The Other “Other Pension Crisis”

Last updated on: August 16, 2016 at 9:52 am by Jane the Actuary

The Other “Other Pension Crisis” 2016-08-16T09:52:33-06:00 Jane the Actuary

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What follows is still a draft, really — I want to fine-tune it and add actual data but wanted to put this out for comments without waiting for time to polish it.

So we’ve heard about the Pension Crisis — the coming exhaustion of the Social Security Trust Fund (for those who believe its real) and the future increase in the level of Social Security benefits as a percent of GDP (a better measure for those who don’t).

And now, having our eyes opened by the pension liabilities in bankrupt cities, we’re hearing about the “Other Pension Crisis,” or the large numbers of unfunded liabilities in state and local pension plans — an issue especially for shrinking cities or cities/states where benefits generous beyond reason have been promised (e.g., through pension spiking, double-dipping, etc.).

But we’re forgetting about the biggest Pension Crisis. I’ll call it the Other Other Pension Crisis, though my spell-checker doesn’t like that, or the Third Pension Crisis: the fact that retirement benefits are un- or under-funded for the majority of private-sector workers.

Granted, this crisis doesn’t give us the opportunity to rail about the greed of unions or the incompetence or corruption of Democrat-run government. (Though I live in Illinois, where corruption’s bipartisan.)

And, strictly speaking, we’re not at a crisis stage yet. But we’re squandering our opportunity to deal with the issue before its a crisis.

I could spend an afternoon linking to reports of all kinds highlighting the low level of retirement savings accumulated by the majority of Americans, though I think most of us are aware, in a general sense, of the issue. But most people aren’t aware of the fact that, for current retirees and near-retirees, those who worked for large companies nearly always had a defined benefit pension, or will have one. There has been a massive shift — from 80% of large employers to a mere 25% of employers offering defined benefit pensions — over the past decade or two, and workers near retirement have generally been sheltered via grandfathering provisions. (I’m citing these figures from memory — I have access to more specific and up-to-date figures via databases at my employer, but I’d have to do some digging and then decide how much is public information.) This means that we have not yet truly begun to see the impact of a new generation of workers dependent on their own retirement savings and money-managing ability, and won’t for a while yet.

What will happen when large numbers of workers reach retirement age with inadequate savings?

Three possibilities (and likely a mix of the three):

1) Workers will simply not retire. I don’t believe that workers will really stay on far past Social Security Normal Retirement Age, because that produces a strong signal that “it’s time to retire.” Besides, there will be large numbers of workers who may wish to stay on but simply aren’t in good enough health to work a 40 hour week any longer. But I do think that the percent of workers voluntarily early-retiring will decrease, and many workers will shift into part-time low-skill jobs as they age.

2) Workers will reach retirement age, do the math on how much they truly have available if they want to avoid outliving their savings, and, dilligently bring their living standard down to match their available cash flow.

3) Workers will spend their retirement savings in amounts that “feel right” to them, not going on cruises or buying second homes but maintaining their preretirement living standard as much as possible, until they exhaust their retirement savings in 5 or 10 years.

Any of my reader(s) who are of a libertarian bent will be inclined to respond with, “it’s the individual’s responsibility to save for retirement or accept the consequences. Government shouldn’t intervene.”

But any of these three scenarios have consequences for the rest of us.

As far as non-retiring retirees, it’s not as simple as “they’d be taking jobs away from young people, just starting out,” because there aren’t a fixed number of jobs in the workforce (otherwise the increasing number of mothers entering the workforce in the 70s and 80s would have been damaging to the employment prospects of men), and how a job market responds to increases or decreases in the size of the labor force (in absolute or relative terms) is complex. (How did the job market respond to increases in the percentage of women working? And were those changes gradual or rapid, anyway?) But there will be an impact on the economy.

As to the elderly to exhaust their savings, this will have a pretty clear impact on all manner of anti-poverty programs, and especially those programs targeted at the near-poor elderly — the poorest seniors aren’t impacted (they’ve never had pensions in the first place) but there are other programs: Senior freeze on property taxes, free mass transit, Medicaid, and others. It also seems fairly likely that we’d see a push for an expansion of such programs, as the near-poor elderly expand beyond those who have always been at that income level and now reach those who have always been middle class, and are accustomed to such middle class expectations as a car, staying in their own house, shopping at Whole Foods, even going on a vacation every now and again. (You want to go to visit the grandkids and can’t afford the plane fare? Tell your Congressman that the Amtrack senior discount should be more discounted!)

And even for those who shepherd their money carefully and don’t make demands of the government — I’m no economist, but it seems rather likely that there will be ill effects on the economy as a whole to have retirees cut their spending on a large scale.

What’s the answer? You, dear reader(s), are not going to like this, but bear in mind that this comes from someone who, on average, is right-of-center politically: we will need to implement some kind of mandatory retirement savings, probably similar to Australia’s Superannuation system (9% of pay, moving to 13% — I’d have to check on the implementation timing). I’ll flesh this out in a later post — but think about it. “Feed the pig” commercials can only take us so far.

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