Is There a Retirement Crisis?

The current (Autumn 2011) City Journal tackles the retirement crisis in a compelling article by Nicole Gelinas.  It begins by reciting what are now well-known retirement problems for the baby boom generation — lost wealth due to the financial crisis, the spectre of reduced Social Security and Medicare benefits, more seniors with fewer workers to support them, stagnant earings for more than two decades, and excessive debt. 

Not surprisingly, those approaching retirement are working longer in general and are very nervous about their prospects. The most recent Census data shows that among men 65 and older, 22 percent are in the labor force, up from 16 percent just a decade earlier. Fewer pensions create issues as well.  In 1980, when the baby boomers were young, 60 percent of private-sector workers with retirement plans could rely on guaranteed employer pensions. That figure is 7 percent today (although public employees still tend to have pensions). 

But there’s ultimately no way around it: baby boomers will eventually have to retire (if only due to health), and to do that, they’ll need more savings than they’ve managed to accumulate so far.

That said, Social Security isn’t in nearly the mess that so many assume.  It needs work, surely, but the problems are manageable.  Even without changes, Social Security’s trust fund should last until 2037 under current law.  But for workers with at least middle class incomes, much more than Social Security will be needed to replace their working life incomes. 

Unfortunately, Americans currently save only about 5 percent of their incomes — up from the near-zero levels of half a decade ago but still nowhere near the 10-15 percent savings rate most experts recommend (see Wade Pfau’s excellent discussion of safe savings rates here). We need a dramatic shift from spending and borrowing to saving and investing to have a reasonable chance at success overall. 

Gelinas recommends a major increase in deductible IRA contribution limits and also advocates the elimination of capital-gains, dividends, and interest taxes on anyone earning less than $250,000 a year, since these taxes discourage people from investing.  But saving more is only a partial solution.  Workers need better returns too. Indeed, average returns in the 8 percent range (as opposed to the 5 percent range) would go a long ways toward solving the younger boomers’ problems.
 
Of course, the biggest retirement uncertainty remains health care.  If health care costs are factored in, the typical rule of thumb that one should replace 80 percent of working income in retirement might need to be replaced by a figure in excess of 100 percent (which isn’t plausible practically).  The problem isn’t so much the costs that Medicare covers (although Medicare is in deeper trouble than Social Security), it’s the long-term care costs that Medicaid covers — since Medicaid requires that its recipients be demonstrably poor to benefit.  However, few people tend to buy long-term care insurance and the prospect of expanding Medicaid coverage is a political non-starter today.
 
According to Gelinas, the “most disturbing statistic on older-worker employment is this: in 2010, only 77.6 percent of men 55 to 59 years old were working or looking for work….”  Moreover, “[i]n 2009, only 14 percent of new male Social Security beneficiaries were of ‘full retirement age’—a precipitous fall from the 26 percent figure of the previous year. It was the lowest rate ever. Unless older unemployed people get back to work soon, they’ll never go back, and they’ll become poorer retirees than they needed to be.”   
 
Gelinas concludes with the obvious:  “fixing our economy now is the most important task of all.”  She suggests that we “let the housing market find its bottom, so that people who want to cut losses on bad housing debt have the information they need to make such a momentous decision. Invest massively in infrastructure. Fix the tax code to channel money out of debt and into innovation. Fix immigration so that we continue to attract the world’s smartest people. These measures would get people back to work soon and prepare the nation better for the future, making it likelier that those who will shoulder the burden of caring for an aging population are able to do it.” 
 
It’s pretty good advice.
 

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