Here Come the Three Horsemen of the Retirement Apocalypse

Coming soon: means testing, mandatory savings, longevity insurance

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Big changes are coming to the broken U.S. retirement system, which in total is underfunded by at least $6.6 trillion, according to one analysis.

All three pillars of retirement—Social Security, employer-sponsored plans and personal savings—have weakened in recent years. The time has come for “out-of-the-box thinking” and a “holistic” solution, Barbara Novick, vice chairman of asset manager BlackRock, said at a briefing on the firm’s latest retirement report.

The nation’s retirement system consists of a patchwork of programs that include Social Security, 401(k) plans, IRAs, Keoghs, traditional pensions and federal thrift savings. Each of these has served a specific need or group. But in many cases, these programs have evolved into something they were never intended to be.

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Social Security is now 90% of income for a third of retirees. It was never envisioned as a sole source of retirement security for anyone—only to provide a safety net to keep elders from falling below the poverty line. Likewise, 401(k) plans were introduced in the 1980s as a supplemental savings program to augment traditional pensions. But they almost immediately began to supplant—not supplement—defined-benefit plans, and today defined-contribution plans are the primary retirement savings vehicle for many workers.

Our troubled pension system has been well documented. Social Security is scheduled to run out of funds in 2033. Both public and private old-style pensions that provide guaranteed lifetime income have become chronically underfunded. Individuals are not saving enough on their own; more than a quarter of workers have less than $1,000 in retirement savings, EBRI found.

BlackRock envisions a sweeping overhaul that will shore up all three pillars—but not without sacrifice. Based partly on proposals and discussions in congress and at the state level right now, here’s how the firm believes things might shake out:

  • Social Security This will be re-established as a safety net to prevent older Americans from declining into poverty. Look for the age of eligibility to be raised, for cost of living increases to be smaller, and for means testing that would cut or cap benefits for the wealthy and anyone with other large sources of retirement income. The disability benefit might be stripped away. Going forward, revenues might be invested in a broader mix of assets with higher return potential—not just Treasury securities.
  • Employer-sponsored plans After decades of focusing on asset accumulation through features like a company match and auto enrollment, these plans will turn toward the thornier issue of making workers’ nest eggs last as they draw down accounts in retirement. A big push is already on to convert 401(k) savings into guaranteed lifetime income through immediate annuities. Look also for a push to take 25% of your retirement accounts for a deferred annuity that provides lifetime income after age 85.
  • Personal savings You may soon be required to participate in your company 401(k) plan with contribution rates determined in part by your salary, age and accumulated savings. Workers at the many small companies that do not offer a 401(k) plan may be required to set aside around 3% of pay into a pooled account with professional management that is run much like a single-employer defined-contribution plan. Another possibility is requiring participation in private tax-advantaged accounts, as is done in Australia, where workers began with a mandatory 3% contribution rate that is being ratcheted up to 12% over 34 years.
6 comments
jr194504
jr194504

Social Security will be in trouble 30 years from now......it is the military that is dragging the country to outragious debt.

verchinski
verchinski

I'm reading this in Australia but am a US citizen.  This out of the box is pure hokum.  InOZ, employers ARE REQUIRED to provide for each employee 12% into an investment fund ON TOP OF THEIR SALARIES.  This is then used as a subsequent pension but is not taxed on withdrawal.  The real issue for 90% of US workers I the lack of ANY disposable income to save for retirement when during their working life famiilies are scraping by to pay for university costs, housing, and health insurance.  Here in OZ, health insurance Is paid by the Federal Government and university costs are not paid up front but as a % of salary.  All areas must be addressed in the US otherwise we will continue to bcome a third world country..

dlmandel
dlmandel

What nonsense, when “out-of-the-box thinking” means more cutbacks for retirees and profits for Wall Street. Social Security is:

a) not running out of funds by 2033, but only gradually losing its surplus, and that can easily be fixed by lifting the cap on the payroll tax, which is now regressively structured so the ultrarich pay a minuscule proportion of their income. 

b) not meant as a safety net to keep seniors out of poverty. That would be SSI. Social Security is a public pension paid for in advance by its beneficiaries. Proposals to cut benefits by raising the age, reducing cost of living adjustments, etc. are obscene. If anything, it should be expanded to make up for the loss of optional private corporate pensions. How? As before, raise the cap so the rich pay their fair share.

c. hated by Wall Street because it's efficient, low cost and doesn't generate huge profits for them. All the proposals to invest SS funds privately and to replace it with 401k and other private savings schemes are motivated by Wall Street greed, not to mention dangerous for the vast majority of workers who shouldn't be forced to gamble with their retirement.

allison.aa
allison.aa

Discussions during congress are unlikely to be about retirement. Did you perhaps mean Congress? On a more serious note, while other income should, as it already does, reduce Social Security payments, means testing (wealth tax) punishes the responsible and rewards the profligate.

carlyt
carlyt

Mandatory savings would probably be a good idea for future retirees. But the real problem is education. Retirement planning education should be mandatory starting in elementary school and right through college and beyond. Many people just don't plan for retirement. In the US some still believe that Social Security will be enough to carry them through retirement.  Everyone should strive for multiple streams of income once retired (Social Security, pensions, dividends, part time work, etc.) There is a great deal of information about retirement available on the web. I recently found the site Retirement And Good Living that provides information on finances, health, retirement locations, part time work and also has a great blog of guest posts about a variety of retirement topics. I never understand why more people don't at least try to educate themselves on these sites. Most are free.