“With dignity, for all” is a phrase politicians often use when discussing retirement. But what exactly is “dignity for all,” and what has Congress done to cement their popular phrase?
According to a recently released report by the Government Accountability Office (GAO) on our nation’s retirement system, Congress has done little to address the changing landscape of retirement over the last 40 years. Unphased by the flood of reports declaring Social Security’s future insolvency, GAO is now insisting Congress get to work on the problem they have ignored for decades.
The report, triggered by similar GAO reports, outlines four areas Congress should examine. They are the change from a defined benefit plan (pension) to defined contribution (401k) in America, challenges Americans face planning and managing for retirement, the fiscal risks to government retirement programs like Social Security, and financing the future of retirement in the United States.
While GAO offers no specific recommendations to Congress other than establishing an independent commission to clarify policy goals, the report includes many important points about the landscape of retirement in America.
Since the 1970’s the amount of pension plans offered by employers has shrunk dramatically, while the rise in 401k type plans has risen dramatically. GAO says, “this shift to [401k type] plans has increased the risks and responsibilities for individuals in planning and managing their retirement. In addition, economic and societal trends—such as increases in debt and health care costs—can impede individuals’ ability to save for retirement.”
With more power over their own retirement, Americans inherently take on more responsibility. Portable retirement plans for a modern and mobile workforce have been a positive development for the American workforce, but some are falling behind. According to the report, many Americans are not saving, and those that do, do not have enough to last through retirement. 55% of Americans ages 55-64 have $25,000 or less in retirement savings, 41% of those have $0.
One issue is access to 401k type plans. Many Americans who are employed by smaller firms or certain industries lack access, especially lower income Americans. Only 40% of those with incomes in the lowest quartile have access to plans. The federal government has tried to increase access by using tax incentives and nondiscrimination rules, but the number of 401k type plans actually decreased over the past decade.
While many Americans do save an adequate amount for retirement, those that do not save enough rely heavily on Social Security, a program that will face extreme challenges on the horizon. According to GAO, beginning in 2035, the Social Security program will be unable to pay full benefits. GAO and the Social Security Administration predict recipients will see about a 25% reduction in benefits if nothing is done between now and then, making it imperative that either Americans begin saving more, or Congress passes major entitlement reform soon.
The program’s issues relate to its structure and financing. Put simply, there are not enough workers to provide benefits for the enormous baby boomer population. Today there are only about 2.8 workers per Social Security beneficiary compared to 16.5 workers in 1950. That ratio is only going to decrease.
Retirement in America is at a crossroads. Soon, the nation’s safety net program for retirees will begin reducing benefits to keep up with the growing retirement population. Coupled with the current retirement savings trend, the problem will multiply quickly, placing the program, and the country’s finances, in extreme danger. The future of the Social Security program, retirement, and America’s fiscal health are all tied together.
Currently, Congress is refusing to work on ensuring Social Security’s solvency for the future, putting a higher need on younger Americans to save for retirement. At the same time, it is being reported that Congress is considering changing the tax incentives for retirement savings as a part of a plan to lower tax rates. The recipe for a financially secure and sustainable retirement system during a time where technological transformation elongates lives and careers is a daunting challenge. But it’s one that cannot be ignored or considered in a one-off, piecemeal fashion. GAO’s report should spark a broader conversation about shoring up and strengthening the core tenets of the American retirement system.
