Gun/mass shooting crisis, drugs/fentanyl crisis, rent crisis, droughts & floods at the same time, now retirement crisis.... Amerikkka, the land of crises.
Economic turmoil took a toll on savings in the first half of 2022 and that’s just the tip of the iceberg as many in the US lack employer-sponsored plans.
Americans have been warned of an imminent pension crisis for years. But the situation is getting worse and worse.
Even when things were going well — there was no inflation, interest rates were low, and stocks were in an extended bull market — there was a trillion-dollar savings gap.
Then came a pandemic, war in Europe, decades of inflation, the fastest cycle of rate hikes since the early 1980s, and fears of a recession. The resulting market turmoil erased roughly $3.4 trillion from 401(k)s and IRAs in the first half of 2022, according to Alicia Munnell, director of Boston College’s Center for Retirement Research.
And that’s just for the people who have retirement accounts. About half of private sector workers do not have an employer-funded retirement plan, and many of those who do end up saving very little.
It’s a problem that’s not easily fixed and contributes to the sense that the American Dream is in decline. And while rising inflation and volatile markets are bad news for people who are retired or nearing retirement, the picture for young Americans squeezed out of the housing market can be struggling to build wealth and buried under mountains of student loan debt are, be even worse.
Read Also: "Impossible to track Canadian pension industry's $2 trillion in climate action": study
“The standard of living for a large part of the population that’s retired is going to go down — that’s the concern,” said Richard Johnson, pensions expert at the Urban Institute. “For people who aren’t in that age range, it’s still a concern because it could strain the social safety net.”
In 2019, Boston College estimated that American households are $7.1 trillion short of retirement savings, with half of them facing lower living standards once they stop working. According to Munnell, that number probably hasn’t changed much since then, despite the rise in stock and house prices over the past three years.
“People who were not at risk benefited from this,” she says.
Millions of Americans face the reality of living their final years in cramped conditions and struggling to make ends meet.
So how did one of the richest countries in the world come to be in this situation?
Up until the Great Depression, Americans worked until they died or just couldn’t take it anymore, then they had to rely on charities or extended families for support.
The misery of the 1930s prompted the introduction of Social Security to protect, as President Franklin Roosevelt said, “against the perils and vicissitudes of life.”
The scheme should provide a minimum level of support, which individuals and employers are expected to supplement as life expectancy increases and people spend more years in retirement. But the generous defined-benefit plans of the past largely disappeared as companies cut costs and embraced 401(k)s.
“The plans work quite well for the top third of workers, not so much for the middle third and not at all for the bottom third,” Munnell said. “The top third always works for companies with 401(k) plans, the middle third goes in and out of employment with coverage and ends up with much smaller balances, and the bottom third is generally not covered by any plan and is entirely dependent on Social insurance.”
It’s likely to get worse as the baby boomer generation retires. According to the Census Bureau, the number of Americans age 65 and older will increase to 73 million, or about 21% of the population, by 2030, compared to 49 million, or 15%, in 2016.
Politically, there is little desire to tackle the problem. The idea of a national auto-IRA that workers could carry from employer to employer has been floated for more than 15 years, but the only real action has been at the state level.
There, too, most government plans exclude the large and growing number of workers in the gig economy.
Even if Congress can enact incremental reform, there is an even bigger concern: whether Social Security can survive in its current form. Unless changes are made, the trust fund’s reserves are expected to be exhausted by 2035, and Americans will receive only 80% of their expected benefits.
“I think something will be done before we get to that, but I’m concerned we’ll have to get awfully close to the brink before anything is done,” Munnell said.
Economic turmoil took a toll on savings in the first half of 2022 and that’s just the tip of the iceberg as many in the US lack employer-sponsored plans.
Americans have been warned of an imminent pension crisis for years. But the situation is getting worse and worse.
Even when things were going well — there was no inflation, interest rates were low, and stocks were in an extended bull market — there was a trillion-dollar savings gap.
Then came a pandemic, war in Europe, decades of inflation, the fastest cycle of rate hikes since the early 1980s, and fears of a recession. The resulting market turmoil erased roughly $3.4 trillion from 401(k)s and IRAs in the first half of 2022, according to Alicia Munnell, director of Boston College’s Center for Retirement Research.
And that’s just for the people who have retirement accounts. About half of private sector workers do not have an employer-funded retirement plan, and many of those who do end up saving very little.
It’s a problem that’s not easily fixed and contributes to the sense that the American Dream is in decline. And while rising inflation and volatile markets are bad news for people who are retired or nearing retirement, the picture for young Americans squeezed out of the housing market can be struggling to build wealth and buried under mountains of student loan debt are, be even worse.
Read Also: "Impossible to track Canadian pension industry's $2 trillion in climate action": study
“The standard of living for a large part of the population that’s retired is going to go down — that’s the concern,” said Richard Johnson, pensions expert at the Urban Institute. “For people who aren’t in that age range, it’s still a concern because it could strain the social safety net.”
In 2019, Boston College estimated that American households are $7.1 trillion short of retirement savings, with half of them facing lower living standards once they stop working. According to Munnell, that number probably hasn’t changed much since then, despite the rise in stock and house prices over the past three years.
“People who were not at risk benefited from this,” she says.
Millions of Americans face the reality of living their final years in cramped conditions and struggling to make ends meet.
So how did one of the richest countries in the world come to be in this situation?
Up until the Great Depression, Americans worked until they died or just couldn’t take it anymore, then they had to rely on charities or extended families for support.
The misery of the 1930s prompted the introduction of Social Security to protect, as President Franklin Roosevelt said, “against the perils and vicissitudes of life.”
The scheme should provide a minimum level of support, which individuals and employers are expected to supplement as life expectancy increases and people spend more years in retirement. But the generous defined-benefit plans of the past largely disappeared as companies cut costs and embraced 401(k)s.
“The plans work quite well for the top third of workers, not so much for the middle third and not at all for the bottom third,” Munnell said. “The top third always works for companies with 401(k) plans, the middle third goes in and out of employment with coverage and ends up with much smaller balances, and the bottom third is generally not covered by any plan and is entirely dependent on Social insurance.”
It’s likely to get worse as the baby boomer generation retires. According to the Census Bureau, the number of Americans age 65 and older will increase to 73 million, or about 21% of the population, by 2030, compared to 49 million, or 15%, in 2016.
Politically, there is little desire to tackle the problem. The idea of a national auto-IRA that workers could carry from employer to employer has been floated for more than 15 years, but the only real action has been at the state level.
There, too, most government plans exclude the large and growing number of workers in the gig economy.
Even if Congress can enact incremental reform, there is an even bigger concern: whether Social Security can survive in its current form. Unless changes are made, the trust fund’s reserves are expected to be exhausted by 2035, and Americans will receive only 80% of their expected benefits.
“I think something will be done before we get to that, but I’m concerned we’ll have to get awfully close to the brink before anything is done,” Munnell said.
