Memo to President Bush and Congress: It's a retirement crisis, not merely a Social Security crisis.
All three legs of the stool on which America's workers are expected to rely for retirement — Social Security, employer-provided retirement plans and personal savings — are deteriorating, and are likely to be unable to support the weight that will be placed upon them in the next four decades.
The coming collision of demographics and economics is driving the United States toward a major pension crisis that will require creative solutions from government and employers, and behavioral changes from employees.
Without such changes, many retirees will be left living below — in some cases well below — their accustomed standards. It may already be too late for some older workers, since the first of the 77 million baby boomers will retire in 2008.
The reason is a nasty combination of poor pension legislation; significant pension plan underfunding, because of poorly designed accounting and funding rules and overly optimistic asset return assumptions; rising pension liabilities because of a rapidly growing retiree population; insufficient participation by employees in employer-sponsored defined contribution plans; a steadily eroding Social Security program; and paltry personal savings habits.
Pension experts, academics, economists and even politicians agree the time is ripe for reform. The question is whether regulators and legislators have the political will and intelligence to do it.
The numbers paint a bleak picture:
• More than half of the nation's 132 million workers do not participate in any kind of employer-provided pension or retirement plan.
• The number of employer-sponsored defined benefit pension plans has declined precipitously, to 31,200 in 2004 from 114,000 in 1985.
• More than 1,000 employers voluntarily shut down their defined benefit pension plans every year, leaving a shrinking pool of employers paying into the federal retirement insurance program that funds the pensions of bankrupt companies.
• People born in 1964 or later face a scheduled increase in the full retirement age for Social Security benefits to 67, as well as substantially higher taxation of those benefits even before a contemplated overhaul of the system that could cut benefits or raise taxes further.
• By 2030, when nearly the entire baby boom generation will be in retirement, Social Security will provide only 26.9% of retirement income, down from 38% for current retirees. With life expectancy continuing to rise, some older Americans will be in retirement for 20 or 30 years.
• The national savings rate, which had already plummeted to an anemic 3.5% by the mid-1990s from a robust 12.3% in 1950, has continued to decline to as low as 1%, by some estimates.
• People in their mid-50s and early 60s had median savings of just $42,000 in retirement accounts in 2001, well below the estimated $1 million that financial advisers estimate the average household with an annual income of about $40,000 will need to ensure a comfortable retirement.
• Escalating health-care costs threaten to exceed those of employer-provided retirement benefits. In 1960, 48.6% of every dollar companies spent on employee benefits went toward retirement benefits, and 12.4% went toward health care for employees and retirees. By 2003, employers spent 42.8% of every dollar of employee benefits on retirement and 31.9% on health care, including retiree health care, according to the Washington-based Employee Benefit Research Institute.
"We're moving into uncharted waters. That's what I'm concerned about," said Sylvester J. Schieber, director of research at employee benefits consultant Watson Wyatt Worldwide, Washington, and a prolific author of retirement studies.
Alicia H. Munnell, director of the Center for Retirement Research at Boston College was even more blunt.
"People are going to find themselves in their 80s and 90s with inadequate savings," she warned. "People are really going to have to change their work life. This business of retiring at 62 …will just not work."