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Retirement InSecurity: Biggest Long Term Issue?

February 17, 2012

With all the attention on the Republican presidential primaries, the payroll tax holiday, healthcare reform mandates and the state of the economy, it’s understandable that many Americans overlook what may be the biggest long term issue: retirement insecurity.

In this regard, the President’s Council on Economic Advisers (CEA) has done the Nation a great service in releasing a new report, “Supporting Retirement for American Families.”

Citing a number of “risks” that can “threaten a secure and stable retirement for American retirees,” the CEA says that the estimated share of households that may not have sufficient assets for retirement at age 65 has increased over the last thirty years from 31 to 51 percent.

Put another way, the dream of being able to retire at age 65 without fear of running out of money is no longer available to a majority of American households.

Part of the reason for these gloomy retirement prospects is the decline in the percent of workers covered by traditional “defined benefit” pension plans. The CEA estimates that in 2008,  the most recent year for which data is available, only 20 percent of private sector workers were covered by DB plans, down from almost 40 percent in a little over twenty-five years.

In other words, the employer-managed, annuity-based pension payout, a mainstay for generations of retirees, is disappearing as a more-or-less guaranteed source of retirement income. In its place, of course, is the so-called “defined contribution” retirement plan, depending on employee as well as variable employer contributions, and subject to stock market volatility, interest rates and, most importantly, sufficient employee contributions. As the CEA points out, “the shift to 401(k)-type plans also has transferred substantial risk from employers to workers.”

To be sure, many Americans had hoped that the Social Security safety net would make up for what they were not able to put away in their own nest eggs during their careers. Assuming Social Security remains the same, which may or may not be a reliable assumption, “Social Security benefits can be expected to provide only about 55 percent of lifetime average earnings,” says the CEA.

The conclusion is inescapable: Americans need to make some fundamental work-lifestyle changes to avoid a retirement Hobson’s Choice: one, outliving one’s retirement assets, what CEA calls the “longevity risk”; or two, postponing retirement past age 65.

Among the fundamental changes the CEA report calls for are encouraging Americans to save more for retirement, a daunting task in a weak economy experiencing little wage growth, and making regulatory changes to make “annuitization” more attractive.

CEA defines annuitization as “using liquid retirement wealth to buy a schedule of future income payments,” i.e., “to guarantee a stream of income for life.” Convinced that annuities can protect retirees from the risk of outliving their assets, pension experts in and out of government believe Americans need to shift away from “lump-sum” pension payouts to annuity-based retirement products that guarantee lifetime income.

The CEA report makes a particularly strong case for annuities for women retirees, who have longer life expectancies than men and “who have significantly lower overall retirement income and retirement assets than men, due in part to lower wages and lower rates of full-time employment among women during their working lives.”

The report concludes with a number of regulatory changes in the works to improve the environment for choosing annuities, such as relaxing the Required Minimum Distribution rules (RMD) to make annuities more attractive relative to lump-sum payouts.

Alas, the CEA report does not address the more formidable cultural lifestyle question of age-65 retirement—indeed, what the word “retirement” even means for healthy, vigorous working people. We too shy away from the conundrum: whether historical concepts of working and then “full-stop” at a fixed age of “65” make sense in today’s global economy.

But one must at least recognize that the tectonic changes taking place in the world of work must inevitably also change our concepts of retirement. Perhaps “pushed” by insufficient retirement savings; perhaps “pulled” by the continuing satisfaction of a job well done, many Americans will choose to continue to work, to continue to be productive, to continue to be active, to continue to contribute, either in the same job or in other pursuits.

These Americans over time will redefine retirement in many different and creative ways. One thing we can know for certain: “retirement” tomorrow will scarcely resemble what we understood “retirement” to be yesterday.

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