This is a repost from Forbes.
So interesting that the conception of a retirement crisis among the financial industry and policy makers is so different from what ordinary people in working households think the retirement crisis is.
To the finance and policy elites, the “retirement” crisis is that state and local government entities may have to raise taxes to pay for their pension obligations.
Closer to what ordinary people view as the retirement crisis is the World Economic Forum’s analysis (I was on the advisory board committee). The "retirement crisis" is the gap between what working households need and what they have. The World Economic Forum study showed that the six largest economies (the US, UK, Canada, Australia, China and India) faced a savings gap.
Various vehicles and programs encompass old age income security, totaling $67 trillion in 2015 or about global GDP. That number is large or small depending on a nation’s ability to raise the money to pay for workers’ retirement years.
Working households fund their retirement through a variety of government and private programs. In the US, working households have some mix of Social Security, Medicare, pension funds, 401(k) plans, IRAs, and home equity. The viability of the retirement income mechanisms depends on the assumptions made about returns on assets and liabilities – like health and longevity. The US savings gap – $7.7 trillion in 2013 – is a train wreck ready to happen.
Similarly, the gap between pension funds and promised retirement benefits to current and former employees by US state and local government is either a piece of cake to handle or a painful horse pill. This depends on the assumptions about future rates of return, where the looming bill can be anywhere from $1 trillion or $3 plus trillion. For some state and city governments (Dallas, Illinois, New Jersey), the gap is so large they will have to make politically-difficult choices about benefits or taxes.
To ordinary households in the US, the retirement crisis is described by the following:
- Most people will have little more than Social Security, will have inadequate balances for retirement savings, and will be relatively worse off than their parents and grandparents.The consequences will split us apart, impoverish families, and weaken the economy. Retired baby boomers make up more than 20% of the population and have anemic buying power.
- Our current voluntary, do it yourself, individual commercial accounts do NOT work for most people, though the well-off are mostly secure having generous wealth to rely on.
Tony James and I have worked hard using wisdom from experts and our own scholarship and practical experience. We have thought through the policy reform principles for practical and efficient recuse of retirement in the United States. We start with the goal of providing everyone with security in old age.
- We want a strong Social Security, Medicare and Medicaid system as no pension supplement is effective without a strong base of funding.
- We don't want to worsen anyone's current arrangements – 401(k) and IRA arrangements work for some – but we do need a good competitor. We need a public option and more fair tax subsidies.
- A streamlined and efficient funded supplement to Social Security the GRA helps everyone accumulate assets, invest them well, and decumulate in the form of a life-long stream of income.
A relevant analogy to the affordability of old age income is how a family assesses its mortgage debt. If you owe $100,000 on your house, that is a lot if you assume your productivity is in permanent decline. Or, this may be fine if you are thriving economically – perhaps earning $200,000 per year in a secure job.
The nation may not have a liability problem, but a revenue problem. I am not calling it, nor am I making a vapid generalization. I am putting the notion of having too many pension obligations in the context of what we want and our capacity to pay.