between 55 and 64 years of age in 2013 was found to be $76,381.”  Less than $80,000 to last 20 years does not provide much security, especially at a time when financial advisors are wondering out loud whether $1 million is enough to retire on.

That’s the hard facts - all three legs of the stool are broken.  A little economic understanding and critical thinking lead to the conclusion that retirement is disappearing.  Everyone without the discipline to save will get to retirement and wonder what they are going to do next.  What will likely happen is that politicians will fiddle around, not wanting to put sound decisions ahead of their popularity and ability to be reelected, and end up throwing more money that the government doesn’t have at the problem until we reach the ultimate point of unsustainability.