News Journal: The coming retirement nightmare is no longer avoidable

Let’s talk political demographics, but zero in on one aspect that hasn’t gotten anywhere near the attention it deserves.
What you can’t have escaped hearing is that the country is becoming more diverse, and that in the not-too-distant future the non-white population will be in the majority. Politically, according to conventional wisdom, this is good news for the Democratic Party and bad news for Republicans. I’m not so sure of that, having seen in my lifetime how both parties have adapted to new political realities to attract voters.
What I am sure of is that, if we don’t make major changes in how we prepare people for retirement, we will face within 20 years a demographic reality that could pit the old against the young and threaten the country’s political stability.
We tend to think of retirement as a personal issue. Poor Joe never did save any money and now he’s faced with living off an inadequate Social Security check. Aunt Joan made some stupid investments and now her nephews will have to help her. Just his, or her family’s, problem, not ours.
When you realize there could be tens of millions more Joes and Joans in a few years, it isn’t just personal anymore. It becomes a national crisis.
Why will there be so many? We have to deal with the intersection of three trends that have radically changed the retirement prospects for the vast majority of Americans. When I was young, virtually every financial adviser told us that retirement income was like a three-legged stool. One leg was the pension we could depend on from the company we worked for. Another was personal savings. The third was Social Security. Put them together, we were told, and we’d be sitting pretty. But for most people that stool doesn’t exist any more.
Corporations that traditionally offered what are called “defined benefit plans” – pensions – have moved away from them. Those plans made them responsible for investing the funds to pay for guaranteed monthly checks to retirees. If the investments didn’t generate a sufficient return, the corporation was on the hook for making up the difference.
Most of them switched to “defined contribution” plans, such as 401(k)s, which set the percentage amount of an employee’s salary contributed to his or her retirement plan but guaranteed nothing beyond that. The risks of investing the money in the plan were now the employee’s. Many of them have made bad investment decisions.
According to the Employee Benefits Research Institute, “the percentage of private-sector workers participating in an employment-based defined benefit plan decreased from 38 percent in 1979 to 15 percent in 2008.” The risk of families not having enough income in retirement to meet basic needs is much higher among retirees without defined benefit programs, says the Institute.
For most Americans, the second leg of the retirement stool is virtually nonexistent. A National Institute on Retirement Security survey shows the median retirement account balance for all working-age households in the U.S. is $3,000. It is $12,000 for families whose wage earners are approaching retirement.
The third leg is Social Security, crucially supported by Medicare. But the inescapable demographic fact is that the ratio of workers to retirees is rapidly declining. A study by the Organization for Economic Co-operation and Development shows that the ratio in the United States was 5.3 to 1 in 1970 and 4.5 to 1 in 2010. It projects that ratio to decline to 2.6 to 1 by 2050.
Other projections are equally alarming. The U.S. Census Bureau forecasts that, while the overall population will increase by 35 percent by 2050, the over-65 population will grow by 100 percent and the over-85 population by 200 percent.
You don’t have to be an actuary to figure out that, with fewer people contributing to the Social Security Trust Fund, and many more taking distributions from it over much longer lifespans, the program will become unsustainable unless we make substantial changes to it. If Social Security and Medicare swallow the federal budget and reach the brink of bankruptcy, I don’t see how we could avoid a political war between the shrinking number of workers (predominately by then nonwhite and perhaps Democrat) and the growing number of retirees (predominately white and perhaps Republican).
Change is still possible. The problems are huge, but manageable if we confront them now.
This is a newspaper column, not a detailed policy paper. But let me make a start on possible solutions with a couple of simple suggestions.
First, we must do far more to encourage or even compel Americans to plan for retirement. The main reason why the Affordable Care Act penalizes people who don’t buy health insurance is because otherwise we all end up paying their medical expenses. The same holds true of retirement. If someone refuses to save for retirement, as a society we will all pick up his or her tab.
So, either through compelling tax incentives, some kind of forced savings plan, or a combination of both, we must encourage even the youngest workers to set aside money for retirement. One-thousand dollars saved in one year becomes $86,438.80 after 30 years of compounded interest at 5 percent. There is absolutely no reason why Americans should not take more responsibility for their own retirement savings.
Second, we cannot allow our elected officials to continue to avoid the political consequences of Social Security and Medicare reform. The hard truth is that those who propose massive cuts never have the political will to follow through, because the programs are overwhelmingly popular with voters. The only way to reach agreement on changes that make the programs sustainable is to raise more revenue for them and also to make changes in benefits. Taking another look at Simpson-Bowles would be a good starting point.
I know Congress is gridlocked. I know the overwhelming majority of Republican legislators have vowed never to raise taxes under any circumstances. But I also know that the longer we wait, the more difficult it will be to avoid an all-too-probable national nightmare.
Ted Kaufman is a former U.S. senator from Delaware.