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Monday, February 18, 2013 - Page updated at 08:30 p.m.
Most future retirees to be worse off than parents
By Michael A. Fletcher
The Washington Post
WASHINGTON — 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.
The decline is likely to have far-reaching 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 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.
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 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.
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.
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, enough to fund an annuity paying about $575 a month, far short of what they will need.
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 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. More are going to have to work longer. After many decades of decline, average retirement ages have been creeping up.
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.
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 retirees.
Both Medicare and Social Security already are on course to provide reduced benefits for future retirees.
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.
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