The Retirement Challenge, Pt. 2 (May 4)

Mike and Co. –

Five years ago, the first baby boomers turned 65.  Since then, the number of retirees in the U.S. has increased by the population of New York State — and growing at a rate of new 10,000 retirees every day.  Between 2010 and 2030, the number of Americans older than 65 is expected to rise from 40 to 72 million, an economically significant cohort.  

Over the 20 years, Social Security will see the largest influx of beneficiaries since its creation.  And as the number of workers shrinks in relation to those who draw benefits, the very first social contract we’ve grown up with for three generations will come under increasing pressure.  

There has been mostly silence on the subject on both sides during the primary season.  But someone — a candidate or questioner — is likely to fill this policy vacuum.   We described the retirement challenge facing the country yesterday; today we look at basic policy solutions. 




A Gathering Problem

Americans are living longer and retiring earlier than they did in the past, employer-provided pension plans are less generous as are social security benefits, and their healthcare costs have risen rapidly.  Despite these developments, Americans have not considerably increased the amount of money they save for retirement, leading to a savings gap that may reach $14 trillion.

One half of workers expect to sharply reduce their spending when they retire.  What’s driving that trend?  The fact that one third of workers have no retirement savings, and another quarter have less than $10,000 saved.

Despite the impending retirement challenge, the discussion surrounding America’s retirement system has focused on only a few components of a much larger problem.  To help close the gap between what Americans need to save forretirement and what they actually have saved, lawmakers will confront a broad range of policy questions.

Social Contract up for Negotiation 

For decades it was possible to retire with a private, defined-benefits, pension package and draw on social security benefits for the rest of your life, and continue to live a middle-class lifestyle to boot.  Everyone knows that’s not the case anymore — retirees draw on various secondary and tertiary income sources.  One in four continues to work part time, while others draw on interest or dividends from assets and annuity payments.  In 1985 social security made up 65 percent of retiree income, today it only makes up 27 percent.  Without a major reset, that trend is set to continue.

The social contract in the past was made up of three pillars: savings, pension, as entitlements.  The new economy has turned all of these on their head, at least in terms of their weighted significance for retirees.  A renegotiation of the contract needs to prioritize savings, account for the loss of pensions, and find a way to make entitlements a sustainable expenditure for government.

Policy Solutions

Some of the leading solutions put forward are low-hanging fruit — like auto-enrollment in 401(k) plans – while others are vastly more complex both in design and implementation (think comprehensive entitlement reform).  One of the biggest hurdles facing these policy options isn’t so much political opposition at this stage, but a lack of awareness as to the true extent of the problem.

At the end of the day Americans have to save more money, and tweaks to incentivize saving may help but probably won’t single-handedly solve this problem.  In the same way that activists and politicians need to rouse their peers to action, so is there a need to inform the population at large.  A dedicated and energetic educational program that lays out why retiring today isn’t like retiring in the 1980’s is a step in the right direction. 

A number of policy solutions have been proposed in the past years as advocacy groups and public policy specialists have turned their attention to the changing retirement landscape.  The three themes below all come back to a single issue – Americans have to start saving more for retirement.

Reforming the IRA:

There are currently twelve types of savings account with different tax rules, but it’s almost certainly feasible for people to work with only a handful – say two or three – of options instead of a dozen.  Even better, this sort of radical simplification makes starting a savings plan less daunting for younger workers.

Another option is to reduce the tax-deductibility of IRA deposits and have the government provide a cash-match on deposits.  This makes the benefit more equitable than it is now – a tax deduction benefits the wealthy over lower-income savers – and the immediacy of a direct match might encourage more saving.

Reforming the 401(k):

Right now 80 percent of all employees have access to an employer-sponsored retirement plan.  Providing tax benefits or some other incentive for businesses could build on that number.

Mandating 401(k) plans be “opt-out” rather than “opt-in” will help to boost participation numbers in those plans which are accessible.  Nearly all workers who have access to a plan participate in one, but studies show that an opt-out system can lead to greater participation even in popular programs.  Universal 401(k) participation should be the goal.

Rewarding Diversification:

The financial crisis was a wake up call regarding how much retirees but too many financial eggs in the home ownership basket. The real estate market had long been seen as a bastion of strong growth, but post-crisis, we know it’s not immune to bubbles of its own.  Finding a way to properly diversify retirement savings accounts may not be a big-ticket item such as changing entitlements, but it can prevent major losses to retirees should a key sector collapse.

Strengthening Entitlements

Strengthening Social Security doesn’t have to mean raising the retirement age, though that’s one of the most commonly proposed solutions.  But it would leave a large number of retirees in the lurch, particularly those who have timed theirretirement to when their social security benefits will kick in.  And it can’t be relied on to strengthen the whole system.

Other options for “fixing” Social Security include offering a lump-sum benefit option for retirees who defer taking benefits, exempting older workers from the payroll tax so they can invest into private accounts, altering the cost-of-living calculation, raiding the payroll tax cap, or means-testing benefits.

Retirees are not only one of the largest and most active voting blocs, if not also the fastest growing one.  Its rapid growth  and economic importance will test the limits of the social contract and may create a powerful policy void.

We may or may not decide as a nation that the current massively inadequate financial preparation of most Americans for their retirement is something we want to address in policy.   If we can agree on that issue, and we can approach the matter seriously, then we will have to reconsider the current patchwork of income sources, tax credits, pension plans, and entitlements in place today and make adjustments that reflect the profound social and scientific changes since this system was constructed.




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