"Retirement - Is There One in Your Future? - Part II"

Sydney M. Williams

Thought of the Day

“Retirement – Is There One in Your Future? – Part II”

October 21, 2010

January 1, 2011 will mark 65 years from when the first baby boomer was born. On that date, 78 million of those babies born between 1946 and 1964 will begin retiring. There is simply not enough capital to ensure everyone a secure retirement.

For sake of simplicity, let us assume that on average each retiree required $50,000 of annual income. Approximately $20,000 will come from Social Security – assuming it is still there. The other $30,000 of income will have to come from IRAs, 401(k)s, pension plans, etc. Assuming a return on the capital of 4%, that means each of the 78 million people need (or will need) about $750,000 in retirement savings. Of course, they may choose to dip into principal, betting that the grim reaper appears before the bailiff. Seventy-eight million people times $750,000 equals $58.5 trillion. According to Federal Reserve data, U.S. household wealth stands currently at $53.5 trillion. That number, of course, includes the value of one’s home, and the assets of those already retired and those who are younger. This is a crisis that is barreling our way like an eighteen-wheeler down a crowded street.

Optimism has long characterized the typical American. He (or she) tends to look forward, not backward. “Live for today for tomorrow will take care of itself”, would appear to be our motto. While such an attitude is appealing in many ways, it has led to irresponsible carelessness, when it comes to preparing for retirement. And the chickens are coming home to roost. The generation that proceeded mine was one for whom defined benefit plans were commonplace at major corporations – one worked long and hard and the company’s pension plan, supplemented by Social Security provided an adequate income for old age. (My grandparents’ generation, except for the few with private resources, had to rely on family, or became wards of the state.) With the exception of union workers (now, largely government workers) and a few others, my generation and the baby boomers that follow have no such safety net, though we do have Social Security. In 1974, under the Employment Retirement Income Security Act (ERISA), Congress created IRA accounts for those not covered by a corporate pension. Four years later, Congress established 401(k) plans. Today, IRA and 401(k) plans hold a total of about $6 trillion – about $34,000 for each baby boomer, assuming all the money belonged to them which it does not. Unfortunately the funds in retirement accounts are not nearly sufficient for the demand retiring boomers will require.

These facts - that boomers are close to retiring and that the funds available are clearly insufficient, along with enormous federal deficits – have prompted some proposals from Washington that are disconcerting, if not outright frightening. Two years ago, House Education and Labor Chairman George Miller (D – California) and Jim McDermott (D – Washington), then chairman of the House Ways and Means Subcommittee on Income Security and Family Support, considered the tax break for 401(k) contributions, substituting a new system of guaranteed retirement accounts to which all workers would be obliged to contribute. Joint hearings were held last month by the Department of Treasury to consider “lifetime income options for retirement plans”. Since Social Security is already bankrupt, the concept of layering on even more entitlements seems foolhardy at best and has convinced some opponents that such a decision would result in the eventual confiscation of all assets in private IRA and 401(k) plans - a process undertaken in Argentina two years ago.

What is especially galling is that Congress has their own very liberal retirement plan; so, like the deceptively named Patient Protection & Affordable Care Act, they are proposing legislation from which they would be exempt.

There is no simple answer. But a way forward must be found. Common sense suggests that any solution will have to include an increase in the retirement age and some form of a means test for Social Security. Of course a means test implies giving up of payments that one has already contributed; so should be tax deductible. A solution should also recognize that incentives are needed to encourage investment and discourage consumption. The system will have to provide the opportunity for those who can afford it to be able to invest far more in retirement accounts on a tax advantaged basis than they now do, especially if a means test for Social Security is implemented. The current system does not work. If a working person contributes the maximum allowable today for twenty-five years and if one assumes a 5% annualized return - two times the current rate on the Ten-Year – he (or she) would accumulate less than $1,000,000 - an amount that will prove barely sufficient for retirement.

As undemocratic as this may sound, we must recognize that there never will be equality in outcomes – some people will always be richer than others. There is an enormous variation in looks, brains and physical prowess - characteristics beyond our control. People are not the same and each person must play to their individual strengths. Society will always be stratified. However, there should be no impediments to ascending the ladder of success, just as there should be no barriers from falling. That is the way America has always been and it is the way she always should be. A society that is fluid, one that rewards brains, industriousness and thrift will be far more successful than one that rewards dependency and profligacy. In the meantime, “Houston, we have a problem.”