More and more people are marching into those so-called happy golden years with less and less.
The number of people turning 65 in this decade will be greater than the past four decades combined — and they will tend to live longer than earlier generations. Fewer and fewer people who will follow them have defined-benefit pensions, and many who have access to employee-contribution plans are coming up short as retirement nears — that is, if they participated in them. Many pass up the opportunity and are even further behind. Moreover, 40 percent of Minnesota private-sector workers are employed at a place where there is no access to a retirement plan of any kind. Already 8.6 percent of Minnesota seniors live at the poverty level and 30 percent are at or below 200 per cent of poverty.
So what to do?
Minnesota is still at the early stages of solving the problem. At the direction of the Legislature in 2014, the state’s Office of Management and Budget hired a consulting company, Deloitte, to conduct a retirement savings study [PDF]; it was released in late March. The study points out that even those workers who have access to retirement plans are falling far short of saving what they’ll need to live comfortably in retirement. Currently, the average worker with a defined-contributions plan is heading into retirement with just $38,000 in savings (if annualized, about $250 per month). And, again, that’s workers with access to retirement plans.
The needs, and the reality
According to the Deloitte study, retirees should aspire to live in retirement on about 75 percent of what they were paid when they were working. That means, Deloitte says, that a worker who was paid $40,000 a year when working needs to have saved anywhere from $280,000 to $440,000 to live near the 75 percent standard. A Pew Research study in 2012 showed that 30 to 40 percent of baby boomers — born between 1946 and 1964 — do not and will not have saved enough to hit that 75 percent goal.
The Deloitte study lays out the dimensions of Minnesota’s retirement savings gap and options for creating a state-administered vehicle to help those employees who who don’t have access to a retirement plan at work.
Meanwhile, on Wednesday two DFL legislators — Sen. Sandy Pappas and Rep. Jamie Becker-Finn — proposed legislation, the Minnesota Secure Choice Retirement Act (SF 2303 and HF 2570), that would be an attempt to offer an efficient and inexpensive way for small businesses to offer their employees access to retirement plans. But there will be only “informational” hearings on the proposal this session, meaning nothing can start moving until 2018 at the soonest.
And there will be fierce opposition from the financial services industry to any sort of a state program. “The (retirement) products they are offering already are offered in the private sector,’’ said Robyn Rowen, a representative of the Minnesota Insurance and Financial Services Council. “We don’t think the way to solve the problem is to create a giant state program.’’
Perhaps the private sector does have the solution. But, so far, even with defined-benefit pensions disappearing and employees coming up short with their defined-contributions plans — or no plans — employees don’t always think to turn to private-sector savings products.
A decades-long shift
The private-sector shift from traditional pension systems to 401(k)s and other ways of saving that put more risk on individuals has been dramatic. Studies show that as recently as 1980, 30 million workers — about 30 percent of the workforce — received pensions in retirement. By 2012, 16 million workers — about 19 per cent of the workforce — received pensions.
The growth of defined-contributions plans (employer administered retirement investment accounts) have filled some of the gaps created by the disappearance of traditional pensions. In 1980, just 19 percent of the workforce participated in IRA programs. By 2012, about half the workers had access to IRA-type plans.
Still, nearly half of private-sector workers have no access to even an IRA. And of course there is a huge gap between the value of a pension and the value of a retirement account.
Daunting problems for younger workers
Bad as it looks for many boomer retirees, the situation is only going to get worse in the future. The simple fact is younger workers are facing more daunting economic problems. Younger Americans are faced with education and housing debt far higher than boomers ever faced. Additionally, such basics as health care are more costly.
As a demographic group, today’s seniors are very fortunate. Again, according to Pew, households headed by the 65-plus crowd are not only the wealthiest segment of the population but they have 42 percent more wealth than their counterparts of 1984.
Meanwhile, households headed by those 35 and under are headed the other direction. They have 68 percent less wealth than their counterparts of 1984.
One more stark comparative stat: Today’s senior-headed households have 47 times as much net wealth as the 35-and-under households. In 1984, seniors had 10 times as much wealth as the 35-and-unders.
Trying to address the access gap
The legislation proposed in Minnesota wouldn’t yield happily-ever-after retirement for today’s workers. The idea is to offer a helping hand to small businesses and nonprofits that currently don’t have retirement programs because of cost and complexity.
Essentially, the plans being proposed by the legislators would give businesses an inexpensive way to set up retirement accounts for their employees. The plans — there are two options, a state-sponsored IRA plan (“IRAP”) or a multiple-employer retirement plan (“MERP”) — would allow the employer to offer employees automatic payroll deductions. A state board would administer the investments of the pooled employee accounts. Neither the employer nor the state would be liable for any losses. On the other hand, the employee would be vested from day one and the account would follow the employee.
Beyond start-up costs — about $30 million — Pappas believes state run retirement operations could be self-sustaining. “Small fees” charged to those using the retirement services would cover the costs of the operation, which would be under the umbrella of the Minnesota State Retirement System.
Proposals similar to this are available — or in the process of being established — in Oregon, Washington, California, New Jersey and Illinois.
“It’s critical to encourage people to plan and save for retirement and ensure they can easily do so,’’ said Pappas.
A couple more sobering stats: By around 2020, the state’s 65-plus population is expected to surpass the age 5-17 (K-12) population for the first time ever. By 2030, one in five Minnesotans will be 65 or older.