Something’s got to give.
Each year 10,000 baby boomers reach age 65, and that will continue for the next 19 years. In general, they are woefully ill-prepared financially for retirement. And despite years of warnings, it is coming as something of a surprise to the boomers.
Why are they so unprepared? For several reasons:
• Pensions are not what they used to be. Thirty-five years ago, 35 percent of workers were covered by a defined-benefit pension plan. This is the type of qualified retirement plan that guaranteed a retirement income based on earnings record and years of service. Now only 15 percent of the work force can look forward to such a guaranteed income.
• The stock market was seen as a safe way to accumulate funds for the long haul, but in some cases that has turned out to be a huge disappointment.
• For many, the personal residence was seen as a reliable source of future retirement dollars. But the downturn in real-estate values changed all that. Three million homes are currently underwater financially, meaning that more is owed on the home than the home is worth.
• Boomers generally have not saved much over the years, preferring to use extra dollars for consumption.
A practical way to deal with this dilemma is to delay retirement. Some policy changes that would help encourage employees to stay on the job and employers to encourage them to do so include the following:
• Stop levying Social Security tax on people over a certain age, such as 62 or 65. Such a change would increase income by 6.2 percent and reduce the employer’s payroll-tax cost for those employees by 6.2 percent and encourage people to keep working.
• Make Medicare mandatory for those over age 65. At present, employees have the choice of going on Medicare or opting to stay on the more benefit-rich employer plan. Requiring Medicare at that age would reduce the employer’s cost of keeping the employee on the payroll by removing him or her plus dependents from the employee-benefit overhead, giving the employer one less reason to let the employee go.
• Give a lump-sum incentive to workers who forego early Social Security (age 62) benefits and even those who delay their benefit beyond normal retirement age. Human nature suggests and some research shows that, while there is modest incentive in higher monthly benefits when one delays the start of Social Security, there is greater interest and incentive in receiving a lump sum for such delay. This should keep more people in the workforce longer.
What is the benefit of people working longer? Well, the longer that they can keep socking away money and leaving their money working for them before starting to draw it out, presumably the more they will have to retire upon. Secondly, the older they are when they begin to depend upon their accumulated assets for living costs, the fewer the future years of such support they will need and so the fewer the required dollars.