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June 5, 2015

Old and Broke In America

  Rare

If you are an older American headed toward retirement, there’s a good chance you will be a poor American, according to a new government survey. And the tragedy is that we can fix the problem of old and broke in America, if it weren’t for entrenched, status quo forces.

The Government Accountability Office (GAO) has just released a report analyzing the household savings of those approaching retirement. It’s not a pretty picture.

Using 2013 Census Bureau data, the GAO found that 52 percent of households aged 55 and older have no—zero, nada—retirement savings in an IRA or a defined contribution plan like a 401(k).

If we look at those between the ages of 55 and 64—that is, getting close to retirement, or just did—nearly 70 percent have less than $100,000 in savings.

Among those households that do having savings, the median saved is about $109,000. The GAO says that would buy an inflation-protected annuity that would pay about $405 a month beginning at age 65.

Social Security is the largest source of income for the majority of retired workers. The Social Security Administration says that the average current retired worker receives about $1,333 a month. And the average spouse of a retired worker gets about $677, or about $2,000 a month for a senior couple—that is, if Social Security holds out.

The Social Security trustees warn the Social Security Trust Fund is rapidly declining and will only be able to cover full benefits for another 20 years or so, at which time, if Congress doesn’t step in, retirement benefits will be cut by about 25 percent, which drops the average couple’s benefits in today’s dollars to about $18,000.

The current federal poverty level for a two-person household is $15,930. So, while millions of seniors aren’t technically poor, they’re pretty close to it—even with that $405 per month annuity.

Of course, it’s not all bad. The Department of Labor claims that there are about 40 million workers currently participating in a defined benefit plan. But the private sector has been moving away from defined benefit plans for years, and many of those that remain are facing serious financial trouble, especially for state and local government workers, and may not survive.

Better yet, millions of seniors or the near-elderly have set aside significant funds—9 percent of those between 55 and 64 have $500,000 or more.

But what if we changed Social Security so that the large majority of retirees had a half a million dollars or more, not just 9 percent?

And we can: By letting those just entering the workforce redirect part of their Social Security payroll tax into a personal retirement account.

Just consider: The median annual household income is about $53,000. That family is paying about $6,600 in Social Security payroll taxes (12.4 percent, split between employer and employee).

Suppose that family were allowed to put, say, 60 percent, about $4,000, of that tax into a personal retirement account that was automatically invested in an S&P 500 index fund. (The remaining 40 percent would cover other Social Security costs.)

The annualized return for the S&P 500 (including dividends) since 1980 is nearly 12 percent. A person just entering the workforce making the median income—and for simplicity’s sake we’ll say the median income stayed the same for the next 40 years—would have about $3.8 million to retire on, based on the long-term S&P 500 returns.

If we calculated a 9 percent annual growth rate, this family would be able to retire with about $1.5 million in the bank—not counting any other savings or pensions. Even a 5 percent return nets more than $500,000.

The point is that we can easily fix the problem of old and broke in America. The current system costs workers a lot of money and they could still end up retired and poor. But it will take politicians willing to break with the current Social Security model.

There would be challenges to slowly transitioning to a system of personal accounts where you own the assets; but the financial rewards, both to workers and the country, would be well worth it. And within a generation the narrative would change from old and broke to old and rich in America.


 

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