Americans to Face Retirement Challenges as SS System Declines

October 11, 2006 ( - A new report released by the US Government Accountability Office (GAO) warns Americans will face tough challenges for retirement as US labor force growth and social security trust assets decline over the years.

Using charts and illustrations, the GAO reveals in its report that Americans’ percent of disposable income has declined from a peak of around 11% in the early 1980s to 0% in 2005. Meanwhile, the annual savings required for a 35-year old expecting social security benefits and wanting to retire at age 65 is around 8% of gross income.

In addition, the population age 65 and over will increase sharply through 2025 as baby boomers retire – creating a decline in labor force growth, the report showed. The resulting decline in workers per social security beneficiary means the social security and Medicare’s hospital insurance trust funds will face a deficit.

The report says the social security system’s surplus will begin to decline as soon as 2009. Annual benefit costs will exceed revenue from taxes by 2017, and social security’s trust fund will cease to grow by 2027, when taxes plus interest will fall short of benefits paid out. The Social Security Administration estimates the trust fund could be exhausted by 2040.

The DB Challenge

In addition to social security depletion, the report says the decline in the number of defined benefit pension plans and DB plan changes will present retirement challenges in the future as well. The GAO says DB plan freezes are likely to accelerate due to new accounting rules for pensions and other post-employment benefits.

Meanwhile, terminations by large pension plan sponsors have put the financial position of the Pension Benefit Guaranty Corporation (PBGC) at risk. The PBGC’s net deficit for single-employer plans was nearly $23 billion in 2005.

The GAO points out that DB plan funding and design should improve due to provisions of the Pension Protection Act of 2006, such as:

  • Improved Funding – Sponsors have seven years to reach 100% plan funding, while they previously had up to 30 years to reach 90%
  • “Smoothing” Period Reduced – for liabilities, from four to two years; for assets, from five to two years
  • Yield Curve – Modified corporate bond yield curve replaces 30-year Treasuries as key discount rate
  • Credit Balances – Use of balances restricted
  • “At Risk” Plans – Tougher funding rules and other restrictions for weakly funded “at risk” plans
  • Cash balance plans – not deemed to be age discriminatory prospectively
  • Multiemployer plans-Benefit restrictions placed on certain underfunded plans.

Despite these provisions, the GAO says the Act will not likely reverse the decline in the DB system in the long term and the PBGC’s deficit is still expected to grow.

The GAO also points out in its report that increased health care costs will be a challenge to future retirees as it is predicted that Medicare’s Hospital Insurance trust fund will be depleted by 2018 and annual contributions to Medicare will be sufficient to pay only about 80% of Hospital Insurance benefits. The agency offers potential health care reform proposals in its report.

The GAO report, “Retirement Challenges in the 21 st Century,” is here .