A new report by one of the nation's most respected retirement research groups confirms the worst fears of pre-retirement Americans: Many of us are on track to run out of money before we run out of years to live.
That's the top-line finding of the 2010 Retirement Readiness Rating from the Employee Benefit Research Institute (EBRI). The report projects future retirement readiness each year by crunching actual performance data from 24 million actual 401(k) plan participants. EBRI defines "running short of money" as households that won't have enough cash to meet basic expenses or to meet projected uncovered home health care or nursing home expenses.
The remarkable finding in this year's report is that shortfalls are occurring up and down the income spectrum. For example, almost one-third of Americans in the second-highest income bracket studies are projected to run out money after 10 to 20 years in retirement. And, nearly two-thirds (64 percent) of Americans in the two lowest pre-retirement income brackets will run short after 10 years in retirement.
Most at-risk by age are the older baby boomers now approaching retirement age. Nearly half of older boomers (47 percent) are likely to run out of money, compared with 44 percent of younger boomers and GenXers.
Washington policymakers should consider these grim findings as they deliberate possible cuts in Social Security benefits this summer. The EBRI report assumes no changes to current Social Security benefits -- and those benefits clearly will be more critical than ever in keeping millions of Americans out of abject poverty in old age.
President Obama's National Commission on Fiscal Responsibility and Reform is tossing around changes such as a higher Social Security benefit eligibility age and reducing the annual cost-of-living adjustment (COLA). Social Security is on the table as part of the debate on federal deficit reduction -- despite the fact that Social Security's trust fund is running a $2.5 trillion surplus. That surplus is parked in government securities -- and hence worries deficit hawks who see it as a government obligation now worthy of avoiding.
But I digress -- and the situation isn't all doom and gloom. In fact, EBRI's report does contain one remarkable silver lining -- and an important caveat to the predictions of penniless retirement.
Overall, Americans' retirement readiness has improved a whopping 10 percentage points since 2003, the year of EBRI's first report. The change results mainly from employer adoption of automatic enrollment and automatic contribution escalation features.
"The biggest surprise in this year's findings was the overall improvement in readiness--especially in the lower-income quartiles," said Jack VanDerhei, EBRI's research director. The improvement in participation rates was most dramatic among workers in the lower third of income; they roughly doubled their participation rates to well over 80 percent, VanDerhei said.
Automation has been gaining ground quickly in retirement plans since the Pension Protection Act became law in 2006. Some of that law's provisions aimed to boost participation in workplace retirement plans by encouraging employers to enroll new workers automatically in retirement plans, and by making it easier to offer target date funds, which re-balance portfolios to a more conservative stance as retirement dates approach.
About half of companies that offer defined contribution savings -- mainly 401(k)s -- now auto-enroll their employees, and one-third of those that don't are thinking of adopting it, according to Towers Watson, the employee benefits consulting firm. Ibbotsen Associates reported that assets in target funds hit $256 billion at the end of 2009, up from $159 billion at the end of 2008.
Here's another silver lining in EBRI's report: the running-out-of-money forecast assumes everyone will retire at age 65. While that may be a reasonable average figure, many Americans will work beyond that age -- both because they need to, and will want to stay engaged in their careers. Working longer is one of the best ways to improve future retirement security and address longevity risk, because it means fewer years drawing down savings, and more years of retirement account contributions.
So, if Americans do work longer, a higher Social Security retirement age shouldn't be a concern, right? Not so fast. A key question is how many older workers can be absorbed in an economy featuring chronic high unemployment. Another key issue is the impact of pushing back benefits for low income workers, many of whom have physically-demanding jobs ill-suited to workers in their mid-60s.
So, for many workers, a later eligibility age could simply mean lower lifetime benefits. The Urban Institute reports boosting the Normal Retirement Age to 70 and Early Retirement Age to 65 would push an additional 1.5 million older Americans into poverty by 2050.
Changes to the COLA would be equally dramatic. A 1 percentage point reduction in the annual COLA now would reduce benefits over time so that a future 75-year-old would see an 11.9 percent cut in benefits, according to research by the Center for Economic and Policy Research.
Some changes to Social Security are inevitable. The program is on course to exhaust its trust fund around 2037, at which point current tax revenue would only cover 75 percent of benefits. But the debate should include discussion of benefits adequacy and revenue increases -- not just benefit cuts.