Reality Two: Many, Probably Most, Baby Boomers Already Blew It.

Social Security Reform: Time has run out

The “it” in the heading is “traditional retirement” where income comes from the proverbial three legged stool of retirement planning: 1) Social Security, 2) a retirement program (pension, IRA, 401(k), 403(b), etc.), and 3) savings (home equity, investments, etc.). 

Among social scientist there’s a lot of chatter about whether baby boomers will redefine retirement by opting for alternatives to traditional retirement.  In the media it often surfaces as a positive trend called the “second acts,” meaning a second career built on volunteerism, hobbies, or neglected interests.   It surfaces as a negative in articles like “Aging and Broke, More Lean on Family” about boomers who become a “burden” on family.  Other articles focus on budget problems that surface when the burden is shifted to strangers (a.k.a. the public).  The truth is that retirement HAS to be redefined.  By not planning for retirement, baby boomers are just forcing the issue, but ultimately it is life expectancies that are creating the change.

For boomers the dye has already been cast. The posting entitled “Now We Know Who the Rich Are” mentioned the foolishness of trying to find someone who can compensate for this failure to face reality. 

Collectively, all the options used to support retirement come up short.  They can help some people, but no amount of redistributing benefits can overcome the deficiency.  Boomers’ total contributions to and earnings in pensions, social security, savings, IRAs, 401(k)s, etc. aren’t enough to support their retirement (i.e., traditional retirement).   There are too many of them, and they are living too long.

The posting, “The 99%ers: Part 5,” illustrated the folly of ignoring employer pensions and health insurance benefits.  But, one doesn’t have to be an expert to know that pensions are largely a thing of the past.  Most of us experienced it firsthand.  The defined benefit pension was the first retirement approach that failed under the stress of greater life expectancies.  Baby boomers may be the last generation where pensions spare some portion of retirees from the consequences of the appeal of not planning.  But, as a generation, pensions are far from a solution for boomers.

“The 99%ers: Part 7” cited some articles (e.g., “US Wealth Gap Between Young and Old Is Widest Ever”) that indicate some encouraging information.  Interestingly, some of the articles about the phenomena greeted the news that some people actually save over time as if it were a class issue.  By contrast, “Oldest Baby Boomers Face Jobs Bust” by  E.S. Browning  (WALL STREET JOURNAL, 12/19/11) presents a starker picture by focusing on a specific demographic, the same age group addressed in “Retirement CrisisCloses In on Baby Boomers” by Tom Brown (Yahoo Finance, Reuters).  

Here’s the picture the Browning article paints; “The median household headed by someone aged 55 to 64 has $87,200 in retirement accounts and other financial assets, according to Strategic Business Insights' MacroMonitor database.”

“Financial planners often advise that retirement resources be large enough to provide 85% of a person's working income. Median households headed by a person aged 60 to 62 with a 401(k) account have saved less than one-quarter of what is needed in that account to live as well in retirement, according to Fed data analyzed for The Wall Street Journal by the Center for Retirement Research at Boston College.”

Keep in mind these quotes are providing data about people who were offered a retirement plan.  What do you think the picture would look like if those who worked for employers that didn’t offer a 401(k) were included?  It would be even worse.

From a policy perspective it shows that, at least as far as baby boomers are concerned, the joys of escaping responsibility for planning were decisive.  They overwhelmed retirement policies based on voluntary actions by individuals (either collectively through employer pension or individually through IRAs and 401(k)s).  Collectively pensions are often underfunded and are a very expensive way to invest.  Individually, (as shown in “Investing PART 5: Oldies: When looking back is most valuable” for IRAs and “Investing PART 6: Perhaps some seasonal music” for 401(k)s) the problem isn’t that the programs couldn’t work.  Combining the two programs could support a decent retirement plan.  However, positives like tax deductibility of most IRAs and 401(k) contributions, deferred taxes on all IRAs and 401(k)s, and potential employer matches just weren’t enough.   The ease of not planning won out over STRONG positive immediate financial returns.

The spreadsheets associated with those postings on investing PART 5 and PART 6 can be used to illustrate that increasing savings now is unlikely to be a total solution for most boomers, although it will help those who have already started.  Maxing out every available benefit would help, but the Browning article highlights another response   “… it also means that people are working longer, because they cannot afford to leave the workforce and lose much needed paychecks and benefits.”

The Brown article highlights the same response: “Older Americans are already clinging to jobs at the highest rate since before Medicare - the federal health insurance plan for the elderly and disabled - was signed into law in 1965.”

“According to Labor Department statistics in an EBRI report, 31.5 percent of Americans aged 65-69 were still in the workforce in 2010, compared to 21 percent in 1990. Of those aged 70-74, 18 percent were still working in 2010, up from 11 percent in 1990. Labor Department (BLS) statistics also show that the workforce of people 65 and older nearly doubled in the last 20 years, rising to 6.7 million in 2010.”

An analysis reported on Bankrate.com found higher portions were still working.  The report states, “MetLife found that 45 percent of 65-year-old boomers are now fully retired….” and “Another 14 percent say they are officially retired but working part time or seasonally.”  Interestingly, the author somehow reached the conclusion that, as the title implies, “Boomers calling it quits by 65,” despite the fact that less than half have fully retired.

The boomers’ response of continuing to work may be the only realistic response to Reality Two: Most baby boomers already blew it.  Social Security reform needs to accommodate, even encourage, longer careers.  At a minimum, it should immediately remove all disincentives and penalties for working while receiving benefits, especially for the most productive members of the labor force.  We need their output to support the consumption that the system supports.