In the (relatively) short run, the retirement crisis is about the Baby Boomer generation—individuals born in 1955 are just turning 65 this year. This age cohort presents at least two major retirement policy challenges. First, their relatively large size versus the size of the under-65 population. Quoting a 2014 analysis by the U.S. Census Bureau: “By 2030, more than 20 percent of U.S. residents are projected to be aged 65 and over, compared with 13 percent in 2010 and 9.8 percent in 1970.”
So, while the 1960s-70s saw an increase in Social Security benefits, financed by the outsized Baby Boomer cohort just then entering the workforce, the 1980s saw a decrease in those benefits, in anticipation of the situation we now find ourselves in.
And second, the fact the Baby Boomer age cohort began employment (more or less) in the 1970s. Half way through their careers, corporate retirement policy shifted from a defined benefit (DB) “culture”—which depended on significant end-of-career accruals—to a 401(k) “culture”—which depended on significant savings/contributions throughout an individual’s career.
This change did not happen at the same time for everyone, and some older Boomers and those whose employers shifted to the 401(k) culture later may have reasonably good DB benefits. But for many Boomers, this mid-career shift from an end-of-career pension to a 401(k)-based system resulted in under-saving.
The result has been that a meaningful number of people in this generation are booked as “unprepared” for retirement. How have they coped with that challenge?
The most obvious Plan B for these individuals has been to work longer. And, indeed, over the last 2 or more decades, the number of Americans ages 65 to 74 who have continued to work has increased by more than 50%, from 17.7% in 1998 to 27% in 2018. (See https://www.bls.gov/emp/tables/civilian-labor-force-participation-rate.htm.)
I would argue, moreover, that these numbers, if anything, understate this phenomenon. Many “retirees” participate in the gig economy, whether ride-sharing or renting out a room in their house, or any number of other services that have emerged as phone apps. And much gig economic activity is (inevitably) off the books.
As we try to imagine the world after we “re-open” from the shutdowns caused by the COVID-19 pandemic—whenever that may be—there are at least a couple of brutal facts that are going to put this Baby Boomer retirement Plan B in significant jeopardy.
First, it looks like older individuals are particularly vulnerable to this virus. And younger people are not. The following chart is from Worldometers.info, showing data provided by New York City Health as of April 14:
Nearly 75% of the virus-related deaths are occurring in individuals age 65 and older, less than 5% in those younger than 45.
In these circumstances, there is likely to be a boom in the employment of the young, at the expense of employment of the old.
Second, as we reopen, the most problematic jobs will be those involving face-to-face interaction.
This phenomenon will, of course, not affect “knowledge workers,” who (as has been widely discussed) generally will be able to adapt to working online. But it will affect those without those sorts of skills, who, perhaps for physical reasons, can no longer work in the manual trade they were in pre-retirement.
It was often the case, pre-crisis, that these sorts of “retirees” opportunistically sought out face-to-face casual labor, looking to make a little extra money to pay the rent. Think Uber, or Walmart greeter. And Airbnb is—along with the hotel industry—certain to take a hit.
Nobody planned on any of this. Indeed, it’s not clear that anyone is thinking much about it now.
But a year from now, it’s likely to be a serious problem. Many retirees without enough savings will be finding it hard-to-impossible to continue to supplement their income by working. And with the typical 2020 target date fund (TDF) down about 5% to 6% on the year, they will have even less savings than they had before. As they age, those that need long-term care will be able to afford less of it, further stressing already stressed State Medicaid systems.
What is the solution? The idea that “we” should rescue the Baby Boomer generation seems a little ludicrous (and I’m speaking as a card-carrying member of that generation). Consider, that most of this debt we’re accumulating is going to have to be paid back by Gen Z, Millennials, and Gen X. And they already resent the Social Security deal they are getting.
Perhaps our talent for innovation will bail us out here. Maybe the telemarketer you get a call from in 2021 will be a 74-year-old.
Or maybe oldsters will simply have to live on less. We are still a first world country. We have reasonably good old-age health benefits. And for the very-low paid, Social Security does a pretty good job. Indeed, (again as has been widely noted) the 65 and older poverty rate is lower than the younger than 65 poverty rate.
But it’s not going to be pretty. Perhaps the best that can be said is that it will be an object lesson to the generations following. Quoting Robert Frost: Provide, provide!
Michael Barry is president of O3 Plan Advisory Services LLC. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
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