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Nest Eggs. Fried or Scrambled?
Commentary on the News
Monday, September 06, 2010
Ed DeShields

As America's baby boom generation surges into retirement, there is a growing sense of apprehension that there won't be any nest egg waiting for them.  And, for good reason. There are two dirty little secrets that will affect your retirement hopes. 

The vast majority of near-retirees are unprepared for retirement.  They do not have traditional pensions.  Most accumulated little in 401(k) accounts or personal savings even before the Great Recession.  Much of what they did accumulate, they lost in the stock market collapse of 2008-2009 or their company was unable to fund. 

What they might not yet realize is their plan for latter life may have been scrambled.  

First, the new Social Security Trustees Report this week revealed that the program can pay only 75 percent of its scheduled benefits after 2037.   The system will run short on funds without an overhaul. 

Second, most corporate pension plans now have large deficits because they’re being underfunded.  At the end of 2008, 297 of the 327 private retirement plans were underfunded, and the total underfunding amount was $222 billion!   This is about what the wars in Iraq and Afghanistan cost each year.  Solving this problem is, by comparison, a war-sized effort.

To get a perspective on the seriousness of the underfunding 42 of 297 plans were underfunded by less than 10%, 64 were underfunded by 10-20%, 83 were underfunded by 20-30%, and 11 pension plans were underfunded by over 50%.   And, remember just a few years ago underfunding was rare.   

So, American’s retirement systems are in serious trouble.  These promises have been broken.  To re-fund private pensions and Social Security is going to take some serious cash in the form of new taxes and higher costs for goods and services as companies re-inflate their future obligations. 

To restore Social Security, raising the wage cap from 50% to 90% of wage income, the original target set by the Greenspan commission, would cover only 25 percent of the deficit projected over the program's 75-year planning horizon.  This would double of our out-of-pocket contribution to Social Security.  But we’ll need more.  A lot more.

We’ll need an increase in the payroll tax.  For example, a one-half of one percent (0.05) percentage point annual rise in both the employer and employee side of the payroll tax over the years 2021 to 2040, coupled with the increase in the cap, would be sufficient to fully fund the program through its 75-year planning horizon.   This places the burden squarely upon our children’s paychecks just when they’ll be bailing out of national debt.

For the vast majority of near-retirees, their major asset is the equity in their home. Much or all of this equity was destroyed with the collapse of the housing bubble. As a result, the huge number of baby boomers approaching retirement will be more dependent on Social Security and their under-funded pension than their predecessors.

The median household in the ages from 55 to 64 has just $170,000 in total wealth, including equity in their home. Since this is roughly equal to the price of the median home, this means that if they could fully pay off a mortgage they would have nothing other than their Social Security to support them in retirement.

The median household in the age from 45 to 54 has $80,000 in total wealth, roughly half of the value of the median home. With the labor market projected to be weak for most of the years they have remaining in the work force, it is unlikely that they will be able to accumulate substantial additional savings before they retire.

Finally, the notion that workers should make up for lower benefits by working later into their lives ignores the actual job conditions faced by older workers. Almost half (45.3 percent) of older workers have either physically demanding jobs or have difficult work conditions.  

So as apprehension grows into the stark reality of our aging predicament, our retirement plans have been scrambled.   Granted;  most of the problem is with our own lack of planning.  But, with little to no plan of action from our great leaders in Washington   don’t expect them to help.  They’re not only broke, they have a distinct advantage.  They can tax.  And, they will. 

About Ed DeShields

Last week: Deja Vu

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