Only 58 percent of workers said they were currently saving money for retirement, compared with a peak of 65 percent in 2009. The decline in the number of people saving was all in households earning less than $75,000. Furthermore, significant numbers of workers said they had to make unplanned withdrawals from their savings in order to meet ordinary expenses.
With the phase-out of defined benefit pension plans I do not see how most people are going to prepare sufficiently for retirement. Most people just don't have long enough time horizons. Their lives are far more focused on short term desires. So I expect poverty among the elderly to rise in future generations and people will find themselves working into their 70s.
This problem is made worse due to demographic changes. Singles do worse in saving for retirement and yet singles are a growing portion of the populace.
DEMOGRAPHIC GROUPS: Singles, blacks, and high school dropouts do not have a sound financial standing in retirement. Their expenditures exceed their income and they hold very little financial wealth. The bottom income quartile, which includes mostly these demographic groups, has the weakest financial standing in retirement.
Another example: I do not see how the future and poorer population of California is going to be able to prepare for their retirement as well as current retirees. Thank you immigration enthusiasts for your lack of foresight and willful ignorance.
Twenty-five percent of workers in the 2012 Retirement Confidence Survey say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65, and by 2012 that has grown to 37 percent.
I repeat advice I've previously offered here: Save more. Work harder. Build up more skills. Spend less. Choose a career path that will enable you to work longer. Get out of your comfort zone and accept you aren't doing well enough. Now, that might not apply to a few of you who have great savings and career prospects that make it very easy to control the latter years of your working careers. But the vast majority need to prepare better for changes coming in the US marketplace and with lower retirement benefits from government and other sources.
On some topics the British political debate is ahead of the American political debate. For example, the British government's planned immigration policy changes are far ahead of US immigration policy. On old age entitlements the British government is also much more realistic and practical than what passes for mainstream US debate on old age entitlements. British Prime Minister David Cameron sees the necessity to raise retirement age in line with increasing life expectancy.
Mr Cameron said he supported plans to increase the retirement age in line with life expectancy which could see workers remaining in employment until well into their seventies.
Slow economic growth and rising health care costs are putting Western governments under water for funding of their old age entitlement programs. We can't have just 2 people working for every retiree.
People need to hear decades before their 60s that they'll need to work longer. They need to know to make career choices and develop skills that will allow them to have viable careers into their early 70s. To compensate for aging brains people need to develop more skills and to develop marketable skills that will be less affected by body and brain aging.
There are additional benefits from longer time spent working. Senior No. 10 aide David Halpern says if old folks worked longer they would not be so lonely.
He told delegates at the Stockholm summit that more than half of those older than 75 in Britain described themselves as lonely “all or most of the time”.
“Work matters, particularly for older people, not just for money, but absolutely for social contact,” he said.
This is very true. Unfortunately, the old folks who are lonely are so isolated that these lonely people are pretty invisible to those who have lots of friends, work associates, and contacts with social networks. Unless you happen to know old lonely people you aren't going to appreciate the scale of the problem. Even if you know old lonely people (and I do) you might live too far away from them to make much difference in their lives. Wish I had a general solution to offer. I've certainly seen benefits from the need for work.
In 1940, there were 42 workers per retiree. In 1950, the ratio was 16-to-1. In 2010, there were 2.8 workers per retiree, and within 40 years, it’s projected that there will be just two workers per retiree¹. At the present rate, as the population ages and life expectancies continue to rise, the system will not be able to sustain itself into the future without major reform.
See this table of retirement age versus worker/retiree ratio. If the retirement age was raised to 72 by 2030 then the worker/retiree ratio would be 4. Note that since it is politically much harder to raise Medicare retirement eligibility (since old folks will find it much harder to get jobs with medical benefits as compare to younger workers) we need a much higher retirement age with a high worker/retiree ratio to bring in more tax revenue to find medical care for the old. By taking the load off of Social Security with higher retirement age we also keep much more money flowing in from workers paying income taxes and Medicare taxes even beyond the point where they become eligible for Medicare.
Ryan Avent has a post at The Economist about zero interest rates and whether the Federal Reserve faces political constraints or other constraints in its seeming inability to cause inflation. But I find the motives ascribed to savers as mistaken. In my view of interest rates are zero then savers have an incentive to save more (to make up for interest income not earned). Economists who expect savers will save less due to less reward from interest income when interest rates are low aren't considering the long term goals of savers. The lower interest rates go the more savers need to accumulate to pay for old age.
Also, if unemployment is high for an extended period with long term unemployment especially high (which it is) then why aren't the long term unemployed lowering the wages at which they'll accept jobs to levels sufficient to get jobs? Inflation is considered by many economists to be the preferred solution to high unemployment. But I'm left wondering why people don't get desperate and work for less. The extended term for unemployment benefits?
Necessity is a mother. Harvard economist Edward P. Glaeser looks at the rising ranks of elderly workers.
The numbers supply a vivid picture of America’s graying work force. Between 2007 and 2010, the number of working Americans over 65 years old jumped 16 percent; the number of under-65’s in the labor force shrank. The trend started before the current downturn: the number of Americans over 65 in the labor force increased from 10.8 percent in 1985 to 12.1 percent in 1995 to 15.1 percent in 2005 to 17.4 percent in 2010. Until 2001, most workers age 65 and older had part-time jobs; since 2001, full-time work has been far more common.
The need to work into old age is growing. I know people in their 60s who have saved nothing toward their old age. So they work out of absolute necessity. Some have suffered financial reversals. Others lived their lives with money flying in and flying out of their lives. Still others just didn't try that hard. They chose to do whatever was more fun and worked part time. Now they are in their 60s and have to keep on working into their 70s.
But even if you are a saver you need to consider the possibility of living into your 80s and 90s and how you'll take care of yourself as you get older. You'll have to pay a larger fraction of your health care costs out of pocket. Governments (not just the US government) will have to cut back on the richness of their old age medical programs. Too large a fraction of the population will be old with too small a working age population to support them.
Today nearly 450,000 Americans 65 and older are unemployed and looking to work. To get an idea of how dramatic a jump this is, consider this: the number of unemployed elderly job seekers has more than doubled in the last four years.
Tough economic times have caused a surge of 65+ looking for jobs. My advice: steer your career years in advance in directions that create opportunities for continued work in ways that beat working as a greeter at Wal-Mart. Back in the 1980s I met a guy who was in his late 60s working as a greeter at Wal-Mart. He invested in a real estate boom and found himself much poorer as a result. So there he was greeting people effusively. Don't wind up like him.
How much money will you have to save to cover your old age health care costs? If you haven't been saving for old age medical costs you probably need to work longer.
A man who has relatively average drug expenses needs to save $136,000 to have a 90% chance of covering his health-care costs in retirement, while a woman — given her likely longer lifespan — needs $156,000, according to the Employee Benefit Research Institute, a nonprofit, nonpartisan group. A couple with median drug expenses needs $287,000 to have a 90% chance of covering their costs. Read more about health-care costs on EBRI's site.
Advances in cell therapies, gene therapies, tissue engineering and other biotechnologies are going raise the life expectancy of most of the people reading this post. Start thinking about a longer work life and how to achieve it. Do you work for a company that will grow or shrink in the coming decades? Do you expect the area you live in to expand or shrink? Does your area have one or two or many employers who could potentially use your skill set? Do technological trends favor the continued existence of your job? If not, how can you shift into a longer lasting career path?
Money to spend in old age on medical treatments will have higher utility in the future because more treatments will be available to buy. Vat-grown replacement organs are already being grown for a few organs in small numbers and more for lab animals. Lots of other treatments will be coming down the pike even as government finances deteriorate. Your own buying power could make the difference in how many years you live. Work and save accordingly.
California's weak economy has voters cutting back on current expenses and largely unable to meet essential future ones, such as the cost of long-term care, according to a new poll from The SCAN Foundation and the UCLA Center for Health Policy Research.
The poll, in its second year, sought to better understand health and long-term care issues facing middle-aged voters, given the state's current economic crisis and the rising number of Californians older than 60, a figure that is projected to nearly double to 12 million people in the next 25 years.
The poll found that Californians, regardless of political party or income level, were worried about the costs of growing older. Two-thirds (66 percent) of respondents said that they are apprehensive about being able to afford long-term care. Sixty-three percent worry as much about paying for long-term care as they do about paying for their future health care.
They should be apprehensive and they should respond by substantially increasing their long term savings rate. Get out of debt. Cut back on optional purchases. Look for opportunities to learn more skills and make more money. You can't count on promises of governments that are running large deficits and looking to slash outlays.
Here's the most interesting part: 48% of voters 40 and older experienced a decline in household income in the last 12 months.
Voters' ability to save for long-term care expenses is hampered by California's weak economy. Nearly half (48 percent) of voters 40 and older said their household income has declined in the past 12 months, and 50 percent said they had to take money out of savings to meet their expenses. Four in ten (41 percent) have had to cut down on the amount they spend on food in the past year.
I've been making the argument that governments are in deepening financial trouble, partisans who think their guy or their side can fix the economic problems that hold back growth have missed out on how much the economic fundamentals have changed in ways unfavorable to growth, and that spiking oil prices will choke off any economic growth. It is telling that even during a supposed recovery from the last recession nearly half of households say they've stepped down in living standards.
While economist James Hamilton thinks the recent oil price spike wasn't quite enough to put the US economy into a recession he thinks the spike makes the US more vulnerable to the effects of the sovereign debt default risk in Europe (which is threatening to create a bank crisis). But the sovereign debt crisis is itself in part due to oil prices. So some of the shocks coming in to the US economy that aren't labeled as oil price shocks really ought to be. If we had $25 per barrel oil right now the economies of Spain, Portugal, France, Italy, and Greece would be doing much better. They'd send far less money abroad to buy oil, their economies would grow faster, more would be employed, the governments would get more tax revenue from higher incomes, and fewer would be living on the dole.
We need a revival of Puritanism or a new religion based around very austere lifestyles combined with long hours of work at the best paying occupations. Why? A new report from the Employee Benefit Research Institute finds that based on how much people at various income levels are saving toward retirement a large portion of the US population will need to work into their 70s and beyond.
Those who earned between $11,700 and $31,200 will need to work till age 76 to have a 50% chance of covering basic expenses in retirement. Those who earned between $31,200 and $72,500 will need to work to age 72 to have a 50% chance and those who earned more than $72,500, those in the highest income quartile, catch a break; they get stop working at age 65 to have a 50/50 chance of funding their retirement.
Since their full report assumes "historic equity returns" (which the market is not going to deliver in the next 20 years) the real level of unpreparedness is much greater than this report indicates.
Unfortunately, some substantial portion of the population will retire too early. They'll be senile and/or sick before they realize that they do not have enough money. I already know people in their 50s with ambitions to retire in their late 50s who are in no way ready (still paying mortgages with years to run on them and little in the way of savings). But it is hard to reason with people who hate their jobs.
Average life expectancy at age 65 is about 18 years (big PDF) and rising. The latter link is probably insufficiently optimistic since advances in biotechnology will cause a large jump in rejuvenation therapies in the 21st century. That jump in biotech argues for saving to directly pay for cutting edge medical treatments you might not otherwise be able to get.
The lowest income people need to work into their 80s. Basically, they need to work until dead.
LOWEST-INCOME LEVELS, HIGHER CHANCES OF ADEQUACY: If the success rate is moved to a threshold of 70 percent, only 2 out of 5 households in the lowest-income quartile will attain retirement income adequacy even if they defer retirement age to 84. Increasing the threshold to 80 percent reduces the number of lowest preretirement income quartile households that can satisfy this standard at a retirement age of 84 to approximately 1 out of 7.
Generation Y (born from 1977 to 1994) aren't doing enough for their retirement and with the decline in defined pension benefit plans they are in even worse shape. Kids, you've got to work longer hours, spend less, save more, and find some worthwhile investments. Making too little money? Your college education was probably worthless. Better start studying for computer network administrator certificates from Cisco and Microsoft. Get useful education.
Then there's the problem of medical cost inflation. Since Medicare benefits are bound to get cut (and you are better off being able to pay a specialist who refuses to participate in Medicare) you need even more money.
Future retirees could face even higher costs. A recent Urban Institute report projected that median out-of-pocket costs for the typical senior could rise from about $2,600 in 2010 to $6,200 in 2040 in constant 2008 dollars. I asked researchers from each of these organizations how we should go about budgeting for health care costs in retirement. Check out The High Cost of Growing Older.
The solution is to make career moves to make more money while living like a pauper. What's needed: a new religion of very hard work and extremely low living standards. Time to bring back Puritanism. In the new austere hard-working religion wearing ragged clothes should be portrayed as a virtue. TV should be labeled as evil. That way you won't have to pay a monthly cable bill. I dropped cable already just to save time. You need that time to work at a second job or to take night classes.
You need to make and save so much money that you won't have to spend 35% of your income in retirement on medical costs.
Furthermore, health spending as a share of after-tax income will rise dramatically. In 2000, health care spending for older married couples was 16 percent of their total income. According to the Center for Retirement Research, that number is expected to increase to:
- 24 percent of income in 2010.
- 29 percent in 2020.
- 35 percent in 2030.
Time to start a new religion of austerity and hard work. I'm looking for names for the religion. Anyone got any ideas?
Laurence Kotlikoff, an econ prof at Boston U who writes extensively on the US budget and unfunded entitlements, has a piece on Bloomberg about how America is really already bankrupt.
Our country is bankrupt. It’s not bankrupt in 30 years or five years. It’s bankrupt today.
Want proof? Look at President Barack Obama’s 2010 budget. It showed a massive fiscal gap over the next 75 years, the closure of which requires immediate tax increases, spending cuts, or some combination totaling 8 percent of gross domestic product. To put 8 percent of GDP in perspective, this year’s employee and employer payroll taxes for Social Security and Medicare will amount to just 5 percent of GDP.
I keep harping on this theme because it is one of the long term developments that will blow up in our faces during the lives of most people reading this. We will suffer declining living standards for this reason among others.
Look at the growth in net interest payments as a budget item and you can see the crisis develop. The graph at that link us from the White House Office of Management and Budget. So it is an overly optimistic projection of the future. various projected cost controls assumed by the Obama Administration will not happen. Plus, economic growth won't happen due to Peak Oil.
Even without considering approaching the US federal fiscal train wreck future generations of Americans are facing retirement at lower living standards.
A new report by McKinsey & Company, the consulting firm, is gloomy about retirement. The report, Restoring Americans’ Retirement Security: A Shared Responsibility, says, “The average American family faces a 37 percent shortfall in the income they will need in retirement,” meaning “the average household will face a retirement savings shortfall of nearly $250,000 by the time of retirement.
Note that's McKinsey, not a stock brokerage trying to get more customers. The article explains some of the reasons why the outlook for retirees is worse: A larger fraction of retiree income will go toward rising Medicare insurance premiums. Plus, taxes will rise. So even if Social Security payments stay the same adjusted for overall inflation the overall inflation rate understates the decline in buying power which retirees will experience.
Since the US government will not be able to maintain the currently projected path of combined Social Security and Medicare expenditures the need to save for one's retirement is even greater than conventional wisdom would suggest.
State and local government pensions are similarly in trouble. Their assumptions for future investment returns are overly optimistic. It was possible to have a few decades of rapid growth in stock prices after stock prices became very depressed in the Great Depression and after they became depressed during the 1970s. But we are now in a period where 8% yearly stock market investment returns are no longer realistic.
Younger households (30-to-39 years old) across all income levels face the biggest retirement challenge with RRIs ranging from 47 to 64, but they have the greatest ability to recover by changing their behaviors. This group must rely almost entirely on personal savings (DB payouts will provide one-tenth of the retirement income of their parents’ generation), and historically it has not saved. These households have, however, started to adapt their savings behavior, at least in the higher-income groups. And although they still are not saving enough, they have the benefit of time to build their nest eggs.
I do not think most people under the age of 50 realize how poor they are going to be in retirement. The McKinsey report makes for good reading both on a personal level (maximize your retirement plan contributions) and on a policy level (make it easier for employers to offer retirement plans among other points).
The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.
A typical couple needs about $650k in a 401(k) going into retirement to maintain something close to their working living standard. The article includes anecdotal reports of couples shocked to find in their early 60s that they have to work five or ten more years. What's worse? People who retire in their 60s without doing due diligence to figure out how long their cash will last. They'll be living in hovels and eating really cheap food by the time they die.
Put away 15% of your salary per year. Even this estimate sounds too low to me.
Vanguard Group, one of the biggest providers of 401 (k) plans, has changed its advice on how much people should save. Vanguard long advised people to put 9% to 12% of their salaries—including the employer contribution—in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.
Recently, Vanguard has begun urging people to contribute 12% to 15%, including the employer contribution, because of the stock market's weak returns and uncertainty about the future of Social Security and Medicare.
Note that Vanguard sees uncertainty around the future of Social Security and Medicare. Well, Barack Obama just proposed a budget with a $1.6 trillion deficit. Uncertainty? No way. I am quite certain that Social Security and Medicare benefits will be cut, along with many other programs. The US government can not pursue fiscal insanity indefinitely. Eventually the market will discipline the USG and force Congress and likely the next US president to cut, cut, cut. California and Ireland serve as models of what is to come. Chop, chop, chop.
Your real savings needs exceed even what this Wall Street Journal reports because the stock market is not going to provide the kinds of returns that it has for most of the post-WWII period. Combine the arguments in Tyler Cowen's arguments for why raising living standards has gotten harder (see The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better) with the approach of Peak Oil and America's declining demographics and what do you get? The US economy (as well as other Western economies) looks more likely to contract than grow over the next 15 years. Think technology is going to save us? American technology companies generate very few jobs for American workers.
Reflecting on the recent tax cut deal that reduces Social Security taxes for a year (and makes the Social Security Trust Fund even more underfunded) Brett Arends points out that average life expectancy for those who reach 66 is so high that buying annuities purchased at age 66 to fund retirement would cost too much for the overwhelming majority to afford.
If your Social Security payments are scaled back, or worse, what would it cost you to buy something similar in the private sector?
We can do some math.
According to ImmediateAnnuities.com, a 66-year-old man would have to pay $128,000 for an annuity providing him with income of $10,000 for life. A 66-year-old woman would have to pay even more, about $138,000.
That's for an income of $10,000 a year. If you think you'll need $40,000 a year to live on, naturally you'd need to set aside four times as much, or about $550,000.
And this would only be for a straight annuity, with absolutely no inflation protection at all.
But an inflation-adjusted $10k annuity at age 66 would cost $180k. To sustain a $40k income until death would cost $720k. Think about that. This also helps explain why Social Security is in financial trouble. For a $14k/year average Social Security benefit (which isn't much, btw) what fraction of the population has paid, say, $252k total in Social Security taxes by age 66? The overwhelming majority hasn't. Hence, Social Security is a pyramid scheme and its future benefits have to be cut somehow.
Then there's Al Gore's famous Social Security Trust Fund lock box. The Trust Fund is really imaginary.
From the mid-1980s through last year, Social Security was a cash cow for the federal government thanks to tax increases and benefit cuts adopted after the Greenspan Commission's 1983 report. Social Security collected more in taxes than it paid out in benefits, turning the surplus over to Treasury, which used the cash to meet various obligations, and gave the trust fund securities in return.
The fact that Social Security was funding the rest of the government to the tune of trillions of dollars gave beneficiaries a moral claim on the trust fund, economically useless though it is.
The US government will have to run a huge surplus in other forms of revenue to be able to afford to pay back the money it borrowed from the Trust Fund. To do that will require a sustained healthy rate of economic growth as well as large cuts in other areas of spending.
It does not appear that Americans either collectively or individually look at the future with time lines sufficiently long enough to drive savings accumulation or spending restraint. The costs of an aging population will have to be paid for by making them work more years.
Support for raising retirement ages seems to be building with the US deficit reduction commission, Sen. Tom Coburn (R., Okla.), and House Republican Leader John Boehner (more here) support an age hike. The American Academy of Actuaries came out for a 2 year increase in retirement age in 2008.
Nyhart (www.nyhart.com), one of the nation's largest independent actuarial and employee benefits consulting firms, released their "Fall 2010 401(k) Retirement Readiness Study" today as part of the firm's ongoing look at the effectiveness of the traditional 401(k) retirement benefit.
The 6-month study reviewed nearly 10,000 retirement accounts from employees at 110 public and private companies. The study evaluated how contributions to their 401(k), the primary retirement tool for most of these employees, would affect the age at which they could retire.
Key results in Fall 2010 401(k) Retirement Readiness Study include:
- 81% of employees 18 or older will not be able to afford to retire by the age of 65
- Employees above the age of 55 will need to contribute more than 45% of pay through the remainder of their career to retire by age 65.
- The average participant, relying on their 401(k) as a primary retirement vehicle, will not be able to retire until the age of 73.
- Most employees age 60-64 will likely need to work until the age of 75 to be able to afford to retire at their current levels of contribution to their 401(k).
- 7 in 10 employees age 24-and-under are not expected to retire by age 65.
Future generations of retirees won't have the defined benefit retirement plans that so many current retirees have. People are not stepping up to the savings rates that they need to maintain to be able to retire before they hit their 70s. Savings rates are so low that either many future elderly will live in poverty or they will work in their 70s. We can already see a trend toward higher labor market participation rates for those over 55 years old. That trend will continue out of necessity.
The recession made things worse, especially for those nearing retirement age.
The study is also the first to reveal the impact the economic recession of 2008-2010 has had on consumers age 55 and older who may have expected to retire at age 65. Craig Harrell, a senior retirement advisor and researcher in the study said “Most employees were under-contributing before the recession. With this further dip in retirement balances, if you’re ages 60-64, you have very little time to make up the losses recently incurred. Most employees in this age category will need to contribute as much as 45% of income or plan to work until you’re in your mid-seventies to retire at the level you expected.
Reality is even worse than these number suggest because Peak Oil is near. We just hit a 2 year high in oil prices even though economic activity in the US is still below the pre-recession peak (check out this graph comparing the current downturn with previous downturns by unemployment changes). The high oil prices are delaying economic recovery. This is a sign of what is coming. Peak Oil will cause a long bear market, lower living standards, lower earnings, and higher rates of unemployment. Plus, lower incomes will mean less tax revenue. Therefore governments will cut retirement benefits including medical benefits. So you'll have to pay more out-of-pocket. My advice: up your savings rate and pay off any debts at a faster rate.