Americans’ Dream of Sound Retirement in Jeopardy

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Senator Tom Harkin (D-Iowa), Chairman of the U.S. Senate Committee on Health, Education, Labor and Pensions, sees a crisis ahead.

According to Senator Harkin, the ticking time bomb that will explode, causing widespread societal damage, is the “retirement income deficit” – the difference between what people have saved for their retirement and what the experts say they should have been saving. The gap is estimated at $6.6 trillion.

For the past two years, Harkin’s committee has held hearings on the state of retirement security in America. The numbers are sobering:

  • Half of all Americans have less than $10,000 in retirement savings.
  • Only 1 in 5 has what is known as a “defined benefit” plan, which traditionally provided retirees with lifetime income based on their years of service and former salary.
  • In 2010, approximately 6 million Americans over 65 were living in or near poverty, a number that is expected to increase by a third in 2020.

‘Failure of 3-Legged Stool’

In a report released this summer, Harkin attributed the predicament to “the failure of the three-legged stool” – the combination of personal savings, defined benefit pension plans, and Social Security – that is supposed to create a solid basis for the retirement system. While Social Security is still expected to provide a rudimentary level of safety for at least the near future, it was never intended to be a retiree’s sole source of income.

And a strain on the system is imminent. When it was established in 1935, average life expectancy in America was 61.7 years. Today it is over 78.

Another leg of the stool that has been weakened considerably is the defined benefit pension. Over the past 30 years, defined benefit plans have largely been replaced by defined contribution plans, including Individual Retirement Accounts (IRAs), and employer sponsored 401(k)s, neither of which offer a guaranteed return. In addition, fewer than half of the nation’s private sector workers are enrolled in a 401(k), and most of them are insufficiently funded.

To make matters worse, the Great Recession obliterated a good portion of many IRAs and 401(k)s. Not only were a majority of the funds in those accounts tied to the stock market, over the past several years, millions of potential retirees have had to raid their accounts with pre-retirement withdrawals (called “leakages”) to stay afloat after a job loss or medical emergency.

Will Congress Act?

While Harkin’s report provides possible solutions to the looming crisis, including improvements to the Social Security system and the creation of new hybrid pension plans – he calls them “Universal, Secure and Adaptable (USA) Retirement Funds” – it is unlikely that a gridlocked and ideologically diverse Congress will act on his proposals anytime soon.

But for the 76 million “baby boomers” who are heading for retirement now and in the immediate future, time is running out. And are they afraid? Yes they are.

A recent study by the Allianz Life Insurance Company found that 92 percent of respondents agree with Senator Harkin that there is, indeed, a retirement crisis. And here’s an even more chilling statistic: 61 percent of those Americans surveyed said they were more afraid of outliving their money than they were of death.

Perhaps the term “crisis” is much too mild.

How about “apocalypse?”



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