A Lost Retirement Dream for Boomers?

Author: Albert B. Crenshaw

Published: December 7, 2003

There has certainly been no shortage of alarms sounded recently about the financial status of future American retirees, especially the giant baby boom generation, which begins turning 65 in 2011.

But a big new study released last week has now put some numbers on the shortfall -- and they are grim.

In the aggregate, retirees in this country in the year 2030 will be at least $45 billion short of the income they need to cover basic living expenses plus expenses associated with nursing-home or even home health care. From 2020 to 2030 the aggregate deficit will be at least $400 billion, according to the study, which was done by the Employee Benefit Research Institute here, in collaboration with the Milbank Memorial Fund, a New York-based foundation.

Those numbers may not seem very meaningful to individuals -- who can, and apparently do, say, "It won't happen to me." But they should make policymakers' hair stand on end, especially at the state level. They are what government in some form will have to come up with unless there is some breakthrough in medical costs or a substantial change in savings behavior by younger people. If those things don't happen, government will have to find the money or, as Milbank Memorial Fund President Daniel M. Fox said, "tolerate more human suffering."

How that can be managed isn't clear. Already, some state treasuries are being eaten up by the cost of Medicaid, the state-federal medical insurance program for low-income people. In Massachusetts, for example, where already one resident in eight is 55 or older, Medicaid consumes roughly $7 billion out of a state budget of $22 billion, state Sen. Harriette L. Chandler (D-Worcester) said at a forum on the study last week.

An aging population will drive costs higher. While the elderly constitute 9 percent of Medicaid enrollees, they account for 27 percent of the program's spending, according to Diane Rowland of the Kaiser Family Foundation.

Employee Benefit Research Institute researchers, beginning with Oregon, and then going on to Kansas and Massachusetts, have built an increasingly sophisticated computer model that they believe capable of figuring not only the trends in saving and investing but also the expenses retirees are likely to face.

Researchers Jack VanDerhei, who is also a professor at Temple University, and Craig Copeland have now extended their findings to the entire country. Their model projects retiree income from traditional pensions, 401(k) and similar retirement accounts, and Social Security, and takes into account wealth in the form of home equity. It does not include savings beyond retirement accounts, which may mean that some people, especially older ones, are better off than they seem. However, for all too many Americans, savings outside of their home equity and retirement accounts are extremely modest, especially among those who are not in the highest income groups.

Worst off, the study found, will be those who are unmarried at retirement, particularly women. Many factors contributed to that finding, especially women's lower lifetime earnings and long life expectancies.

The brightest spot in the report is its conclusion that a great many younger people could significantly increase their chances of having enough money for basic expenses throughout retirement by boosting savings by 5 percent of their pay. That wouldn't work for most older people or for the lowest-income people of any age, but it does suggest that the possibility exists, mathematically at least, of avoiding the worst that the future might hold.

Unfortunately, experience so far indicates that such an increase in savings is unlikely to happen without major behavioral or policy changes.

Boston College economists Alicia H. Munnell and Annika Sunden, in a forthcoming book on 401(k) plans, note that the assets reported in retirement accounts don't jibe with reported contribution rates. "Every study . . . indicates that those who join 401(k) plans make significant contributions across age and income groups. Yet they do not appear to end up with substantial asset accumulation. How does this happen?" they write.

Two factors -- "leakage," the tendency of people to cash in and spend 401(k) plan balances when they change jobs, and late starting of contributions -- play key roles, Munnell and Sunden conclude. "In 401(k) plans a major risk to future accumulations is . . . the failure to save continuously from the beginning of one's working life," they write.

Against that background, the federal government is racking up deficits that may make it very difficult for it to rescue states or penniless retirees. The Bush administration's proposals for various kinds of tax-free savings accounts could also undermine the willingness of employers, especially small ones, to offer even 401(k) plans, leaving even more people to their own devices for retirement.

There are, though, policy changes that could help.

? Former Treasury benefits tax counsel J. Mark Iwry pointed out at the forum that tax credits, rather than tax deductions, would make retirement saving more attractive because deductions are of little value to those in low- and zero-tax brackets. Further, he said, program changes such as automatic enrollment in 401(k) plans for new employees and default mechanisms that would put them in age-appropriate investments unless they opt out would boost participation and make k-plan investments more effective.

? Improvements in marketing of long-term-care insurance are of great interest to the states because such coverage could take a lot of the pressure off Medicaid. Four states have deals that allow people who buy a certain amount of this insurance to qualify for Medicaid without being destitute if they outlive their private policies. But other states have been barred by federal law since 1993 from adopting such arrangements.

? Making annuities more attractive would also help, because they offer protection against outliving your income -- but it's tough to see how it could be done without government intervention. Traditional pensions have long provided lifetime annuities for beneficiaries, but they are becoming less common. Employers are allowed to offer annuities as an option in a 401(k) plan, but few do. Private annuities are expensive, and people don't like the idea of losing their investments if they die early.

Investor nation: The number of U.S. households that own mutual funds fell to 53.3 million in July, (47.9 percent of total households) from 54.2 million (49.6 percent) in July 2002, according to a survey by the Investment Company Institute, a fund-industry trade group. The survey also found that the number of individuals owning mutual funds slipped to 91.2 million from 94.9 million in 2002. About 33 percent of all households -- or 36.4 million -- owned mutual funds inside employer-sponsored retirement plans, the institute said.