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Is Your Retirement Planning as Bad as Most Americans' Planning? Find Out Here.

Gary North - June 26, 2013
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Reality Check

The National Institute on Retirement Security has issued a report: The Retirement Savings Crisis: Is It Worse Than We Think? There is no question about it; it is worse than we think -- way, way worse than we think. It is posted here.

The report is divided into two parts. The first part is clear. It is a careful description of the discrepancy between the retirement plans of Americans and the financial resources available to these Americans to fulfill their retirement plans. The discrepancy is greater than I had imagined. In contrast, the second part is an exercise in utter fantasy. It calls for massive federal programs to increase the amount of capital that private firms invest in employees' retirement programs. In other words, there is a massive discrepancy between the first part of the report and the second part.

Here are some of the highlights from the first part.

Approximately 38,000,000 working households in the United States do not own any retirement assets. This is about 45% of all the working households in the United States. They do not have an IRA. They do not have a 401(k). They do not have anything. In other words, they have made no plans whatsoever to fund their retirements.

If we take into consideration all households in America, meaning the ones that have no retirement savings and the ones that have some retirement savings, the median retirement account balance is $3,000. Got that? $3,000. Americans believe that $3,000 will carry them through retirement, as long as they continue to let those 3,000 precious dollars grow by wise investing. If we talk about people who are 55 years or older and still in the labor force, the total accumulated retirement savings for all of these people is $12,000 (p. 1). This means they have about 12 years, max, to accumuulate 8 to 11 times their annual income in the final year of their careers.

The utter impossibility of this situation should be obvious. This is not a slight shortfall. This is a guaranteed head-on collision inside the American social order. That is because the Social Security system is going bankrupt, which the second part of this report categorically denies. There is no possibility that the dreams and schemes of Americans will be fulfilled by the Social Security system.

Even if they could could be fulfilled, the Medicare system's shortfall will completely bankrupt the federal government anyway. Medicare is a huge expense, and this expense is going to be shifted onto the backs of the families of Americans. In other words, not only is Social Security going to go belly-up, the Medicare system is going to go belly-up. This means that the total burden of the Social Security tax system is going to be imposed on workers, but there is going to be a steady increase in the retirement age for these workers. They will pay into the system, and they are not going to get much out.

Meanwhile, the Medicare system, which has to start at age 65, because the private insurance companies kick everybody out of their programs at age 65, will bankrupt the federal government. There is no question about this. The system is over $220 trillion in the hole: Kotlikoff's 2012 estimate.

With this as background, consider further statistical indicators from the first part of this report. Factor these into your plans, and especially your plans for what happens in American political life, when the Medicare system will overwhelm the entire federal government, and the Social Security trust fund is empty today, not in 20 or 30 years.


The report speaks of a collective retirement savings gap: what is needed vs. what has been saved. Among working households, ages 25 to 64, this range is now somewhere between $7 trillion and $14 trillion, depending on the financial measure. We are talking about the private sector. If we look at existing retirement assets, at least 90% of working households in the United States do not meet the targets (p. 14). Obviously, households that do not have any retirement savings are not meeting the targets. Remember, this is about 45% of all households. But when these households are factored into the total population, then we find that 90% of the population has fallen short, age bracket by age bracket.

What kind of income should be provided to an individual in retirement? The experts debate over this. The minimum figure cited is 70%. A more common estimate is 85% (p. 2). This means that a person who enters retirement should continue to have 85% of the income that he had in the year before he entered retirement. In other words, his annual retirement income should equal 85% of his maximum year of income as an employed person.

Under this assumption, the Social Security system will provide approximately 35% of a typical household's retirement income. This leaves a retirement income gap of about 50% of the individual's pre-retirement earnings. This is the portion of the families' income that has to be made up by means of retirement savings program. But we have already seen that that is a hopeless goal for 45% of the American population, and a near hopeless goal for about 80% of the population.

What about people who are nearing retirement? These are the people who are 55 years old to 64 years old. You cannot get conventional Social Security benefits and to you are 67. But, let us ignore that. How much money does the average person in this age bracket have in his 401(k) or IRA account? Approximately $100,000 (p. 2). These are the people who actually have 401(k) accounts and IRA accounts. They constitute less than half of the American working class. These are the really future-oriented people who bothered to set up a retirement program. At the end of the entire process of their careers, they have $100,000 in reserve.

In the United States, about 48% of the population works for a company that does not have any retirement program at all. This is the lowest rate since 1979. So, it is clear why most employees do not have any retirement program. If the companies do not provide one, they are unlikely to provide one for themselves, and they do not.

There used to be defined benefit programs. These guaranteed a particular income to retirees. They have declined in number for 30 years. Fewer than a third of Americans who are under 55 years old participate in such a program (p. 3). Employers have decided that they cannot afford to guarantee retirees anything. So, if they have to compete by offering retirement programs to new employees, they simply offer some kind of matching grant program to the retirees, usually capped somewhere around 6%. The report does not mention this figure. It does mention that when the 401(k) programs were first introduced in 1978, they were assumed to be supplemental to retirement programs of a defined-benefit nature. Instead, the companies have abandoned the defined-benefit programs. Out of all households that have a workplace retirement program, 60% have only a 401(k) program.

Now let us talk about income. About 40% of households age 25 to 34 have some sort of retirement program. For households aged 55 to 64, it is about 60%. Let us look at households with some retirement account. Let us look at median income: right in the middle of the sample. Half the population has a lower income; half the population has a higher income. Remember, these are the really future-oriented households, meaning households that have a retirement program. Households with a retirement program have a median income of a little over $76,000 a year. Among households that do not have retirement assets, the median income is about $30,500 a year (p. 9). In other words, there is a huge discrepancy of income.

Now let us look at net worth. If we exclude all retirement savings, the median net worth of those households that own a retirement account have between five times and six times as much money as families that do not have any retirement savings. This is true across all age groups. Among the near retirees, meaning people 55 years old or older, households have about $245,000 in assets. This is non-retirement wealth. Among the owners of retirement assets, the net wealth is about $40,000 (p. 9). As you might expect, although the report does not say this, the bulk of that wealth is in the value of their homes.

A general estimate of the financial industry is this: at the time of a person's retirement, he needs in his retirement account about eight times his current income. One estimate says that it ought to be 11 times current income. With this in mind, let us return to the fact that among working households age 55-64, about 32% have no retirement savings at all. Another 32% have retirement savings of less than 100% of their annual income (p. 11). In short, there is no possibility that these people will be able to accumulate enough wealth to meet the estimates of what is required for comfortable living in retirement.

Consider somebody with $200,000 in retirement savings. This is less than half of the minimum that a couple which has $60,000 a year in combined income will need, according to conservative estimates (p. 13).

Consider employees of the largest companies, the ones most likely to offer comprehensive retirement programs. One study of 2.2 million employees at 78 large companies found the following. Of those employees who spent their entire careers at these companies, beginning at age 25, and who have participated in the programs, they will retire with about 8.8 times their annual pay in the retirement programs. The organization that did the study says that this is a shortfall of about 20%, since people need about 11 times their annual pay accumulated in their programs. The problem with this scenario is that very few employees started at age 25 and spent 40 years with the same company. In any case, those who did started a long time ago. What if all employees at these companies are considered, not just the ones who began at age 25 and stay with the companies? In this group, only 15% of them will have a sufficient retirement income at age 65 (p. 16).

Here is Part 1's conclusion.

It is highly unlikely that most individuals and households will be able to fill such a large retirement income gap by themselves. They also need employers to become more engaged in assuring the retirement readiness of the workforce. In addition, public policy can play a critical role in putting all Americans on a path toward a secure retirement (p. 17).


Part 2 offers policy implications. It begins with a deception, namely, that there is anything in the Social Security trust fund other than IOUs from the Treasury.

The Social Security system faces challenges stemming from an aging population that, while significant, are manageable. Primarily a pay-as-you-go system, benefits are funded through payroll taxes as well as the Social Security (Old Age and Survivors Insurance, or OASI) Trust Fund. The trust fund is projected to become depleted by 2033, after which payroll taxes will cover approximately three-quarters of promised benefits through 2087.

This makes it look as though there is no immediate problem.

It then reports that the voters want more -- much more.

Given highly deficient household-level retirement savings, strengthening Social Security--a system on which all Americans rely--is critical to the foundation of retirement security. While current political debate about the program is often focused on benefit cuts--e.g., increasing the full retirement age and reducing Cost of Living Adjustments (COLAs)--a study by the National Academy of Social Insurance found strong public support for maintaining and expanding Social Security benefits as well as for increasing system revenues in order to preserve the system (p. 17).

In short, when the price falls, more is demanded. The public thinks it can get these goodies for free -- free to them, anyway. More, more, more!

Citing low coverage of low- and middle-income workers and families, some policy experts have advanced a number of proposals at the national level to move toward more universal retirement plan coverage.47 These proposals aim to provide an additional layer of stable retirement income to supplement Social Security and private savings in the absence of traditional pensions. Most proposals feature automatic enrollment, payroll deduction, full portability, and low-cost professional investment management. The Auto IRA concept has support from the Obama administration, and one version has been introduced in Congress by U.S. Representative Richard Neal.48 Basic provisions include requiring employers that do not offer their own plan to automatically enroll workers in an IRA and deduct a default contribution rate from paychecks, while allowing employees to individually opt out (p. 18).

Are you getting the picture? The federal government must force employers to provide pensions.

We are living in a world run by people who do not have a clue about what is coming. They write their papers. They call for government action. They demand more coercion. And they refuse to consider Kotlikoff's 2012 estimate of a combined present value shortfall in Social Security and Medicare of $222 trillion.

We are headed for the Great Default. Plan for it.

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