A struggle lies ahead for most of us

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The Plain Dealer Sunday, June 18, 2006
RETIRE AT YOUR OWN RISK
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RETIRE AT YOUR OWN RISK
A struggle lies ahead for most of us
Teresa Dixon Murray
Plain Dealer Reporter
T
his is the most difficult
story I’ve ever had to
write.
It’s ugly, and it affects
everyone I know and the world
as I know it.
This nation faces a massive
economic crisis — indeed a social
catastrophe — that some experts
even say will be among the worst
the country’s ever seen.
Much has been said about how
the looming retirement of 76 million baby boomers will stampede
Social Security, which is expected
to start running out of money in
11 years. We almost joke about
senior citizens eating dog food.
Maybe that joking is the only way
we can keep from crying.
But Social Security is just one
piece of a cruel puzzle. It’s not
until you look at the big picture
that you realize how dire the crisis is. The pieces won’t fit together without a lot of pain and
anguish for a lot of people.
If you think it’s time to stop
reading, this is a wake-up call
you can’t afford to ignore.
By nearly every expert’s forecast, half to three-fourths of the
next few generations of retirees
will live on the edge financially
or in desolate poverty.
Today’s children and most of
today’s workers almost certainly
will pay steeply higher taxes to
cover promises to retirees. Taxes
will rise while workers are told
they need to save more and work
into their 70s to avoid the same
plight.
“The cupboard is bare compared to what we’ve dreamed of,”
said Phil DeMuth, a California
investment adviser whose firm
has $45 million under management. He’s co-written books with
commentator Ben Stein. His
newest is “Yes, You Can Still Retire Comfortably: The BabyBoom Retirement Crisis and
How to Beat It.” But beating the
crisis, he says, involves choices
such as delaying retirement and
tapping home equity.
“It’s a terrifying problem,” DeMuth said. “Politicians don’t
want you to think about it. Your
employer doesn’t want you to
worry about it. . . . It’s very depressing, and it’s not going to get
any better.”
By most estimates, about a
fourth of future retirees will be in
good financial shape. They have
significant savings, insurance,
pensions, good health and are
married and own their home,
said John Rother, director of policy and strategy for the AARP in
Washington.
Another fourth face an impossible future because of little savings, no home, no insurance and
no spouse, he said.
The remaining half will be “on
the edge,” he said. Best case:
Many will struggle. Worst: Most
will collapse financially.
Study after study shows
roughly the same bleak outlook.
An analysis this month by the
Center for Retirement Research
at Boston College found that, under the best assumptions, 43 percent of households will have
trouble making it in retirement.
That assumed people worked until at least 65 and lived partly off
the value of their homes. And it
didn’t add health-care costs,
which researchers said were too
unpredictable to even estimate.
“Unless Americans change
their ways, many will struggle in
retirement,” said Alicia Munnell,
director of the study.
Cleveland certified financial
planner Ken Robinson is just as
grim. “We need to get ready for
parts of America to turn Third
World and where you need your
extended family to support you
financially,” Robinson said. “I
hope I’m wrong, but I don’t see
us on a course that protects us
from that.”
Survival for Paula Tinsley, 53,
of Maple Heights, will mean delaying retirement until she’s
about 80. That’s when she’ll pay
off the house she and her
70-year-old husband bought
three years ago.
Tinsley, a manager of a Shell
convenience store in Willoughby,
has a small 401(k) and small
pension. “If I had it to do all over
again, I would have started saving earlier,” she said. She’ll depend heavily on Social Security
— which is the most prominent
part of this crisis.
“It’s a terrifying problem. Politicians
don’t want you to think about it.
Your employer doesn’t want you to worry
about it. . . . It’s very depressing, and it’s
not going to get any better.”
Phil DeMuth,
Systems starting
to run dry
retirement and investment author
Social Security is on course to
start paying out more than it
takes in by 2017. The money
built up before then will be gone
in 34 years, just about the time
today’s 30-somethings start
reaching in their mailboxes for a
benefits check.
Even now, Social Security pays
an average of only about $12,000
a year to a retiree.
The Medicare system that retirees rely on for health coverage
starts to run out of money this
year. It’ll go broke in 12 years.
“We may have already committed more physical resources
to the Baby Boom generation in
its retirement years than our
economy has the capacity to deliver,“ Alan Greenspan said last
year, when he was chairman of
the Federal Reserve.
Pension plans, which about 40
percent of today’s retirees rely
on, are crumbling. While about
the same percentage of people
are covered by some kind of
work-related retirement plan today as in years past, the type of
coverage has changed. Only 25
years ago, 80 percent of privatesector workers in retirement
plans had pensions. Today, that’s
only one in three, with most of
the rest instead given the chance
to save in an individual investment plan.
Even workers who have pen-
sions are at risk, given how many
plans have run into trouble.
Personal savings will be even
more important to future retirees, but last year Americans
spent more than they brought in
— meaning no savings — for the
first time since the Great Depression.
A third of all workers aren’t
saving a dime toward retirement,
according to the Employee Benefit Research Institute. Most who
are saving don’t have nearly
enough. Among workers 55 and
older today, 52 percent have less
than $50,000 saved for retirement, the institute found. (You
need $350,000 to $400,000 at retirement to have an income of
$30,000 a year.)
Only a fourth of workers 55
and older have $250,000 or
more. If that much money
sounds good, stomach this: It’s
projected that a 65-year-old
needs $210,000 in savings just to
pay for out-of-pocket medical expenses and supplemental insurance.
Maybe dying early doesn’t
sound bad about now.
But wait: The typical man who
makes it to 65 has a 50 percent
chance of living until age 85. A
65-year-old woman has the same
chance of living until age 88.
That’s 20-plus years of a life
that’s far from the warm-andfuzzy images of spending our
golden years traveling and playing golf.
The game plan for many is to
work into their 70s or 80s. Those
will be the lucky ones. About 40
percent of people retire involuntarily because of illness or layoff.
Even working until age 67 was
difficult for Robert Newton of
Cleveland Heights. He’s in good
health, but he still felt as if he
was dragging himself to a fulltime job servicing postage meters
for Pitney-Bowes. An engineer
with a college degree, he was laid
off about eight times over a career that spanned TRW, Cleveland Steel Container and Bailey
Controls. He had only seven
years with Pitney-Bowes, meaning a tiny pension, and he didn’t
have enough years at the other
employers to qualify for pensions
there.
He kept working until two
years ago, when he could pay off
his home and draw a bigger Social Security check.
“My body was telling me, ‘It’s
time.’ I was pretty worn out at
67,” he said. “A lot of people who
plan to keep working are going to
find their body isn’t going to accept that.”
The widower gets about
$23,000 a year from Social Secu-
rity, his pension and an annuity
combined. “I can live on that.
That’s enough.”
Social Security is 40 percent of
the income of today’s retirees
and the only income for one in
five retirees today.
Five factors
brought us here
How did we get to this horrifying point? It’s the convergence of
five phenomena — all of which
were preventable or, at least,
foreseeable:
R The flood of baby boomers and
a slowing birth rate since. Between now and 2030, the number of people over 65 will double.
The number of new workers paying into Social Security and
Medicare will increase only 20
percent.
R Longer life spans. Life expectancy is about 13 years longer for
children today than when current retirees were born.
R A stock market that lost value
for three straight years — also a
first since the Great Depression.
R Procrastination by political
leaders. Washington saw the
warning signs in the 1970s and
1980s, but passing the buck has
always seemed easier than real
solutions.
R Procrastination by individuals.
Experts have begged us to spend
less and save more. But the median retirement account holds
$10,000 — barely more than the
average household has in credit
card debt.
Younger workers
to pay the price
Between 1946 and 1964, the
number of U.S. births soared. Instead of two children for every
woman on average, there were
three or four.
Births declined rapidly after
1964, when birth control pills became widely available and
women entered the work force in
greater numbers.
Since then, the birth rate has
been about half as much as at the
height of the baby boom. That
means fewer new workers to support Social Security for the growing number of retirees.
Meanwhile, old people are living to be really old.
The age for receiving full benefits like Social Security and Medicare had always been 65. That
was no big deal at first, because
until 1950 the average life expectancy for male babies was less
than that.
Now life expectancy is 75 years
for men and more than 80 for
women. Credit medical advances
as well as healthier lifestyles.
DeMuth, the investment ad-
viser, said the decline of smoking
is one of the biggest causes of the
retirement imbalance. In 1935,
nearly two out of three adults
smoked. Now, it’s one in five.
All this adds up to far more
people living in retirement. In
1950, Social Security had 16
workers paying in for every retiree. Now, the ratio is three
workers for every retiree. By
2030, it will be 2-to-1.
Unless benefits are cut
sharply, which isn’t expected,
workers will lose a bigger chunk
of their paycheck to support retirees, said Matt Moore of the
National Center for Policy Analysis. “People in their 20s and 30s
will be most affected.”
Social Security always has collected more each year than it
pays out. But the government
borrows from that surplus to pay
for other things. When Social Security starts paying out more
than it collects, it will need
money back. The government
will have to raise taxes or borrow
more. Or it could cut benefits.
To fix the problem now
through the bluntest methods,
we would have to either raise Social Security taxes 16 percent or
cut benefits 13 percent, said Bob
Rosenblatt, a former journalist
who focused on retirement issues
and is now with the National
Academy of Social Insurance in
Virginia, a nonpartisan group of
more than 700 experts in government benefit programs.
The longer we wait, the more
drastic the fix.
Most experts believe Social Security will get fixed, no matter
how bitter the medicine. If you
look really hard, you can find a
couple of other rays of hope:
R For retirement-age boomers
who want to keep working, there
should be jobs available. Today,
there are more people who want
to work than there are jobs. By
2014, it’ll be the other way
around, the government says.
R Younger workers save more
than their parents did at the
same age.
R More people overall are saving
money than a decade ago.
Among workers of all ages, the
percentage who have something
saved for retirement has increased from 57 percent in 1994
to 70 percent in 2006.
Even the savers
get caught short
Fat lot of good that saving did
for some people. Just when the
first baby boomers were within
10 years of retirement, the stock
market tanked. Not only did
most investors suffer 30 percent
to 50 percent declines (which
they haven’t fully recovered
since), but economists and financial planners were spurred to rethink projections.
For stock investments, they
used to forecast annual returns
of 10 percent to 12 percent a
year. Now, most project 7 percent to 9 percent, said economist
LeRoy Brooks of John Carroll
University. “That’s a huge difference,” he said.
This is bad for pensions and
individual investments.
Brooks calculates that a
30-year-old could invest $840 a
year at 12 percent and have an
income of $50,000 a year in retirement. But if the return is only
8 percent, she’d have to invest
$2,700 a year to get that same income.
The same principles apply to
pensions, so many employers are
caught without nearly enough
money in their pension funds
based on lower earnings projections. That includes the government. Standard & Poor’s said federal employee pensions are short
about $4.5 trillion. Taxpayers
could be forced to pay that bill.
John Strangfeld, vice chairman
of Prudential Financial Inc. in
New Jersey, believes many pension plans will be in trouble in
the next 10 to 20 years. The trail
already includes IBM, General
Motors, Hewlett-Packard, Sears,
Delta Airlines, Polaroid and
Goodyear.
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Mark Iwry, a senior fellow at
the Brookings Institution in
Washington, said shutdowns
or freezes are rare and most
pensions are going along OK.
What worries him, though, is
that the freezes — in which
workers no longer accumulate
pension benefits, though they
may be instead given the
chance to save in a 401(k) —
have spread from sick companies to healthy ones.
And many pension plans
could go bankrupt. The Pension Benefit Guaranty Corp.,
which insures workers whose
company plans go bust, could
be under a “mega-threat,” Iwry
said, because it wasn’t designed to bail out whole industries.
Retirement experts are most
vocal and exasperated about
what Washington hasn’t done.
Once it became obvious 20
or 30 years ago that the birth
rate was slowing and life expectancies were increasing, researchers waved warning flags.
Changes could have come then
with minimal pain.
“Nobody has wanted to deal
with this,” DeMuth said. “Everyone just wants to kick the
can down the road. But there
is no Santa Claus. The government is functionally bankrupt.”
Brooks, the economist from
John Carroll, said politicians
“have been playing to the populace by giving them what they
want. People always say
they’re paying too much in
taxes and so we cut taxes. They
say they want more benefits,
so we increase benefits.”
Any solutions now will be
extremely painful and unpopular, but politicians need to face
the crisis, he said.
Americans who are angry
about the government’s role
should look in the mirror.
With one out of three people
not saving anything toward retirement, and most of the rest
not saving enough, we must be
waiting for the retirement
fairy.
Saving for retirement is a
fairly new phenomenon. As a
society, we’re just not good at
it, said Mayfield certified financial planner Kevin Myeroff,
author of the 2001 book
“Countdown to Retirement.”
What we are good at: spending.
“We carve out so much of
our money for things we didn’t
used to need,” said Robinson,
the Cleveland planner. “Is it so
hard to imagine life without
TiVo?”
DeMuth, a psychologist by
training, said spending is more
exciting and more immediately
rewarding than saving.
For those who don’t have the
money, it’s easy to reach for
the credit card. Charge-card
debt (an average of $9,300 per
household) has hit millions of
people.
Myeroff isn’t sure what it
will take for Americans to face
reality. “People think this is all
just going to work out,” he
said.
It’s now obvious it won’t,
said Brooks.
“We’ve known this for decades,” he said. “We’re getting
closer and closer to the day of
reckoning.”
To reach this Plain Dealer reporter:
[email protected], 216-999-6315
The dream
of retirement
is less than
50 years old
Fran Henry
Plain Dealer Reporter
A
gingham apron ’round
her waist, Mom was in the
kitchen, baking cookies for her
3.7 children. And Dad was in
his Buick, driving home after a
hard day at the office. When
they sat down for dinner, they
said grace, passed the meatloaf
and talked about the day.
Then Grandpa and Grandma
ambled over from next door
with a tall molded orange JellO for dessert. It jiggled when
Grandma set it down and the
kids laughed.
The 1950s: When life was a
sitcom, or so they would have
us believe. But they never told
us about how angry Grandpa
was when he faced forced retirement — for that’s what it
took to get people out of the
work force.
Even though the first
monthly Social Security check
had been issued in 1940, a decade later, up to 60 percent of
those reaching 65 still preferred to work. And why not?
Even company pensions had
been rare until after the Depression. Most retirees in the
’50s had no pension. A third
had no retirement savings.
Who could blame them for
rejecting retirement? It meant
you were old, your life was
over. Besides, what did you do
when you didn’t work?
That was the problem, said
author Santha Rama Rau at a
1951 conference on leisure and
retirement. “Americans have
no idea how to enjoy doing
nothing,” she said. Those assembled agreed. Beginning at
age 50, they said, Americans
needed to be educated about
leisure.
“Perhaps we have to glamorize leisure as we have not,”
chairman Lynn White Jr.,
president of Mills College, reportedly said.
It would be the marketing
job of the decade, a campaign
bankrolled by life insurance
companies in the pension business. Advertising would redefine the American Dream to include retirement as a delicious
opportunity for a new lease on
life.
On New Year’s Day 1960, in
scorpion-infested, crusty,
dusty Arizona desert, a sign
appeared that the message had
penetrated the nation’s ironclad work ethic: a traffic jam.
Cars lined up for two miles
on the road to Sun City, Ariz.,
cars filled with older couples
from all over the country,
lured by the idea of a retirement community. Over the
course of the weekend,
100,000 people pushed their
way through six model homes
located near a new golf course
and recreation center.
In three days, 237 homes
sold.
And so it began.
To reach this Plain Dealer reporter:
[email protected], 216-999-4806
About
this series
Every Sunday for the next
two months, The Plain Dealer
will explain how the American
dream of retirement has
ended. What we’ll tell you:
PENSIONS
New workers aren’t covered,
and existing plans are at risk
of collapse. The company
pension is a dinosaur and the
comet has already smashed
into the system.
PBGC
The Pension Benefit Guaranty
Corp., a backstop for failed
pension plans, was flawed
from the start — and even its
first leader says so.
SOCIAL SECURITY
Politicians won’t allow the
program to fail. But the cost
will be higher taxes and
longer waits to collect.
SAVINGS
It’s too late for the oldest
boomers to mend their
spendthrift ways. Today’s
youngest workers still have
time to save — if they can
after they pay for the older
generation’s mistakes.
HEALTH CARE
In the future, we’ll live longer
and feel better. But we can’t
afford to.
SOLUTIONS
Thirty years after the first
warnings of a retirement
crisis were raised,
Washington has finally
acknowledged the problem.
But by now, the potential
fixes are almost as bad.
YOUR FUTURE
Should your children have to
pay for your retirement
dreams? Do the elderly
deserve all the health care
that money can buy? Heading
into a changed world, our
most comfortable
assumptions will be
challenged.
TALK TO US
To comment on this series:
R Use the comment box at
cleveland.com/retirement.
The page also includes links
to a discussion forum, related
studies online, a blog from
series editor John Kroll and
other resources.
R E-mail [email protected].
R Write to Retire at Your Own
Risk, The Plain Dealer, 1801
Superior Ave., Cleveland, Ohio
44114.
CAN YOU AFFORD
TO RETIRE?
A Plain Dealer BusinessExtra
section on Monday, July 24,
will offer advice on planning
for your own retirement.