The Retirement Challenge (May 3)

Mike & Co. —

Last week, the House voted along party lines to adopt a resolution blocking the Labor Department’s recent rule requiring retirement advisers to put their clients’ interests ahead of their own.  President Obama has said that, should the bill pass the Senate and land on his desk, he will veto it; Labor Secretary Tom Perez called the vote “a waste of time.”

Among the most delayed and divisive of the hundreds of DFA-mandated rules, this one has very little impact on retirement savings itself.  The White House claims that $17 billion is lost each year from investors receiving conflicted advice. Meanwhile there exists a $14 trillion savings gap between what Americans have saved for retirement and what they will need.

Today — what is the scale and scope of our retirement problem facing the United States?  Tomorrow — what are the leading policy proposals to address it?




A Fast-Approaching Challenge

The loss of defined-benefit pensions, a lack of private savings, poor access to and poor participation in 401(k) plans have all combined to create a freight train running right toward the American people.  Every day for the next 19 years 10,000 baby boomers will turn 65 years old, joining 40 million other Americans.  Driven by that trend, the proportion of Americans over 65 years old will rise from 13 percent today to 20 by 2030.

In the coming months the SEC is expected to release its own proposal of a fiduciary rule though chair Mary Jo White has told lawmakers it may diverge from the DOL version in some respects.

Mountain vs. Molehill 

Not only is the finalized rule from the Department of Labor more relaxed and reasonable than the financial industry expected, but it seems to be a molehill when compared to the mountain sized scale of America’s retirement challenge.

One third of working age Americans have no retirement savings at all.  Any other quarter of workers have saved less than $10,000.  On average, 70 percent of Americans aged 35-64 were on track for not saving enough money for retirement (defined as 85 or more percent of working income).

The allocation of retirement savings among Americans closely mirrors the distribution of income and wealth. In 2013, the top 20 percent of working-age households by income owned 67 percent  of all retirement savings, while the bottom 50 percent owned only 7.4 percent.

Redefining the Social Contract 

One of the greatest issues affecting retirement savings isn’t the demise of private pensions, but the fact that no savings mechanism has arisen arose to take their place.  At one time it was possible to retire with a defined-benefit pension plan along with social security benefits and lead a middle-class lifestyle, in 1985 social security covered 65 percent of retiree income while today it only accounts for 27 percent.

Today the maximum monthly benefit from social security is $2,787.80, or $33,543.60 per year, well below what’s needed in some parts of America.  The median income for retirees is  $25,757.

Reflecting reductions from private pension plans and more generous social security benefits, retirees today receive income from a variety of sources.   The percent of retirees receiving income from the following sources:

Social security: 86%

Interest from assets (bonds, notes, dividends, annuities): 49%

Private pensions: 27%

Public pensions: 15%

Part-time employment: 26%

Overall, Americans retiring today are facing a much bleaker financial landscape than those who retired a generation ago.

Meanwhile, the broader economy will suffer from retiree’s diminished spending power.  America’s retired workers cutting spending means that all sectors will see diminished demand.  One-half of Americans will not be able to maintain their current standard of living during their retirement, meaning that their consumption of any non-necessary good is going to drop.

The extent of this decline in demand is still a matter for study, but considering Americans are estimated to be up to $14 trillion short of having adequate retirement savings, the impact on demand may significantly constrain growth starting in the next few years.

Filling a Policy Void

The picture we see includes not just a large reduction in demand for goods and services, but a huge increase in the cost of Medicare and Social Security, and an explosion in the number of impoverished retirees.  This is going to happen to one of the largest voting blocs in the country,  one that can be relied on most to show up to the polls on Election Day.

There is a large and wide-open policy vacuum on retirement unpreparedness and on policy solutions to help Americans prepare for retirement.  Candidates who seek to fill that vacuum may find a rapt audience and support from a voting bloc that punches way above its weight.



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