Credit: Shutterstock photoSpecial Report:Retirement Planning 2015
W ork is a four-letter word that many Americans of retirement age don't want to hear. Like it or not, they're hearing it. "I think we have seen the golden age of retirement come and go," said Alicia Munnell, director of the Center for Retirement Research at Boston College.
The idea of retiring at 62 or earlier isn't a realistic choice for most people, Munnell told IBD in an interview.
"Working longer is a notion that we are going to have to get used to," she said.
A professor at Boston College, Munnell served as assistant secretary of the Treasury Department for economic policy in the Clinton administration and on the Council of Economic Advisers, also under Clinton. She is co-author of "Falling Short: The Coming Retirement Crisis and What to Do About It."
Munnell is a firm believer in the Social Security system despite its projected troubles.
Unless something changes, government actuaries expect that the Social Security trust fund will be exhausted in 2033. At that point, the system will be able to pay only 75% of benefits.
Pay As You Go
The Social Security System operates on a pay-as-you-go basis. Taxes currently paid into the system are being used to pay current retirees. In 1983, a trust fund was created as a result of legislation to cover the baby boomer generation's retirement benefits. However, the problem is more than a one-generation challenge. After the boomers die, the actuaries still expect problems balancing taxes and benefits.
At least, that appears to be the general consensus. Dissent, though, exists -- challenging the consensus view from several angles.
One camp argues that there is no crisis. The trust fund established in 1983 was in response to the boomer population and is therefore designed to be depleted. This camp also is skeptical of the government actuaries' projections. They say U.S. economic growth could prove stronger than what is currently expected, meaning the day of reckoning may never come.
The other camp argues that Social Security is doomed to fail because the ratio of workers to retirees has fallen sharply. These critics contend that Social Security is a bad deal.
A privatized system -- with individually owned accounts -- would pay better benefits, they say.
Munnell disagrees with the critics. Her tone is emphatic, showing no doubts.
"I'm a strong believer in the Social Security actuaries," she said. "They show that the trust fund will be exhausted in the early 2030s." She added that if we don't want benefit cuts, then we need to do something before that.
She also believes that doing something shouldn't mean junking Social Security. "I come down very strongly on maintaining the system," she said.
The realities surrounding retirement reflect broader changes within U.S. society and the economy.
Once retirees had three sources of income: a company pension, individual savings and the Social Security checks. With the three streams of cash, it was easy to drop out of the work world at the age of 62.
A 'Roll Your Own' System
Now the company pension is mostly history, with pensions generally found only in government jobs. Today's retirees have savings in a 401(k) or individual retirement account and a Social Security check, and good luck making that finance a comfortable retirement.
After the 1990s, Munnell says the U.S. transitioned to a "roll your own" system.
This might have worked, if people had saved enough.
However, according to data compiled in 2013, the average senior has $111,000 in their 401(k) account. "That's just not very much money," Munnell said.
To encourage more savings, Munnell favors automatic enrollment in 401(k)s with a voluntary option to opt out.
Inertia is a factor in human behavior. Some people have a bias toward doing nothing. This, though, can be made to work in favor of saving, Munnell says. While some people won't exercise an option to enroll in a 401(k), they won't opt out if they are automatically enrolled.
Research shows automatic enrolling with a choice to opt out has "a big effect," Munnell said. "They tend to stay."
If people are preparing poorly or not at all for retirement, then the same could be said for Congress.
Congress has known about the Social Security controversy for years. By doing nothing, they let the boomers skate on paying more taxes to fund it, Munnell said.
"There is a real tendency of putting off doing anything on it," said Munnell. "Congress needs to act."
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
