Unless timely action is taken, many older Americans risk not having sufficient means for a secure and dignified retirement, according to a new report released Feb. 6 by the U.S. Government Accountability Office (GAO).
It has been nearly 40 years since a federal commission has conducted a comprehensive evaluation of the nation’s approach to financing retirement, the GAO points out.
It adds that without a more comprehensive re-evaluation of the challenges across the three main pillars (Social Security, employer-sponsored plans and individual savings) supporting the U.S. retirement system, it may be difficult to identify effective, enduring solutions.
The GAO says fundamental changes over the past 40 years have led to various risks and challenges for all three pillars.
For example, current projections indicate that by 2034, the Old-Age and Survivors trust fund for Social Security’s retirement program—the first pillar—will only be sufficient to pay 77 percent of scheduled benefits, due in part to the aging of the population.
Other federal government retirement-related programs also face financial uncertainty. The Pension Benefit Guaranty Corporation, which insures the pension benefits of most private sector defined benefit plans, estimates a greater than 90 percent chance the multiemployer program will be insolvent by 2025.
Meanwhile, employer-sponsored plans—the second pillar—have experienced a shift from traditional defined benefit (DB) plans that generally provide set monthly payments for life, to defined contribution (DC) account-based plans, like 401(k)s.
Those DC plans provide greater portability of savings that can be better suited to the needs of a more mobile workforce, but also require individuals to assume more responsibility for planning and managing their savings.
While DC plans can provide meaningful retirement security for many, especially higher earners, the GAO report says lower earners appear more prone to having little or no savings in their DC accounts.
Further, individuals’ savings—the third pillar—may be constrained by economic trends such as low real wage growth and growing out-of-pocket health care costs. Combined with increased longevity, these challenges can put individuals at greater risk of outliving their savings and fiscal pressures on government programs will likely grow.
Congress generally has sought to address retirement-related issues in an incremental fashion.
Also, no one agency is responsible for overseeing the U.S. retirement system in its entirety, so there is no obvious federal agency to lead a comprehensive reform effort.
The GAO concludes strengthening the U.S. retirement system to be more accessible and financially sound is important to ensuring that all Americans can retire with dignity and security, and to managing the fiscal exposures to the federal government from various retirement-related programs.
Currently, the U.S. retirement system, and many of the workers and retirees it was designed to help, face major challenges.
The GAO’s testimony before the U.S. Senate Special Committee on Aging, from Gene L. Dodaro, Comptroller General of the United States, discusses (1) the fiscal risks and other challenges facing the U.S. retirement system, and (2) the need to re-evaluate the nation’s approach to financing retirement. It is based on a 2017 report, GAO-18-111SP, on the nation’s retirement system.
What GAO recommends
In the 2017 report, GAO recommended that Congress should consider establishing an independent commission to comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve how the nation promotes retirement security.
A panel of 15 retirement experts convened by GAO in November 2016 agreed that there is a need for a new comprehensive evaluation of the U.S. retirement system. They noted weaknesses in the current system’s ability to help ensure that all individuals can provide for a secure retirement.
They also discussed the burden that the current system’s complexity places on individuals, employers, and federal government.
Although there was agreement among many panelists that a more comprehensive approach would be needed to provide a secure retirement for future retirees, opinions varied on the types of solutions needed.
For example, some panelists suggested that a new government-sponsored savings vehicle should be created, while others supported modifying the existing employer-sponsored system to make any needed changes.
In addition, several panelists commented on how the current system can be overly complex and confusing for employers, especially small employers.
They discussed how the current private sector system poses financial and litigation risk for employers, especially with respect to investment decisions, fiduciary duty, and fees.
One panelist suggested that DC plan sponsors may welcome the federal government providing more guidance on the types of investments that would be regarded as prudent and safe as a way to reduce their litigation risk.
In its 2017 report, the GAO suggested five policy goals for a reformed U.S. retirement system as a starting point for discussion: (1) promoting universal access to a retirement savings vehicle, (2) ensuring greater retirement income adequacy, (3) improving options for the spend down phase of retirement, (4) reducing complexity and risk for both participants and plan sponsors, and (5) stabilizing fiscal exposure to the federal government.
10 notable nuggets from the report
- In 2016, among households age 65 and over, the bottom 20 percent, ranked by income, relied on Social Security retirement benefits for 81 percent of their income, on average.
- Since 2010, Social Security has been paying out more in benefits than it received and has relied on interest income to help cover expenses. For 2018, the cost of the program was expected to exceed total income by $2 billion and, as a result, asset reserves were expected to decline. If no changes are made, current projections indicate that by 2034, the retirement program trust fund will only be sufficient to pay 77 percent of scheduled benefits.
- The number of baby boomers turning 65 is projected to increase from an average of about 10,200 per day in 2018 to more than 11,000 per day in 2029.
- While there are currently 2.8 workers contributing to Social Security per beneficiary, this ratio is expected to decline to 2.2 by 2035, and to 2.0 by 2095.
- PBGC’s multiemployer plan is projected to become insolvent in approximately 6 years, and if that happens, participants in the insolvent multiemployer plans who rely on PBGC guarantees will receive only a small fraction of current statutory guarantees. According to PBGC, most participants would receive less than $2,000 a year, and in many cases less.
- Bureau of Labor Statistics data indicate that about one-third of private sector workers in the U.S. did not have access to an employer-sponsored retirement plan in 2016, and about two-thirds did. Of those with access, the vast majority (about 76 percent) participated in the plan, either because they were automatically enrolled by the plan sponsor or they chose to participate.
- According to SCF data, households in the top 10 percent of income level appeared to be substantially better prepared for retirement than most others, with an average account balance of more than $720,000 in 2016. In contrast, households with below average income, in the second quintile, had an average account balance of about $47,000.
- Over the past several decades, the personal saving rate—calculated as the proportion of disposable income that households save—has trended steeply downward, from a high of 14.2 percent in 1975, to a low of 3.1 percent in 2005, before recovering somewhat to 6.8 percent in 2018.
- CMS projections estimate that the annual growth rate of out-of-pocket health care spending for the U.S. population, per capita, will increase from 3.0 percent in 2018 to about 3.8 percent by 2026.
- A man turning 65 in 2030 is expected to live to age 85.0, on average, an additional 5.3 years compared to a man who turned 65 in 1980, who was only expected to live to age 79.7, on average. A woman turning 65 in 2030 is expected to live to age 87.2, on average, an additional 3.5 years compared to a woman who turned 65 in 1980, who was only expected to live to age 83.8, on average.