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.)