A Lost Retirement Dream for Boomers?
By Albert B. Crenshaw
Sunday, December 7, 2003
There has certainly been no shortage of alarms sounded recently about the
financial status of future American retirees, especially the giant baby
boom generation, which begins turning 65 in 2011.
But a big new study released last week has now put some numbers on the
shortfall -- and they are grim.
In the aggregate, retirees in this country in the year 2030 will be at
least $45 billion short of the income they need to cover basic living
expenses plus expenses associated with nursing-home or even home health
care. From 2020 to 2030 the aggregate deficit will be at least $400
billion, according to the study, which was done by the Employee Benefit
Research Institute here, in collaboration with the Milbank Memorial Fund,
a New York-based foundation.
Those numbers may not seem very meaningful to individuals -- who can, and
apparently do, say, "It won't happen to me." But they should make
policymakers' hair stand on end, especially at the state level. They are
what government in some form will have to come up with unless there is
some breakthrough in medical costs or a substantial change in savings
behavior by younger people. If those things don't happen, government will
have to find the money or, as Milbank Memorial Fund President Daniel M.
Fox said, "tolerate more human suffering."
How that can be managed isn't clear. Already, some state treasuries are
being eaten up by the cost of Medicaid, the state-federal medical
insurance program for low-income people. In Massachusetts, for example,
where already one resident in eight is 55 or older, Medicaid consumes
roughly $7 billion out of a state budget of $22 billion, state Sen.
Harriette L. Chandler (D-Worcester) said at a forum on the study last
An aging population will drive costs higher. While the elderly constitute
9 percent of Medicaid enrollees, they account for 27 percent of the
program's spending, according to Diane Rowland of the Kaiser Family
Employee Benefit Research Institute researchers, beginning with Oregon,
and then going on to Kansas and Massachusetts, have built an increasingly
sophisticated computer model that they believe capable of figuring not
only the trends in saving and investing but also the expenses retirees are
likely to face.
Researchers Jack VanDerhei, who is also a professor at Temple University,
and Craig Copeland have now extended their findings to the entire country.
Their model projects retiree income from traditional pensions, 401(k) and
similar retirement accounts, and Social Security, and takes into account
wealth in the form of home equity. It does not include savings beyond
retirement accounts, which may mean that some people, especially older
ones, are better off than they seem. However, for all too many Americans,
savings outside of their home equity and retirement accounts are extremely
modest, especially among those who are not in the highest income groups.
Worst off, the study found, will be those who are unmarried at retirement,
particularly women. Many factors contributed to that finding, especially
women's lower lifetime earnings and long life expectancies.
The brightest spot in the report is its conclusion that a great many
younger people could significantly increase their chances of having enough
money for basic expenses throughout retirement by boosting savings by 5
percent of their pay. That wouldn't work for most older people or for the
lowest-income people of any age, but it does suggest that the possibility
exists, mathematically at least, of avoiding the worst that the future
Unfortunately, experience so far indicates that such an increase in
savings is unlikely to happen without major behavioral or policy changes.
Boston College economists Alicia H. Munnell and Annika Sunden, in a
forthcoming book on 401(k) plans, note that the assets reported in
retirement accounts don't jibe with reported contribution rates. "Every
study . . . indicates that those who join 401(k) plans make significant
contributions across age and income groups. Yet they do not appear to end
up with substantial asset accumulation. How does this happen?" they write.
Two factors -- "leakage," the tendency of people to cash in and spend
401(k) plan balances when they change jobs, and late starting of
contributions -- play key roles, Munnell and Sunden conclude. "In 401(k)
plans a major risk to future accumulations is . . . the failure to save
continuously from the beginning of one's working life," they write.
Against that background, the federal government is racking up deficits
that may make it very difficult for it to rescue states or penniless
retirees. The Bush administration's proposals for various kinds of
tax-free savings accounts could also undermine the willingness of
employers, especially small ones, to offer even 401(k) plans, leaving even
more people to their own devices for retirement.
There are, though, policy changes that could help.
. Former Treasury benefits tax counsel J. Mark Iwry pointed out at the
forum that tax credits, rather than tax deductions, would make retirement
saving more attractive because deductions are of little value to those in
low- and zero-tax brackets. Further, he said, program changes such as
automatic enrollment in 401(k) plans for new employees and default
mechanisms that would put them in age-appropriate investments unless they
opt out would boost participation and make k-plan investments more
. Improvements in marketing of long-term-care insurance are of great
interest to the states because such coverage could take a lot of the
pressure off Medicaid. Four states have deals that allow people who buy a
certain amount of this insurance to qualify for Medicaid without being
destitute if they outlive their private policies. But other states have
been barred by federal law since 1993 from adopting such arrangements.
. Making annuities more attractive would also help, because they offer
protection against outliving your income -- but it's tough to see how it
could be done without government intervention. Traditional pensions have
long provided lifetime annuities for beneficiaries, but they are becoming
less common. Employers are allowed to offer annuities as an option in a
401(k) plan, but few do. Private annuities are expensive, and people don't
like the idea of losing their investments if they die early.
Investor nation: The number of U.S. households that own mutual funds fell
to 53.3 million in July, (47.9 percent of total households) from 54.2
million (49.6 percent) in July 2002, according to a survey by the
Investment Company Institute, a fund-industry trade group. The survey also
found that the number of individuals owning mutual funds slipped to 91.2
million from 94.9 million in 2002. About 33 percent of all households --
or 36.4 million -- owned mutual funds inside employer-sponsored retirement
plans, the institute said.