How will we answer to an unprecedented surge when our system is at its most vulnerable?
by Jason FichtnerMr. Fichtner is the Alliance for Lifetime Income’s Senior Fellow and leads its Retirement Income Institute.
The greatest surge of new retirees in the nation’s history is fast approaching. In a mere three years, the U.S. will have more 65-year-olds than ever before, with more than 10,000 people turning 65 every day, a number that will increase to more than 12,000 a day until the nation reaches its “Peak 65” moment in 2024. And by 2030, 20 percent of the U.S. population will be age 65 or older, reaching the traditional age associated with retirement as our nation’s retirement system is at risk like never before.
For generations, the sound construct of the three-legged stool for retirement planning—employer pensions, personal savings and Social Security—was stable. This is no longer the case as the unprecedented surge of retirement age Americans gives the nation little time to prepare for the fact that that millions of Americans are entering retirement with Social Security as their only means of protected income.
Private And Public Retirement Systems Are Obsolete
The retirement landscape has fundamentally changed since the Peak 65 generation entered the workforce. Our private and public retirement systems have grown obsolete, as evidenced by an estimate by the Center for Retirement Research at Boston College that as many as 50% of households are “at risk” of not having enough to maintain their standard of living in retirement.
- When the Peak 65 generation entered the labor market in 1980, 60% of private sector workers relied on the protected income of a pension plan, as compared to 4% in 2020.
- Today, a mere 20% of civilian workers participate in a pension plan, most of whom are employed by federal, state and local governments.
- While Social Security was designed to replace about 40% of pre-retirement income for the average worker, the lack of other adequate safety nets means it now has to provide 50% or more of the required income for 50% of married couples and 70% of unmarried persons.
- Americans lose as much as $3.4 trillion in potential income by claiming Social Security benefits before reaching their full retirement age, when they can receive full benefits.
- The Social Security trust funds face a financial shortfall of $16.8 trillion in present value through 2094 and $53 trillion over an infinite horizon. Further, the trust funds will be depleted and unable to finance full benefits in 2035—a mere 11 years after the Peak 65 moment. That’s a best-case scenario, as the economic fallout from the Covid-19 pandemic further undermines Social Security, resulting in fund depleting as early as 2030, according to an analysis by the Bipartisan Policy Center.
With each passing day, the need for a new retirement security framework that provides adequate protected income for Americans grows more urgent. While Social Security is in need of financial support, the program will likely remain the bedrock of retirement security for the vast majority of Americans. However, since the current retirement security framework focuses largely on asset accumulation, the new framework must include a focus on how protected income can provide the security necessary to maintain a given standard of living in retirement.
Secure Act 2.0
Congress has an essential role to play. Lawmakers should continue to enact regulations that promote annuities, while removing regulations that are barriers to annuitization, as they did with the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). That includes mounting a bipartisan effort to pass Secure Act 2.0, as is reportedly underway, which would potentially offer additional proposals to improve retirement security.
The private sector has an equally essential role to play. Employers and plan sponsors should design better benefit statements by illustrating lifetime income estimations under current contribution patterns to give people a better understanding of the implications of their saving choices. Also, employers should encourage employees to save more money by establishing automatic saving plans that enroll workers, raise contributions gradually over time (perhaps associated with annual raises), and allocate contributed funds to diversified, low-cost investments, including annuities.
The Advisor As A Workplace Benefit
Finally, employers should offer access to financial professionals as a workplace benefit to their workers. In addition to retirement options, employees could seek professional advice on a wide variety of financial issues, including saving for emergencies, a home, education, and even help with basic financial literacy and developing a monthly budget. It is an important component of the new retirement framework that employers take an active role in helping their workers save for events that occur during their working lives, as well as helping them to have a financially secure retirement.
The obsolescence of the nation’s private and public retirement systems is laid bare by the Peak 65 generation, but the problem doesn’t stop with them. As the number of defined benefit plans continues to decrease, and the life expectancy of Americans continues to increase over the long-term, succeeding generations will lack the protected income required for a financially secure retirement. A new retirement security framework should be a top priority of both the private and public sectors.
About the Alliance for Lifetime Income
The Alliance for Lifetime Income is a non-profit 501(c)(6) educational organization based in Washington, D.C., that creates awareness and educates Americans about the value and importance of having protected lifetime income in retirement. Our vision is for a country where no American has to face the prospect of running out of money in retirement. The Alliance provides consumers and financial advisors with educational resources, interactive tools, and actionable research and insights to use in building retirement income strategies and plans. We believe focusing attention and conversations on retirement income that lasts throughout life leads to greater retirement security for millions of Americans. Learn more at www.ProtectedIncome.org.