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Our Retirement Savings Crisis

Adam Rust's picture

Posted February 8, 2011

  • Retirees: Look to your left, look to your right.

One of you is going into your retirement without any savings.

AARP put together is topically appropriate video this week. While they could not seem to find anyone that would admit that they didn't personally have any savings, they did find some people that were willing to speculate about what

it must be like for the 22 percent of baby boomers that have no retirement savings, or the additional 14 percent that have no personal savings.

Geesh. This is going to be a big problem. There are only so many jobs available for retirees. Are we really going to become a country where generations are fighting over Wal-Mart greeter jobs?

How did we get here?

  • Plenty of people had retirement savings, but then they lost a lot of money when the markets swooned in 2008.
  • Lots of people have been working without a pension or a 401 (k). Some had those accounts available, but never signed up. Luckily, the latter problem has been solved. In most cases, employees have to opt-out, rather than opt-in, to a 401 (k) plan if their employer offers one.
  • Plenty of people are just scraping to get by, every day of their life.

"Old and well-off" can be fun, even if you have a random assortment of chronic pains, hearing loss, and loss of muscle mass. But, old and poor is tough.

Solutions: Easier if you are old and well-off

This is a wonderful country, and part of the reason for that fact is that this is such an entrepreneurial country. The NYT has an interesting story today about how some companies are looking to find ways to devise products that solve the needs of older people. The trick is that old people don't want to buy something that says "this is for old people." Those med-alert bracelets and big button cell phones with only two numbers (hospital and your kids) are just not going to work for a generation that grew up with "Are You Experienced" and plenty of percoset.  Guess what? While young people buy potato chips and teeth-whitenting toothpaste, those are stealthily-packaged old people goods.  I can attest that it is the same thing with newspapers.

However, new products are sort of an "old-and-well-off" fix. We need something different. We need something for "old-and-penniless."

Start with the assumption that Social Security continues. That means a baseline income of maybe $1,100 per month, according to 2010 data from SSA. Add in SSI, and there's another $400.

I imagine that scores of retirees living hand-to-mouth will provoke a tidal wave of political energy. Acknowledge the truism that seniors believe in the power of the vote and it seem unlikely that our country will be able to resist transferring more benefits to the graying boomers.

Unfortunately, that is just one more generational wealth transfer. The backs of young people - the ones that are paying high tuitions and looking forward to dimmer and dimmer job prospects - are going to pay off the debt of any additional funding. The money-s worth question (did you get your money's worth on Social Security?) shows that younger people are much less likely to get any kind of return on their FICA contributions.

A relatively ignored problem about Social Security is that it just doesn't provide a very good return. The first generation of paying recipients (born in 1950) still earned about 2.2 percent on their FICA. That's pretty poor considering what happened between 1982 and 2003. Workers are making about 1.2 percent. The implicit fix to that problem is to put more people into the basic investments that any 401 (k) offers: an S&P 500 index fund and maybe a few TIPs.

Erskine Bowles and Alan Simpson want us to consider raising the retirement age. That is a tradeoff. We get a solvent SSA but we also will experience more poverty among seniors.

Maybe our best solution is to offer an easier path to immigration for foreign-born people of working age. Right now, 45 percent of all US Hispanics are under 24. Only 34 percent of non-Hispanic Americans are in the same age group. Right now, only about 5.5 percent of Hispanics are older than 65. That is only one-third of the portion of non-Hispanic whites. These demographics add to in-payers of SSI. Moreover, the youngest Hispanic workers appear to be fairly productive. They have a higher median level of earnings than non-Hispanic whites.