MB360: Looming U.S. retirement disaster

In this context, cutting Social Security makes even less sense.  Just like with health insurance, the private sector has foisted this responsibility onto its employees, and the federal government.  

Pension disaster looms over the horizon: In 1980 60 percent of Americas participated in a pension program. Today it is less than 10 percent and the amount saved for retirement is startling.

Posted by mybudget360 | September 15, 2013

Americans are on the verge of a retirement disaster.  As pension plans slowly go extinct Americans are not saving enough for retirement.  The figures point to a looming pension and retirement disaster.  Retirement for most Americans is largely a mirage.  As organizations switched from pensions to 401ks it was expected that most Americans would save money. This trend started in 1980 and over 30 years have now passed.  We now have enough data to see if this transition has been beneficial to most Americans.  Unfortunately the answer highlights an American population that has not saved enough for retirement.  Most Americans will make Social Security their default retirement plan.  Pension issues also loom as many state governments contend with deep underfunding for retirement benefits.  In the end, there is a disaster looming.

The disappearing pension

Very few Americans now have access to a pension.  This wasn’t always the case:

Today, less than 10 percent of Americans have access to a pension.  Most however have access to 401k plans and other retirement options.  Unfortunately as the middle class shrinks more Americans are finding it more difficult to save any money.

Social Security unfortunately is going to become the default retirement plan for many.  Many current pension plans are setup with unrealistic returns.  Many states are underfunded in spite of the dramatic returns in the stock market:

Keep in mind there is simply no way the stock market can continue producing returns as it has. It is simply impossible and already ratios are getting inflated showing a slight exuberance.  As the chart above highlights, many state pensions are underfunded and if the market even has a slight correction, this will exacerbate the problem.

Beyond the above data that only impacts a small number of Americans, most simply do not have enough (or anything) saved for retirement.

The lack of savings in retirement accounts

Without pensions many Americans are left to fend for themselves via retirement accounts.  How has this worked out?

These are disturbing figures.  The median amount saved by all Americans is $3,000 for retirement!  Even those nearing retirement in the 55 to 64 age group have roughly $12,000 to get by in their later years.  In other words, many are going to be working deep into old age.

A lot of this can be attributed to the lack of income being made by most Americans.  As we have seen income inequality is at record levels, even higher than it was prior to the Great Depression.  It is simply hard to get by when the per capita wage is $26,000 and the cost of living continues to increase without any wage increases.  Getting by is priority number one, not a far off retirement.

Retirement dreams pushed out

As you would imagine the retirement age is being pushed out:

It is becoming tougher for Americans to retire and there is less of a safety net.  Since the retirement amount saved is so low, many are going to depend on Social Security as their main income stream in their later years.  Much of this money is going to be paid by a younger and less affluent generation.  You can already see this disaster lining up.  As young people struggle, how will they feel when they see pensions going out while they struggle to find work?  If you think you have heard the last of this think again.

Personal finance gurus are dead wrong

Thank goodness somebody is stating the obvious, as if people today are just so much dumber and profligate with their money, when in fact we're the first ones to deal with retirement and very old age all on our own!:

[O]nce upon a time, a majority of us at least had the possibility of receiving a pension when we retired. That’s no longer the case. We’re now expected to do this on our own. And, frankly, most of us aren’t capable of this task, and we have 30 years of evidence – that is, the lifespan of the 401(k) – to prove this fact. We do everything wrong we possibly can. We are unable to save enough money and we don’t invest it well. At the same time, we lack the crucial ability to see the future. We don’t really know when we will retire and why that will occur. We don’t know if our investments will pan out. We don’t know how the greater economic environment will either play out or interact with our lives.

I was reporting on this stuff 15 years ago and I can tell you just about no one said anything like “oh, by the way, you’ll need more than $200,000 just for medical expenses in retirement.” It’s just unfair to expect people – who are not financial experts – to be able to pull this off. The fact is Social Security and other such schemes were created for a reason. There was no imagined past where people saved up for their old age.

Here's another sacred cow slaughtered:

Financial literacy classes sure sound good. But students who take the classes don’t seem to retain much of the knowledge. And, when you think about it for a moment, that makes sense. The idea that taking a class on how finance works at the age of 17 can save someone from a predatory 100-page small-print mortgage when they are 40 is just preposterous. 

[...] Wouldn’t it just be a heck of a lot easier to not offer certain products, or design them in such a way so that they are easily comprehended, than to take on the seemingly hopeless task of teaching a consumer what a structured product is? Of course. So why isn’t this happening?  Well, a cynic might say that’s because financial literacy works quite well at what it was really designed to do and that’s head off legislative protection of consumers.

And here's the simple truth that the Suze Ormans of the world will never utter:

Our best hope for our personal finances is to realize we aren’t in this alone. There is a powerful culture of shame around money in this country, and it is so powerful it actually seems to prevent us from stepping forward, saying things aren’t working out for us financially, and asking not for charity, but for substantive legislation designed to help us all.

Everything You've Been Told About Personal Finance Is Dead Wrong -- Here's the Truth

By Lynn Stuart Parramore 

March 5, 2013 | AlterNet

URL: http://www.alternet.org/economy/everything-youve-been-told-about-personal-finance-dead-wrong-heres-truth

Myerson: Re-secure U.S. retirement

You tell me what's wrong with this scenario:

• "Greedy old people" are poorer than they were 30 years ago;
• Old people are working longer than they did 30 years ago;
• Fewer retirees receive a defined-benefit pension than 30 years ago;
• Retirees rely more on Social Security than ever to avoid poverty;
• Medical and drugs costs for seniors continue to climb, making Medicare more necessary than ever. 

         Meanwhile, 

• U.S. corporate profitability and productivity are at all-time highs;
• "Fix the Debt" CEOs, the American Chamber of Commerce and other "pro-business" groups keep telling us we need to cut Social Security, Medicare and Medicaid... or else.

Here's how Harold Myerson sums it up:

Just as U.S. businesses have been able to raise the share of corporate profits to a half-century high by reducing the share of their workers’ wages to a half-century low, so, too, their ability to reduce pension payments has contributed not just to their profits but also to the $1.7 trillion in cash on which they are currently sitting.

Myerson, Paul Krugman, Rep. Alan Grayson, et al are right: this entitlement- and debt-cutting fetish in the aftershocks of the Great Recession is total bullshit.  It's a scam. It is complete opportunism by corporate big-wigs and bankers who see a way to cut their costs and attract more SS money into financial markets for them to gamble with, while they enjoy both real and implicit subsidies and government guarantees in case they f**k up (again). 

Let's face it, our national 401-k  experiment has been a disaster for this generation of retirees and near-retirees.  This is not to mention the young and middle aged: "Today, more than half of U.S. workers have no workplace retirement plan" at all, according to Myerson. And yet Republicans want to cut younger workers' future SS and Medicare benefits "so that Social Security and Medicare will be there for them when they retire"?!  

Sorry for my potty mouth, folks, but that's called "getting f***ed at both ends," there's just no other way to describe it.

UPDATE (03.16.2013): I usually don't loop back like this, but I can't get this one phrase written by Lynn Stuart Parramore out of my head, it was such an eye-opener for me, and it totally relates to this antedated article: "There was no imagined past where people saved up for their old age."  What we are going through, we are the first people in the history of the earth to go through, not to mention the history of the United States. We need to cut ourselves a little slack here.

This is so, so important for Americans to remember when they're feeling financially stressed out and inadequate in the face of global financial markets and contradictory investment advice, not to mention getting lectured at by rich businessmen and their pocket politicians about how underpaid, overworked Americans need to save more and depend on government less.

Steering America toward a more secure retirement

By Harold Myerson

March 7, 2013 | Washington Post

URL: http://wapo.st/13HEvYz

The coming crisis of elderly poverty

It's good that older teabaggers suck at imposing their political views on younger generations; otherwise, we would slash their Socia Security, Medicare and Medicaid and make them spend their golden years in squalor and indignity.

But we're not gonna do that, because our progressive principles are too strong.  Sorry to break it to you, old-timers, but because of you, "Social Security and Medicare are going to have to be more generous, not less, than these programs are today."

Broke Boomers and the Coming Crisis of Elderly Poverty

By David Callahan

June 19, 2012 | Huffington Post

Most of the coverage last week of the Fed study on household wealth focused on the gigantic financial hit taken by nearly all Americans since 2007. Dig deeper into the report, though, and it makes for even scarier reading, as many of those people losing lots of wealth are older and don't have much time to recover before retiring.

In 2007, near the boom's height, older households (between 55 and 64) had a median net worth of $266,200. That figure included everything -- home equity, savings, 401(k)s, etc. -- and is hardly the kind of money people need to get through their golden years. By 2010, though, the nest eggs of Americans approaching retirement had shrunk dramatically, falling to $179,400 -- a 33 percent drop. The main reason for this, of course, was the collapse of the housing market, with home equity accounting for the lion's share of older Americans' net worth.

Older workers also experienced a drop in earnings, making it harder for them to stash away cash and make up for losses to their net worth. Indeed, barely over half of all families in the 55 to 64 group reported to the Fed that they saved money in 2010. You heard that right: Half of all workers hurtling toward retirement aren't putting away for the future. Yikes.

Another scary finding of the study: Only 60 percent of families, 55 to 64, even have a retirement account where they take advantage of tax breaks for retirement savings. And the median amount of money in such accounts is $100,000.

Of course, that's no surprise to us here at Demos, as we have recently been documenting the many shortcomings of the 401(k) system. Foremost among the faults of 401(k)s is that so many employers don't offer such plans to their workers. Another major problem: most workers don't build up a very big nest egg, even after decades in the labor force thanks to low contribution levels, stock market meltdowns, and loans taken out against their 401(k)s.

Not surprisingly, also, there is a huge disparity in who has access to a 401(k). According to the Fed report, 70 percent of Americans with a college degree have a retirement account -- compared to just 41 percent of those with only a high school diploma. The report shows, moreover, that such coverage for all groups declined somewhat between 2007 and 2010 -- reflecting a broader trend of more employers choosing not to offer 401(k)s.

Beyond the paltry assets of many older Americans, there is also the problem of debt among those in their fifties and early sixties. The Fed report shows that a great many older Americans carry credit card debt -- a worrisome trend that Demos documented a while back in our report, Retiring in the Red. Needless to say, it's not good to be scrambling to pay off your Amex bill when you should be putting away money for retirement.

Again, no big surprises from this data. Just more warning signs that the 401(k) system isn't working and that America is facing an epidemic of elderly poverty in the decades ahead -- a crisis that will make it very difficult to cut the big entitlement programs for seniors, which tends to be the linchpin of most centrist and conservative deficit reduction plans.

Indeed, it's hard to look at the data on how the broke the Baby Boomers are without concluding that Social Security and Medicare are going to have to be more generous, not less, than these programs are today. Strangely, few leaders in Washington seem to be tuned in to this grim reality -- or ready to deal with it.

Time to retire 401(k) plans

I've distilled this interesting article's most important points below. These statistics on Americans' retirement savings are scary.

I'm especially intrigued by the idea of retirement insurance, whether it is a public system, or run privately run with government regulation. The question that comes to mind is what the issuer of that insurance will do with savers' contributions? Invest them in the market, presumably – the same market which is exposed to the bubbles and unpredictable fluctuations that can wipe out retirees' life savings in no time. But I guess the beauty of this idea is that it avoids the problem of timing: by making retirement savings a collective endeavor, the ones who are unlucky enough to retire in a bad market year are covered by everybody else. By pooling everyone's risk, it should all even out. (Hmmm... kinda reminds me of another big current issue!)

Why It's Time to Retire the 401(k)

By Stephen Gandel

October 9, 2009 TIME

[I]n your early years, your 401(k)'s growth is driven mostly by contributions. You control your own destiny. But the longer you hold a 401(k), the more market-exposed it becomes. It's a twist that breaks the most basic rule of financial planning.

The Society of Professional Asset-Managers and Record Keepers says nearly 73 million Americans, or just under 50% of our working population, now have a 401(k). The average 401(k) has a balance of $45,519. Even worse, 46% of all 401(k) accounts have less than $10,000.

In order for 401(k) plans to succeed, workers have to stash savings regularly for about 30 years. Most accounts haven't been around that long.

[T]he past year has shown that even with our added savings, we are at much greater risk today of our bank accounts running empty than when employer-guaranteed pensions were the norm. … 44% of all Americans are in danger of going broke in their postwork years.

A 2007 study from the National Bureau of Economic Research (NBER) estimated that, on the basis of historical returns, by 2040 the average 401(k) of a near retiree would grow to an inflation-adjusted $451,944. That money, spread over 30 years, could replace at least 50% of the average retiree's income. Add Social Security and even highly paid workers will probably earn more than 80% of their preretirement income. "The only reason these accounts haven't lived up to their potential is that they haven't gotten enough time," says James Poterba, president of the NBER, who co-authored the study.

The average 55-to-64-year-old should have a 401(k) balance of $320,000. In fact, at the end of 2007, the average 401(k) of a near retiree held just $78,000 — and that was before the market meltdown.

Remember, the biggest factor in whether the 401(k) works as designed has to do with when you retire. If the market rises that year, you're fine. If you retired last year, you're toast. And the chances of your becoming a victim of this huge flaw in the 401(k) plan are pretty high. The market fell in four of the nine years since the beginning of the decade. That means anyone retiring this decade had a nearly 50% chance of leaving work in a down market. In fact, your chances of retiring into a down market are even greater than that: forced retirements spike in recessions just as the stock market is tanking.

What the ERIC plan and others like it are essentially proposing is a form of retirement insurance. So instead of putting 6% of your salary into a 401(k) or some other investment account, each pay period you would send 6% of your check to a retirement-insurance provider. The policy would work similarly to a traditional pension in that it would provide a guaranteed monthly check equal to about a quarter of your final pay, from when you quit working until you die. Some employers might even be willing to pay the annual premium as a perk. If not, employees would pay for it much as they currently fund their own 401(k)s. But the policy would be portable. Contribute for 30 years and you would be guaranteed income in retirement, no matter how many employers you worked for. Combine your retirement-insurance check with the money you get from Social Security, which can equal as much as 50% of final pay, and presto: you have something approaching retirement security.

But many policy experts say some type of change to our retirement-savings system is coming. First of all, given the market carnage, there is some backing for the idea — not to mention anger and disappointment among retirees who can't really retire. Recent opinion polls show that people would be willing to give up the flexibility of a 401(k) for a guaranteed return. What's more, the fact that ERIC supports a guaranteed plan is encouraging. "Whether the 401(k) is a perfect plan or even the right plan is something that is being questioned in Congress," says Democratic Representative George Miller of California, chairman of the House Education and Labor Committee. "When you have seen the market's ability to create bubbles, you've got to ask whether the people trying to save for retirement should have to ride that risk."