Fu­ture re­tirees at greater fis­cal risk

Sav­ings short­fall threat­ens decades of progress

The Washington Post Sunday - - FRONT PAGE - BY MICHAEL A. FLETCHER

For the first time since the New Deal, a ma­jor­ity of Amer­i­cans are headed to­ward a re­tire­ment in which they will be fi­nan­cially worse off than their par­ents, jeop­ar­diz­ing a long era of im­proved liv­ing stan­dards for the na­tion’s el­derly, ac­cord­ing to a grow­ing con­sen­sus of new re­search.

The Great Re­ces­sion and the weak re­cov­ery dark­ened the re­tire­ment pic­ture for sig­nif­i­cant num­bers of Amer­i­cans. And the full ex­tent of the dam­age is only now be­ing grasped by ex­perts and pol­i­cy­mak­ers.

There was al­ready mount­ing con­cern for the long-term se­cu­rity of the coun­try’s rapidly gray­ing pop­u­la­tion. Then the down­turn de­stroyed 40 per­cent of Amer­i­cans’ per­sonal wealth, while cre­at­ing a long pe­riod of high un­em­ploy­ment and an en­vi­ron­ment in which sav­ings ac­counts pay al­most no in­ter­est. Although the surg­ing stock mar­ket is ap­proach­ing record highs, most of th­ese gains are flow­ing to well-off Amer­i­cans who al­ready are in rel­a­tively good shape for re­tire­ment.

Lib­eral and con­ser­va­tive econ­o­mists worry that the de­cline in re­tire­ment prospects marks a his­toric shift in a coun­try that pre­vi­ously has fos­tered gen­er­a­tions of im­prove­ment in the lives of the el­derly. It is likely to have far­reach­ing im­pli­ca­tions, as an in­creas­ing num­ber of re­tirees may be forced to dou­ble up with younger rel­a­tives or turn to so­cial-ser­vice pro­grams for sup­port.

“This is the first time that Amer­i­cans

whelmed by con­cern about the na­tion’s fast-grow­ing long-term debt, which has left many pol­i­cy­mak­ers fo­cused on ways to trim So­cial Se­cu­rity and other re­tire­ment ben­e­fits rather than in­crease them.

The eco­nomic down­turn ex­ac­er­bated long-term fac­tors that were al­ready erod­ing the fi­nan­cial stand­ing of ag­ing Amer­i­cans: an in­ex­orable rise in health-care costs, grow­ing debt among older Amer­i­cans and a shift in re­spon­si­bil­ity from em­ploy­ers to work­ers to plan for re­tire­ment.

The con­se­quence is that the na­tion is fac­ing a huge re­tire­ment sav­ings deficit — as much as $6.6 tril­lion, or about $57,000 per house­hold, ac­cord­ing to a U.S. Se­nate report.

Us­ing data on house­hold fi­nances col­lected by the Fed­eral Re­serve, the Cen­ter for Re­tire­ment Re­search es­ti­mates that 53 per­cent of Amer­i­can work­ers are go­ing to be rel­a­tively worse off than their par­ents or grand­par­ents in old age,” said Teresa Ghi­lar­ducci, di­rec­tor of the Schwartz Cen­ter for Eco­nomic Pol­icy Anal­y­sis at the New School for So­cial Re­search.

Ad­vo­cates for older Amer­i­cans are call­ing on the fed­eral government to bol­ster So­cial Se­cu­rity ben­e­fits or to cre­ate a new layer of re­tire­ment help for fu­ture re­tirees. Oth­ers want em­ploy­ers and the government to do more to en­cour­age re­tire­ment sav­ings and to dis­cour­age work­ers from us­ing the money for non-re­tire­ment pur­poses.

But those calls have been over- 30 and older are on a path that will leave them un­pre­pared for re­tire­ment. That marks a sharp de­te­ri­o­ra­tion since 2001, when 38 per­cent of Amer­i­cans were at risk of de­clin­ing liv­ing stan­dards in old age. In 1989, 30 per­cent faced that risk.

The cen­ter’s find­ings are sim­i­lar to those re­cently un­cov­ered by re­searchers at the New School, the Her­itage Foun­da­tion and the Se­nate’s Com­mit­tee on Health, Ed­u­ca­tion, La­bor and Pen­sions.

“There is a mis­match be­tween re­tire­ment needs ris­ing and re­tire­ment ben­e­fits con­tract­ing,” said Ali­cia H. Mun­nell, di­rec­tor of Bos­ton Col­lege’s Cen­ter for Re­tire­ment Re­search.

The pre­car­i­ous sit­u­a­tion comes af­ter a long pe­riod of change that im­proved life for the na­tion’s se­niors start­ing with the enactment of So­cial Se­cu­rity in 1935.

By the 1960s, re­tirees also ben­e­fit­ted from uni­ver­sal health in­surance through Medi­care and Med­i­caid, sharp in­creases in So­cial Se­cu­rity ben­e­fits and new pro­tec­tions en­acted by the fed­eral government for work­ers who re­ceived tra­di­tional pen­sions, which for decades were a stan­dard em­ployee ben­e­fit.

The changes rescued mil­lions of re­tirees from poverty, while lift­ing mil­lions of oth­ers to pros­per­ous re­tire­ments sym­bol­ized by va­ca­tion cruises, recre­ational ve­hi­cles and sec­ond homes.

But now prob­lems for fu­ture re­tirees seem to be clos­ing in from all sides. Half of Amer­i­can work­ers have no re­tire­ment plans through their jobs, leav­ing peo­ple on their own to save for old age.

Mean­while, four out of five pri­vate-sec­tor work­ers with re­tire­ment plans at work have only 401(k)-type de­fined con­tri­bu­tion ac­counts, rather than tra­di­tional pen­sions that pay re­tirees a fixed ben­e­fit for life. Numer­ous stud­ies have found that work­ers with de­fined-con­tri­bu­tion ac­counts of­ten put aside too lit­tle money, make too many with­drawals or em­ploy the wrong in­vest­ment strate­gies to save enough for old age. Over­all, peo­ple ages 55 to 64 have a me­dian re­tire­ment ac­count bal­ance of $120,000, Bos­ton Col­lege re­searchers have found, which is enough to fund an an­nu­ity paying about $575 a month, far short of what they will need.

Of­fi­cials at money-man­age­ment firms that han­dle 401(k)-type in­vest­ments ar­gue that the tools are in place for Amer­i­cans to re­tire com­fort­ably. The prob­lem, they say, is that em­ploy­ers and work­ers are not us­ing them cor­rectly.

Robert L. Reynolds, pres­i­dent and chief ex­ec­u­tive of Put­nam In­vest­ments, noted that 2006 changes in fed­eral law gave em­ploy­ers the power to au­to­mat­i­cally en­roll work­ers in re­tire­ment ac­counts. But too few choose to do that and even when they do, com­pa­nies typ­i­cally set aside only 3 per­cent of pay — far less than the es­ti­mated 10 per­cent that ex­perts say work­ers need to set aside to fund a sound re­tire­ment.

“I would be adamant that there is noth­ing wrong with 401(k)s that can’t be fixed by tak­ing bet­ter ad­van­tage of the cur­rent sys­tem,” Reynolds said.

Daniel J. Hous­ton, pres­i­dent of re­tire­ment, in­surance and fi­nan­cial ser­vices at the Prin­ci­pal Fi­nan­cial Group, con­tended that de­fined con­tri­bu­tion ac­counts are bet­ter tai­lored than old-fash­ioned pen­sions to to­day’s highly mo­bile work­force. Work­ers can take them when they switch jobs. But that con­trol also is a weak­ness, al­low­ing Amer­i­cans to tap them for non-re­tire­ment pur­poses.

The re­tire­ment sav­ings short­fall is re­veal­ing an eco­nomic di­vide sep­a­rat­ing those who are well pre­pared for re­tire­ment from those who are not. Re­cent pol­icy changes aimed at bol­ster­ing Amer­i­cans’ re­tire­ment prospects have only contributed to the grow­ing in­equal­ity.

The government grants at least $80 bil­lion a year in tax breaks to en­cour­age re­tire­ment sav­ings in 401(k)-type ac­counts. But the big­gest ben­e­fits go to up­per-in­come peo­ple who can af­ford to put aside the most for re­tire­ment, al­low­ing them to reap the big­gest tax breaks.

Some­one mak­ing $200,000 a year and con­tribut­ing 15 per­cent of pay to a re­tire­ment ac­count would re­ceive about a $7,000 sub­sidy from the fed­eral government in the form of a tax break, whereas work­ers earn­ing $20,000 mak­ing the same 15 per­cent con­tri­bu­tion would get noth­ing be­cause they don’t earn enough to qual­ify for a de­duc­tion. Some­one mak­ing $50,000 and mak­ing the 15 per­cent con­tri­bu­tion would re­ceive only about a $2,100 tax de­duc­tion.

Even many of the di­min­ish­ing share of work­ers who are en­rolled in tra­di­tional pen­sion pro­grams face un­cer­tainty as an in­creas­ing num­ber of plans are un­der­funded, caus­ing em­ploy­ers to freeze ben­e­fits.

The hits to re­tire­ment in­come come as many Amer­i­cans are liv­ing longer and health-care costs con­tinue to grow, mean­ing they need to salt away more money for re­tire­ment.

Work­ers have lim­ited op­tions for clos­ing the gap. More are go­ing to have to work longer. Af­ter many decades of de­cline, av­er­age re­tire­ment ages have al­ready been creep­ing up in the past 20 years.

A re­cent sur­vey by the Con­fer­ence Board found that nearly two-thirds of Amer­i­cans ages 45 to 60 say they plan to de­lay re­tire­ment. Two years ear­lier, 42 per­cent said they would work longer.

Some law­mak­ers and other ad­vo­cates say the best way to cope with the grow­ing gap would be to fur­ther ex­pand So­cial Se­cu­rity and Medi­care ben­e­fits, or to add an­other layer of tax­payer-sub­si­dized sav­ings that work­ers could use only for re­tire­ment.

“We need to do more to help Amer­i­can fam­i­lies cope with this loom­ing re­tire­ment cri­sis,” Sen. Tom Harkin (D-Iowa), chair­man of the Com­mit­tee on Health, Ed­u­ca­tion, La­bor and Pen­sions, said at a hear­ing late last month. “Hard­work­ing Amer­i­cans de­serve to be able to rest, take a va­ca­tion and spend more time with their grand­kids when they get older.”

But many pol­i­cy­mak­ers are push­ing to rein in the na­tion’s debt by trim­ming Medi­care, Med­i­caid and So­cial Se­cu­rity ben­e­fits. Those pro­grams are the pri­mary drivers of the long-term deficit but are also fi­nan­cial main­stays for the vast ma­jor­ity of the na­tion’s re­tirees.

Both Medi­care and So­cial Se­cu­rity al­ready are on course to pro­vide re­duced ben­e­fits for fu­ture re­tirees — re­duc­tions that will grow deeper if law­mak­ers fol­low through on new pro­pos­als to fur­ther trim the pro­grams.

With the So­cial Se­cu­rity re­tire­ment age mov­ing to 67 un­der a fed­eral law passed in 1983, peo­ple who leave the work­force ear­lier — and the vast ma­jor­ity do — will see smaller pay­outs.

Health-care costs con­tinue to out­pace in­fla­tion, mean­ing more out-of-pocket ex­penses for fu­ture se­niors. Re­tirees are also slated to pay more for their health care with Medi­care pre­mi­ums, which are de­ducted from the So­cial Se- cu­rity checks of se­nior ci­ti­zens, set to rise from 12.2 per­cent to 14.9 per­cent by 2030.

James G. Marzano, 60, was on his way to a com­fort­able re­tire­ment when he lost his job at a telecom­mu­ni­ca­tions firm in 2002. “Peo­ple talk about a lost decade; that’s what I’ve been through,” he said.

Marzano, a Tampa res­i­dent who is mar­ried to a re­tail worker and has a son who is a high school se­nior, spent most of the past decade in and out of con­tract jobs and other posts that paid far less than he was used to. He was forced to dip into his 401(k) ac­count to make ends meet, and even now that he has found a good job, he says, his sav­ings is maybe 60 per­cent of what it was 10 years ago.

“If ev­ery­thing had stayed sta­tus quo from 2002 un­til 2012, I might be do­ing what I wanted to do to­day,” he said. “But, as it stands, I am nowhere near ready to re­tire.”


James G. Marzano, 60, of Tampa was headed to a com­fort­able re­tire­ment when he lost his job at a telecom­mu­ni­ca­tions firm in 2002. “If ev­ery­thing had stayed sta­tus quo . . . I might be do­ing what I wanted to do to­day. But, as it stands, I am nowhere near ready to re­tire,” he says.

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