Academic journal article Generations

A Future out of Reach? the Growing Risk in the U.S. Retirement Security System

Academic journal article Generations

A Future out of Reach? the Growing Risk in the U.S. Retirement Security System

Article excerpt

The levels of economic risk are rising, and shaping an increasingly insecure future for today's-and tomorrow's-retirees.

Today's workers-many of them trapped in low-wage jobs with declining benefits-are facing a difficult future in which the kind of retirement their parents were able to take for granted is out of reach. Unemployment and stagnant or declining wages have made it difficult for many Americans to save for retirement. Likewise, the defined benefit pension plans for the half of the United States labor force with a pension of any kind have been replaced by defined contribution plans, which depend on the variable performance of markets. This change has made income from private pensions generally smaller, less reliable, and dependent on the ability of workers to manage their personal accounts. The increasing costs of healthcare have also eroded the retirement security of most workers.

From Thirty Years Ago to Now

The level of economic risk facing retirees has risen steadily over the past several years. According to the Institute on Assets and Social Policy at Brandeis University, 78 percent of all senior households are financially vulnerable and do not have sustainable economic security. Of single senior households, which are mostly women, 84 percent are financially vulnerable, and 36 percent are at serious financial risk. Most of this risk is generated by the lack of assets (low financial net worth), largely caused by the inability to save while working, small (if any) private pensions, high housing costs (even though elders have higher home ownership rates than younger cohorts), high and rising out-of-pocket medical costs, and insufficient monthly income to absorb unexpected expenses. The Great Recession of the late 2000s has increased the level of financial risk by reducing retirement investments accounts and the value of equity in homes.

For more than thirty years, federal policy has encouraged conversion of the defined benefit pension into defined contribution plans. This has allowed corporate executives to underfund pension benefits and use them for their own benefit as described by Ellen Schultz in her recent book, Retirement Heist (Schultz, 2011). Policy makers also did little for decades to prevent the unprecedented growth in economic inequality and the hollowing out of our productive real economy. Increasing inequality and the loss of good jobs have undermined the income and asset wealth of many working families.

The goal of some policy makers and pundits to make workers more individually responsible for their retirement is fundamentally at odds with the economic realities of retirement. Private retirement accounts, such as 401(k) and Individual Retirement Accounts (IRA), if effectively managed, can make a major difference in retirement income and their potential should be maximized through strategies such as the ones described in this issue of Generations. However, one should not assume that these plans will ever be adequate substitutes for Social Security or sufficient to cover significant cuts in Social Security and Medicare. Even well-managed accounts are subject to market volatility and huge swings in retirement income, depending on one's retirement date.

The Economic Status of Current and Future Retirees

The significance of Social Security to the economic well-being of current retirees is obvious. The median share of income from Social Security for those ages 65-plus is 67 percent, and for those ages 75-plus, it rises to 77 percent. For single women ages 65-plus, the share is 84 percent; for African Americans, 82 percent; and for Hispanics, 84 percent. Among single women ages 75-plus, 39 percent rely on Social Security for 90 percent of their incomes, and 73 percent for 50 percent or more of their income (Ettlinger and Chapman, 2005).

What about the income and financial status of the next generation of retirees, those now in the 47 to 64 age group? …

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