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.
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.