Your clients’ retirement savings, for the most part, are in big trouble according to a recent Government Accountability Office (GAO) report which makes clear that 40 years of societal changes have wreaked nothing but havoc on retirement savings and the ability to build those savings.
The report, “The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security” states a variety of reasons for the dismal scenario:
Defined benefit plans, better known as pensions, are far less common than they once were. Instead, more employers have shifted retirement planning to 401(k) plans (defined contribution plans) that put employees more in control of their savings. The thing is, many people aren’t especially savvy at doing that and the GAO report indicates that people just aren’t saving enough for retirement. Further, debt and health care costs have increased.
According to a GAO analysis of retirement plans from 1975 to 2015, there were close to 200,000 pension plans nationwide in the 1980s. In 2015, there were less than 50,000.
But 401(k)s mushroomed from about 300,000 in 1975 to more than 700,000 in 2000. The plans decreased to roughly 694,000 in 2015 but that’s still a huge amount compared to pensions.
Besides the changes in these two types of retirement planning, the GAO indicates that Social Security will likely be unable to pay full benefits beginning in 2035. “Long-term fiscal projections show that, absent fiscal policy changes, the federal government is on an unsustainable path, largely due to spending increases driven by the growing gap between federal revenues and health care programs, demographic changes and net interest on public debt,” the GAO states in its report.
Social Security never was intended to be the sole source of retirement income, but it has become just that, the GAO states. As of 2015, about a third (34 percent) of U.S. households 65 or older received at least 90 percent of their income from Social Security. Yet financial advisers believe that most retirees will need at least 70 percent of their pre-retirement income to live comfortably.
Here’s the timeline for depletion of federal programs:
- 2025: Multi-Employer Insurance Program trust fund
- 2028: Social Security Disability Insurance trust fund
- 2029: Medicare Hospital Insurance trust fund
- 2035: Social Security Old-Age and Survivors Insurance trust fund
Yet, people just aren’t saving enough money for retirement outside of employer-based programs and that could increase how much they have to rely on federal and state programs, the GAO states.
Consider this: Data from the Centers for Medicare & Medicaid Services (CMS) indicates that out-of-pocket health care spending grew faster than inflation from 2002 to 2012. CMS estimates that the annual growth rate for that spending will grow even more from 2020 to 2025.
Though everyone will pay more, people who are 65 or older will pay the most – almost 3.5 times higher compared to people younger than 65 in 2012.
For workers without an employer-sponsored retirement plan, things are even tougher. The annual contribution limits to IRAs are lower than for employer plans and fees are higher.
So what to do? The GAO report indicates that a new comprehensive evaluation is in order. Appointed by Congress, an independent commission should recommend key policy goals and how the U.S. promotes retirement security.
“We suggest that such a commission includes representatives from government agencies, employers, the financial services industry, unions, participant advocates, and researchers, among others, to help inform policymakers on changes needed to improve the current U.S. retirement system,” the GAO report states.
So what are you doing to help ensure your individual clients have a plan for their retirement? What are their concerns?
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.