A CNBC article yesterday caught my eye, The U.S. retirement system gets a ‘C+’ grade, experts say — even though it’s worth $39 trillion. Here’s why.
I usually try to guess an article’s conclusion before I read it. My brain just works that way. Obviously, $39 trillion is a lot of money, but my thought was, “How much is it per person?” Using the $39 trillion number and a U.S. population of 329 million, it’s about $118,361 per person. That’s not a great amount to retire on, but it might be able to last a few years. It could last longer depending on whether Social Security is included in that number. It’s much lower than the $2 million that many consider necessary for financial independence*.
The “C+” grade from Mercer CFA Institute Global Pension Index wasn’t for the reason I expected, though. The article points out that the United States has a “patchwork retirement design.” It’s unclear to me whether the system counted Social Security or not. To read the report, you have to give away a ton of personal information, and I’m not that interested in their opinion that much. It makes me more skeptical that they wouldn’t release it freely.
The main reason for the C+ grade seems to be that the United States retirement system is full of “haves” and “have-nots.” Here is an eye-opening passage from the article:
Consider this statistic: Just three of the 38 countries in the Organization for Economic Co-operation and Development rank worse than the U.S. in old-age income inequality, according to the bloc of developed countries.
Indeed, poverty rates are “very high” for Americans 75 years and older: 28% in the U.S. versus 11%, on average, in the OECD.
Being #36 of 38 the countries in the OECD is terrible. I’m surprised we (the United States) even got a C+.
It seems like the patchwork system works for some people but not everyone. My guess is that there’s one group of workers who have 401ks and have been saving and investing. Investing in U.S. stocks over the last decade has done well. They could have had their money quadruple. For employees who don’t have a 401k or who aren’t investing, they’ve just got whatever they’ve been able to save. Even if they save $3,000 a year – over 20 years (without compound interest), it is $60,000.
So what’s the answer? The first thing I would do is fix Social Security. If the contribution limit has to go from $147,000 to $500,000 or more, I don’t see a problem with that. We all agree that Social Security running out of money is a problem. The fix isn’t going to come from workers making $50,000 a year contributing more.
Next, I might look to provide a Universal Basic Income (UBI) for people 65+ at poverty rates. We saw how much the child tax credit helped end child poverty. I did some searching around, and it seems that about 5 million people aged 65+ are in poverty. It wouldn’t be too expensive to provide a little more of a safety net. I would hope that would get bipartisan support from lawmakers; if they are against helping old, poor people, they shouldn’t be elected.
As for the overall United States retirement system, I’m not sure it’s so bad. I grew up knowing that pensions wouldn’t be around and that I had to save in retirement vehicles. However, I’m 46, so people in my generation haven’t gotten to retirement age yet. It looks like 401k were getting popular in the late 1980s and Roth IRAs in the late 1990s. The people retiring today entered the workforce in the late 1970s, so they likely missed the first 10, 15, or 20 years of early compound interest.
I hope that the bad grade for the U.S. retirement system reflects a transition from pensions to a system based more on personal responsibility. Of course, that system of personal responsibility is… not great. Some more quick internet searching shows that only about 40% of people have access to a 401k plan. I don’t know if that counts 403b and TSP plans, which are similar for specific professions. At least everyone earning under $129,000 has access to a Roth IRA. Those are the people who need it.
I’m not sure if we should scrap the current retirement system. I think if we ensure that we eliminate elderly poverty and help educate people that retirement is something they need to plan for, we should shoot up the charts.
* That $2 million generally comes from people wanting around $80,000 to spend per year and reverse engineering the 4% withdrawal rate rule of thumb. (The math is 80,000 divided by 0.04 for those with a calculator handy. Feel free to play around with numbers that may be more accurate for you.)
Great article. Since we are a country of haves and have nots, it makes some sense that our retirement system would mirror that. My father, born in 1921, never bought a stock, but he worked his career to have pensions, federal government and state of Texas(I should note that Texas now comingles the amount of other retirements to reduce retirement income, one of the reasons we are losing teachers), and retired with a very good income. Though even that plan had issues as when he retired he had to take less income in order to allow for spouse benefits for my mother if he died first. My mother died just a couple of years into the retirement, so dad received less income for the next 20+ years that he lived. Much like decisions of social security, they are complicated and for the most part irreversible if you make what turns out to be the wrong choice. Our joke is that it’s all easy as long as you know exactly when you will die.
Since I’m 59 and not wanting to work in IT until I’m 70, retirement is always on my mind. My wife has not worked full time since 1993, so trying to save for retirement while having two kids in private school, etc, was difficult. Throw in a couple of “recessions” and having your old age quality of life based on the stock market can be concerning. So I’m glad the chatter of privatizing SS has yet to take off, since that is all a big chuck of our citizens will have to live on.
I’m dreading trying to figure out Social Security. It is too complicated for me now – I don’t know how I’ll manage it in 20 years.
I’m sure you and your readers are doing well, but I don’t think the public as a whole can be trusted to save for retirement. Too many people don’t know how, are living paycheck to paycheck, and/or don’t have the will to save. I think the reason homeownership is so highly praised in the US is that building equity over the course of 30 years is the only way many households save money. Personal responsibility works for those who are capable, but leaving the incapable behind in poverty is not a good option.
Yeah, I’m hoping those people somehow find this site or other sites that may help them out. Not that financial education solves everything either. I certainly didn’t want to leave anyone behind which is why I proposed UBI to get the elderly out of poverty. At least in this way, there are fewer have-nots.
You are right about home ownership. The forced savings is very valuable.
It is interesting. My greatest generation parents who passed almost ten years ago were in the pension generation. They received over $80K in income from various pensions and Social Security. That covered 100% of their expenses even when they both were needing expensive full time nursing care. They also had invested well with a couple of million in stocks and bonds but they never touched that or the income it generated. And this was a couple who never were big earners. They were products of the depression and were pretty frugal but still lived rich lives.
Me, a Boomer, got to watch pensions shut down early in my career and understood it was going to be up to me to fund retirement alone. I wasn’t sure I could count on Social Security so I felt I’d need millions in investments to be secure later. I had to put a higher percentage of my income into investments which is what we did. I wonder what retirement will look like for my three millennial grown kids?
You raise a very good point. Penson loss affects professionals, but hopefully we can compensate, but the lost of pension for blue collar workers, such as many in my east Texas home town, will be a big issue, especially with housing cost and inflation hitting lower income workers harder.
It’s just really hard for regular people to save for retirement. The 401k plan is great if you can do it, but a lot of people aren’t doing well with it. I guess UBI for 65+ would be nice, but I don’t know if it would pass. Probably now. We really need to fix Social Security first.
The UBI for 65+ would be for those in poverty. It’s an important distinction because it brings money to those who need it. I know it’s hard to pass anything in this government, but it almost makes too much sense not to.
I agree that fixing Social Security should come first. It’s really not that hard if you raise the annual income cap. However, passing that isn’t easy either.
A 401K is a decent vehicle for saving for retirement, but I think it was originally designed to benefit Wall Street more than Main Street. Annual fees are around 3% to 5% of the account balance whether your Wall Street investment manager makes you money or not. They still get paid even if you lose money in your 401K. This is not to say that investing in a 401K is bad (I invest in one), but it shouldn’t be treated as the one single solution for retirement savings, in my opinion.