The Real Retirement Crisis
There’s an ominous rumble in the financial world. It warns that retirement is likely to hit many Americans like an oncoming train. Social Security is waning. Monthly pension checks are drying up. Americans are living longer and not saving enough.
Surveys are done nearly every month, with some bank, mutual fund company or government agency trumpeting the results: At today’s rates, poverty and retirement may become synonymous. Indeed, the survey findings are nearly identical: The average American family has less than $20,000 saved for retirement--about six months’ worth of living expenses for a group that’s likely to live a good 30 years after leaving the working world.
Policymakers in both government and industry have labeled it a “retirement savings crisis,” and Congress recently passed legislation--immediately signed into law--to address it. It should be noted that the law, called the SAVER Act (for Savings Are Vital to Everyone’s Retirement), does nothing to finance retirement benefits. It simply aims to educate the public about the impending doom in the hope that Americans will save more to solve the problem on their own.
If there is a crisis, however, it’s unlikely to hit the Albert Grillos of the world. Grillo, a 30-year-old Los Angeles-based flight attendant, saves 20% of his $32,000 salary in a 401(k) plan and has already accumulated more than $10,000 in assets. At this rate, he’ll have a tidy $800,000 saved when he retires 30 years from now--assuming he never boosts his contribution rate and earns an 8% average annual return on his money.
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Given his modest lifestyle, he figures that amount will produce an adequate monthly income, even after adjusting for inflation.
Marcia Lewis, 36, is in even better shape. The Delaware corporate controller has been setting aside about a quarter of her $60,000 in annual earnings for years. She now has $215,000 saved and continues to sock away $15,000 each year. Even under the most pessimistic of investment scenarios, her retirement earnings will well exceed her working income.
And then there’s Larry Sowka, 42, a doctor so bent on saving that he lives on a mere 10% of his annual income. The remainder of the $400,000 he makes annually as a cardiac surgeon in Lakeland, Fla., goes into short- and long-term savings accounts. If he works 10 more years, he’ll have millions of dollars accumulated.
These three may be in the minority, but they are by no means alone. In fact, despite all the talk of crisis, serious savers represent a significant portion of the population and an even more significant portion of the younger population, economists say.
“The average [amount of retirement savings] tends to be a very poor ‘descriptor,’ ” says James P. Smith, senior economist with the Rand Corp. research firm in Santa Monica. Smith, who is studying soon-to-be and current retirees, finds that although about 30% of Americans have saved virtually nothing, another 30% have saved quite a bit--upward of $50,000. Some have hundreds of thousands socked away, he adds.
More important, the group that didn’t save didn’t have to. Among the more interesting findings in Smith’s research is that retired non-savers are not starving. In fact, as a whole, they are as well off--some, even better off--in retirement as they were while working.
Why? Because Social Security and employer pensions have replaced all or a substantial part of their wages, Smith says.
Indeed, in the lowest-income groups, which are also the groups least likely to save, Smith found that Social Security is replacing about 80% of wages and in some cases as much as 90%. Those who also have pensions can find themselves better off in retirement.
“Especially with low-income people, the fact that they haven’t saved is a reflection of the fact that they were getting Social Security and a pension that was almost equivalent to their income anyway,” he says.
For many Americans, that will continue to be true. Although the death of the company pension has been trumpeted for years, the plans are hardly rare.
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According to data from the 1993 census, 49% of American workers are covered by some type of pension. Among full-time workers nationwide, 56% are covered (although just 15% of part-time workers are covered). The coverage rate is lower in the private sector, where 43% of full-time workers are in pension plans, but pensions cover about 85% of full-time workers in the public sector, according to the Labor Department.
Pension plans cannot simply be withdrawn if the employer decides that providing one is too expensive. If a company decides to fold its defined-benefit pension plan--that’s the type that pays workers a monthly stipend for life--it must give workers the amount of money that has been set aside in their names. Frequently, companies do this by transferring defined-benefit assets into defined-contribution plans, such as 401(k) programs, in which workers contribute to their retirement savings.
(If the company becomes insolvent and is unable to pay defined-pension benefits, the federal Pension Benefit Guaranty Corp. steps in and pays workers their monthly stipends, within certain limitations.)
David Wise, another economist who has been studying retirement savings, considers the move toward 401(k) plans highly positive. Although the plans don’t promise a set benefit--you get only as much as you (and for most people, your employer) put in, plus the money earned on your investments--they are portable; defined-benefit plans are not. Individuals who relied on defined-benefit plans to finance their retirement were locked in to a single job because the plans offer sizable payments only to those who worked for one company for the bulk of their careers, Wise says. With a 401(k), you can switch jobs as often as you like--your retirement money goes with you.
The amount of money being contributed to and accumulating in 401(k) plans is quickly overtaking the total amounts of defined-pension money. Wise estimates that about half the country’s families have access to a 401(k). Contributions by worker and company average 8.7% of wages and total about $100 billion a year, Wise says.
“The money going into these plans is just enormous,” says Wise, the John F. Stambaugh professor of political economy at Harvard University’s John F. Kennedy School of Government. “For people who are retiring in 2020 or 2030, they are sure to have more money from 401(k) plans than they will have from Social Security.”
Still, Smith, for one, agrees that there’s a retirement crisis in the making, but for one reason only: Social Security. Although the retirees he’s studying are living comfortably in spite of their sorry savings, that’s largely because they’re receiving fairly big Social Security payments. The system won’t be able to afford such payouts in the future, when the population of retirees burgeons because of increasing longevity and the retirement of the massive baby boom generation.
“There is a very serious problem based on the budgetary imbalance, given the promises that were made and the ability of the government to meet them,” Smith says. “They imply a 30% reduction in benefit levels. The longer you wait, the more people are going to be hit by this.”
Adds Wise: “There is no retirement savings crisis. There is a Social Security crisis. That problem has to be solved.”
There are potential solutions: an across-the-board cut in benefits; an increase in the retirement age; privatization, which would give recipients the option of investing a portion of their savings in higher-risk, higher-return investments such as stocks; or simple means-testing, which would mean subtracting benefits from wealthy retirees. There is also the option of separating retirement benefits from the consumer price index. Social Security payments would no longer correlate directly with CPI rises. Inflation adjustments, if any, would be determined some other way.
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All of the proposals are controversial.
“There are a variety of proposals, none of which has enough popular or political support to carry the day,” Smith says. “What’s important, though, is when the Social Security commission studied this, the option of preserving the existing system got very few votes. There is a lot of support for change, but not for any one proposal.”
However, for Generation Us, just one practical question remains: Are you facing a retirement crisis or retirement riches? If you’re like most people, you haven’t a clue, says Paul J. Yakoboski, senior research associate at the Employee Benefit Research Institute, a Washington-based nonprofit group that studies health and retirement issues.
The latest EBRI annual retirement preparedness survey found that 70% of Americans are saving but that few had any idea whether they were saving enough. Only a third had even tried to figure out whether their savings would be adequate, and even among that intrepid group, less than half could come up with a solid figure.
To be sure, it is a difficult exercise that requires speculating about myriad variables, from your Social Security benefits to how much you’re likely to earn on your savings. Those who have employer pensions must factor in how much these plans will pay them, which requires guessing how long you’ll stay with that employer and how much you’ll earn during that period.
Nevertheless, even a guesstimate is better than nothing, experts say. And if things change--or you find that you guessed inaccurately--there’s no reason you can’t review the figures and guess again.
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Coming of Age
1935: System created when President Franklin D. Roosevelt signs Social Security Act. Law creates insurance program for retired workers 65 or older.
1935-37: First mission of program is to issue Social Security numbers to country’s 35 million workers.
1937: First Federal Insurance Contributions Act, or FICA, taxes are collected.
1937: Ernest Ackerman, who retired one day after the Social Security program began, is first beneficiary, collecting lump-sum payment of 17 cents after contributing 5 cents in his one day of participation.
1940: Payment of monthly benefits begins. Payments authorized for retired workers and their wives, widows, dependent children and surviving parents.
1940: First monthly retirement check of $22.54 issued to Vermont’s Ida May Fuller. She receives monthly benefits for next 35 years until her death at age 100.
1940-53: The system undergoes several internal reorganizations and eventually becomes division of Department of Health, Education and Welfare.
1956: Social Security Act amended to provide benefits to disabled workers ages 50-65 and to disabled adult children.
1956-60: Act further amended to expand disability benefits to workers under 50 and allow dependents of disabled workers to receive benefits. By 1960, 559,000 Americans are receiving Social Security disability. In addition, age at which women can first receive benefits is dropped to 62.
1961: Age at which men can first receive benefits is lowered to 62.
1965: Medicare Act signed, making Social Security responsible for administering new social insurance program that extends health coverage to most Americans over 65. Nearly 20 million people enroll in Medicare program in first three years of operation.
1966: Prouty Amendment passed, directing Social Security to begin making monthly payments to people 72 and older who are otherwise not eligible for payments.
1969: The Federal Coal Mine Health and Safety Act passed, directing Social Security to pay benefits to coal miners afflicted with black lung disease.
1969: Number of people receiving retirement benefits rises to 1.7 million, from 742,000 in 1961.
1972: State welfare programs that provide assistance to needy, aged and blind individuals come under Social Security’s broadening wing. Called Supplemental Security Income, these programs provide monthly benefits to those who never paid into the system, or who paid in for too short a time to qualify for ordinary benefits. Includes elderly noncitizens. SSI adds 3 million additional beneficiaries into program.
1972-74: Takes two years to transfer SSI recipients onto the federal rolls. By 1974, there are 3.2 million beneficiaries, receiving average of $114 per month. By the end of 1994, there are 6.2 million SSI beneficiaries, receiving average of $351 per month.
1980-84: Social Security’s disability program revamped to provide work incentives and to review disability claims to determine continuing eligibility of beneficiaries.
1983: Long-term financial viability of Social Security questioned. President Reagan appoints a blue-ribbon panel, known as the Greenspan Commission, to study financing issues and make recommendations. Result is laundry list of changes, including taxation of 50% of Social Security benefits for some middle- and upper-income recipients, and gradual ratcheting up of retirement age.
1993: President Clinton signs law that increases percentage of Social Security benefits that are taxable. Up to 85% of certain benefit payments now subject to taxation. In addition, law repeals limits on earnings subject to Medicare taxes and requires states to start reimbursing federal government for certain SSI benefit payments.
1994: Social Security becomes an independent agency.
1996: New restrictions are placed on disability payments to those disabled because of alcoholism or drug addiction. Unless drug addicts and alcoholics qualify for disability under some other medical basis, they can no longer apply for Social Security disability.
1996: Welfare reform law terminates SSI eligibility for most noncitizens and tightens rules determining whether disabled children can receive Social Security disability benefits.
1997: Alcoholics and drug addicts, who previously had received Social Security disability, are cut off unless they can prove another medical disability.
1997: Earnings limitations, which kick in when retirees who are age 65 and over continue to work, rise gradually, allowing Social Security recipients to earn a bit more without having their benefits reduced.
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Benefits Over Time
Social Security benefits paid, im millions of dollars
1950: 1.0
1960: 11.2
1970: 31.9
1980: 120.5 1990: 247.8
1995: 332.6
1996: 341.1
Source: Social Security Administration
