February 18, 2013

Fiscal trouble ahead for most future U.S. retirees

After a long era of higher living standards for the elderly, most people will be worse off than their parents in old age, experts say.

Michael A. Fletcher / The Washington Post

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The changes rescued millions of retirees from poverty, while lifting millions of others to prosperous retirements symbolized by vacation cruises, recreational vehicles and second homes.

But now problems for future retirees seem to be closing in from all sides. Half of American workers have no retirement plans through their jobs, leaving people on their own to save for old age.

Meanwhile, four out of five private-sector workers with retirement plans at work have only 401(k)-type defined contribution accounts, rather than traditional pensions that pay retirees a fixed benefit for life. Numerous studies have found that workers with defined-contribution accounts often put aside too little money, make too many withdrawals or employ the wrong investment strategies to save enough for old age. Overall, people ages 55 to 64 have a median retirement account balance of $120,000, Boston College researchers have found, which is enough to fund an annuity paying about $575 a month, far short of what they will need.

Officials at money-management firms that handle 401(k)-type investments argue that the tools are in place for Americans to retire comfortably. The problem, they say, is that employers and workers are not using them correctly.

Robert Reynolds, president and chief executive of Putnam Investments, noted that 2006 changes in federal law gave employers the power to automatically enroll workers in retirement accounts. But too few choose to do that and even when they do, companies typically set aside only 3 percent of pay – far less than the estimated 10 percent that experts say workers need to set aside to fund a sound retirement.

"I would be adamant that there is nothing wrong with 401(k)s that can't be fixed by taking better advantage of the current system," Reynolds said.

Daniel Houston, president of retirement, insurance and financial services at the Principal Financial Group, contended that defined contribution accounts are better tailored than old-fashioned pensions to today's highly mobile workforce. Workers can take them when they switch jobs. But that control also is a weakness, allowing Americans to tap them for non-retirement purposes.

BIGGER BREAKS FOR UPPER-INCOME PEOPLE

The retirement savings shortfall is revealing an economic divide separating those who are well prepared for retirement from those who are not. Recent policy changes aimed at bolstering Americans' retirement prospects have only contributed to the growing inequality.

The government grants at least $80 billion a year in tax breaks to encourage retirement savings in 401(k)-type accounts. But the biggest benefits go to upper-income people who can afford to put aside the most for retirement, allowing them to reap the biggest tax breaks.

Someone making $200,000 a year and contributing 15 percent of pay to a retirement account would receive about a $7,000 subsidy from the federal government in the form of a tax break, whereas workers earning $20,000 making the same 15 percent contribution would get nothing because they don't earn enough to qualify for a deduction. Someone making $50,000 and making the 15 percent contribution would receive only about a $2,100 tax deduction.

Even many of the diminishing share of workers who are enrolled in traditional pension programs face uncertainty as an increasing number of plans are underfunded, causing employers to freeze benefits.

The hits to retirement income come as many Americans are living longer and health-care costs continue to grow, meaning they need to salt away more money for retirement.

Workers have limited options for closing the gap. More are going to have to work longer. After many decades of decline, average retirement ages have already been creeping up in the past 20 years.

A recent survey by the Conference Board found that nearly two-thirds of Americans ages 45 to 60 say they plan to delay retirement. Two years earlier, 42 percent said they would work longer.

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