It seems like you can’t open up a newspaper (or twitter feed) without reading about the impending “retirement crisis.” The word crisis, used to describe so many things, may get the public’s attention, but is it accurate?
Many retirees today struggle to make ends meet and others face dire situations triggered by job loss or unexpected health expenses. But the prospect of a broader retirement crisis depends on your frame of reference.
Because of the protections Social Security provides, we are unlikely to see exploding poverty rates for retirees any time soon. The Social Security program — which keeps millions out of poverty — will continue to pay benefits as promised, at least until 2033. In that year, we can expect a 25 percent across-the-board cut in benefits — unless we take steps to strengthen the program’s finances.
So if poverty is the standard — a pretty low bar — then there is no immediate crisis. But researchers who study this issue foresee real challenges ahead.
According to the Boston College Center for Retirement Research (CRR), 53 percent of households are “at risk” of not being able to maintain their standard of living in retirement — and CRR says the households at greatest risk tend to be lower income and younger.
Even this estimate may be too optimistic. The CRR assumes people retire and claim Social Security at age 65. Most people, however, claim earlier and receive reduced benefits. Also, while the labor force participation rate for older people has grown significantly and will continue to grow, only about one in two people age 62 to 64 and less than one in three people age 65 to 69 actually participate today by working or looking for a job. You might think more older people should be working, and that would help boost financial security. But not everyone is able to work because of health problems and lack of opportunity.
The CRR analysis also assumes that households will draw on home equity by taking out a reverse mortgage. But today, only about two percent of owner-occupied properties of households age 65 and older have a reverse mortgage. And with the reverse mortgage market in a state of uncertainty, it is hard to imagine this as a major income source that homeowners will tap. Downsizing is another way retirees can unlock some of the equity in their homes, but most prefer to stay put.
Whether we call it a crisis or not, here’s the situation: unless households take steps to shore up their retirement security, and policy makers make it easier for people to take these steps, too many people will have to cut back significantly in retirement.
Younger households, while at greater risk, have more time than older households to save and plan for retirement. But the longer many younger workers go without access to a workplace retirement plan, the more likely projections of difficulties in retirement will become a reality. If that happens, and Social Security is allowed to dwindle, then we’ll see a real crisis.
Gary Koenig directs the economic security team in AARP’s Public Policy Institute. His own work focuses on Social Security, private pension reform, retirement savings and income adequacy in retirement. Follow him on Twitter.
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