News Articles

The 401(k): Americans ‘just not prepared’ to manage their own retirement funds

By Jia Lynn Yang

April 4, 2o12

The Wall Street Journal

When lawmakers added a subsection to the tax code called the 401(k) more than three decades ago, they could not have imagined that this string of three numbers and a letter would become a fixture in the financial lexicon.

Nor could they imagine the stress it would unleash.

A poll by Gallup last year showed that for two-thirds of Americans, not having enough money for retirement topped seven other financial worries, including medical bills, mortgage payments and their children’s college tuitions.

Worrying about having enough money for retirement is not a new phenomenon. But the rise of the 401(k), dating to the early 1980s, has steadily shifted more financial responsibility onto the shoulders of many Americans who are — let’s face it — clueless.

The number of people who are unprepared is growing. In 1983, researchers now at the Center for Retirement Research at Boston College calculated that 31 percent of working-age households were “at risk” of not being able to maintain their standard of living after they retired. By 2009, it was 51 percent.

“I don’t know how you feel, but managing your own money is just horrible,” said Alicia Munnell, director of the center. “We just don’t know how to do it.”

Consider the hurdles between every American with a 401(k) and a decent retirement: First, wade through your HR department’s paperwork to enroll in a plan at your company. Second, save enough. (Imagine what you think is enough. Then save more.) Next, manage your investments intelligently through stock market highs and lows, tending to your portfolio every year to make sure you have the right balance of stocks and bonds, and avoid withdrawing any money early. And not least, when you retire, ration your money at just the right rate: not so little that you live uncomfortably but not so much that you run out.

The result has been a system that works well for people who know how to use it. For many others, it’s better than nothing, but it still may not be enough.

“Does the system work or not? It’s really a ‘compared to what’ question,” said Eric Toder of the Urban Institute. “One side emphasizes the glass is half-full and the other emphasizes the glass is half-empty. The real question is, how do we make the system work better for the people for whom it’s not working while not destroying the benefits?”

As company pension plans peter out, Munnell estimates that it will be another decade before people rely almost entirely on their 401(k)s.

That means 10 more years before a system — once imagined to be only supplementary to Social Security and pension plans — is fully tested. That’s 10 years in which bigger waves of workers sign up for a savings vehicle that they expect will see them through old age.

For the past several years, there’s been a movement to fix the 401(k), or at least make it work better for average people — that is to say, almost all of us — who are bound to make some mistakes along the way.

Reformers want the 401(k) of the future to look very different. But even the program’s biggest critics concede that the system that was unwittingly launched in 1978 is here to stay.

A poll by Gallup last year showed that for two-thirds of Americans, not having enough money for retirement topped seven other financial worries, including medical bills, mortgage payments and their children’s college tuitions.

Worrying about having enough money for retirement is not a new phenomenon. But the rise of the 401(k), dating to the early 1980s, has steadily shifted more financial responsibility onto the shoulders of many Americans who are — let’s face it — clueless.

The number of people who are unprepared is growing. In 1983, researchers now at the Center for Retirement Research at Boston College calculated that 31 percent of working-age households were “at risk” of not being able to maintain their standard of living after they retired. By 2009, it was 51 percent.

“I don’t know how you feel, but managing your own money is just horrible,” said Alicia Munnell, director of the center. “We just don’t know how to do it.”

Consider the hurdles between every American with a 401(k) and a decent retirement: First, wade through your HR department’s paperwork to enroll in a plan at your company. Second, save enough. (Imagine what you think is enough. Then save more.) Next, manage your investments intelligently through stock market highs and lows, tending to your portfolio every year to make sure you have the right balance of stocks and bonds, and avoid withdrawing any money early. And not least, when you retire, ration your money at just the right rate: not so little that you live uncomfortably but not so much that you run out.

The result has been a system that works well for people who know how to use it. For many others, it’s better than nothing, but it still may not be enough.

“Does the system work or not? It’s really a ‘compared to what’ question,” said Eric Toder of the Urban Institute. “One side emphasizes the glass is half-full and the other emphasizes the glass is half-empty. The real question is, how do we make the system work better for the people for whom it’s not working while not destroying the benefits?”

As company pension plans peter out, Munnell estimates that it will be another decade before people rely almost entirely on their 401(k)s.

That means 10 more years before a system — once imagined to be only supplementary to Social Security and pension plans — is fully tested. That’s 10 years in which bigger waves of workers sign up for a savings vehicle that they expect will see them through old age.

For the past several years, there’s been a movement to fix the 401(k), or at least make it work better for average people — that is to say, almost all of us — who are bound to make some mistakes along the way.

Reformers want the 401(k) of the future to look very different. But even the program’s biggest critics concede that the system that was unwittingly launched in 1978 is here to stay.

Retirement plans, defined

Broadly speaking, companies help workers plan for retirement in two ways.

Defined benefits, often called pension plans, guarantee workers a certain amount annually when they retire based on earnings in their final years and how long they’ve worked at the company. The employer must set aside the money, invest the funds and pay employees, regardless of what happens in the market.

In a defined-contribution plan, which includes 401(k)s, the employer diverts money from the employee’s paycheck — while perhaps chipping in some to an account owned by the employee, effectively creating a savings account. There are restrictions on when the money can be drawn. The employee owns the account, though, and can move the money from employer to employer.

The 401(k) was created by the Revenue Act of 1978, which also reduced individual income tax rates and the corporate tax rate and created flexible spending accounts.

But years before the law, companies had defined-contribution plans that were precursors to the 401(k). Firms — banks in particular — created accounts in which employees could put their bonuses rather than collect the money in cash. The accounts allowed employees to defer the taxes they would owe immediately with a cash payout.

The IRS was wary of this setup, but Congress gave it the rubber stamp. In the 1978 law, Congress added 401(k)s to the tax code, formally allowing employees to put a portion of their salary in these tax-deferred accounts. Three years later, the government issued official regulations, and companies including Johnson & Johnson and PepsiCo were among the first to adopt the new 401(k).

The number of companies offering the plan exploded in the 1980s and 1990s.

In 1990, about $384 billion worth of assets had been saved in 401(k) plans. By 1996, the number surpassed $1 trillion. The mutual fund industry flourished with all the new business.

In the meantime, companies rolled back their pension plans.

‘If you want to drive a car . . .’

Let’s say a worker making $50,000 contributes 6 percent of her annual salary with a 3 percent employer match. By the time that person retires, she should have about $320,000 saved up, according to calculations by Munnell. But reality rarely plays out that way. People forget to enroll, or they don’t save enough, or they wind up withdrawing money to cover a financial emergency. The result: Individuals nearing retirement have closer to $78,000 saved, according to the Federal Reserve’s Survey of Consumer Finances. (And that number is rosy; the last regular survey was done in 2007, just before the financial crisis.)

“The old-style 401(k) before automatic enrollment came along was basically telling people, ‘If you want to drive a car, you have to be able to repair it and maintain it yourself,’ ” said William Gale, director of the Retirement Security Project at the Brookings Institution. “If the 401(k) is supposed to be the primary retirement vehicle for the average American worker, then it needs to be consistent with the information and financial ability of the average American worker, who is just not prepared to manage funds like that over the course of a lifetime.”

Whatever the 401(k)’s flaws, freedom has been a selling point as people work at multiple companies in their careers and need to move their retirement savings with them.“I think there’s a reason people do tend to like these things,” said Peter Brady, senior economist at the Investment Company Institute, a mutual fund industry group. “They much better match up to people’s work histories . . . and I think they like having control over their investments.”

Some of the fixes proposed involve diminishing the do-it-yourself nature of the 401(k), or at least nudging people toward better decisions.

The Pension Protection Act of 2006 paved the way for companies to offer automatic enrollment in 401(k) programs. Many firms have also added automatic annual increases in how much employees contribute. Half of the companies surveyed by the Profit Sharing/401(k) Council of America in 2010 offered automatic enrollment. Of those, about 40 percent also offered automatic increases.

Many companies automatically enroll their workers to contribute roughly 3 percent — more than they might save if they didn’t enroll at all but probably not enough to build a secure nest egg.

This year, the Treasury Department offered new rules that would make it easier for employers to offer annuity options to workers who are retiring. This way people are not left having to manage a lump sum but can instead count on a steady stream of payments.

In a way, these changes try to bring the best features of pension plans — their steadiness and predictability — to the 401(k).

“It’s kind of like we ran all the way to the cliff to D.C. [defined contribution] and then looked over the cliff and decided to make them more like D.B. [defined benefits],” Gale said.

Gale predicts that in the future there will be “hybrid” systems in which employers are still leaving much of the retirement saving to workers but plans are less overwhelming to manage.

At the core of any reform, Munnell said, there has to be massive education of employees on how to plan for retirement. Many people think that saving 6 percent with a 3 percent match, for example, is enough. Not so, according to the Center for Retirement Research.

As a baseline, the group estimates that a household earning at least $50,000 needs roughly 80 percent of its earnings to maintain its pre-retirement lifestyle.

To pull that off, a person who is 25 and earns $43,000 needs to be saving 15 percent a year in order to retire at 65, assuming a 4 percent rate of return on his investments. Wait until 35 to start saving, and the necessary savings rate creeps up to 24 percent.

The solution for many people, Munnell said, will be to work longer. If that 25-year-old doesn’t retire until 70, he would only have to save 7 percent a year.

“Our whole retirement system’s too small,” Munnell said. “When you put together Social Security and these 401(k) plans, it’s just not going to provide enough for retirement income. . . . The question is, can you fix it by fixing the 401(k)s?”

Florida Hispanics lack suitable retirement options

December 6, 2011

By Mayra Del Valle

Sun Sentinel

Americans are gravely concerned about their retirement security. A recent survey commissioned by Americans for Secure Retirement found that 88 percent of voters expressed concern about “being able to maintain a comfortable standard of living throughout retirement.”

What’s more, three out of five middle-class Americans entering retirement today are projected to outlive their financial assets. On average, people are living longer and the cost of living has surpassed what Social Security and savings will cover.

Nowhere is this more evident than right here in Florida, home to more than three million seniors and five million Baby Boomers, making Florida the oldest state in the nation.

For Hispanics, realizing this final phase of life has been met with concern. Florida has the fourth largest Hispanic population in the nation with 14 million.

Although Hispanics work in all industries, they are more heavily concentrated in jobs lacking traditional retirement options and typically earn a lower income, affecting their ability to save for retirement. In fact, only 25.6 percent of Hispanics are covered by pension plans, compared to 42.5 percent of whites.

Exacerbating the problem is the disproportionately large number of Latinos who are small business owners, many of whom rely on selling their business to finance retirement. A lack of knowledge and reluctance or lack of access to invest in a retirement vehicle that provides a guaranteed lifetime income stream means they are likely to fall short.

As millions of Floridians and Latinos struggle with saving for retirement, government officials should support public policy that makes access to retirement vehicles more accessible and affordable to all.

Such options are key to ensuring a secure retirement.

Mayra Del Valle is the President and Chief Executive Officer of Duty Free World.

Many have little to no savings as retirement looms

December 5, 2011

By Matt Krantz

USA Today


For many Americans, the golden years are quickly taking on a tin-like hue.

After a vicious decade of no growth for the stock market, including two 401(k)-eating bear markets and persistently sky-high unemployment, more Americans are finding themselves in their 50s and 60s with practically no money saved for retirement.

“We were in our 30s, blinked, and now we’re our parents’ age,” says Alan Tipps, a corporate jet pilot who typically earns more than $100,000 a year when he’s working. But Tipps, 52, has been laid off three times during the past four years, and says that has forced him to burn through what was in his 401(k) just to “keep the lights on” in his home in Portales, N.M.

Investors of all ages have suffered. But for those close to retirement, it’s been especially tough, because they’re faced with taking distributions from investment portfolios that in some cases are a fraction of their peak value. Forced early retirements and the near extinction of pensions are making things worse, creating a generation of aging investors in which some have little or no plans for how they’re going to pay for retirement.

It gets more ominous, given the other changes Americans are facing. Declining property values have drained home equity that many retirees might have counted on. Meanwhile, the number of people reaching retirement age is soaring as the Baby Boom generation ages.

Saving early and often is the way Americans typically fund their retirement, the biggest financial obligation most will face. Pensions for many have become a thing of the past. Retirement needs vary greatly, but the numbers are universally huge. A 65-year-old retiree would need to have $1.1 million saved to draw $50,000 a year in inflation-adjusted dollars, assuming 3% inflation and a 5% annual return from investments. That’s if the investor is lucky enough to get a 5% return, which, given the flat-line returns of stocks the last decade, might give some pause.

Meanwhile, data show that many workers nearing retirement age have saved nowhere near the amount they need, and many have very little savings. More than half of all workers, 56%, say they have less than $25,000 in savings, according to a survey by the Employee Benefit Research Institute.

And the strain is already starting to show up as more American actually retire. More than half of retirees, 54%, report they have less than $25,000 saved. That’s up dramatically from 2006, when 42% said they had less than that.

For many Americans approaching retirement age, the increasing gap in savings is eroding confidence that retirement is even possible. Nearly 30% of workers of all ages surveyed aren’t confident they’ll have enough to retire, the highest level in the 21 years that EBRI has tracked the statistic. That means 36% of workers now expect to have to keep working after age 65, up from 20% in 2001.

Not only are many Americans close to retirement age lacking savings, some are in the hole financially.

The EBRI survey found that 42% of retirees say their current level of debt is a problem.

Double whammy

Financial advisers say they’re seeing an increasing number of workers and new retirees with no savings and no plan to dig out of debt. “There are a lot more people behind the eight ball,” says Joel Redmond, a financial planner for Key Private Bank in Syracuse, N.Y.

Redmond and other advisers cite a range of factors jeopardizing retirement today:

Ravages of the stock market. The people Redmond encounters most who are lacking sufficient retirement savings weren’t necessarily delinquent or negligent. Many had money saved but were wiped out by the sour stock market in the past decade and poor investment strategies, Redmond says.

That’s what happened, in part, to Robert and Connie Cabana of Tampa, who are both in their 60s. Robert built up a sizable 401(k) working as a financial executive at Verizon. Connie was a business assistant for a local irrigation supply company. Connie was laid off four years ago; Robert was let go three years ago.

But the serious hit to their retirement, which wiped out half their 401(k) savings, resulted from the stock market and an overexposure to risky stocks, they say. Now, 75% of their 401(k) is gone, and they have “very little” left, Robert says.

Procrastination and delays in getting retirement savings in place. Baby Boomers, in contrast with their Depression- and World War II-era parents, who typically were good savers and had company pensions, have looked at savings as a downer, says Chris Olsen, 49, a financial planner with Ameriprise.

Many people now in their 50s and 60s with no savings figured they could lean on Social Security for their retirement, he says. In reality, Olsen says, Social Security payments are far from adequate to fund skyrocketing health care costs. The payments also are losing purchasing power relative to inflation, he says. Social Security, in practice, pays for only about 40% of most retirees’ needs, says Paul Jarvis, financial adviser at State Bank & Trust in Fargo, N.D.

“I always made a lot of money. I always spent a lot of money. I’ve done whatever I wanted to do,” says Paul Conlin, 53, a contractor in Liverpool, N.Y., who says he has less than $50,000 saved for retirement. “I live for the moment. When I want to do something, I do it.”

But after consulting with a financial planner, Conlin, who is married and has three children, is starting to put money away for retirement. He’s saving $6,000 a year in a Roth IRA, “and it’s growing,” he says. “I’ve changed my habits.”

Even so, he’s not ready to go crazy on a savings binge, figuring he’ll probably keep working well into his 70s or beyond. “If you stop working totally, then you will die.”

Putting retirement last. Financial obligations faced by young families can be so crushing that saving for retirement often is the last thing that gets attention, Jarvis says. After paying down debt and paying for kids’ college, many Americans find themselves in their 50s with next to no retirement savings, he says.

Unemployment hitting retirement savings plans. Tipps says that while his income is good while he’s working, routine layoffs constantly knock his retirement savings plans off course.

“It’s good money while you’re working,” he says. “But it’s feast or famine.” Unfortunately, since corporate jets are seen as an executive perk, companies are quick to cut them when times get tough. “My retirement plan is the New Mexico state lottery,” he jokes.

Make a plan

Joking aside, it’s critical for people in their 50s and 60s to recognize immediately the severity of the situation, Redmond says. Coming up with a financial plan, at least, allows people to set realistic expectations for what they need to do. There are only so many things people in this situation can do, says Redmond. The only variables most people can control are working longer, saving more or getting a higher return on their investments, he says.

Some, such as Conlin, may simply choose to postpone retirement and keep working. He says members of his family routinely live into their 90s, and he’s ready to keep working.

In an effort to save more, the Cabanas are attempting to launch a business in which they distribute coffee and chocolate to organizations conducting fundraisers. They’re hopeful the business could take off, though sales recently have been soft due to the economy, they say.

But working longer might not be an option for some, such as Tipps. He says that insurance carriers that provide coverage for pilots might make the premiums for those older than 65 prohibitively expensive in the future.

Instead, Tipps, is trying to teach himself to be a successful active investor and get a higher rate of return on savings. He’s using a practice trading account at an online brokerage to try different active trading strategies using virtual money. If he’s successful, he’d like to start for real once he’s working steadily again. Tipps is also determined to set up a Roth IRA, a retirement account that lets investors’ money grow tax-free.

Perhaps the most likely option for many is doing an extreme makeover of their finances and slashing costs. Olsen and Jarvis have both seen retirees with little money sell their homes in costly parts of the nation and move to less expensive places. Others forgo many of the things Americans dream of doing during retirement, such as travel.

There’s no guarantee that even such extreme measures in retirement will help Americans recover from a lifetime of not saving. Making such sacrifices now creates worries many Americans would rather avoid at this stage in their lives.

Connie Cabana cautions young people to learn from her predicament. “Young people need to start saving as soon as they start working,” she says. “There are roadblocks you don’t see when you’re young. You think money will always be there,” she says. “But with life, you need to make provisions.”

Do Tea Partyers support Social Security and Medicare?

November 8, 2011

By Steve Vernon

CBS Money Watch

In a recent poll conducted jointly by prominent Republican and Democratic polltakers, 34 percent of self-identified Tea Party supporters said that Social Security and Medicare should not be cut, no matter what. Another 30 percent of Tea Partyers said that if cuts to Social Security and Medicare were to be considered, lawmakers must also look for other ways to help people better plan for retirement.

Responses favoring Social Security and Medicare were higher among most voters of all political persuasions, with 62 percent of Democrats and 49 percent of Republicans saying these programs shouldn’t be touched, no matter what. Overall, half of all voters surveyed supported this position.

The poll of 800 voters was conducted in September by Public Opinion Strategies and Lake Research Partners, and sponsored by Americans for a Secure Retirement.

The poll’s results show evidence of widespread support for both Social Security and Medicare. After all, everybody has parents and grandparents they’re concerned about. Positions taken by Rick Perry and other extremists regarding Social Security are out of touch with the general populace, who wouldn’t think of calling Social Security a “monstrous lie” (Rick Perry’s description of the program).

Lawmakers, however, are caught between a rock and a hard place, given the overwhelming concern that voters have about the federal debt spiraling out of control. If lawmakers don’t touch Social Security and Medicare — two of the largest programs funded by federal taxes — they’ll need to raise taxes to help balance the federal deficit. But that may be fine with voters: Raising taxes on the wealthy was one of the more popular actions favored by poll respondents in order to save Social Security and Medicare.

But there’s a middle ground here. Changes can be made to Medicare to reduce fraud and waste, reward more efficient health care providers, and encourage the citizenry to improve their health and reduce the demand for medical expenditures. Of course, such measures alone won’t be enough to keep Medicare solvent — though they’ll certainly help — and in some form, additional revenues or benefit cutbacks will be needed to help reduce the deficit.

There are similar adjustments that can be made to Social Security that will improve its finances, such as increasing the amount of wages that are subject to Social Security taxes, and refining the eligibility for disability payments. But again, we’ll need a package of changes; there’s not one single magic bullet that will solve all our challenges.

The poll takers mentioned above also reported a remarkable deterioration in voters’ confidence regarding their ability to maintain a comfortable standard of living during retirement: One-half of poll respondents said they were less confident now than a year ago. A major reason for this concern? The economy and the partisan gridlock in Washington. It’s high time for lawmakers to put their country’s interests ahead of their own political party’s interests and ideology, and focus on making the hard compromises and choices that will help restore our confidence in the future.

© 2011 CBS Interactive Inc.. All Rights Reserved.

The debt fallout: How Social Security went ‘cash negative’ earlier than expected

October 30, 2011

By Lori Montgomery

Washington Post

Last year, as a debate over the runaway national debt gathered steam in Washington, Social Security passed a treacherous milestone. It went “cash negative.”

For most of its 75-year history, the program had paid its own way through a dedicated stream of payroll taxes, even generating huge surpluses for the past two decades. But in 2010, under the strain of a recession that caused tax revenue to plummet, the cost of benefits outstripped tax collections for the first time since the early 1980s.

Now, Social Security is sucking money out of the Treasury. This year, it will add a projected $46 billion to the nation’s budget problems, according to projections by system trustees. Replacing cash lost to a one-year payroll tax holiday will require an additional $105 billion. If the payroll tax break is expanded next year, as President Obama has proposed, Social Security will need an extra $267 billion to pay promised benefits.

But while talk about fixing the nation’s finances has grown more urgent, fixing Social Security has largely vanished from the conversation.

Lawmakers in both parties are ducking the issue, wary of agitating older voters and their advocates in Washington, who have long targeted politicians who try to tamper with federal retirement benefits. Democrats lost control of the House last year in part because seniors abandoned them in protest over Medicare cuts in Obama’s much-contested health-care act, and no one in Washington has forgotten that lesson.

In his February budget request, Obama ignored the Social Security blueprint put forth by his own bipartisan panel on debt reduction. During this summer’s debt-limit showdown, he endorsed the panel’s proposal to tie future benefits to a less-generous inflation index. But Obama took that idea off the table in September when he submitted recommendations to a special debt-reduction “supercommittee” now at work on Capitol Hill. Until recently, members of the supercommittee said, Social Security had rarely come up in their closed deliberations.

Social Security is hardly the biggest drain on the budget. But unless Congress acts, its finances will continue to deteriorate as the rising tide of baby boomers begins claiming benefits. The $2.6 trillion Social Security trust fund will provide little relief. The government has borrowed every cent and now must raise taxes, cut spending or borrow more heavily from outside investors to keep benefit checks flowing.

Many Democrats have largely chosen to ignore the shortfall, insisting the program is flush, citing the existence of the trust fund. They argue that fixing Social Security can wait, perhaps for years.

Senate Majority Leader Harry M. Reid (D-Nev.), who is fighting to maintain control of the Senate, has been particularly outspoken. In March, as a bipartisan group of six senators was gaining attention for a push to draft a debt-reduction plan that included a Social Security fix, Reid summoned hundreds of activists to a rally on Capitol Hill. Fresh off a tough reelection campaign that turned in his favor after he accused his tea party opponent of wanting to “wipe out” Social Security, Reid exhorted policymakers to “leave Social Security alone.”

“Let’s worry about Social Security when it’s a problem. Today, it is not a problem,” Reid said to applause.

In an MSNBC interview, he added: “Social Security does not add a single penny, not a dime, a nickel, a dollar to the budget problems we have. Never has and, for the next 30 years, it won’t do that.”

Such statements have not been true since at least 2009, when the cost of monthly checks regularly began to exceed payroll tax collections. A spokesman said Reid stands by his comments and his view that Social Security is entirely self-financed. But Reid’s position has frustrated some Democrats who argue that fixing Social Security — the government’s single-largest program — would go a long way toward restoring confidence among future retirees and the nation’s investors.

“It’s the one thing I’ve had the most difficult time grasping,” said Erskine Bowles, the former Clinton White House chief of staff who co-chaired Obama’s fiscal panel with former GOP senator Alan Simpson.

The Bowles-Simpson plan would have righted the system’s finances with a combination of payroll tax increases and reductions in scheduled benefits, mainly years down the road. It would have hit upper-income workers while raising benefits for the most needy, those with average lifetime earnings of less than $11,000 a year. “By making these relatively small changes, you make it solvent and you make it be there for people who depend on it,” Bowles said. “I thought that’s what we as Democrats were supposed to be for.”

Just as the GOP has rejected any form of tax increase to contain the debt, however, Reid and House Minority Leader Nancy Pelosi (D-Calif.) have ruled out any reduction in government retirement benefits. Last week, Reid softened his stand, backing a Democratic proposal to the supercommittee that included the change in the Social Security inflation index. In return, however, Democrats demanded $1.3 trillion in new tax revenue — which Republicans instantly rejected, leaving the ideological divide as wide as ever.

Even that modest change to Social Security is drawing fire, however, from a powerful network of organizations representing the elderly, unionized workers and traditional liberals. For years, these groups have cast any proposal to trim the growth in retirement benefits as unnecessary — and as a mean-spirited attack on the elderly.

In recent weeks, AARP, the nation’s largest and most influential seniors organization, has been airing television ads in which an older man warns viewers that “some in Washington want to make a deal cutting the Social Security and Medicare benefits we worked for,” instead of cutting “waste and loopholes.” AARP’s legislative director, David Certner, said the ads reflect the popular view that Social Security should not be dragged into a separate debate over the nation’s escalating debt.

“We paid into these programs all our lives,” he said. “This is our money. Congress has no business cutting into this program.”

The public relations campaign has proved effective, particularly in the wake of a recession that devastated private retirement accounts and left even younger people anxious about the future. Eighty-two percent of Americans worry that Social Security will not deliver promised benefits, according to a recent poll for Americans for a Secure Retirement. Fifty percent oppose cutting the program “no matter what.”

Poll numbers such as those have an impact. “If you’re trying to win an election, you look at this and say, ‘It is a lost cause,’ ” said former senator Bob Kerrey (D-Neb.), who co-chaired a 1994 Social Security commission. “AARP has made a decision to make it almost impossible” to fix the program, he said. “If they tag you as someone who wants to cut benefits, you’re dead in the water.”

Even some longtime champions of Social Security are getting frustrated by the lack of movement. “The political stance of my progressive friends is you can’t touch anything, and that doesn’t make any sense to me,” said Alicia Munnell, director of the Center for Retirement Research at Boston College and an economist in the Clinton White House. “Social Security is the backbone of our retirement system,” Munnell said in an interview. “We should fix it because people are going to need it.”

A costly transformation

What Congress gives, it finds almost impossible to take away.

Created during the Great Depression, Social Security grew in popularity as Congress repeatedly raised benefits through the 1950s and 1960s and then, in the 1970s, set initial benefits to rise automatically with wages and with inflation thereafter.

Those changes made the program vastly more expensive than the “old age and survivors” insurance originally envisioned by President Franklin D. Roosevelt. He wanted to protect workers and their families from financial hardship due to death, disability or aging. Retirement benefits were available at 65, at a time when life expectancy was significantly lower than today.

“The American social insurance plan works on the assumption that I will work, make meaningful contributions and, if I face one of these common tragedies of life — unemployment, disability, impending death — collectively we’re going to pool the risk together,” said Andy Achenbaum, a University of Houston professor who has written extensively about Social Security. But, he said, “I really was expected to work as long as I could contribute.”

That began to change as the concept of retirement gripped the public imagination, Achenbaum said. In the 1950s, financial executives began trying to persuade people to “invest” in their retirement, making it something to save for, like a new car. The 1960s gave rise to the “Golden Years,” a concept popularized by housing developer Del Webb, who broke ground for his first leisure community in Sun City, Ariz., in 1961.

Congress aided the transformation, enacting an “early eligibility age” that permitted qualified workers to claim Social Security benefits at age 62.

Retirement was no longer viewed as a brief period of rest at the end of life. It became an integral element of the American dream, said author Marc Freedman, who has studied the cultural history of retirement. “People scrimped and saved and deferred gratification to get to it as soon as possible — not even 65 or 62, but in your 50s,” Freedman said. “That became the definition of success: Whoever gets there first, wins.”

The average age for claiming Social Security benefits dropped from 68 in 1940 to 63 in 1980, where it remains. Meanwhile, average life expectancy has risen by five years. The average worker spends 20 years drawing benefits. A quarter will see their 90th birthday.

As a result, the average retirees have gotten back far more in federal benefits than they paid into the system during their working life, according to research by Eugene Steuerle, a senior fellow at the Urban Institute. That return is diminishing, in part because people today have paid more into the system than previous generations. But a two-earner, middle-income couple retiring this year can expect to get $913,000 in Social Security and Medicare benefits over their lifetimes, in return for $717,000 in payroll taxes.

“I don’t think anybody envisioned a 30-year retirement,” Freedman said. “That was never really the goal. And it certainly doesn’t make any sense today.”

‘That’s not the deal’

No crystal ball is necessary to predict Social Security’s future. Hard numbers tell the story. Social Security supports about 55 million people. By 2035, that figure will swell to 91 million. Today, for every person claiming benefits, there are three workers paying into the system. By 2035, there will be two.

Congress foresaw this as early as 1983. Inflation had driven the program’s costs through the roof. After decades of expansion, Congress finally had to scale back the program, choosing to tax wealthier retirees’ benefits and gradually raise the retirement age to 67.

Those changes, along with other adjustments, restored solvency and promised yearly surpluses that would build up the trust fund in preparation for the retirements of the baby boom. The surpluses were invested in special Treasury bonds, which, by law, must be repaid with interest.

Assuming they are, Social Security can pay full benefits through 2036. Once the trust fund is depleted, the system would rely solely on incoming taxes, and benefits would have to be cut by about 25 percent across the board.

Several factors have disrupted even that timetable. The recent recession caused the program to go cash negative years earlier than expected. The payroll tax holiday is depriving the system of revenue. And 10 years of escalating debt have crippled the government’s ability to repay the trust fund.

Certner, of the AARP, said it is unfair to cut Social Security benefits to solve that problem.

“The federal government is saying, ‘We’re in the red right now and we’re having trouble paying back Social Security, so we’d like to cut Social Security benefits,’ ” Certner said. “But that’s not the deal.”

Others argue that the deal has long since been abandoned and that the trust fund has become a fiction of accounting. “We can debate until the cows come home whether there’s really a trust fund or not,” said Olivia Mitchell, a professor at the University of Pennsylvania’s Wharton School who served on a 2001 presidential commission to study Social Security. “But the fact is, there’s no money available to pay for those benefits. And the system is short on cash now.”

Few argue that Social Security is too generous. This year, the average retirement check is $1,181 a month, or about $14,000 a year. Because of caps in the formula, even the wealthiest Americans get checks of only about $2,500 a month.

“Benefits are probably too high for upper-income workers,” who should be able to save more on their own, said David John, a retirement expert at the Heritage Foundation. But, he added, “they are actually too low for lower-income workers.”

“If we focused on this, we could fix it,” John said, but that pragmatic approach has been stymied by competing ideological views about the program’s purpose.

Sen. Richard J. Durbin (D-Ill.), who has long allied with those who want to preserve the current benefit structure, surprised much of Washington last year when, as a member of the Bowles-Simpson commission, he backed cuts in benefits as well as tax increases to stabilize the program.

The panel’s report — and Durbin’s vote — drew howls from Social Security’s defenders. Obama declined to back it. And Senate leaders resisted an effort by Durbin and five other senators from both parties to bring the plan to a vote in the Senate, an effort that ultimately failed.

In an interview, Durbin said he decided to back the Bowles-Simpson plan because he viewed it as “a chance to seize a bipartisan opportunity” to restore the program to solvency. He said friends assured him that regular people would accept ideas such as gradually raising the normal retirement age to 68 over 40 years: “To a person, they said, ‘Over 40 years? That’s not a problem.’ ”

“The reaction from some of the groups — and they’re my friends — I think was an overreaction,” Durbin said. “As I looked at this, I thought small changes made today will give 50 years or more solvency to Social Security. And that should be our goal.”

David Hendricks: Prospects for retiring well worry many

October 28, 2011

By David Hendricks

San Antonio Express News

Doubts about being able to retire with a comfortable standard of living are soaring in the country. The level of concern may be boiling toward a panic level.

A recent poll shows that nearly nine out of 10 people, 88 percent to be exact, are concerned about their retirement prospects.

The poll was taken from 800 registered voters across all age groups from Sept. 10 to 13 by Lake Research Partners and Public Opinion Strategies for Americans for Secure Retirement, a coalition of more than 70 organizations working to improve retirement programs.

Veteran pollster Bill McInturff of Public Opinion Strategies said he has never seen numbers that high.

Of the people asked about the possibility of a comfortable retirement standard of living, 52 percent said they were “very concerned.” That is up 15 percent from just last year.

Perhaps even more alarming is that the percentage of people lacking confidence in their retirement hardly differs even if they have been saving for retirement.

Fifty-two percent of people who have no retirement savings said their confidence in a decent retirement is falling. Fifty percent of people with less than $100,000 in savings also are less confident. Even 49 percent of people with more than $100,000 in retirement savings are more worried.

“What we’re seeing is significant and increasing concern from Americans of all political stripes about falling short financially during retirement,” McInturff said.

“Not only are Americans concerned about their own financial health, but they also express widespread concern over how the continued contentious debate in Washington could further undermine what they are planning for in retirement. Even those who feel we must make dramatic cuts to deal with the debt think Congress needs to identify concrete ways to help Americans deal with further retirement instability,” he added.

Eighty-eight percent of surveyed voters told the poll that tax incentives for retirement savings programs are important.

The poll should have gone further in its questions.

Is the high level of worry about retirement a reflection that savings invested in stocks have lost a great deal of value the past four years? Is it a reflection that Washington keeps making noise about reduced Social Security and Medicare benefits?

The answer probably is both, but a third factor might even be a larger source of worry. Many workers simply have not saved for retirement or saved very little. Tax incentives for individual retirement accounts and employer-match programs for 401(k) accounts have not been strong enough the past two or three decades to create any broad-based confidence for financially comfortable retirements.

McInturff said the question about incentive effectiveness is valid, but the survey was not geared to answer that question. Members of Congress and executive branch policymakers need to take a closer look at incentives and need more information about public opinion and retirement savings data.

The whole answer should not come from government, however. Employers need to educate and steer their workers toward programs that can make saving for retirement easier for workers, paycheck by paycheck.

More needs to be done because widespread retirement desperation is on the horizon.

Higher Anxiety Over Retirement Among Rich, Poor

October 18, 2011

By Anne Tergesen

Smart Money

We all know that Americans are feeling insecure about retirement these days. A new poll illustrates how pervasive these feelings have become.

According to a recently released survey of 800 voters nationwide, 50% of respondents with $100,000 or less in savings are feeling less confident about their retirement prospects today than they were a year ago. The surprise? Among those with more than $100,000 in savings, the same percentage–49%, to be precise–are feeling just as insecure.

“That is a stunner,” says Bill McInturff, a Partner at Public Opinion Strategies, LLC, which conducted the poll for Americans For Secure Retirement, a coalition of more than 70 organizations–ranging from the Hispanic Business Roundtable to the American Council of Life Insurers–that is dedicated to raising awareness about “the importance of guaranteed lifetime income, whether through annuities” or similar options within 401(K) plans, says Lindsay Gilbride, a spokeswoman for the organization. The organization’s web site says it is particularly concerned about “Americans with little or no access to employer-sponsored plans.”

Normally, Mr. McInturff says, “people with higher savings have a lot less anxiety than those with lower savings.” But clearly, he adds, the impact of simultaneous declines in the housing, stock, and labor markets has taken a toll on the outlook of even the wealthiest Americans.

“Those changes are not just affecting middle income people. They are also having a powerful affect on the affluent.”

Among the survey’s other findings:

  • One out of every two Americans say they are less confident today about their retirement outlook than they were a year ago.
  • Those closest to retirement have experienced the greatest loss in confidence, with 62% of those ages 45 to 54 and 60% of those ages 55 to 64 reporting a loss of confidence compared to a year ago. (In contrast, only 40% of those ages 60 and over–a population with less at stake in the stock market– say they are less confident than they were last year at this time.)
  • 50% of respondents believe Social Security and Medicare should be off-limits to budget cutters.
  • 88% of respondents say they are concerned about being able to maintain a comfortable standard of living throughout retirement–up from 73% last September.

That last statistic–which shows an erosion from an already-high level of retirement insecurity–is cause for alarm, says Mr. McInturff. “If you had asked me a year ago whether retirement confidence would further erode from 73% to 88%, I would have said no. That’s a big concern.”

88% in poll say they’re worried about retirement

October 6, 2011

By Christine Dugas

USA Today

Retirement worries continue to grow, and the cloud of pessimism has blanketed all Americans.

Last month, 88% of 800 registered voters said they were concerned about maintaining a comfortable standard of living in retirement, up from 73% last year, says a national poll out Thursday by Americans for Secure Retirement (ASR).

In the past, Americans have differed about what causes the most anxiety. Now, retirement has moved to the forefront, says Celinda Lake, president of Lake Research Partners, a public opinion and political strategy research firm that conducted the poll.

Regardless of age, income, education or political party, the poll found that retirement is at the top of the list.

“This recession has been so terrible and so long that we essentially have flattened consumer confidence across essentially everyone in the country,” says Bill McInturff, founder of Public Opinion Strategies, which also conducted the poll. “It’s not happy data.”

Optimism had been improving, but in September, it plunged to nearly the same low it reached during the financial crisis in 2008, according to a Gallup Poll released this week by Wells Fargo. Its index of investor and retirement sentiment, which showed optimism high with a positive reading of 42% in February, plunged to a negative 45% last month.

In addition to unemployment and market volatility, Americans say that the confrontational nature of politics in Washington has caused them to lose control of their financial future. And their pessimism has risen, because many investors, 65%, say they have little or no control of their savings, the Gallup Poll found.

“People feel like Congress is not listening to them,” says Nancy Hwa, spokeswoman for the Pension Rights Center. “Poll after poll is showing public support for Social Security and a desire not to see it weakened or cut.”

Half of voters say lawmakers should not cut Social Security and Medicare, the ASR poll found. They say that the future of Social Security and the ability to maintain their standard of living in retirement is their biggest concern. When asked what the government should do, 88% wanted tax advantages that will help them save money for retirement.

“As policymakers look for ways to address our national debt, they must find ways to generate peace of mind among Americans as they look toward retirement,” says Shannon Hunt, executive director of ASR.

Delay Taking Social Security, Add Annuity to Survive Retirement, GAO Says

July 1, 2011

By Margaret Collins

Bloomberg

Retirees may have to delay Social Security benefits and buy an annuity to have enough money for retirement, said a U.S. government study.

“The risk that retirees will outlive their assets is a growing challenge,” according to a study from the Government Accountability Office released today. Increased life expectancies and health-care costs coupled with declines in financial markets and home equity over the last few years have “intensified” workers’ concerns about how to manage their savings in retirement, the report said.

Annuities are insurance contracts that can offer a steady stream of income for life. High-income households generally don’t need them, according to experts the GAO consulted. Middle- income households, defined in the study as having a net worth of about $350,000 including their homes, that don’t have traditional pensions should consider using a portion of their savings to purchase an inflation-adjusted annuity, the study said. Lower-income families need to accumulate some cash savings first.

The study recommended that retirees make withdrawals from their investment portfolios at a rate of 3 percent to 6 percent annually. Many also should wait to take Social Security until at least the full retirement age, or 66 for those born from 1943 to 1954.

Tremendous Benefits

The Social Security program lets recipients take reduced payments as early as age 62. It provides full benefits at age 66 and increases payouts for those who wait up to age 70. Almost three-quarters of individuals took payouts before age 65, the GAO said. Monthly benefits received at age 70 are increased by at least 32 percent compared with taking them at 66, according to the study.

“The benefits are tremendous especially if you’re married and the higher wage earner waits until 70,” said Christine Fahlund, senior financial planner at T. Rowe Price Group Inc. The amount retirees receive each year almost doubles from age 62 to age 70 in terms of purchasing power, Fahlund said. As long as retirees live to age 77, delaying payments until age 70 is usually worth it, said Fahlund.

Social Security’s trustees said in May that it wouldn’t be able to pay recipients in full beginning in 2036. The bipartisan U.S. deficit commission has recommended increasing the retirement age to cut costs.

Can’t Cover Expenses

The GAO study was requested by Senator Herb Kohl, a Wisconsin Democrat and chairman of the Senate Special Committee on Aging. The shift by employers from traditional pension plans, which generally guarantee income for life, to 401(k) savings accounts has put more responsibility on Americans for managing their “hard-earned savings” during retirement, Kohl said.

Almost half of those near retirement are predicted to run out of money and won’t be able to cover their basic expenses and uninsured health-care costs, July 2010 data from the Washington- based Employee Benefit Research Institute show. A husband and wife who are both 65 years old have about a 47 percent chance that at least one of them will live until 90, the GAO report said.

An immediate annuity can protect retirees from the risk of outliving their savings, according to the study. For example, a contract purchased for $95,500 by a 66-year-old couple in Florida may provide $4,262 a year until the death of the surviving spouse and include increases for inflation, the report said. Six percent of workers with a 401(k)-type plan opted for an annuity at retirement, said the study.

Resistance to Annuities

Americans have resisted buying annuities for reasons including concern about fees and the desire for control of assets, said David Laibson, an economics professor at Harvard University. Employers have held off on adding them to 401(k) savings plans because they’re worried about litigation and lack clarity on how to proceed, Laibson said.

“The problem right now is interest rates are so low you’re not getting a great return for that chunk of cash you’re handing the insurance company,” said Liz Weston, author of “The 10 Commandents of Money.” That’s why retirees may want to purchase a contract with some of their money now and buy another in the future when rates may be higher, said Weston, who’s based in Los Angeles.

The Labor and Treasury departments are considering ways to encourage lifetime-income options in 401(k)-type plans, including showing the potential income streams from account balances in participants’ statements.

“We anticipate issuing our first set of relevant guidance or rules in this area later this year,” Assistant Secretary of Labor Phyllis Borzi said in an e-mail.

State Street, BlackRock

Asset managers and insurers understand that annuitization may need to be part of the retirement savings system as people live longer and have fewer defined benefit pension plans, said Harvard’s Laibson. “Everyone’s racing to be at the head of that pack when the ice breaks,” he said.

State Street Global Advisors, a unit of State Street Corp. (STT), is planning to announce a 401(k) investment this fall that will include a built-in annuity, said Kristi Mitchem, head of the company’s global defined contribution business, which had $166 billion in plan assets at the end of last year.

BlackRock Inc. (BLK), the world’s biggest money manager, has a target-date fund with a fixed deferred annuity from MetLife Inc. (MET) for 401(k)s that’s available to employers, said Brian Beades, a spokesman for the firm. No companies had adopted it as of June 27, he said.

‘Guinea Pig Employer’

“The thing that will be the icebreaker eventually is that one of these providers is going to come up with a product that finally gets traction,” Laibson said. “There’s huge resistance to being the guinea pig employer that adopts it first.”

Individuals should consult with a fee-only planner before committing to any retirement strategy, said Weston, the author. That’s because many things can go wrong when spending down savings, such as withdrawing funds too fast or tapping pots of money in an incorrect order, she said.

“It’s really not a do-it-yourself project,” Weston said.

Wilkes: Protect the American dream of a secure retirement

June 16, 2011

By Brent Wilkes

Austin American-Statesman

Over the past several decades, many Hispanic Americans and their families have come to this country for a chance to live in a place where freedom means endless possibility. For Americans of all ethnic backgrounds, this means freedom to live where we want, earn a living in the way that we choose and retire with the security of knowing that we can live out our final years with dignity and in happiness. Indeed, it’s the cornerstone of the American dream. Creating a better life for your family and future generations is what we all strive for – and that includes financial prosperity and security.

Those in our Hispanic communities approaching retirement represent the first generation that had a real opportunity to pursue this American dream. Many worked hard to earn a decent living and are now ready to reap the benefits in retirement.

But for many aging Hispanics, like all Americans, realizing this final phase of the American dream has been met with apprehension and widespread concern.

We all know the facts. On average, people are living longer and the cost of living has surpassed what Social Security and savings will provide. Declines in the stock market have devastated many 401(k) plans.

And while these conditions adversely affect all Americans, Hispanics are hit disproportionately hard when it comes to retirement. Although Hispanics work in all sectors of the economy, they are more heavily concentrated in jobs lacking traditional retirement options and typically earn a lower income, affecting their ability to save for retirement. In fact, a study conducted by The Hispanic Institute and Americans for Secure Retirement found only 25.6 percent of Hispanics are covered by pension plans, compared to 42.5 percent of whites and 40 percent of African Americans.

Moreover, a lack of financial literacy among the Latino community means greater disparities in retirement preparation. Hispanics suffer from an absence of information on the retirement savings vehicles available, how they work and why they are important. This is more prevalent among many first generation Hispanics, who choose to keep their savings in their homes and out of banks and retirement plans. Complicating matters more is an often overlooked language barrier.

Exacerbating the problem is the disproportionately large number of Latinos who are small business owners, many of whom rely on selling their business to finance retirement. A lack of knowledge and reluctance to invest in a retirement vehicle that provides a guaranteed lifetime income stream means they are likely to fall short. Further, many do not have access to defined contribution plans, such as 401(k)s.

Latinos also have a long tradition of keeping aging relatives within the family home, which reduces costs but leads to little retirement planning or concern. Today, many Hispanics approaching retirement remain reliant on the younger generation. But as our world becomes more connected, an influx of Latinos are attending college and moving away from home – leaving elders anticipating assistance on their own in retirement.

The predatory lending epidemic in minority communities and the crippling impact of the housing collapse has also adversely affected the ability for Hispanics to cultivate a “nest egg” for retirement.

Considering the cost of living these days, it’s a wonder anyone can save anything at all. However, there are a number of financial products that, in combination, can ease the insecurity one has about retirement. These include pensions, 401(k)s, IRAs, annuities, savings and others.

The American dream is a concept that is uniquely American. But for many in our Hispanic community, it’s been hindered by concern over how and when retirement will become a reality. As a result, government officials, community leaders and citizens should support public policy that makes access to retirement vehicles, particularly those that guarantee lifetime income, more accessible and affordable to all. Such options are key to ensuring a financially secure retirement, and with that a chance to live out the American dream.

Brent A. Wilkes is the National Executive Director of the League of United Latin American Citizens (LULAC), the largest and oldest Hispanic civil rights organization in the United States. The organization is a leading member of Americans for Secure Retirement, a broad-based collection of more than 70 member and affiliate organizations committed to raising awareness of the increasing challenges Americans face in having a financially secure retirement.