Retirement, 20 Years From Now
This expert sees a rocky road ahead and a likely crisis along the way
Why a crisis? Well, consider our current situation. We face a sharp mismatch between retirement needs and retirement resources. We need more money than ever before because we are living longer and continuing to retire relatively early (average retirement age for men is 64, for women 62), which means that we have to support ourselves for two decades, on average, and considerably longer for many.
This extension in the retirement span has occurred as health-care costs have risen substantially and show signs of further increase. At the same time, real interest rates are at historical lows. So, to produce a given stream of income, we have to boost wealth accumulations.
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While we need more retirement income, we are now getting less from Social Security and employer pensions. Under current law, Social Security replacement rates — benefits as a percent of pre-retirement earnings — are being gradually reduced as the Full Retirement Age rises, Medicare premiums take a bigger bite of benefit checks and more people are subject to taxes on their benefits.
In addition, the shift to two-earner households is reducing replacement rates further. Moreover, Social Security faces a long-term deficit, so its retirement benefits could be cut even further to restore balance.
On the private employer side, traditional pensions have been replaced by 401(k) plans. While these plans could be an effective way to save, today they are clearly falling short.
These plans shift all risks and responsibilities from the employer to the individual and most are not well-prepared for this burden. The result is that for households nearing retirement with a 401(k), the typical total is only $120,000 — including any assets that were rolled over into IRAs.
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And those with 401(k)s are the lucky ones. Half of private sector workers do not have any employer-sponsored retirement plan.
The one potential bright spot in this gloomy picture is that many of us are saving through our house with each monthly mortgage payment and we could tap this home equity in retirement to help pay the bills. But hardly anyone does.
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So that’s where we will be in 20 years. People will be working roughly five years longer. Social Security will be adequately financed to provide a solid base of retirement income. Automatic 401(k) plans invested in low-fee indexed funds will provide supplementary income for those with coverage, and supplementary government-sponsored accounts will generate income for those without an employer plan. And people will routinely tap their home equity to cover day-to-day expenses.
To get there, however, requires the political will to fix Social Security, to make 401(k)s automatic, and to expand coverage. Unfortunately, the impetus for these changes will likely require a crisis where retirees simply to do not have enough money to support themselves.
Alicia H. Munnell is the director of the Center for Retirement Research at Boston College.
