That Other Retirement Problem
June 17th, 2010 - 9 Comments
Yesterday, Smeal’s Ron Gebhardtsbauer weighed in on the funding of American pensions and their insurer, the Pension Benefit Guaranty Corporation (PBGC). Below, Gebhardtsbauer continues the topic of retirement, addressing what he considers to be far more important reforms:
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As I noted yesterday, the underfunding of the private pension system is not the biggest retirement problem facing our country. It is only a concern for some workers at a small number of companies that will go bankrupt while sponsoring an underfunded pension plan.
The major problem is elsewhere. At one time, about 40 percent of workers had traditional pensions through their employer, but today it is less than 20 percent. Half of employees don’t have any retirement program. The remaining employees have 401(k)s, in which they provide most or all of the contributions. Since most people don’t save enough (and have no idea how much money is needed to retire), average 401(k) balances are around $50,000 for older workers, which is nowhere near enough to retire.
What would a retiree get with $50,000? Investment advisers suggest retirees withdraw 4 percent of their money ($2,000) in their first year of retirement, and increase the “programmed withdrawal” by the inflation rate each year. An annuity purchased from an insurance company with $50,000 could provide $3,000 per year indexed to inflation or $4,000 flat per year—up to twice as much as a “programmed withdrawal,” but still nowhere near enough to retire.
Thus, the bigger problem is not underfunded pension plans, but a lack of pension plans (or adequate savings), and that will come to haunt our country in the 2030s, when baby boomers are in their 80s and running out of money. Not only will that create problems for the individual retirees, but it will be a huge drain for the country when Medicaid (i.e., taxpayers) will have to pay the nursing home costs. The Medicaid moral hazard is magnitudes larger than the PBGC moral hazard.
So what is the solution? We recently passed a major health care reform bill because the cost of uninsured health care was making our companies uncompetitive on world markets. This could be a similarly huge problem. We have tried educating the public. It helped, but didn’t come close to solving the problem. Now we are trying automatic defaults which enroll employees in the company 401(k), but not enough companies are trying it, and employees don’t realize that they need to save a lot (e.g., 10 percent of wages in many cases). The solution is to mandate workers (or their employers) save more for their retirements, and the fix is needed now (2030 is way too late). Additionally, people will have to work longer and retire later. One important signal for doing that would be to raise Social Security’s normal retirement age above the current 66 (67 for those born after 1959), but that won’t be easy (even though it would also be very helpful for making Social Security sustainable).
Many baby boomers are working longer, because it gives them a sense of worth, and keeps them energized, but many others won’t like this idea. If that’s the case, they should work for an employer that has a pension plan, or save more when they are working, but that’s easy for me to say. I enjoy teaching, and I have a good pension and good saving—of course, I’m an actuary. But that’s not true for a huge proportion of our population that hates their job, didn’t earn much, is worn out, and didn’t save.
What do you think we should do?