Articles on retirement security, like this one from the NY Times, are good to read and know about. The short version is that few of us are saving enough for retirement, so we’re going to see more “retired” people working part-time, retiring later, or, worst case scenario, looking for a government fix. The situation is even worse for younger Americans.
One thing that’s particularly relevant for this blog is that defined benefit pension plans are more or less a thing of the past for most workers, and in the next five or ten years we’re going to have a whole class of workers becoming eligible for retirement age who’ve never had a DB plan in their entire working career.
To see why this matters, check out the chart below from a recent McKinsey report. It’s divided by age and income, and it shows how much, or how little, workers have saved for retirement and what form that savings takes. At the bottom right-hand side are workers aged 60-65 who earn $20-50,000 a year. Sixty percent of their retirement income will come from Social Security, 22 percent will come from a defined benefit pension plan, only 1 percent will come from personal savings, and they’re facing a 17 percent shortfall between what they have saved and what they’re likely to need. Looking at the next youngest age bracket, workers aged 40-59 earning the same amount, they can expect 48 percent from Social Security, only 4 percent from a DB plan, an 6 percent from personal savings (including 401k plans and IRAs). They face a 42 percent shortfall.
These figures would be improved, although not erased, through a stock market boom. The awful truth is that Americans just aren’t saving enough for retirement.
The consequences of this are unknown. It’s almost a guarantee that Social Security will become even more important in retirement plans. But will soon-to-be-retirees, a large and important voting bloc, push for even stronger government support? Are politicians ready to tell the truth that years of subsidizing retirement plans through the tax code, through various tax-subsidized accounts, just aren’t doing enough? Will private employers start offering more generous retirement plans, or will workers start demanding them? Most fundamentally, are Americans prepared to start saving significantly more money for retirement?
For all of their problems, defined benefit pensions plans have historically been good at getting employees and employers to set aside money for workers’ retirements. Without those guarantees and left to their own savings and investment decisions, workers have proven fallible. This will start becoming even clearer in the years to come.