More Bad News for Future Retirees

How Bad is the Retirement Crisis?

Bad and getting worse, according to a recent column by David Ignatius who paints a bleak picture about the prospects for people approaching retirement.

Among His Key Points:
--Only about 50% of Americans have an employer-sponsored retirement plan, the rest will rely on Social Security for retirement income;
--A typical boomer worker would receive a monthly benefit of about $2,400 at a retirement age of 66 in 2020;
--Not surprisingly, a National Bureau of Economic Research (NBER) study found that people are not good at doing their own financial planning, which is the key element of creating a viable 401(k) plan. The 401(k) replaced pension plans because they were cheaper and had less legal (fiduciary) responsibility burdens for corporations. The mutual fund industry loves 401(k)s since people cannot tell good funds from bad ones, and expensive ones from cheaper ones. That gets into the entire discussion of 12b-1 fees which all 401(k) participants better become familiar with. (See numerous other posts on the important of 12b-1 fees on this blog.)
--Another study noted by Mr. Ignatius is one from the Congressional Research Service. which found that 53% of households hold at least one retirement account, but unfortunately, the median combined balance was only $45,000.
--But perhaps the worst news was this: The NBER found that, as of 2004, the typical boomer household was holding nearly 50% of its wealth in housing equity. That's the kicker: the decline in financial assets combined with the decline in housing equity has devastated retirement plans for millions of people. And this problem will not be solved soon.

More details about the link between housing wealth and retirement, including the all-important amount of time it will take to recover these hard-dollar losses can be found in my white paper on housing, plus other posts on this blog.

What we now have is a major problem which finds the children of the Greatest Generation becoming the Lost Generation, in terms of their financial well-being.

The current economic crisis has wiped out half a generation of wealth. The investment boom days will not be coming soon, or at all. This accounts for the new frugality stories we are seeing in the major media.

Reasons for This Problem:

After writing about retirement and investing since the mid-1970s, you could say this has been a crisis in the making for about 25 years. The first problem was the decline in pension funds offered by corporations.

Mr. Ignatius notes that about 80% of employees in medium and large companies had pension plans in 1985, according to the U.S. Labor Department. By 2000, defined-benefit recipients fell to just 36%. The decline in pension plans is directly related to the break in the relationships between employers and employees, accompanied by the decline in union memberships. When unions got weaker, pension plans declined.

Among the other problems:
--pension plans because too expensive to run;
--They often could not often meet their actuarial projections;
--They were being looted by corporate raiders, investment managers, consultants and/or their parent corporation.

401(k)s: The Great Experiment
I had a proposed book title about the rise of 401(k)s called "The Great Experiment," but could not find an agent. The idea behind this book was that 401(k)s serve a purpose, but most people would prefer a pension, or some type of annuitized income product (not necessarily an annuity which carries too many hidden fees.)

This annuitized product could be offered by a fraternal organization, church or professional society for its members and span an entire lifetime. It would provide a floor-level income, and possibly housing, but security and peace of mind are worth millions to a participant, but are outside the purview of the financial services providers who focus on flooding the market with redundant mutual funds which often carry fees that are too high versus the level of service and investment returns they deliver.


--Chuck Epstein
cepstein@prodigy.net