Several recently published articles have highlighted the poor financial condition many pre-retirees find themselves in. Many of these folks have not been putting enough money into their company retirement plans or their own IRA/Roth IRA accounts. Many are also grappling with paying off student loan debt for their children. These things coupled with fewer people being covered by pension plans means that most retirees are entirely on their own to figure it out. A 2014 Survey of Household Economics and Decision Making by the Fed found that “Thirty-one percent of non-retirees have no retirement savings or pension, including nearly a quarter of those older than 45”. Things are very dire for lower income workers. A 2015 study by the Government Accounting Office (GAO) found that those aged 55-64 have saved $104,000, and those aged 65-74 have saved $148,000. When you look at how much people need each year to survive these sums are significantly less than what is needed.
Even those covered by pension plans need to be aware of the financial condition of their plans. Many corporate plans have been discontinued or have gone bankrupt and are now being managed by the Pension Benefit Guaranty Corp (PBGC is a federally affiliated agency that oversees the insurance and administration of insolvent pension plans). This often leaves the pensioners with much smaller checks. At the time of this writing, the plan managed by the union that represented my mother and her two sisters is in danger of failing. This plan has a funding level in the low 60% range and is now complying with PBGC requirements in an effort to save the plan.
In Philadelphia the city’s pension system is in chaos right now as the plan for city workers is only 45% funded (according to two recent articles appearing in the Philadelphia Inquirer). Most corporate pension plans go into a danger zone area when funding drops below 70% (meaning that the PBGC stipulates certain steps that must be followed to try and fix the plan). This seems almost impossible when the plan is only 45% funded. The remedy that is normally proscribed for these types of situations is one of three things – higher taxes (income and/or property taxes), reduce benefits for current and future retirees, overhaul the system entirely and move to a 401k style retirement program. Something drastic needs to done as the City is $5.9 billion behind in its funding requirements.
The point of mentioning all of this is to highlight the severity of the crisis. The employees affected by state and local pensions typically do not save as much as regular corporate employees as they expect to fall back on their pensions. If their pensions get cut or are eliminated, these retirees will be in trouble.
Social Security is another areas where a crisis is brewing. Social Security represents a larger share of retirement income than it was intended to cover. For many Social Security is their primary income. The following bullets were pulled directly from the Social Security Administration’s website:
- Among elderly Social Security beneficiaries, 53% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.
- Among elderly Social Security beneficiaries, 22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income.
We all know the state of Social Security and Medicare and how it will be critical to see changes made to the Social Security system as soon as possible. Resurrecting the work done by the Simpson Bowles Commission will go a long way toward helping Social Security.
As previously discussed, savings rates by all U.S. works are well below what they need to do. It may be prudent to adopt mandatory contribution levels to help address this gap. This type of involuntary step does restrict an individual’s ability to control their own finances, however, it may be justified when we can project that these workers will become dependent on the state or federal government to help them when they are no longer able to work. I will point you to a review of Australia’s retirement system done by the Boston College Center for Retirement Research as an example of a system we may consider here – http://crr.bc.edu/briefs/australia%E2%80%99s-retirement-system-strengths-weaknesses-and-reforms-2/. Australia has mandatory contribution levels for all citizens and its system is generally considered to be one of the better systems in the world.
Finally, retiree medical care is another major crisis that is looming as the costs to manage Medicare continue to escalate. Many of the changes coming down the pike will most certainly result in significant increases in the cost of Medicare for retirees. First, Medicare Part B is currently means tested, which means that those that earn more pay higher premiums. Over the next several years the income thresholds at which participants will pay higher premiums will be lowered. This will result in a much larger portion of Medicare beneficiaries paying significantly more for Medicare Part B. This coupled with the gradual phaseout of certain Medicare supplement plans, in addition to significant rate increases for all plans, will mean retirees will have much higher out of pocket costs for their health insurance.
See some of the articles posted below for reference:
Look for our next retirement blog post with high level recommendations for ways to improve your outlook. Regardless, it is our belief that recognition of the problem now will result in an opportunity to develop a set of solutions that the Congress and the President can consider. Anything short of that, in my mind, will result in what I believe will be a significant crisis we are not prepared to deal with.