On Retirement

Mary Beth Franklin: The $6 trilllion sleeper issue

Feb 23, 2012 @ 9:41 am

By Mary Beth Franklin

I attended an extraordinary meeting yesterday. Representatives of big business and big labor, academics and consumer advocates, and key leaders from the Departments of Treasury and Labor, the Pension Benefit Guarantee Corporation and the Social Security Administration all gathered on Capitol Hill to discuss a dirty little secret: America's retirement system is broken.

The oldest of the Baby Boomers may have reached traditional retirement age, but the majority of them can't afford to stop working. The retirement deficit—the difference between what Americans need to save to provide for a basic income in retirement and what they have actually accumulated—is estimated at $6 trillion. Some of the participants called it the sleeper issue of the 21st century.

Although your clients are unlikely to be among the half of American workers with no access to employer-based retirement plans or the quarter of Americans whose total savings amount to $25,000 or less, they will live in a country where poverty among the elderly may become rampant at a time when there is increasing budget pressures to trim government entitlement programs.

The focus of the day-long “Re-Imagining Pensions” conference was to encourage the wide-ranging stakeholders to work together to solve the retirement deficit crisis. Although several innovative proposals were presented, including one to allow small businesses to piggyback on state public pension plans as a way to benefit from professional investment management and economies of scale of administrative costs, the event amounted to a wistful wake for the fading defined benefit system. Most participants agreed that employers are no longer willing to shoulder all the cost and risk of traditional pensions and individuals are ill-equipped to handle them in the “you're-on-your-own” defined contribution system.

There is a crying need for a new retirement model that allows employers, employees and government to share the risks and costs. The question is whether it can work in a voluntary system or whether the U.S. needs to look abroad for inspiration. Australia's mandatory retirement system was cited as one role model..

Ironically, the shining star of the event turned out to be Social Security—the much-maligned last leg of the traditional three-legged stool of retirement security. It's amazing how solid it looks after one of the legs--pensions—has virtually disappeared and the other—personal savings—is wobbly.

The consensus of the star-studded lineup was that for many Americans, the best use of their meager retirement nest eggs may be to use them as a bridge to fund the early years of retirement, allowing them to delay collecting Social Security benefits for as long as possible. Steve Goss, chief actuary of the Social Security Administration, extolled the value of delaying benefits until age 70 when they are worth a third more than at full retirement age. “It's a remarkable deal that is not well understood,” said Goss.

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