By Nicholas Merckling
Retiring the Retirement Crisis
As a Millennial, “retirement” is a fuzzy, far-off concept. Somewhere between paying off my student debt and dying, I’ve been told there is a time in one’s life where you stop working and, conceivably, spend your later years enjoying the life that you have built for yourself. Having worked in the investment world, however, I know that the way retirement looks may be drastically different by the time I’m ready to retire. With demographic and market shifts changing the way we prepare for later years, our nation may soon face a crisis in which the current system is incapable of affording each elderly American a quality standard of living. Individuals, the private sector, and our government must take cooperative action to ensure that we do not face this issue.
At face value, the pressures on our retirement system are the result of positive events. The number of retired Americans continues to increase, with over 44 million Americans receiving Social Security in 2016, as compared to nearly 32 million in 2000, according to the Social Security Administration. Improvements in technology and healthcare are increasing lifespans, too: Americans who reached the age of 65 in 2016 can expect to live for an additional 18 years, as compared to 16 years for those turning 65 in 2000, according to the OECD.
The bad news is that the system we use to prepare for retirement hasn’t kept pace with these advances. Traditionally, the American retirement system has been built upon three pillars: Social Security, pensions, and private savings and investments. Gone are the days when Social Security payments could cover a household’s expenses: today the average household can only expect $1,369 in monthly benefits. Social Security alone cannot keep Americans above the poverty line, let alone cover unforeseen expenses or keep up with basic increasing costs. Additionally, many worry that Social Security in its current form will be unsustainable for future generations.
The other two pillars are also shifting: defined benefit plans (i.e., a pension plan that an employer is responsible for) are dwindling in favor of defined contribution plans (401(k)s that an employee is responsible for contributing to and managing). The very notion of planning for retirement has changed — Americans need to save more to accompany their longer life spans, with fewer guarantees. These changes are real, and they are scary, especially for those who are not confident in their financial planning skills.
Both the private sector and government have attempted to ameliorate bad effects of these changes. Innovations such as automatic enrollment and target date funds, as well as drastically cheaper financial planning advice, have been helpful. However, these changes are pieces of a broader puzzle; none of these act as a single solution to the problem of solving the retirement crisis.
This puzzle-piece approach is one indication that the United States lacks a cohesive retirement system that incorporates all actors in the private and public sectors, and that keeps the best interests of American investors at heart. Partnerships like these have been implemented in several nations. Australia’s superannuation system, for example, legally requires that every citizen invest part of their salary in an investment fund, into which employers are required to contribute 10% of the employee’s salary, on top of guaranteed payments by the Australian government similar to Social Security. In turn, Australians feel more comfortable in their financial readiness for retirement, with National Australia Bank’s Consumer Behavior Survey showing 53% of Australians reporting low anxiety regarding their preparation for retirement. Crafting a similar approach based upon cooperation in the United States would help to ensure that future generations are prepared for their retirement years with a comprehensive, user-friendly system.
Millennials cannot afford – literally – to remain on the sidelines when it comes to retirement readiness in the United States. While retirement may be decades in the future, steps must be taken now to ensure that a comprehensive system is in place well before we are ready to exit the workforce. This can only be achieved by encouraging greater cooperation between the government, the private sector, and individuals, similar to the collaboration present in the Australian retirement system. Inaction is simply not an option.