Respected retirement researchers call for shifting more of the Social Security tax burden to upper-income taxpayers, tapping home equity in retirement, and mandatory auto enrollment in retirement plans.
For the next few weeks, Scott Cooley will be filling in for John Rekenthaler, who is on sabbatical.
Americans are accustomed to hearing about the problems with their retirement system. Social Security faces a long-term deficit. Most private-sector workers lack access to a defined-benefit plan. Too few people save for retirement in defined-contribution plans, and those who do, frequently save too little.
There may be a book that challenges this conventional wisdom, but Falling Short: The Coming Retirement Crisis and What to Do About It is not it. Indeed, authors Alicia Munnell, Charles Ellis, and Andrew Eschtruth make a strong and familiar case that all the things we think are wrong with our retirement system truly are flaws. But they also provide a helpful how-to guide for investors to navigate the current, problematic retirement system, while they attempt to jump-start a conversation about how policymakers can fix it.
As befits a book written by authors with a strong academic bent--Munnell and Eschtruth are researchers at Boston College's influential Center for Retirement Research, while Ellis is the former managing partner of Greenwich Associates and the author of 16 books--this volume provides considerable historical context for the development of the current retirement system. In short, no one designed the overall structure of our American retirement system--and if someone had, it would probably look quite different. Rather, key developments occurred on an ad hoc basis in the 1950s, when a tight labor market and strong unions produced a proliferation of defined-benefit plans, and in the 1980s, when defined-contribution plans gained in popularity. Although initially meant to supplement defined-benefit plans, 401(k)s and other defined-contribution plans ultimately came to supplant them, especially when companies sought to offload risk following the 2000-02 bear market.
At many companies, then, there has been a shift from compulsory, privatized retirement savings--workers could not opt out of their defined-benefit plans in exchange for higher pay--to a voluntary defined-contribution system in which most workers have no idea how much they should save, and often favor current consumption over saving for retirement. There is not much new in the authors' story of the historical development of the American retirement system, and in fact, the topic is covered in much greater detail in two of Jacob Hacker's books, The Divided Welfare State and The Great Risk Shift.
At the same time that workers are losing access to the (mostly) secure income stream provided by defined-benefit plans, Social Security has come to replace a lower share of preretirement income, according to Munnell, Ellis, and Eschtruth. In part, that is because the official Social Security retirement age is gradually rising from 65 to 67. Also, as a percentage of Social Security benefits, Medicare Part B premiums are expected to rise to more than 10% in 2030 from about 5% in 1990. Finally, because tax-free thresholds for Social Security benefits have not risen in line with inflation, 50% of recipients will owe taxes on their Social Security benefits in 2030, versus just 10% in 1985. As a result, a typical Social Security recipient in 2030 will find that the program replaces only 31% of preretirement income, versus 40% in 1985. Obviously this replacement rate will fall further if Social Security's finances are not stabilized; in the absence of reforms, future benefit cuts will occur.
So, how do we fix this? The authors offer a set of prescriptions for both individuals and for policymakers.
For individuals, one key is to accept that they will need to work longer, until age 70. Munnell, Ellis, and Eschtruth write that Americans should consider 70--the age at which monthly Social Security benefits reach their maximum level--the true retirement age. Delaying retirement from 62 to 70 produces a 76% increase in monthly Social Security benefits and a projected doubling of 401(k) assets. Due to rising life expectancies, the authors argue, a later retirement age does not necessarily mean having to spend fewer years in retirement than past generations enjoyed.