Is “work, save, move” the solution to America’s pension crisis?

Last updated on: August 16, 2016 at 9:56 am by Jane the Actuary

Is “work, save, move” the solution to America’s pension crisis? 2016-08-16T09:56:32-06:00 Jane the Actuary

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So says the “Buttonwood” columnist at the Economist, which everyone is now tweeting. This is based on a freshly-published book, Falling Short: The Coming Retirement Crisis and What to Do About It, by Charles D. Ellis, Alicia H. Munnell and Andrew D. Eschtruth ($27.50 for a 168-page book? Not on my wishlist.)

Back when I started blogging, everyone was all about state and local unfunded pensions as “the other pension crisis,” that is, because Social Security is the first “pension crisis.” I tried to be clever and call American’s lack of sufficient employer-sponsored pensions or private savings as the “other other pension crisis,” but since I had maybe half a dozen readers, it didn’t quite catch on.

Anyway, let’s look at this prescription:

Work = Americans will have to plan to work until age 70 to compensate for lack of retirement savings. This may work for some, but it’s very iffy to rely on this as government policy. (See “Is ‘I just won’t retire’ a feasible solution?” also from early blogging days.) Life expectancy is increasing, but if you think this means that people can consistently still work physically or, more likely, intellectually demanding full-time jobs up to age 70, well — what world do you live in? What’s more, while we have age-discrimination laws on the books, it’s simply a given that someone who’s reached their 60s will have a very hard time finding a job if they become unemployed for whatever reason.

What is an option is phased retirement, that is, employers allowing their older employees to work part-time, and in less-demanding jobs, or workers changing careers to less-demanding work. But this hasn’t really caught on (except for store greeters — and there’s just not that large a market for this job) because, for all that a decade ago, everyone was talking about the impending labor shortage due to Baby Boomer retirements, employers really aren’t that eager to make it possible. One incentive: allow workers, and their employers, to stop paying into Social Security once they hit Social Security Normal Retirement Age.

Save =

The federal government could help by following the British lead, and insisting on, rather than merely encouraging, auto-enrolment, whereby workers have to opt out of, rather than into, pension schemes. Only half of American workers participate in some kind of employer-sponsored pension plan. Auto-enrolment boosts participation by 40 percentage points.

What the columnist refers to here is a system in the U.K. called “NEST,” in which all employers are required to provide 401(k)-type plans for their employees, and automatically enroll them, with a match. Employees can opt out, but, f I’m not mistaken, periodically they are re-enrolled and have to re-opt-out.

Of course, this is only half the story. The U.K. had, until recently, a requirement that participants buy an annuity with their retirement savings; this has been ended but I expect that it’s still much more the norm to buy an annuity there than here, where Americans basically flounder when it comes to spending their savings in retirement, with the upper middle class seeking out financial advisors who may advise a “4% rule” and the remainder just making their best guess. I will once again flog the Harkin Pooled Retirement Plan, which attempts to provide an alternative, in the form of shared-risk benefits, with some of the characteristics of annuities but more affordability.

Move = the suggestion that retirees use the equity in their house either by means of a reverse mortgage or by downsizing and using the difference between the house and the condo as extra cash for the bank account. (Which reminds me, I have to get back to that Harvard report. . . ) This is a limited solution, both because the number of seniors with paid-off mortgages has declined, and because senior-friendly housing (that is, a newer multifamily building, with elevators and in-unit laundries and garage parking) is not necessarily much cheaper than the single-family homes they leave behind. But you know I’m all for, at a minimum, eliminating the subsidies that we give to seniors who stay in single family homes.

So I suppose I need to come up with a pithy three word summary of my own solution, so that I can get it passed around, shared, and tweeted, too.

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