Navina Persaud
Employee Benefits Plans
December 9, 2018
The Future of Retirement Financing in the U.S.
Introduction
The retirement crisis has been a recent rising debate among Americans. The concept of retirement plans and, the idea of retirement, is rapidly changing. Americans have always looked to Social Security, Employer-Sponsored Retirement Plans, and their personal saving to comfortably take care of them after retirement, however, with the depleting funds of Social Security and the decrease in Employer-provided pensions along with many American workers having little to no savings, there is no retirement security. This “retirement crisis” is a future that many generations may have to face, however, as the crisis is a big topic that is being discussed, so are many solutions and ideas that could possibly stop this crisis from happening.
Social Security
In the past Social Security benefits have been a huge part of income security for many elderly and retirees in the U. S. This form of social insurance has served as a safety net for many retirees especially those who had low incomes and not much opportunity to have personal savings. Since adoption, it has been affected by factors such as marriage trends and the rising life expectancy. Social security was first adopted in 1935 to provide income replacement for the elderly through retirement benefits. It was created to fit the needs of an average family which in that time consisted of a working husband, a stay at home mom and their kids. It was also solely based on the individual’s earnings. The program evolved to include more benefits for example for spouses and the disabled. Now the typical family in America has two working parents. Another major issue with the current status of Social Security is the age difference of life expectancy from then until now. When Social Security was first implemented, the average life expectancy in 1935 was a mere 61 years old. If now in 2018, the average retiree retires at age 65, we can see why there is a lesser of a time of payout per individual. As the years go on within the system, something that was not calculated was the possible increase in life expectancy. As we fast forward, the average life expectancy has increased to an astounding 75 years. When we look at this math, we notice a major swing from retirees passing away before a potential payout to +10 years of payout to the average retiree. This can be a major issue if people are living longer but retiring at the age of 66 years and 2 months. If fewer people are working and failing to pay into the system, we may experience a time where there are simply just not even funds to distribute.
Employer Retirement Programs
As an addition or alternative to public programs, employers offer employees a separate retirement plan. Employers usually offer two types of pension plans; defined benefit plans and defined contribution plans. Defined benefit plans are a bit more uncommon than it used to be in the past as many employers don’t offer them anymore. They are a bigger risk in longevity and risk for the employers than the Defined contribution plans. It also cost employers a lot more money and it’s difficult to administer. The employer makes contributions on behalf of their employees, so it is easy to see how these types of plans would be more costly to the companies. The amount of money that retirees get in their retirement is calculated with a formula that uses how long an employee has been working and their salary. The defined contribution plans are the more common type of plans offered and companies are shifting to this type more recently in order to reduce the employer's liabilities. Most of the time eligible employees are automatically enrolled in the program and must be fully vested in the plan. The most common type of defined contribution plans that employers offer is a 401(k) or a 403(b). These plans require employees own contribution with a set amount of money each pay period and their employees can choose whatever rate they want to contribute. Many employers contribute a match or a certain amount of their employee's contributions. These types of plans are also less expensive and risky for employers and require little work for employers. While these plans lower risk for employers, because the employees have the choices and freedoms of contributing their own income, many people are saving as much as they should. Many employees only contribute sporadically, or they are tempted into taking out money from their plans for other things they may need now regardless of any fees or taxes this may incur. This leaves many retirees with inadequate funds when they retire from their jobs and need the money. This means that some retirees live borderline in poverty in retirement in their golden years.
The shift in the Defined Benefit Plans to Defined Contribution Plans has created insecurity among employees about their future after retirement. This has caused many financial concerns to employees resulting in delaying their retirement. This poses challengers for employers because of the number of individuals in the work force. Improving the plans to include help to employees in managing their retirement income could be a simple but pretty effective solution.
The “Retirement Crisis” Solutions
There are many speculations and theories as to what would actually start to provide security to retirees. The reality is that it will take many fixes and not just one solution to the crisis. When it comes to Social Security increasing retirement ages or regulating or decreasing payouts a bit as the Reagan administration did. However, that was a solution for over 20 years ago and our country is very different today. This may be a difficult task to go about. But, even though politically our country is on polar ends, there should be a common willingness to remedy this crisis that seems to be nearing our country’s retirement system. This seems like it could be a solution that could be worked out with a bit of compromise.
The access to retirement plans is far too dependent on employers where many Americans don’t have access to retirement savings plans like 401(k). Getting plans that are more easily accessible, portable and simple would help employees in America to take advantage of this savings benefit.
Closing
The retirement crisis that Americans are facing is very much real. With factors like marriage, working spouses, and a rising life expectancy affecting Social Security a solution needs to be put into place before the next 16 years. That along with the shift in Defined Benefit Plans to Defined Contribution Plans, the low access to Employer- Provided Retirement Plans and the workforce having below average savings the future for retirees doesn’t look too bright. Fortunately, some believe that it is not a lost cause yet and that there are solutions that can remedy the situation for the future. Changes to the Social Security program, for example raising the retirement age, need to be seriously considered.