America is facing a retirement crisis. Most experts agree that a significant portion of the population will lack the resources to live comfortably after they stop working. This, in turn, will place an increasing burden on the country’s social safety net.
Exactly how big is the problem? Put it this way: Under reasonable assumptions, it could overwhelm state budgets across the country.
Once upon a time, as recently as the late 19th century, Americans typically worked until they died — which they could expect to happen, on average, before age 65. With the exception of the rare military pension, the old and infirm relied on charity or extended families for support.
That all changed amid the rapid industrialization and rising prosperity of the 20th century. Life expectancy for those who reached working age shot upward: As of 2018, it was almost 77 for men and 82 for women. Companies, which increasingly dominated the economy, proved unwilling to employ older workers, whom they saw as less productive. For an increasing number of people, a period of idleness became possible, even inevitable.
The government recognized the new reality by establishing Social Security in 1935. The program initially started paying benefits at age 65, which became the official retirement threshold. Yet it was never intended to provide more than a bare minimum income. To maintain a decent standard of living, people (or their employers) had to do something they had rarely done before: set aside enough money for life after work.
Therein lies the origin of America’s retirement crisis. The U.S. has never properly considered how people will make up the difference between Social Security and a financially secure old age. This week, the House is expected to consider legislation that will expand automatic enrollment in employee retirement plans and make it easier for small businesses to offer certain benefits. But a more fundamental rethink is in order.
The size of the problem will depend on a few variables: how much the population of retirees grows, how much money they need to be comfortable, and how much they manage to save. Consider each in turn.
The U.S. will have a lot more retirees in coming decades, thanks partly to the aging of the baby-boom generation. The Census Bureau forecasts that by 2030, there will be more than 73 million people aged 65 and over, comprising about 21% of the country’s total population. That’s up from 49 million, or about 15%, in 2016.
So will they have enough? The Center for Retirement Research at Boston College — which has been studying financial preparedness for more than a decade — estimates that about half of working-age households are “at risk,” meaning they’re on track to fall more than 10% short of the income they’ll need to retire comfortably. In dollar terms, that amounts to a retirement-savings shortfall of about $7 trillion. And that assumes no future cuts in Social Security benefits.
Granted, people can reduce the shortfall by working beyond the age of 65, the cutoff that the center uses for its calculation. Many already do: As of December, about a third of people aged 65 to 69 were employed. But there are limits. It’s much harder for, say, a truck driver to work until 70 than it is for a college professor. And even if half of all workers kept going past 65, the share of the population “at risk” would fall only to about a third. That’s still a terrible outcome for one of world’s richest nations.
The lack of savings is more than a humanitarian crisis. It’s also a fiscal disaster in the making. The more people reach retirement with inadequate resources, the more they will rely on welfare programs such as Medicaid, food stamps and Supplemental Security Income. One study estimates that by 2030, seniors will require an added $7 billion in public assistance annually in the state of New Jersey alone. That’s almost a fifth of the current state budget. And New Jersey doesn’t have an outsized senior population. The situation in other states could easily be worse.
What to do? People can work only so long, and they’re not going to die sooner. This leaves one solution: Get them to save more. The next editorials in this series will explore why they aren’t naturally inclined to do so, why today’s patchwork of options — including 401(k) plans and individual retirement accounts — isn’t helping, and how to design a better system.
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