March 07, 2011

Responsible Retirement

It's not hard to find organizations talking about retirement being in a crisis due to pensions. From organizations using that narrative to undercut unions to reporting that uses a snapshot approach to talk about plans with very long life-spans, the idea that pension plan funding and retiring baby boomers are going to bankrupt us all is everywhere. However, there are two problems with this idea.

The first is that it's not true. State pensions and private pensions are not fully funded at the moment, but that has more to do with the current state of the markets and the fact that contributions largely weren't made to these plans while market returns were being inflated by the tech and housing bubbles. Contributions need to be made, but nothing is spiraling out of control. Benefits cost money. That's just the way it works.

The second problem with the pension crisis narrative, however, is worse. The emphasis on pensions hides a much larger problem with retirement in America. This crisis won't hit for another decade or two, but the size of the problem is easily visible today--if you look.

What is the financial magnitude of the nation’s retirement income crisis? Retirement USA asked the respected non-partisan Center for Retirement Research at Boston College to calculate the figure that represents our current retirement income deficit – that is, the gap between the pensions and retirement savings that American households have today and what they should have today to maintain their standard of living. Using the data from the Federal Reserve Board’s Survey of Consumer Finances, the Retirement Research Center has calculated that figure at $6.6 trillion.

The deficit figure covers households in their peak earning and saving years—those in the 32-64 age range—excluding younger workers who are just beginning to save for retirement as well as most retirees. It takes into account all major sources of retirement income and assets: Social Security, traditional pension plans, 401(k)-style plans, and other forms of saving, and housing.

It's not hard to say what's driving this. We are stunningly bad at long-term planning, we're not terribly numerate, and almost everything around us encourages us to live at the edges of our means. That was bad enough in the era of the paternalistic pension, but now that 401(k) plans make the money to fund our retirements "ours" in a more immediate sense, we're doomed. We decide we can't afford to contribute. We take loans and hardship withdrawals. We cash out our savings instead of rolling them over when we switch employers. We're not saving the money we need.

Beyond that, we're doing a lousy job of investing the money we do save. We try to play the market. We avoid risk (and its associated reward). In volatile markets, we do exactly the opposite of what we should do--we sell low and buy high. As investors, we suck.

And if you're sitting there feeling smug because none of what I've just said applies to you, hang on a minute. Actually, hang on for 10 to 20 years. That's when my generation (Gen X) will start retiring and you get to really find out what this means for you.

Let's start with what it means for your kids. We've seen it the last couple of years. Fewer people are retiring at all, and those who are leaving their careers are often still working, just in a less demanding job. Can't afford to start drawing down your savings too quickly when you don't have much. That means jobs that would be entry-level or unskilled are going to people with job histories to show they're reliable. Young adults find it harder to find jobs. Sorry, kids.

Then there's the run on public services. For the working poor, Social Security isn't nearly enough for financial security. And no matter how much we say we're going to throttle "entitlement" spending, money we don't pay on basic services we end up spending on other services. If we don't pay for food stamps, we pay for health care. If we don't pay for preventive care, we pay for emergency care. There are costs we just can't make go away. If retirees can't pay, the rest of us do, and we don't even get humane outcomes for our money.

Finally, there is the impact on the economy. We live in a consumer-driven economy. Poorer consumers mean a less-healthy economy. In addition to what that means for jobs for everyone still working, that hits savings invested in the market. It hits bonds as well, as those are no longer nearly as independent of stock price movements as they used to be. And once the effects start hitting, people who have savings won't even be able to protect them by buying annuities. The current interest rates make annuities very expensive right now, and that's going to be the case whenever markets are threatened.

So, saver or non-saver, you have only so much time before this retirement income deficit hits us all, and hard. Isn't it about time to tell your media and your government to ignore the pension non-crisis and start paying attention to this?


Silver Fox said...

I'm hoping to be able to afford to retire; if not, I hope to be able to continue working (and maybe training the rising Gens, mostly younger than X). Very few of my generation have retired yet, but we're mostly not of that age quite yet. But then again, geologists are known for hanging on and not retiring on time.

Heather M. Rosa said...

Another reason for not being ready to retire is divorce. Hard to save when half or less of the previous income is available to run a household. When savings don't start until after the kids graduate, you can't take advantage of the miracle of compounded interest.

Ben Zvan said...

But legacy expenses like pensions bankrupted GM!!!!11!

D. C. said...

But legacy expenses like pensions bankrupted GM!!!!11!

Indeed -- thus demonstrating what happens when you spend sixty years handing out IOUs to make the current quarter look better.

401(k) plans are far from ideal in too many ways to count -- but they beat defined benefit plans when you can't count on staying at one employer for forty years. At least they're funded with more than a note at the bottom of the jar.

Stephanie Zvan said...

D. C., since the legal changes in the last decade, the funding situation is changing. In order for private pension plans to stay open, they have to maintain a fairly high level of funding.

Heather, that illustrates one of the very nice things about Social Security. When retirement funding is across the board like that, and there's no option to not pay for it, it becomes invisible in the setting of wages. We think of wages in terms of take-home pay, so companies have to work around that in what they offer, rather than setting take-home pay and having individual decide whether they can afford to save out of that.

D. C. said...

D. C., since the legal changes in the last decade, the funding situation is changing. In order for private pension plans to stay open, they have to maintain a fairly high level of funding.

Which still leaves you with the problem so many of us discovered in the 70s: that the present value of your pension when you're laid off at 50 is close to zero, along with your chances of building up anything like a reasonable retirement income after starting over.