Nearly half of middle-class Americans face a slide into poverty as they enter their retirement, a recent study by the Schwartz Center for Economic Policy Analysis at the New School has concluded.
That risk has been driven by depressed earnings, depressed asset values and increased health-care costs — causing 74 percent of Americans planning to work past traditional retirement age. Additionally, both private and public pension plans have been allowed to become seriously underfunded. So what can be done?
Fundamental changes in the structure of the U.S. economy, combined with increased health-care costs and lack of saving, have created a financial trap for millions of American workers heading into retirement.
Roughly 40 percent of Americans who are considered middle class (based on their income levels) will fall into poverty or near poverty by the time they reach age 65, according to the study.
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The study also concluded that if workers age 50 to 60 decide to retire at age 62, 8.5 million of them are projected to fall below twice the Federal Poverty Level, with retirement incomes below $23,340 for singles and $31,260 for couples. Further, 2.6 million of those 8.5 million downwardly mobile workers and their spouses will have incomes below the poverty level — $11,670 for an individual and $15,730 for a two-person household.
It can be debated as to how this happened. Who is to blame? Who is ultimately responsible for a retiree's well-being in retirement?
Most importantly, though, employers and employees need to focus on a fix. Personal savings is obviously a needed conversation. And sponsors of pension plans — whether corporate, governmental or multi-employer — need to ensure they are doing their part.
Not coincidentally, older Americans increasingly continue to work longer than their forebears. More than 20 percent of the workforce in the United States is 55 or older, a historic high, and that percentage is expected to increase — 74 percent of Americans now say they plan to work past traditional retirement age.
So how will this impact employer pension plans? Are there solutions? What do they look like? Who do they affect and how?
Employers need to complete an in-depth analysis of their business models, risk management policies, benefit offerings and financial options through a total compensation approach.
A defined benefit plan should be managed like a separate line of business: It should have budgets, forecasts and a strategic plan. The magnitude of the issue and its prominence require this approach, as the plan is a use and source of cash, creates volatile liability and expense and causes negative consequences often at the worst time in business cycles.
The process involves a variety of areas regarding benefit design, cost, risk management, cash flow, taxes, competitiveness and labor management:
Finally, pension plan sponsors must continually monitor investment strategies; the impact of potential regulatory changes, including funding and accounting rules; appropriateness of assumptions; and development of funding policies to ensure they are appropriately managing their risk and cost issues, but acting in the most prudent manner for their current employees and current retirees.
— By Elliot Dinkin, president and CEO of Cowden Associates