Aging and Retirement: The Elephants in the Room

Posted Wednesday, March 19th, 2014| Comments (9) rule
There is a retirement crisis in the United States. Or is there?

Philip Moeller

Author, book on Social Security, under contract with Simon & Schuster
Speaker, on retirement and successful aging
Journalist and Editor, American History of Business Journalism
Research Fellow, Sloan Center on Aging & Work, Boston College

Millions and millions and, for emphasis, even more millions of middle-aged Americans are moving closer to retirement these days. We don’t know exactly when all of them will retire or exactly what retirement will look like. Surveys find many people expect to keep working well past age 65. Yet Social Security shows a preponderance of claimants continue to file for retirement at age 62 or 63.

If we don’t know exactly what retirement looks like, we do know the financial condition of our aging nation filled with Baby Boomers—shaky at best. Even with the resounding comeback of the stock market since the Great Recession, and a slow but steady recovery in most housing markets around the country, retirements for many if not most will not be pretty.

Yet, even if this statement is true (and there are good reasons to challenge just about any absolute statement about retirement security), it’s hardly clear that it amounts to a crisis, or what we should do about it that we’re not already trying to do.

Private employers with 401(k)s and 403(b)s have taken a lot of heat in recent years for not doing more to help employees achieve better retirement outcomes. While employers have been struggling themselves to recover from the recession, they nevertheless have stepped up support for their plans (yes, often after pointed prodding), helped by better federal laws and innovative solutions provided by behavioral economists.

Retirement plans generally now offer better investment choices, lower fees, improved consumer disclosures and a range of participation rules that have raised employee contributions and participation. Retirement-plan balances are rising and projected outcomes portray satisfactory retirement solutions for the overwhelming percentage of plan participants.

The lack of tax-advantaged retirement accounts at smaller employers is widely cited as a major problem here. Roughly half of the nation’s private-sector employees do not even participate in a retirement plan and most of them work for smaller employers. President Obama and members of Congress have repeatedly proposed new retirement plans targeted to this population. There is also support for relaxing ostensibly pro-consumer safeguards for investment plans that have had the unintended consequence of making it harder for smaller employers to create and manage such plans.

We can argue about the pace and degree of change here. But it’s not as if anyone is turning a blind eye to the problem. And we should hardly be surprised that reallocating federal budget dollars to help improve retirement outcomes is not likely to happen these days. It is true that government budget deficits are declining. But they are still large, and government costs for helping our aging population—primarily through Social Security, Medicare and Medicaid—are set to soar in future decades.

Academic researchers have long identified Americans’ financial illiteracy as a primary cause of poor retirement planning and outcomes. And they have further urged schools and community colleges to greatly expand financial education courses. This is happening, albeit too slowly. But such efforts are more likely to help turn things around for future generations than for boomers whose financial realities for retirement already are largely determined.

Today’s reality, then, is that we have limited dollars and not much time to improve retirement outcomes, especially for people within 10 years of retirement. To move ahead, we must target our efforts where they will do the most good. To do this, we first have to recognize some unpleasant realities that have long been elephants in the room when it comes to retirement policy discussions.

  • Longevity gains are putting unforeseen pressures on retirement prospects. We are living longer, meaning we need to save more money for longer retirements, and we will have less to spend during retirement. Expecting employers or governments to “fix” this problem is naïve.

  • Social Security is the only source of retirement income for half of all American seniors and even the dominant source for another 25 percent. If you really want to improve retirement prospects for most Americans, you can do so by boosting Social Security payouts. If you don’t want to increase government spending in the process, you will need to boost taxes on the top tier of wage-earners.
  • Expecting any voluntary savings program to make a difference in the retirement prospects of lower-earning Americans is not realistic. They either don’t have or are unlikely to set aside extra funds, even with attractive tax incentives (which, of course, could add to federal deficits).
  • Citing the decline of traditional pensions as the cause of our retirement crisis is a popular theme among 401(k) critics. But it’s not accurate. Even during the prime of traditional pensions, fewer than 30 percent of employees actually qualified for and received payouts. Pensions improved retirement prospects mostly for the same types of employees who are now being helped by 401(k) plans. The difference, of course, is that pensions were funded and invested by employers; they took all the risks. Today, employees take on all the risk.
  • The notion that Social Security simply pays people back for what they put into the system in taxes is false. So is the prevalent attitude toward Social Security that “I paid for it; it’s mine.” The program’s progressive payout rules provide retirement benefits that replace much larger percentages of people’s incomes for people who don’t earn much money. For people who earn only 25 percent of the nation’s average wages, for example, Social Security benefits replace 77 percent of their income. People who earn the top amount of wages subject to payroll taxes qualify for benefits that replace only 28 percent of their incomes.

In reality, Social Security is a massive income redistribution program. You may think this is a good thing or a bad thing, but at least we should recognize the program for what it is. In terms of retirement, Social Security has evolved into the only game in town for most of us.

Among the top 50 percent, there is no retirement crisis for people aged 65 and older in the top quartile of income. They make enough money and also are big beneficiaries of tax breaks provided to holders of 401(k)s and IRAs. The next quartile is the sweet spot for retirement plans, and the evidence is clear that these savers are increasingly on track toward decent retirements.


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9 responses to “Aging and Retirement: The Elephants in the Room”

  1. Jessica Lang says:

    It is amazing that anyone at all can retire in this economy. With everybody working well into their 70s and others retiring as soon as they can.

  2. Heidi Kehren says:

    I work for a private company and my pay is low. They offer a retirement plan but I live pay check to pay check. I am in my early 30′s and have nothing in savings and plan not to contribute any of my income to a savings plan or a retirement plan.It’s just not in my budget. Because of this I know that I will probably end up working till I die. I really believe either schools or work places need to help educate people on how to plan for the future.I also have heard that there will be no social security when I am able to retire. If there is some social security it probably will not be enough to survive on, so I would end up working anyways and still struggling because everything in the world has gone up in price.It’s sad.

  3. Katie says:

    Yes Jessica it is amazing that anyone can retire in this economy. Some people do just simply have the money to retire. This is not the case for most though. Part of the problem could be looked at by the fact that some of our taxes could be spend in better places. Instead of them being spent on wants, for example, a new Vikings stadium, they could be spent on needs. They could be going towards social security instead. Most people live pay check to pay check and are not able to put money away for retirement. Perhaps people should have more of a say of what our money is getting spent on and the government should take more advice of the people. Why should somebody have so much power of what our money gets used on? How can the elderly possibly survive on such a small of social security a month? This is a issue of debate that could really go in all different directions.

  4. Joanna Carlson says:

    In highschool’s it seems that they are teaching the students not to plan on Social Security and save money in an IRA. But I think that you put in a good point, it is unlikely that people in the working class will be able to put money away at all for retirment. I think the younger generation doesn’t worry soon enough about retirement. I personally don’t mind putting money into Social Security because its helping out my grandparents and parents. But when it comes for me to retire and I get nothing in return I most likely will have a change of heart.

  5. Diego Apling says:

    I do like the way you have presented this specific problem plus it really does present me some fodder for consideration. Nevertheless, because of what I have observed, I just hope when the actual feed-back stack on that men and women keep on issue and not get started on a tirade of the news of the day. Still, thank you for this exceptional piece and although I can not necessarily agree with the idea in totality, I value your standpoint.

  6. Mama Hadija says:

    i think with the economy all our savings will be worth nothing by the time we are required to retire

  7. Tira says:

    1)Do you think you’ll have enough money for a coblrotamfe retirement?Does not apply. I love my career as an artist and hope to die with the tools of the trade in my hands.2) Do you plan on receiving the social security benefits that have been promised to you?Sure, I’m a boomer. I plan to tap in at 62. But my intent is to pass it along every month to someone in one of the following generations. There’s some delicious irony there.3) What % of your income do you save today for retirement?When I work my savings rate is usually around 40-50%. But let me say that life so far has been like a long summer vacation. I have taken as much as a year to enjoy myself and recharge my batteries several times in my adult life. I rarely reject an offer to go river rafting or fishing (which are very low cost and high enjoyment activities). On the financial side, I sold my suburban home four years ago and rent a small farm now. The cash is well invested (I hope) since it has more than doubled in that time. To buy in my locale would cost me at least triple what I now pay in rent. 4) Where would you like to retire?I’m an avid, no, really I’m a compulsive food gardener and tree grower. Soil, water, four real seasons and open spaces blow my skirt up. I’ll stay in the USA and take my chances with the coming times since my tribe is here. 5) How old are you, and what age do you plan on retiring?The answer to part one is that I’m just about to turn 61. For part B see the above.A little rambling: The real goal is to have a good life. Keep it simple and full of heart. Be joyful doing vigorous work. Eat healthy food not poisonous crap. My key to having enough money has been to tighten down the outflow spigot rather than exert myself in the mind numbing quest for big bucks. Oh yeah, exchange goods and services with others because the return is much greater (though a bit difficult to quantify). You have all seen pictures of some ancient and very wrinkled peasant in bib overalls holding a bunch of grapes with a twinkle in his eye and a wise smile on his face. This is not a bad goal. Finally, it is better to die deservedly well loved than rich.

  8. Gian says:

    I will comment on this beuacse I AM retired already – it wasn’t rocket science. . .I am now 57 and retired at 55 – I started putting 10% into my 403 (the public version of 401) in 1983 when it was offered at University of California. I also have a decent pension system with healthcare from UC. I am coordinated with Social Security, and will likely take it at 62 if it is still offered. . .if not, I can live without it. My advice to people in their 20′s and 30′s is to live below your means, save 10%(I put my money in an equity fund from 1983 to 1998 – when I switched to a bond fund) and buy real estate, ONLY if rent to own ratio comes back into line.I bought my condo in 1987, and in 1992, my neighbor wanted out of his place, and sold it below market value to me, during the last housing crash in California. I rented it out for positive cash flow, and sold it in 2004 for tripple the money.Timing is everything – I think there will be a lot of opportunities for investment in foreclosed properties in the next 2 years. . .also some nice blue chips can be picked up at low costs. . .I got Chevron back this week at 78 with a 3% dividend.Living of course in San Diego – good downtown airport, nice weather, and at least enought culture to keep me happy – hey it isn’t NYC or SF, but ok.Another advice – don’t build your life around doom and gloom – things looked pretty bad in 1981, and again in 1992. . .the economy usually muddles through, and those who invest at low prices are rewarded.

  9. Nandkishor says:

    1) Do you think you’ll have enough money for a cmrofotable retirement?I have no idea.None of us are guaranteed a tomorrow.There is no certainty that I will even be around at that time in order to retire!The money that I save today is put there for a rainy day, and is put there to eventually give away or pass on to heirs… but to say when that rainy day arrives and how I would expect to dispense of that money could be anybody’s guess right now. It seems to me that the important thing to do is to save money for unexpected contingencies. I see my savings as a way of being self-insured.2) Do you plan on receiving the social security benefits that have been promised to you?I would hope so, but by that time, the amount would probably be insignificant due to inflation and the system collapsing on itself. By that time, I would expect to hear the government say “We’re broke. Yeah, it’s not much that you’re getting, but it’s better than nothing”.3) What % of your income do you save today for retirement?I save as much as the tax laws allow me to do so.I max out IRA’s, SEP IRA’s, 401K’s, etc. And after that, if there is little left over, I try to save that too… (after paying for living expenses).4) Where would you like to retire?Wherever the good Lord puts me.5) How old are you, and what age do you plan on retiring?44.I plan to retire when I can no longer work… In other words, if it is God’s will, then I would prefer to be working in some capacity to the very end (with adequate time for some vacation from time to time).