America’s Retirement Crisis is a Clear and Present Danger

A number of economic factors have stacked the odds against the abilities of today’s seniors to retire comfortably and successfully, all of which are bubbling to a new crisis in the making for both current and future retirees, suggests new research spotlighted in The Economist.

As more Americans near retirement age and grapple with saving enough to support themselves in their non-working years, they may only have three solutions: they must live on less, work longer or save more during their working years, says a new book by several retirement planning experts, two of which hail from Boston College’s Center for Retirement Research.

One of the biggest factors today is longevity, as it applies to both age and span of retirement, which has risen from 13 years in the 1960s to 20 years today, notes the book “Falling Short: The Coming Retirement Crisis and What to Do About It,” spearheaded by Alicia Munnell, director at the Center for Retirement Research (CRR). Furthermore, today there is a 50% chance that one member of a retiring couple will live to age 92.

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But even if one is fortunate enough to live to that age, smaller payouts from pension systems like Social Security provide even more retirement challenges.

“Various attempts to repair its finances mean that Social Security is paying out less as a proportion of pre-retirement earnings,” writes The Economist.

In the 1980s and 1990s, the replacement ratio for Social Security was about 40% for the average worker, however, as the formal retirement age has risen to 67, individuals who opt for an early retirement prior to that age receive lower payments.

Another big difference between retiring in the ’80s and retiring today are the tax implications retirees face. In 1985, whereas only about 10% of Social Security recipients were taxed, now it is 37%, according to Munnell and her co-authors, Andrew Eschtruth, associate director for external relations at the CRR, and Charles Ellis, founder of global financial consulting firm Greenwich Associates.

Come 2033, the projected depletion date of Social Security’s Old-Age and Survivors Insurance and Disability Insurance Trust Fund, researchers note the net effect will lead to a further reduction in replacement ratio of about 31% by 2030.

Even considering that individuals’ expenses generally tend to fall in retirement, the book’s authors calculate that more than half of all American workers won’t be able to maintain their standard of living in retirement.

The solution: Americans will have to work longer, pay greater attention to their pensions and begin saving earlier.

Read more at The Economist.

Written by Jason Oliva