How to Solve America's Retirement Problem

Editor’s note: This article is part of Next Avenue’s 2015 Influencers in Aging project honoring 50 people changing how we age and think about aging. Here, Prof. Alicia Munnell, one of the Influencers, discusses her recommendations to solve America's retirement problem.

Aging has many joys — among them, a growing family, becoming comfortable in your own skin and wearing comfortable shoes. And it has noticeable drawbacks — notably, a keen sense that the party does not go on forever, wrinkles and brown spots.

But lately, aging has come with a serious problem: Most of us fear we are not going to have enough money to support ourselves.

That last problem is one we need to fix.

Consider our current situation. We face a sharp mismatch between our retirement needs and our retirement resources.

We need more money than ever before because we are living longer and continuing to retire relatively early (the average retirement age is 64 for men, 62 for women), which means that we have to support ourselves for two to three decades. This extension in the retirement span has occurred while health care costs have risen substantially and show signs of further increase.

At the same time, real interest rates are at historic lows, so we need a bigger nest egg to produce a useful stream of income.

Yet at the same time we need more retirement income, we are now getting less from Social Security, the foundation of the nation’s retirement system.

Under current law, Social Security replacement rates — retirement benefits as a percentage of pre-retirement earnings — are being gradually reduced as the so-called Full Retirement Age rises, Medicare premiums take a bigger bite of benefit checks and more people are subject to taxes on their benefits.

Moreover, Social Security faces a long-term deficit, so benefits could be cut even further to restore balance.

The other main source of retirement income — for workers fortunate enough to have coverage — is employer pensions. Here, the shift from traditional pensions to 401(k) plans has transferred all of the risk and responsibility to workers. As a result, while 401(k)s could be an effective way to save, today they are clearly falling short.

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.

If things continue this way, more than half of today’s working households will not be able to maintain their standard of living once they stop working.

That’s the bad news.

The good news is that we can fix the problem — by working longer and saving more.

In terms of working longer, most of us are healthier and have less physically demanding jobs than our parents and grandparents. And we are living much longer. So stretching out our work lives is a sensible option.

And the payoff is dramatic. Delaying Social Security benefits from age 62 to 70 increases monthly payments by 76 percent, with a comparable impact on 401(k) plans.

On the saving front, we need to fix Social Security (leaning much more toward higher revenues than lower benefits, in my opinion) and boost 401(k) savings by expanding the use of the automatic 401(k), a model that is a proven success. (With an automatic plan, employees are automatically enrolled and can choose to opt out.)

We also need to solve the pension coverage gap for the half of private sector workers without a 401(k) plan.

The final piece of the saving puzzle is the house. Most people will need to tap their home equity — either by downsizing or taking a reverse mortgage — to help pay the monthly bills in retirement.

Solving the retirement security problem is a high priority, because worrying about running out of money should not be part of growing older.