Photo by Merrilee Schultz on Unsplash
Can you look forward to a secure Retirement in the U.S.?
That depends largely on how old you are. Teresa Ghilarducci, professor of economics at The New School for Social Research, finds that if you’re between ages 68 and 76 today (making you an Early Baby Boomer), your retirement prospects are rather good. If you’re aged 59 to 67 (Late Baby Boomer), 43 to 58 (Gen X), or 27 to 42 (Millennial), your extended outlook is partly cloudy to stormy.
In a series of research papers called Tracking the Retirement Crisis, Ghilarducci and colleagues at the Schwartz Center for Economic Policy Analysis distill economic data to paint a picture of a U.S. retirement system that is on shaky legs at best.
Those most likely to have a rough retirement are members of an “edge cohort” – a group of 63 million Americans ages 50 to 64 who have little savings and no pensions. Many in this cohort are opting to draw Social Security benefits earlier than the full retirement age of 67 because they are anxious about receiving any benefits at all if they wait.
Much of the retirement system’s weakness, Ghilarducci says, stems from the decline of defined-benefit Pension plans. Nearly 40% of Silent Generation workers had this type of pension. That percentage has dropped in each generation, and today only 22% of Generation X workers have them. Pensions “boosted wealth by up to 50%,” she writes, and their benefit was fairly evenly distributed among all income levels. The decline of pensions represents “a loss of guaranteed, equitable, and resilient retirement income for millions.”
What replaced pensions were defined-contribution plans such as 401(k)s and IRAs. These plans have helped high-income employees save but have had negligible impact on households in the bottom 60%. They also carry greater risk, she notes, because defined-contribution plans “depend on market performance, personal investment decisions, and stable Employment.”
In short, many corporations that offered defined-benefit pensions to their employees decided they were too expensive. Instead, they shifted the risks to the individual employees, and the result has been less Security.
Some defenders of the status quo have argued that the retirement “crisis” is exaggerated, since the current crop of retirees (Early Baby Boomers) seem to be financially secure. Ghilarducci acknowledges that point but notes that later generations of retirees face three significant challenges to retirement security: debt, rising healthcare costs, and Longevity.
In 2022, 41% of older adults were still repaying mortgage loans – 30 years ago it was only 25%. Student loan debt also consumes a significant share of potential retirement income. And while Medicare covers most medical expenses, a typical 65-year-old male needs $127,000 in savings to have a 90% chance of covering medical costs. For a woman, it’s $143,000. And those numbers do not include long-term care. “These are expenses most middle-class families can’t easily absorb, especially when they’re already under-saved,” Ghilarducci said in a recent interview.
Longevity is both a blessing and a problem. Generation X retirees have expected life spans 10-15% longer than Early Baby Boomers. That’s wonderful, of course – but it means they need 10-15% more savings to maintain their standard of living.
Ghilarducci, who co-authored the 2018 book Rescuing Retirement, recommends several policy changes to ensure a stable, affordable retirement for future generations. Social Security – on a path that would require benefit reductions of 25% in eight years – can be strengthened by increasing revenue, such as by lifting the cap on earnings that are taxable ($176,100 in 2025). She also favors the Retirement Security Act for Americans, a bipartisan bill introduced in Congress this year that would create tax-advantaged, portable savings accounts for all workers, including part-timers. Expanding caps on prescription drug prices would help lower costs to consumers, as would lowering Medicare eligibility age from 65 to 60.
None of these proposals is likely to find favor in the current Congress and administration. But Ghilarducci notes that the longer we wait to reform the system, the more expensive it will be to fix.
Of course, this is only a forecast. If you don’t want it to be an accurate one, it behooves you to tell your elected representatives you expect them to do something now.
