Retirement Savings Problems? The Politicians Created This Mess
Retirement is a stage of life which requires a lifetime of planning: saving, investing, and saving some more. Some Americans are fortunate enough to hold jobs that offer generous pension benefits, and many of those jobs are with the state, local, and federal levels of government. But can these employees expect to actually collect what's being promised? This is where things get messy.
As Andrew Biggs, expert in state and local government pensions, explains, politicians have long been better at promising retirement benefits than delivering them.
Social Security is underfunded by more than $10 trillion for well-known demographic reasons, yet Congress has done nothing for 30 years. State and local governments have overpromised and undercontributed to their public employee pensions. Today, based on some economic estimates, funding shortfalls approach $4 trillion. Estimates of combined unfunded liabilities for Social Security and federal, state and local government employee pensions range from $14 trillion to $26 trillion.
One of the points frequently brought up by special interest organizations like National Institute for Retirement Security is that a large portion of Americans, 92 percent they claim, are undersaving for retirement, leaving a $14 trillion shortfall. However, Biggs brings up the fact that several peer-reviewed studies show that the real number is around 25 percent, not 92.
Most Americans are preparing for retirement appropriately, and retirement plans have only gotten better over time.
Labor Department data show that the average retirement plan contribution today is over 8 percent of employee wages, one-third higher than the 6 percent rate in the 1970s when traditional pensions were at their peak. Likewise, Federal Reserve data show that total retirement savings were equal to only 50 percent of annual employee earnings in the 1970s. Today, retirement plan assets exceed 300 percent of wages, a six-fold increase.
In the private sector, retirement plans are doing fairly well, but the real problems are stemming from governments promising immense pension benefits with no way of avoiding unfunded liabilities.
The defining characteristic of public retirement plans is for the government to promise benefits without paying for them. It’s true in the United States and around the world, where a World Economic Forum report finds that 75 percent of retirement saving shortfalls are due to government underfunding. That’s just the incentive politicians face, and we should be mature enough to recognize that.
Indeed, states like Illinois have nearly all of their annual budgets allocated just towards pension promises. Because of that, the state's credit rating is tanking and the state's debt is growing at a shocking rate.
Governments simply cannot afford these kinds of benefits, and Biggs believes that alternative retirement plans might be the best path forward. There are three things he believes could be better plans.
Transforming Social Security into an actual safety net that safeguards against falling into poverty, while require middle and upper income Americans to manage their own retirement.
Pensions need to be transformed to the 401(k) model so that the plans do not generate massive amounts of debt.
It may be best to offer retirement plans only to those above a certain income threshold. A recent study on federal workers found that when they were automatically enrolled into a retirement plan, their savings increased but so did their debt. For low-income households, that could seriously backfire.
What do you think of these proposals? How can states and local governments get better control of their pension promises?