Work longer and save more

[Gob]

The next generation of Americans to hit retirement will be 'shocked' when they find out how little they have to live on.



A former Assistant Secretary of the Treasury warns that the US government is standing idly by. "We need to do something, we're not doing anything," she says.

Professor Alicia Munnell, who is now director of Boston College's Centre for Retirement Research, tells BBC World Service's In the Balance programme that most Americans' voluntary 401(k) pension schemes are seriously under-funded.

In a new book, Falling Short, she says the only answer is to work longer and save more.

But it is part of a bigger global pensions gap between what is needed to fund pensions and what is actually available in private and public pension pots.

America's 401(k) was introduced in 1978 as a tax-efficient way of encouraging individual citizens to save for retirement.

But the average 401(k) fund, to which individuals and employers contribute, stands at $111,000. That's about enough to provide just $400 (£256) a month in retirement.

On the streets of New York, we questioned people on how confident they were about their retirement income.

"I'd say fairly-to-very confident," says Mark, aged 53 from Boston. "I think we've done our part, put as much dough aside as possible.

"In the next five to seven years we should be able to save even more - we'll have to."

However, Prof Munnell says the first retirees who are going to rely solely on their 401(k) are going to be "stunned" at how little that average $111,000 balance provides them in terms of monthly income.

"People are going to be shocked," she says.

Hannah, a 31-year-old New Yorker says: "I think it is getting to the point now in the economy where people my age are going to have to work until they die.

"I don't think social security is going to be able to do anything by the time I retire."

While Prof Munnell says that there will always be some kind of safety net in the US, "we need to put more money in to maintain current benefit levels".

Across the world company and public pension schemes are moving away from 'defined benefit' schemes.

These typically guarantee a pension equivalent to a proportion of a person's final salary, sometimes as high as two-thirds.

Instead they have moved to 'defined contribution' schemes where workers get out what they put in - plus, hopefully, some gains made by investing the funds over the years.

But not enough people are using the schemes.

"We have introduced 'auto-enrol', which is where people are assumed to be putting money into a small personal pension unless they deliberately opt out," says David Willetts, MP, a former shadow pensions minister in the UK.

"It's not compulsory but it's a powerful nudge. The bad news is these provisions are not going to be enough."

And private pension pots don't always catch on.

Monika Queisser, head of pensions policy at the Organisation for Economic Co-operation and Development (OECD) explains how there has been a "reticence in many populations," who believe that "this is like putting your pension in the casino, [it's] too dangerous, there is too much risk.

"And since private pensions also entail administration costs people are looking very closely at returns - and saying they don't think they should be putting their money there."

Prof Munnell says that with the 401(k) scheme only covering half the US workforce she would love to see automatic enrolment.

People should also work longer to put more into their schemes, she says.

"If people put off retirement until they were 70, then they would be in good shape."

So, faced with a reluctance to save through private pensions, most governments outside the US are getting workers to save for longer instead and imposing later retirement ages.

In countries such as China, Italy, Greece and Germany pension ages have been raised, although the pill has been sugared slightly by pegging retirement to the length of time workers have paid into a fund, rather than their actual age.

The bottom line is: People have to pay more.

The pension problem is particularly acute in countries where there has been a massive decline in fertility rates and simultaneous rises in life expectancy.

David Willetts describes the phenomenon as being like a "python trying to swallow a pig," as the large numbers of one generation reach working age first and then retirement age - while the smaller numbers of the succeeding generation struggle to pay for them.

South Korea is a good example of this phenomenon, says the OECD's Monika Queisser. It is, she says, "the OECD's second youngest country but in a few decades will be the oldest country.

"Korea... doesn't have a long standing pension system. And we have a long standing problem of old age poverty there already, and it's not going to get any better."

There are other, more informal ways in which individuals will try to pay their way.

Prof Munnell suggests that people could also use equity in their homes to finance their pensions.

"For most middle class people their house is their major asset, and to date people have not wanted to tap into their home equity at all.

"They want to leave their house to their children. Given the situation now that is no longer going to be possible."

However, this will not always work, warns David Willetts.

"You can 'eat your house' but 'eating your house' probably won't deliver quite as much income as people hope," he says.

"I think we do have this problem with people imagining they are going to have a better income than their current savings would predict."

But it may soon be in the interests of employers to give more generous pensions, he says.

"We are all going to be working longer and there will come a point when the company wants to reorganise itself and create opportunities for younger employees.
"It will try to get its 70-year-old employees to leave, and will find that to get them to leave it will have to give them a nice fat departure payment."

So, once you have finally made it out the company door, how much do you actually need for your retirement?

In the UK, Tom McPhail, head of pensions research at Hargreaves Lansdown, explains how much would be needed to provide a decent income for an average wage earner.

"Let's take someone in the UK with a typical earnings of £30,000 ($50,000) a year. They may want to look for a pension of £20,000 a year.

"In order to do that they are going to have to build up a pot of money of £300,000, roughly $500,000. In order to do that someone starting saving in their twenties is going to to need to save 12% of their income.

"The problem is many people have missed that boat. They are in their thirties and they still haven't started saving, so the saving rate for them is going to have to be 15-20% of their income."

[TPFKA@W]

My astrological sign is the grasshopper.

[liberty]

I fear it is true and we have one man to blame for it and his name is not George Bush. If we had not been so slavish to his will in the beginning of his presidency perhaps it would not be necessary to take such sever measures now or in the near future. The debt is now better than eighteen trillion dollar. Can any nation continue to borrow one out of ever three dollars it spends?

I believe that severe measures must be taken, but they should not fall equally on all. We should follow certain principals: All financial obligation should be met, that would include monies borrowed, pensions and social security.
US citizen would have priority in all things. For example, no tuition assistance for non citizens and no foreign aid.

The most needed programs would be protected, such as welfare, SSI, Medicaid, Medicare, national defense and border patrol. Things that could be wiped out would like all support for the arts and national parks.

Everyone would pay more taxes including the poor, no earned income tax credit, but the wealthy would pay a lot more.

[BoSoxGal]

It's the corporations who need to be coughing up a great deal more taxes. And not being allowed to shelter offshore when the majority of operations are here in the USA.

[liberty]

It's the corporations who need to be coughing up a great deal more taxes. And not being allowed to shelter offshore when the majority of operations are here in the USA.

I agree on both points, but alone it will not be enough and without some way to impose financial discipline on congress it want matter how much tax is paid.

[oldr_n_wsr]

While I have sympathy for many who cannot put money aside for their retirements, I also see many who must have the new car every three years, the latest cell phone.... but don't save for their future either.

I have lived frugally for most of my life and have put a lot away into 401K's and IRA's. We struggled but I always "paid myself first" even if it was only $5. We did without for long stretches but it will pay off. I should be close to $1mil in retirement funds in about 10 years (I will be 66) which is what I have been advised to have on hand for retirement here in the North East.

Maybe we need ot bring back the poor houses.

[wesw]

we sure have spent a lot of money on wars, and searching for totally destroyed planes full of already dead people at the bottom of the sea, somewhere, and on many un necessary things.

I don t get the tax tax tax drumbeat.

frugal frugal frugal sounds better to me.

[TPFKA@W]

Part of the problem is psychological. People in general have trouble relating to and identifying with their future selves. We are quite incapable of looking into the future and giving any more of a rat's patoot for our future selves than we would for a random stranger. Many are more pragmatic, but most don't care about anything but the person they are in the moment.

[Big RR]

Wes--sure we have spent money on frivolous and unnecessary things, but a good deal of the money we spend is on services people need, from public health to social security, highways to national parks, etc. Even with our military spending, a good portion of it of it is to keep our standing armed services more than active war fighting. Certainly we should tighten out belts, but when a good portion of our budget goes to debt service, we don't have a lot of room. Even if we got rid of most of the programs many would consider "frivolous", getting out of debt will cost a lot more and require tax increases as well. More taxes and less services is not the slogan of any campaign likely to be popular, and so we will continue as we are until things reach a breaking point.

I recall when I was very young running up some credit card debt that took me a year to get out of; putting most of my discretionary income to pay down the cards was not easy or comfortable, but it worked. Somehow, I doubt we could convince most of the country to support a similar federal plan.

[wesw]

don t get me wrong. I m not against gov t. not a libertarian or anything, I just think there are some expenses which benefit very few if anyone.

one example: I think we had to go to Afghanistan, and could have done some good there, but I can see little benefit to the Iraq fiasco that followed.

[Big RR]

I agree with you on Iraq, and disagree on Afghanistan (IMHO there were a lot of other things short of combat that we could have done), but remember at the time even congress backed W (with bipartisan support, even among his critics) and the ventures were wildly popular (people daring to even question them were denounced as unpatriotic); sadly, there are probably few ways to prevent similar occurrences in the future.

[dgs49]

Social Security ain't going anywhere, and for the middle class, it will perpetually be indexed to inflation. 401k's supplement ss, and need not fund retirement entirely. In addition, we boomers have mountains of wealth that will be transferred to our kids in due time. But some small percentage of the population will be near destitute, as always. What's new?